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Public Offering Registration - DRUGSTORE COM INC - 2-9-2000

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Public Offering Registration - DRUGSTORE COM INC - 2-9-2000 Powered By Docstoc
					As filed with the Securities and Exchange Commission on February 9, 2000 Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

DRUGSTORE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) 5912 04-3416255 (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification Number)

13920 Southeast Eastgate Way, Suite 300 Bellevue, Washington 98005 (425) 372-3200 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Peter M. Neupert President and Chief Executive Officer drugstore.com, inc. 13920 Southeast Eastgate Way, Suite 300 Bellevue, Washington 98005 (425) 372-3200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to:
William H. Hinman, Jr. SHEARMAN & STERLING 555 California Street San Francisco, California 94104 (415) 616-1100 Neil Wolff WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, California 94304 (650) 493-9300

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE

Title of Each Class of Number of Proposed Maximum Proposed Maximum Securities to be Shares to be Offering Price Aggregate Amount of Registered Registered(1) Per Share(2) Offering Price Registration Fee ----------------------------------------------------------------------------------------Common Stock, par value $.0001 per share....... 6,923,000 $29.00 $200,767,000 $53,003

(1) Includes 903,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and based upon the average high and low sales prices on February 3, 2000, as reported on the Nasdaq National Market. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +Securities and Exchange Commission is effective. This prospectus is not an +offer to sell securities and we are not soliciting offers to buy these +securities in any state where the offer or sale is not permitted. + + + +

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued February 9, 2000 6,020,000 Shares [LOGO OF drugstore.com(TM)] COMMON STOCK

drugstore.com, inc. is offering 4,500,000 shares of common stock and the selling stockholders are offering 1,520,000 shares. drugstore.com will not receive any of the proceeds from the sale of the shares by the selling stockholders.

drugstore.com, inc.'s common stock is listed on the Nasdaq National Market under the symbol "DSCM." On February 7, 2000, the reported last sale price of our common stock on the Nasdaq National Market was $29 5/16 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on page 8.

PRICE $ A SHARE
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions drugstore.com Stockholders -------- ------------- ------------- -----------$ $ $ $ $ $ $ $

Per Share........................ Total............................

drugstore.com, inc. and one of the selling stockholders have granted the underwriters the right to purchase up to an aggregate of 903,000 additional shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000.

MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY THOMAS WEISEL PARTNERS LLC , 2000

The first page of the gatefold includes: drugstore.com [PICTURE OF DRUGSTORE.COM HOMEPAGE] Lines pointing to specific items on the picture of the homepage connect to the following text:
Five stores in one: health, beauty, wellness, personal care and pharmacy. Personalized service, shopping lists and reminders. Licensed pharmacy with home delivery. Detailed product, topical and health information to make purchase decisions. A high-quality selection of brand-name and specialty products organized in easy-to-shop departments.

Choose from thousands of products in drugstore.com.

Shop for high-quality items in privacy. The following text is placed to the left of the picture of the homepage: CONVENIENCE AND PRIVACY drugstore.com has created a leading online drugstore and information site where customers can shop in privacy from the convenience of their home or office. More than a buying experience, drugstore.com offers useful information to assist in the thinking and buying process. Our store is designed to make What Every Body Needs easier for our customers to acquire. At drugstore.com, customers never have to park the car, stand in line or bump into nosy neighbors. FIVE STORES IN ONE drugstore.com is five stores in one, offering health, beauty, wellness, personal care and pharmacy products, which we believe offers a superior customer experience not found at store-based retailers. Through the Internet, drugstore.com offers: . Convenient, personalized service . Shopping 24 hours a day, seven days a week . Helpful information to make purchase decisions . Secure credit card payment . Direct delivery to home or office . Private shopping from home or work . Licensed pharmacy . Personal access to pharmacists to answer questions . Specialized customer care [LOGO] drugstore.com-TM-

The second page of the gatefold includes: drugstore.com Five Stores in One The following text is placed at the top left of the page: A FAMILIAR, COMFORTABLE WAY TO SHOP Our store is designed to be a familiar, comfortable place with product categories organized like the aisles and shelves of a traditional drugstore, beauty counter or wellness store. Customers can easily browse through the store departments, quickly view promotions and featured products and select products according to their brand or unique attributes. [PICTURE OF THE BEAUTY PAGE] [PICTURE OF THE HEALTH PAGE] [PICTURE OF THE BOUTIQUE PAGE] The following text appears under the picture of the Health page: HEALTH Along with browsing for health tips and information, customers can quickly compare and purchase antacids, pain relievers, and family planning, first aid and other health products. The following text appears under the picture of the Beauty page: BEAUTY Customers can find their favorite beauty products, and our Ask Your Beauty Expert feature answers their questions via e-mail. The following text appears under the picture of the Boutique page: BOUTIQUE Combining the prestige of department-store beauty counters with online shopping convenience, the boutique offers high-end cosmetics, fragrance and skin and spa products. [LOGO] The following text appears on the same line as the logo and spans both the second and third pages of the gatefold: drugstore.com-TM-

The third page of the gatefold includes: [WATERMARK OF THE LOGO] [PICTURE OF THE PERSONAL CARE PAGE] The following text appears to the right of the picture of the Personal Care page: PERSONAL CARE drugstore.com provides fast, convenient purchase of toothpaste, shampoo, tampons, diapers, shaving needs and more. [PICTURE OF THE WELLNESS PAGE] [PICTURE OF THE PHARMACY PAGE] [PICTURE OF THE DRUG INDEX PAGE] The following text appears below the picture of the Wellness page: WELLNESS drugstore.com offers a wide, high-quality selection of wellness products, including vitamins, supplements, herbs and homeopathy and other natural products. The following text appears below the picture of the Pharmacy page: PHARMACY Licensed pharmacists fill/refill prescriptions, which are then delivered to the customer's door. Our pharmacists can provide personal guidance, by phone or e- mail, about prescription usage. The following text appears below the picture of the Drug Index page: DRUG INDEX In the pharmacy's Drug Index, customers can get easy access to information about particular medications, including prices and usage.

TABLE OF CONTENTS
Page ---Prospectus Summary......................................................... 4 Risk Factors.............................................................. 8 Use of Proceeds............................................................ 24 Price Range of Common Stock................................................ 24 Dividend Policy............................................................ 24 Capitalization............................................................. 25 Dilution................................................................... 26 Selected Consolidated Financial Data....................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 28 Business................................................................... 39 Management................................................................. 57 Certain Relationships and Related Transactions............................. 66 Principal and Selling Stockholders......................................... 69 Description of Capital Stock............................................... 71 Shares Eligible for Future Sale............................................ 74 Underwriters............................................................... 76 Legal Matters.............................................................. 77 Experts.................................................................... 77 Where You Can Find More Information........................................ 77 Index to Consolidated Financial Statements................................. F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock. 3

PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this prospectus. drugstore.com is a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products. As of January 2, 2000 we had sold our products to approximately 695,000 customers. We designed our store to provide a convenient, private and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. We believe that our online store delivers a superior customer experience, making buying What Every Body Needs(TM) less of a chore. International Data Corporation estimates that worldwide business-to-consumer sales over the Internet will increase from approximately $11 billion in 1998 to approximately $93 billion by 2002. The Internet has also become an important personal tool for accessing health and medical information. According to a recent Forrester Research report, 32% of online consumers shop for healthcare products online. We believe there is a significant market opportunity for an online store that can offer consumers an enhanced shopping experience for health, beauty, wellness, personal care and pharmacy products. We seek to attract and retain consumers by emphasizing the following key attributes: . Convenience. We feature 24 hour a day access to our user-friendly Web store, direct home or office delivery, a personalized shopping list and confidential access to a personal medication profile. . Selection. We believe we offer a significantly greater number of products than are available in a typical traditional chain drugstore. . Information. We have assembled a broad array of product information to assist customers in making informed buying decisions. We offer full product packaging information, extensive drug information, customer reviews of products, and a Solutions area which includes buying guides, reference information, interactive shopping advisors and articles on beauty trends and products. . Communication. We can communicate with customers on a regular basis through the convenience of e-mail. We also offer our popular "Ask Your Pharmacist" and "Ask Your Beauty Expert" features. . Privacy. Consumers can shop in the privacy of their own homes or offices and can obtain answers to questions that they might otherwise be uncomfortable asking in public. . Pharmacy. We employ licensed pharmacists and are able to ship prescription products to all 50 U.S. states and we offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick-up at conveniently located Rite Aid stores nationwide. Our objective is to become one of the world's leading retailers of health, beauty, wellness, personal care and pharmacy products. Key elements of our strategy include: strengthening the drugstore.com brand, continuously improving our Web store and service, taking advantage of repeat purchasing patterns, developing technologies to enhance our offerings and capitalize on the benefits of the Internet, improving the efficiency of our distribution activities and developing strategic relationships. In addition, we will also continue to make significant investments in technology and distribution. Consistent with our strategy, in June 1999 we entered into strategic relationships with Rite Aid Corporation and General Nutrition Companies, Inc. (GNC). Benefits of our Rite Aid relationship include additional revenue and traffic generated by Rite Aid customers who visit our Web site, the pharmacy benefit coverage provided by the insurance companies and pharmacy benefit management companies (PBMs) with which Rite 4

Aid has a relationship, including PCS Health Systems, Inc., the co-promotion and co-branding activities that we have undertaken and our ability to offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick up at Rite Aid stores nationwide or delivery to the customer's home or office. The benefits of our GNC relationship include the opportunity to be the exclusive online provider of GNC-branded products and each party's co-promotion of products in traditional and online marketing efforts. We face many risks and challenges in our business. Some consumers may prefer to shop at traditional retail stores, especially consumers who do not have easy access to the Internet or who need products immediately. As part of our relationship with Rite Aid, we have agreed not to operate physical stores. An investment in our common stock involves risks and uncertainties, including the fact that we are an early stage company in a new market and that we expect continuing losses for the foreseeable future. See "Risk Factors" below for further information. Recent Developments Operating Results for the Fourth Quarter of Fiscal 1999. For the quarter ended January 2, 2000, our net sales were $18.5 million, a $6.3 million, or 51.6%, increase over the immediately preceding quarter, reflecting an increase in sales of both pharmaceutical and non-pharmaceutical products. These increases were due to an increase in new customers as well as an increase in repeat orders. Total costs and expenses for the quarter ended January 2, 2000 were approximately $64.0 million, a $7.9 million, or 14.1%, increase over the immediately preceding quarter. The increase in costs and expenses primarily reflects increases in fulfillment-related expenses due to the increase in order volume, as well as increases in other marketing and sales expenses relating to our ongoing customer acquisition and corporate branding campaigns. Our net loss for the quarter ended January 2, 2000 was $43.5 million, or $1.02 per share, compared to $42.0 million, or $1.04 per share (on a pro forma basis to give effect to the conversion of all of our preferred stock into common stock at the time of our initial public offering as if such conversion occurred at the beginning of the period), for the immediately preceding quarter. Strategic Agreement with, and Investment by, Amazon.com. On January 24, 2000, we entered into an agreement with Amazon.com to integrate various shopping features of our Web sites and to create a persistent drugstore.com shopping presence as the exclusive health and beauty product section on Amazon.com's Web site. This integration and shopping presence will enable Amazon.com's significant customer base to access our Web site from the Amazon.com Web site for purchases of health, beauty, wellness, personal care and pharmaceutical products. The benefits of this agreement are expected to include an increase in traffic and revenue generated by Amazon.com customers who visit our Web site as well as various advertising and promotional initiatives the parties have agreed to undertake. The parties will also work to implement additional features on Amazon.com's Web site designed to improve customer shopping experiences, including integrated search and browse capabilities and a shared shopping basket. We agreed to pay Amazon.com a total of $105 million over the three-year term of the agreement, of which $30 million was paid at the time the agreement was executed. Concurrently with this agreement, we sold Amazon.com 1,066,667 shares of our common stock in a private placement transaction for $28.125 per share, or approximately $30 million in the aggregate. All of the proceeds to us from this private placement transaction were paid to Amazon.com to satisfy our initial payment obligations under the commercial agreement, of which $27 million reflects a prepayment of amounts due for the first year following the launch of the drugstore.com health and beauty product section on Amazon.com's Web site. Acquisition of Beauty.com. On February 2, 2000, we acquired Beauty.com, Inc., a leading online retailer of prestige beauty products, and entered into an agreement to retain the employment of its founder, Roger Barnett, for a total of 1,266,289 shares of drugstore.com common stock (approximately $40.4 million based on the price of our common stock on January 12, 2000, the date the transaction was announced). Beauty.com offers prestige brands, including specialty lines exclusive to the site, and has ongoing relationships with a team of industry experts. Roger Barnett, the founder of Beauty.com, will continue as president of Beauty.com following the acquisition. We believe that the acquisition of Beauty.com will accelerate the expansion of our product 5

offerings in the prestige beauty market and enhance our ability to enter into relationships with prestige beauty product vendors. We will account for the acquisition as a purchase. Distribution Center. In January 2000, we began limited operations at our own 290,000 square foot distribution center in New Jersey, and we are in the process of transitioning our distribution capabilities for pharmaceutical and non-pharmaceutical products from third party distributors to our center. We continue to rely primarily on third party distributors to fill customer orders, although we expect that the transition to our own distribution facility will be completed by the end of the second quarter of 2000. We believe that operating our own distribution center will allow us to achieve greater control over the distribution process and help us to ensure adequate supplies of products to our customers. In connection with opening our distribution center, we also opened our own pharmacy as part of our arrangement with Rite Aid. Operating our own distribution facility will require us to increase inventory levels substantially and establish a significant number of direct relationships with manufacturers in the near term. THE OFFERING
Common stock offered by drugstore.com...... Common stock offered by the selling stockholders.............................. Common stock to be outstanding after the offering.................................. Use of proceeds............................ 4,500,000 shares 1,520,000 shares

50,522,560 shares We intend to use the proceeds for general corporate purposes, including working capital to fund anticipated operating losses and purchases of inventory for our new distribution center, and capital expenditures. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders. See "Use of Proceeds." Nasdaq National Market symbol.............. DSCM

The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding at February 3, 2000, which includes (1) 1,066,667 shares of our common stock issued on January 24, 2000 to Amazon.com in a private placement transaction and (2) 1,266,289 shares of our common stock issued on February 2, 2000 in connection with our acquisition of Beauty.com. This number does not include approximately 11,640,000 shares of our common stock subject to options outstanding or reserved for issuance under our stock option and stock purchase plans at February 3, 2000. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters' overallotment options. DRUGSTORE.COM(TM), the drugstore.com logo, THE BOUTIQUE(TM), WHAT EVERY BODY NEEDS(TM), WHERE EVERY BODY SHOPS(TM), WHAT YOUR BODY NEEDS(TM), HEALTH . BEAUTY . WELLNESS(TM), WELLNESS CONNECTIONS(TM), LET THE DRUGSTORE COME TO YOU(TM), QUICK LISTS(TM), TEST DRIVE(TM), ONE VERY HEALTHY ATTITUDE(TM) and EPUNCHCARD(TM) are our trademarks. This prospectus also includes trade dress, trade names, trademarks and service marks of other companies. Use or display by drugstore.com of other parties' trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of drugstore.com by, the trademark or trade dress owners.

We were incorporated in Delaware in April 1998. Our principal executive offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue, Washington 98005, and our telephone number is (425) 372-3200. Our World Wide Web site is www.drugstore.com. The information contained on our Web site is not part of this prospectus. 6

SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except share and per share data) The balance sheet data displayed in the "Pro Forma" column is as of January 2, 2000, with adjustments to give effect to (1) our sale of 1,066,667 shares of common stock to Amazon.com on January 24, 2000 in a private placement transaction and the application of the net proceeds therefrom and (2) our acquisition of Beauty.com on February 2, 2000. The data displayed in the "Pro Forma As Adjusted" column gives further effect to the receipt of the estimated proceeds from our sale of 4,500,000 shares of our common stock at an assumed public offering price of $29.3125 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" for a description of how we intend to use the net proceeds of this offering.
Period from April 2, 1998 (Inception) through Year Ended December 31, January 2, 1998 2000 ------------------- ---------(in thousands, except share and per share data) -8,201 (8,201) (8,027) $(14.70) 546,149 $ 34,848 155,591 (120,743) (115,831) $ (6.13) 18,880,969 $ (3.73) $

Consolidated Statements of Operations Data: Net sales...................................... Total cost and expenses........................ Operating loss................................. Net loss....................................... Basic and diluted net loss per share........... Weighted average shares used to compute basic and diluted net loss per share................ Pro forma basic and diluted net loss per share (unaudited)(1)................................ Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited)(1)......................

31,045,835 As of January 2, 2000 -----------------------------Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------(in thousands) $257,346 240,455 585,160 2,687 528,565

Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities.................................... $132,754 $132,735 Working capital................................ 106,960 115,844 Total assets................................... 395,708 460,549 Capital lease obligations, less current portion....................................... 2,687 2,687 Total stockholders' equity..................... 350,749 403,954

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to compute pro forma basic and diluted net loss per share. 7

RISK FACTORS You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Our Business We Are an Early Stage Company in a New and Rapidly Evolving Market, Which Makes It Difficult for Investors to Determine Whether We Will Accomplish Our Objectives Because drugstore.com was founded in April 1998 and we only began selling products in February 1999, we have a limited operating history on which investors can base an evaluation of our business strategy. We have limited insight into trends that may emerge and affect our business. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies, as well as the risks we face due to our participation in a new and rapidly-evolving market. These challenges include our: . Need to increase our brand awareness; . Need to attract and retain customers at a reasonable cost; . Dependence on Web site and transaction processing performance and reliability; . Need to compete effectively; . Need to establish ourselves as an important participant in the evolving market for healthcare products and services on the Internet; and . Need to establish and develop relationships in the healthcare industry, particularly in the areas of reimbursement and managed care. Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products May Not Accept Our Solution, Which Would Harm Our Revenues and Prevent Us From Becoming Profitable If we do not attract and retain a high volume of online customers to our store at a reasonable cost, we will not be able to increase our revenues or achieve profitability. We may not be able to convert a large number of customers from traditional shopping methods to online shopping for health, beauty, wellness, personal care and pharmacy products. Even if we are successful at attracting online customers, we expect it will take several years to build a critical mass of these customers. Specific factors that could prevent widespread customer acceptance include: . Shipping charges, which do not apply to shopping at traditional drugstores; . Delivery time associated with Internet orders, as compared to the immediate receipt of products at a physical store; . Pricing that does not meet customer expectations of "finding the lowest price on the Internet;" . Additional steps and delays in ensuring insurance coverage for prescription products; . Lack of coverage of customer prescriptions by some insurance carriers; . Lack of consumer awareness of our online pharmacy; . Customer concerns about the security of online transactions and the privacy of their personal health information; . Product damage from shipping or shipments of wrong or expired products from us or our fulfillment partners or other vendors, resulting in a failure to establish customers' trust in buying drugstore items online; . Delays in responses to customer inquiries or in deliveries to customers; 8

. Inability to serve the acute care needs of customers, including emergency prescription drugs and other urgently needed products; and . Difficulties in returning or exchanging orders. We Expect Significant Increases in Our Operating Expenses and Continuing Losses for the Next Several Years We incurred net losses of $123.9 million for the period from inception through January 2, 2000. We have not achieved profitability. We only began selling products in February 1999 and cannot be certain that we will obtain enough customer traffic or a high enough volume of purchases to generate sufficient revenues and achieve profitability. We believe that we will continue to incur operating and net losses for at least the next four years (and possibly longer) and that the rate at which we will incur such losses will increase significantly from current levels. We intend to increase our operating expenses substantially as we: . Increase our sales and marketing activities, particularly advertising efforts; . Provide our customers with promotional benefits, such as selling selected products or offering shipping below our actual costs; . Increase our general and administrative functions to support our growing operations; . Expand our customer and pharmacist support organizations to better serve customer needs; . Develop enhanced technologies and features to improve our Web site; . Enhance our distribution fulfillment processes; and . Begin operating our own distribution facility and possibly buy or build additional distribution facilities. Because we will spend these amounts before we receive any incremental revenues from these efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. We May Not Succeed in Establishing the drugstore.com Brand, Which Would Adversely Affect Customer Acceptance and Our Revenues Due to the early stage and competitive nature of the online market for drugstore products, if we do not establish our brand quickly, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to provide consistent, high quality customer experiences. To promote our brand, we have incurred and expect to continue to incur substantial expense in our advertising efforts on major Internet destinations such as Amazon.com, America Online and Yahoo! and other Web sites our customers are likely to visit, as well as other forms of media such as television and magazines. We will also need to spend money to attract and train customer service personnel. If these brand promotion activities do not yield increased revenues, we will incur additional losses. Even if our efforts are successful, adverse publicity about our strategic partners could damage our brand and negatively affect customer acceptance of our site. We Expect Our Quarterly Financial Results to Fluctuate And Our Early Stage of Development Limits Our Ability to Predict Revenues and Expenses Precisely Historical trends and quarter-to-quarter comparisons of our operating results are not a good indicator of our future performance. It is likely that in some future quarter our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. Our revenues and operating results are expected to vary significantly from quarter to quarter due to a number of factors, including: . Demand for our products; . Our ability to attract visitors to our Web store and convert those visitors into customers; 9

. The frequency of repeat purchases by customers; . Shifts in the nature and amount of publicity about us or our competitors; . Changes in the growth rate of Internet usage; . Average order size; . The mix of products sold; . Our ability to enhance our technology to accommodate any future growth in our operations or customers; . Our ability, including through our fulfillment partners, to manage inventory levels and ensure sufficient product supply, particularly as we transition customer order fulfillment to our own distribution facility; . Changes in our pricing policies or the pricing policies of our competitors; . Changes in government regulation; . The availability of reimbursement for pharmacy products; and . Costs related to potential acquisitions of technology or businesses. Our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue for any reason could result in substantial additional operating losses. The volume and timing of orders of health, beauty, wellness, personal care and pharmacy products on our Web store are difficult to predict because the online market for such products is in its infancy. Due to the limited operating history of our Web store, we do not yet have sufficient historical data on which to predict future business from repeat customers. Accordingly, we may have difficulty forecasting revenue from regular customers or overall anticipated revenue trends. A portion of our revenues may also be seasonal in nature, especially with respect to the sale of certain beauty products, which depend to some extent on seasonal product changes and seasonal purchasing patterns. Consumer "fads" and other changes in consumer trends may cause shifts in purchasing patterns, resulting in significant fluctuations in our operating results from one quarter to the next. Our limited operating history makes it difficult to fully assess the impact of these factors. If We Are Unable to Obtain Insurance Reimbursement Coverage for Our Customers, Our Ability to Sell Pharmacy Products Online Could Decrease, Which Would Harm Our Revenues To obtain reimbursement on behalf of our customers for the prescription products that they purchase on our Web site, we must maintain relationships with insurance companies and PBMs, either directly or through our relationship with Rite Aid. We currently rely primarily on Rite Aid's relationships with insurance companies and PBMs, and the extension of these relationships to cover prescriptions processed by us. To the extent Rite Aid is unable to maintain these relationships, or if these relationships do not extend to cover the prescriptions we process, our ability to obtain reimbursement coverage for our customers would be reduced. This would reduce the number of customers that fill prescriptions through our Web site, which would reduce our revenues. Our ability to enter into direct relationships with insurance companies and PBMs, or retain our existing relationships for an extended period of time, is uncertain for the following reasons: . Many of these companies are in the early stages of evaluating the impact of the Internet and online pharmacies on their businesses. These companies may delay their decisions to contract with online pharmacies or may decide to develop their own Internet capabilities that may compete with us. 10

. Many insurance companies have existing contracts with chain drugstores and PBMs that have announced their intentions to establish online pharmacies. . Some insurance companies and PBMs will likely contract with only one or a limited number of online pharmacies. If our online competitors obtain these contracts and we do not, we would be at a competitive disadvantage. Other than our contract with PCS Health Systems, Inc., which is a 10-year agreement, many of our agreements with insurance companies and PBMs are short- term and may be terminated with less than 30 days' prior notice. In addition, we must process each insurance application individually, which may raise the costs of processing prescription orders and delay our order processing time. Customers may not initially embrace our online insurance coverage procedure. We Depend on a Limited Number of Distribution Partners; If They Do Not Perform, We Will Not Be Able to Effectively Ship Orders We currently rely to a large extent on rapid distribution by third parties. Since inception, we have purchased a substantial majority of our pharmaceutical products from one vendor, RxAmerica L.L.C., and in connection with operating our own distribution center, we will become obligated to purchase all of our pharmaceutical products from Rite Aid unless we are able to obtain better overall terms from another vendor. We also currently purchase a substantial majority of our non-pharmaceutical products from one vendor, Walsh Distribution, Inc., which accounted for 68% of our non-pharmaceutical cost of sales from launch of our Web store to January 2, 2000. However, as we transition customer order fulfillment to our own distribution center, we intend to establish relationships directly with product manufacturers, and we expect that order fulfillment through Walsh Distribution will cease by the end of the second quarter of 2000. Our business could be significantly disrupted if RxAmerica, Rite Aid or, in the near term, Walsh Distribution were to breach their contracts or suffer adverse developments that affect their ability to supply products to us. In addition, RxAmerica is a joint venture owned by American Stores Company (which was recently acquired by Albertson's, Inc.) and Longs Drugs, both of which are potential competitors of drugstore.com, and actual competitors with Rite Aid, one of our principal stockholders and business partners. If for any reason RxAmerica, Rite Aid or Walsh Distribution is unable or unwilling to supply products to us in sufficient quantities and in a timely manner, we may not be able to secure alternative fulfillment partners on acceptable terms in a timely manner, or at all. For a discussion of certain potentially adverse developments at Rite Aid, see "--Our Relationship with Rite Aid Involves Many Risks and May Restrict Our Ability to Promote, Contract With, or Operate Traditional Retail Stores." Because we rely primarily on third parties to fulfill orders, we depend on their systems for tracking inventory and financial data. If our distribution partners' systems fail or are unable to scale or adapt to changing needs, or if we cannot integrate information systems with any new distributors, we may not have adequate, accurate or timely inventory or financial information. We also rely on third-party carriers for shipments to and from distribution facilities and to customers. We are therefore subject to the risks, including employee strikes and inclement weather, associated with our distribution partners and of our carriers' ability to provide product fulfillment and delivery services to meet our distribution and shipping needs. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, the drugstore.com brand and our results of operations. Opening and Operating Our Own Distribution Center Will Require Significant Investments in Management Resources We began limited operations at our own 290,000 square foot distribution center in January 2000 to achieve greater control over the distribution process and to ensure adequate supplies of products to our customers. 11

Opening and operating this distribution center will require additional capital investments in facilities and equipment and will require us to: . Hire and train a significant number of new employees; . Establish a significant number of direct relationships with manufacturers in the near term; . Substantially increase our inventory levels in the near term; . Effectively manage our product purchasing function and our inventory levels to avoid product shortages or markdowns due to unpopular or expired inventory; and . Control product damage and shrinkage through effective security measures and inventory management practices. We have limited experience processing customer order fulfillment through our distribution center and managing significant levels of inventory, and issues arising with respect to the opening and operation of our distribution center could divert management attention from other aspects of our business. In addition, we may be unable to obtain products on terms as favorable as our distribution partners. In connection with the opening of our distribution center, we also expanded our pharmacy operations through our arrangement with Rite Aid. Our pharmacy operations will subject us to additional regulatory requirements and related costs. We believe that our new distribution center will provide us with sufficient distribution capacity for the foreseeable future. However, we may need to increase our distribution capacity sooner than anticipated, and any further expansion would require additional financing that may not be available to us on favorable terms when required, or at all. Any Errors in the Filling or Packaging of the Prescription Drugs We Dispense May Expose Us to Liability and Negative Publicity Pharmacy errors relating to prescriptions, dosage and other aspects of the medication dispensing process can produce liability for us that our insurance may not cover. For example, a study of community pharmacies appearing in the December 1995 issue of American Pharmacy found that 24% of prescriptions contained dispensing errors and 4% of prescriptions contained errors that were clinically significant. Because we distribute pharmaceutical products directly to the consumer, we are the most visible participant in the medication distribution chain and therefore have more exposure to liability claims. Our pharmacists are required by law to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists. Our pharmacists may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effects. This counseling is in part accomplished through e-mail and inserts included with the prescription, which may increase the risk of miscommunication because the customer is not personally present or may not have provided all relevant information. We also post product information on our Web store. Providing information on pharmaceutical and other products creates the potential for claims to be made against us for negligence, personal injury, wrongful death, product liability, malpractice, invasion of privacy or other legal theories based on our product or service offerings. Our general liability, product liability and professional liability insurance may not cover potential claims of this type or may not be adequate to protect us from all liability that may be imposed. Pharmacy errors either by drugstore.com or our competitors may also produce significant adverse publicity either for us or the entire online pharmacy industry. Because of the significant amount of recent press coverage on Internet retailing and online pharmacies, we believe that we will be subject to a higher level of media scrutiny than other pharmacy product channels. The amount of negative publicity that we or the online pharmacy industry receive as a result of pharmacy or prescription processing errors could be disproportionate in relation to the negative publicity received by other pharmacies making similar mistakes. We have no control over the pharmacy practices of our competitors, and we cannot ensure that our pharmacists or our prescription processing will be 12

able to operate without error. We believe customer acceptance of our online shopping experience is based in large part on consumer trust, and negative publicity could erode such trust, or prevent it from growing. This could result in an immediate reduction in the amount of orders we receive and adversely affect our revenue growth. We Face the Risk of Systems Interruptions and Capacity Constraints on Our Web Site, Possibly Resulting in Adverse Publicity, Revenue Losses and Erosion of Customer Trust The satisfactory performance, reliability and availability of our Web site, transaction processing systems and network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. Any future systems interruption that results in the unavailability of our Web site or reduced order fulfillment performance could result in negative publicity and reduce the volume of goods sold and the attractiveness of our Web store, which could negatively affect our revenues. From time to time, we have experienced temporary system interruptions for a variety of reasons, including power failures, software bugs and an overwhelming number of visitors trying to reach our Web site. We may not be able to correct any problem in a timely manner. Because we outsource certain aspects of our system and because some of the reasons for a systems interruption may be outside of our control, we also may not be able to exercise sufficient control to remedy the problem quickly or at all. We opened our site for customers in February 1999 and to the extent that customer traffic grows substantially, we will need to expand the capacity of our systems to accommodate a larger number of visitors. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of order fulfillment, or delays in reporting accurate financial information. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our Web site accurately or in a timely manner to permit us to effectively upgrade and expand our transaction-processing systems or to integrate smoothly any newly developed or purchased modules with our existing systems. We Have Grown Very Rapidly, and We Need to Manage Changing and Expanding Operations We have rapidly and significantly expanded our operations, and anticipate that we will continue to expand. Our number of employees has grown from 85 on December 31, 1998 to 408 on January 2, 2000. This growth has placed, and our anticipated future operations will continue to place, a significant strain on our management systems and resources. We will not be able to implement our business strategy in a rapidly evolving market without an effective planning and management process. We will not be able to increase revenues unless we continue to improve our transaction-processing, operational, financial and managerial controls and reporting systems and procedures, expand, train and manage our work force and manage multiple relationships with third parties. Many of our senior management have no prior senior management experience at public companies, and none of our executive officers have prior management experience in the healthcare or retail drugstore industry. Expanding the Breadth and Depth of Our Product and Service Offerings Is Expensive and Difficult, and We May Receive No Benefit From Our Expansion We intend to expand the breadth and depth of our product and service offerings by promoting new or complementary products or sales formats. We cannot be certain that these new offerings will generate sufficient revenues for the costs involved. Expansion of our offerings in this manner could require significant additional expenditures and could strain our management, financial and operational resources. For example, we may need to incur significant marketing expenses, develop relationships with new fulfillment partners or manufacturers, or comply with new regulations. We cannot be certain that we will be able to expand our product and service offerings in a cost-effective or timely manner. Furthermore, any new product or service offering or sales format that is not favorably received by consumers could damage the reputation of our brand. The lack of market acceptance of such efforts or our inability to generate satisfactory revenues from such expanded offerings to offset their cost could harm our business. Finally, our agreement with Amazon.com contains prohibitions that 13

limit our ability to work with other companies in markets for products and services that are competitive with those offered by Amazon.com, although we are able to sell products and services in these markets ourselves. See "--Our Relationship With Amazon.com May Restrict Some of Our Activities." Our Relationship With Amazon.com May Restrict Some of Our Activities Our relationship with Amazon.com may restrict our activities and is subject to change. We entered into a technology license and advertising agreement in August 1998 with Amazon.com. In addition, in January 2000 we entered into a three-year agreement with Amazon.com to integrate various shopping features of our Web sites and create a persistent drugstore.com shopping presence on the Amazon.com Web site. Amazon.com is currently our largest stockholder and Jeffrey P. Bezos, Amazon.com's chairman of the board and chief executive officer, is a member of our board of directors. Our relationship with Amazon.com has received significant media attention, but the parties' obligations to provide support to each other are limited. Pursuant to these agreements, each party has committed to providing the other with advertising on our respective Web sites. The agreement we entered into in January 2000 contains provisions restricting the percentage of total revenues we can obtain from the sale on our Web site of products or services other than health, beauty, wellness, personal care and pharmaceutical products. We may not assign this agreement without Amazon.com's consent. Under the technology license and advertising agreement, we are restricted from promoting on our Web site any company that sells products or services competitive with those that Amazon.com offers or is preparing to produce or market. If we were acquired by a competitor of Amazon.com and Amazon.com did not vote in favor of the transaction, we would lose our rights to advertise on Amazon.com's Web site and to use Amazon.com's technology (if we are then using any). In addition, we have agreed not to sell advertising on our Web site to any company that sells products or services competitive with those offered by Amazon.com, although the sale of advertising on our Web site is not presently, and is not expected to be, part of our business strategy. In addition, due to Amazon.com's significant ownership of our common stock, it will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. For more information about our relationship with Amazon.com, see "Business--Relationship with Amazon.com." See also "Executive Officers and Directors" for background on Jeffrey P. Bezos, "Certain Relationships and Related Transactions" for a description of our agreements with Amazon.com and "Principal and Selling Stockholders" for a description of Amazon.com's stock ownership relative to other stockholders. Our Relationship with Rite Aid Involves Many Risks and May Restrict Our Ability to Promote, Contract With, or Operate Traditional Retail Stores In June 1999, we entered into a series of agreements with Rite Aid. These agreements involve many aspects of our businesses and the operation of our respective Web sites, the fulfillment of orders and the extension of Rite Aid's insurance relationships to cover prescriptions processed by us. This type of arrangement is complex and requires a great deal of effort to operate successfully. As a result, there are many risks related to these arrangements, including some that we may not have foreseen. It is difficult to assess the likelihood of occurrence of these risks, including the lack of success of the overall arrangement to meet the parties' objectives. In the event that we do not realize the intended benefits of these relationships, we will have expended a great deal of time and effort that could have been directed to more beneficial activities. In addition, customer perceptions and our business may be adversely impacted if these relationships are not successful. While Rite Aid has committed to promoting drugstore.com in its stores and in its advertising, we do not control the choice of ads that will feature us and this form of advertising may not result in additional 14

drugstore.com customers. While the Rite Aid relationship substantially broadens our ability to provide prescription medications to consumers with insurance reimbursement plans, it may not allow all of our potential customers to purchase these medications from drugstore.com and receive insurance reimbursement, which could adversely affect consumer perceptions and our revenues. We have agreed not to promote any other traditional chain drugstore or operate one ourselves. We have also agreed not to contract with another traditional retail store to fill pharmacy product orders we receive unless a Rite Aid store is not conveniently located. These restrictions could limit our flexibility and ability to grow our business if our relationship with Rite Aid does not develop successfully. Rite Aid has recently received significant negative publicity regarding its financial situation following its announcements regarding the restructuring and extension of its banking facilities, including amendments to financial covenants, the planned restatements of its 1999, 1998 and 1997 financial statements and the resignation of its independent auditors in November 1999. Rite Aid has since engaged new auditors and made significant changes to its senior management team. Our relationship with Rite Aid is important to us, particularly in our pharmacy fulfillment operations. If Rite Aid's financial condition were to worsen, it may be unable to continue to fulfill its obligations to us under our agreements, and this would have an adverse effect on our business. In addition, negative publicity regarding Rite Aid could negatively affect the drugstore.com brand and our stock price. Rite Aid is offering 1,500,000 shares of common stock in this offering, although it will continue to own a significant percentage of our common stock following this offering. As a result, Rite Aid will continue to be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. For more information about our relationships with Rite Aid, see "Business-- Relationship with Rite Aid." See also "Certain Relationships and Related Transactions" for a description of our agreements with Rite Aid and "Principal and Selling Stockholders" for a description of Rite Aid's stock ownership relative to other stockholders. We Are Dependent on Our Strategic Relationships to Help Promote Our Web Site and Expand Our Product Offerings; If We Fail to Maintain or Enhance These Relationships, Our Development Could Be Hindered We believe that our strategic relationships with Amazon.com, Rite Aid, PCS and GNC as well as portals and third party distributors are critical to attract customers, facilitate broad market acceptance of our products and the drugstore.com brand and enhance our sales and marketing capabilities. If we are unable to develop or maintain key relationships, our ability to attract customers would suffer and our business would be adversely affected. In addition, we are subject to many risks beyond our control that influence the success or failure of our strategic partners. Our business could be harmed if any of our key strategic partners were to experience financial or operational difficulties or if other corporate developments adversely affect their ability to perform under our agreements. We Face Uncertainty Related to Pharmaceutical Costs and Pricing, Which Could Affect Our Revenues and Profitability We expect that pharmacy sales will account for a significant percentage of our total sales. Sales of our products will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations (HMOs), PBMs and other organizations. Because these organizations are traditionally focused on reduced cost to employer groups, whereas we are focused more on direct customer service, we must devote time and resources to develop third-party payor confidence in our approach. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. The efforts of third- party payors to contain costs will place downward pressures on 15

profitability from sales of prescription drugs. Our revenues from prescription drug sales may also be affected by health care reform initiatives of federal and state governments, including proposals designed to significantly reduce spending on Medicare, Medicaid and other government programs, changes in programs providing for reimbursement for the cost of prescription drugs by third-party payors and regulatory changes related to the approval process for prescription drugs. Such initiatives could lead to the enactment of federal and state regulations that may adversely impact our prescription drug sales. We cannot be certain that our products or services will be considered cost effective or that adequate third-party reimbursement will be available to enable us to maintain price levels sufficient to realize a profit. Competition From Both Traditional and Online Retailers May Result in Price Reductions and Decreased Demand for Our Products and Services We compete in a market that is highly competitive and expect competition to intensify in the future. We currently or potentially compete with a variety of companies, many of which have significantly greater financial, technical, marketing and other resources. These competitors include (1) various online stores that sell pharmaceutical as well as over-the-counter drug and health, wellness, beauty and personal care items; (2) mail service pharmacies; and (3) existing drugstores. Most of these drugstores, which include national, regional and local drugstore chains, discount drugstores, supermarkets, combination food and drugstores, discount general merchandise stores, mass market retailers, independent drugstores and local merchants, have existed for a longer period, have greater financial resources, have established marketing relationships with leading manufacturers and advertisers, and have secured greater presence in distribution channels. Some of these companies may also commence or expand their presence on the Internet. We also compete with hospitals, HMOs and mail order prescription drug providers, all of whom are or may begin offering products and services over the Internet. Finally, we are aware of numerous other smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete directly with those offered at drugstore.com. We believe that there may be a significant advantage in establishing a large customer base before our competitors do so. If we fail to attract and retain a large customer base and our competitors establish a more prominent market position relative to ours, this could inhibit our ability to grow. We also believe we may face a significant competitive challenge from our competitors forming alliances with each other. Our direct online competitors may form partnerships with PBMs, HMOs or chain drugstores. For example, PlanetRx, an online pharmacy, recently formed an alliance with Express Scripts, a PBM. The combined resources of these partnerships could pose a significant competitive challenge to drugstore.com. In addition, certain PBMs and HMOs could form alliances with our competitors that would prevent them from also entering into relationships with drugstore.com. Our inability to partner with a major PBM or HMO could be a major competitive disadvantage to us. We believe the principal factors that will draw end users to an online shopping application include brand availability, selection, personalized services, convenience, price, accessibility, customer services, quality of search tools, quality of content, and reliability and speed of fulfillment for products ordered. We will have little or no control over how successful our competitors are in addressing these factors. In addition, with little difficulty, our online competitors can duplicate many of the products, services and content offered on our site. Increased competition could result in price reductions, fewer customer orders, fewer search queries served, reduced gross margins and loss of market share. Acquisitions Could Result in Dilution, Operating Difficulties and Other Harmful Consequences If appropriate opportunities present themselves, we intend to acquire complementary or strategic businesses, technologies, services or products. For example, we recently acquired Beauty.com, an online retailer of prestige 16

beauty products. The process of integrating an acquired business, technology, service or product into our business and operations may result in unforseen operating difficulties and expenditures. Integration of an acquired company may also require significant management resources that would otherwise be available for ongoing development of our business. Moreover, the anticipated benefits of any acquisition may not be realized or may depend on the continued service of acquired personnel who could choose to leave. We currently do not have any understandings, commitments or agreements with respect to any other acquisition and no other material acquisition is currently being pursued. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. Our Systems and Operations, and Those of Our Distributors, Are Vulnerable to Natural Disasters and Other Unexpected Problems Substantially all of our computer and communications hardware is located at our leased facility in Bellevue, Washington and our systems infrastructure is hosted at an Exodus Communications facility in Tukwila, Washington. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, earthquakes and similar events. In addition, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. We do not currently have redundant systems or a formal disaster recovery plan and do not carry sufficient business interruption insurance to compensate for all losses that may occur. The facilities of our current fulfillment partners, Walsh and RxAmerica, which are located in Texas, as well as our distribution facility in New Jersey, also face these risks. In particular, RxAmerica only has a single location and no back-up facility. We depend on the efficient operation of Internet connections from customers to our systems. These connections, in turn, depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages. Any system delays, failures or loss of data, whatever the cause, could reduce customer satisfaction with our applications and services and harm our sales. We retain confidential customer and patient information in our processing centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. A material security breach could damage our reputation or result in liability to us. Governmental Regulation of Our Business Could Require Significant Expenses, and Failure to Comply With Certain Regulations Could Result in Civil and Criminal Penalties Our business is subject to extensive federal, state and local regulations. In particular, entities engaging in the practice of pharmacy are subject to federal and state regulatory and licensing requirements. Please see "Business--Governmental Regulation" for detailed information about these regulations. Regulations in this area often require subjective interpretation, and we cannot be certain that our attempts to comply with these regulations will be deemed sufficient by the appropriate regulatory agencies. Violations of any regulations could result in various civil and criminal penalties, including suspension or revocation of our licenses or registrations, seizure of our inventory, or monetary fines, which could adversely affect our operations. We are also subject to laws and regulations regarding homeopathic drugs, and we may face enforcement actions, lawsuits or claims asserting that we have not complied with these laws and regulations. As we expand our product and service offerings, more of our products and services will likely be subject to regulation by the FDA, which regulates drug advertising and promotion. Complying with FDA regulations is time consuming, burdensome and expensive, and could delay our introduction of new products or services. The U.S. House of Representatives Committee on Commerce and the General Accounting Office are conducting a review of online pharmacies, including the current laws that govern pharmacy operations, and the 17

potential for abuses by some online sites, focusing on those that do not require the submission of a valid prescription issued by the customer's physician. In addition, in December 1999 the Clinton administration announced a proposal to eliminate illegal sales of prescription drugs over the Internet by unlicensed Web site operators. If approved by Congress, the proposal would, among other things, establish new federal requirements for Internet pharmacies to ensure that they comply with state and federal laws, create new civil penalties for the illegal sale of pharmaceuticals, and authorize additional federal enforcement powers. We believe that any regulations resulting from these investigations or the Clinton administration's proposal will likely result in increased reporting and monitoring requirements, which could be burdensome and increase our expenses. Other legislation and regulations currently being considered at the federal and state level could affect our business, including legislation or regulations relating to confidentiality of patient records, including electronic access and storage of such records, as well as the inclusion of prescription drugs as a Medicare benefit. In addition, various state legislatures are considering new legislation related to the regulation of nonresident pharmacies. Compliance with new laws or regulations could increase our expenses. The Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. Regulations have been proposed to implement these requirements, and we are designing our applications to comply with the proposed regulations. However, until these regulations become final, possible changes in these regulations could cause us to use additional resources and lead to delays as we revise our Web site and operations. Until recently, Health Care Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. We are also subject to extensive regulation relating to the confidentiality and release of patient records. Additional legislation governing the distribution of medical records exists or has been proposed at both the state and federal level. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or prevented from delivering patient records electronically. This could have an adverse impact on our ability to gain and retain customers. Failure to Attract and Retain Experienced Personnel and Senior Management Could Hurt Our Ability to Grow Our Business We intend to continue to hire a significant number of additional sales, support and marketing personnel, as well as pharmacists, software developers and personnel to staff our recently established distribution facility. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain additional highly qualified personnel in the future. Our future success also depends upon the continued service of our executive officers and senior management. None of our employees is bound by an employment agreement for any specific term. We do not have "key person" life insurance policies covering any of our employees. In addition, none of the members of our senior management team have prior experience in the healthcare industry or in drugstore operations. We Cannot Be Certain That We Will Be Able to Protect Our Intellectual Property, and We May Be Found to Infringe Proprietary Rights of Others, Which Could Harm Our Business We rely or may in the future rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our sales formats or to obtain and use information that we regard as proprietary, such as the technology used to operate our Web site, our content and our trademarks. We have filed applications for U.S. trademark registrations for "drugstore.com" and twelve other trademarks. We may be unable to secure these registrations. It is also possible that our competitors or others will adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term drugstore.com or 18

our other trademark applications. Any claims or customer confusion related to our trademarks, or our failure to obtain any trademark registration, could negatively affect our business. Litigation or proceedings before the U.S. Patent and Trademark Office may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain name and determine the validity and scope of the proprietary rights of others. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could seriously harm our business and operating results. Finally, we may in the future sell our products internationally, and the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Third parties may also claim infringement by us with respect to past, current or future technologies. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. We May Not Be Able to Protect Our Domain Names In All Countries or Against All Infringers, Which Could Decrease the Value of Our Brand Name and Proprietary Rights We currently hold the Internet domain name "drugstore.com," as well as various other related names. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not acquire or maintain the "drugstore.com" domain name in all of the countries in which we conduct business. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our brand name, trademarks and other proprietary rights. We May Face Liability for Content on Our Web Site Because we post product information and other content on our Web site, we face potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that we post. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, we could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business. Our Officers, Directors and Certain Existing Stockholders Control the Majority of Our Common Stock, Which Could Discourage an Acquisition of Us or Make Removal of Incumbent Management More Difficult Executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately 64.7% of our outstanding common stock following the completion of this offering. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. In addition, after this offering, Amazon.com will beneficially own approximately 24.5% and Rite Aid will beneficially own 15.5% of our outstanding common stock. Therefore, Amazon.com and Rite Aid will each be able to significantly influence all matters requiring approval by our stockholders, including the election 19

of directors and the approval of mergers or other business combination transactions. Amazon.com's substantial equity stake in drugstore.com could also make us a much less attractive acquisition candidate to potential acquirors, because Amazon.com alone could have sufficient votes to prevent the tax-free treatment of an acquisition. See "Principal and Selling Stockholders" for a description of Amazon.com's and Rite Aid's stock ownership relative to other stockholders. We May Need Additional Capital in the Future to Support Our Growth, and Such Additional Financing May Not Be Available To Us We do not expect the net proceeds from this offering to be sufficient to meet all of our long-term business development requirements. Although we believe that the net proceeds from this offering, together with our available funds, will provide adequate liquidity to fund our operations and meet our other cash requirements for at least twelve months following this offering, unanticipated developments in the short-term may require additional financing. We may seek to raise additional funds through public or private debt or equity financings in order to: . Take advantage of favorable business opportunities, including acquisitions of complementary businesses or technologies; . Develop and upgrade our technology infrastructure; . Enhance and increase our distribution capacity; . Develop new product and service offerings; and . Respond to competitive pressures. We cannot assure you that any additional financing we may need will be available on terms favorable to us, or at all. Our Net Sales Would Be Harmed if We Experience Significant Credit Card Fraud A failure to adequately control fraudulent credit card transactions would harm our net sales and results of operations because we do not carry insurance against this risk. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder's signature. Certain Antitakeover Provisions and Significant Equity Ownership by Amazon.com and Rite Aid Could Preclude an Acquisition Provisions of our certificate of incorporation, bylaws, Washington law and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Further, because Amazon.com and Rite Aid each own a significant percentage of our capital stock, a competitor of Amazon.com or Rite Aid as well as other potential acquirors could determine not to merge with or acquire us. In addition, if we were acquired by an Amazon.com competitor and Amazon.com did not vote in favor of the transaction, we would lose our rights to promotional placements on Amazon.com's Web site, and to use Amazon.com's technology (if we are then using any). The potential loss of these rights could inhibit offers to acquire us. Risks Related to Internet Commerce We Depend on Continued Use of the Internet and Growth of the Online Drugstore Market Our future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the Internet as an effective medium of business and communication by our target customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. 20

In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Further, the online market for drugstore products is in its infancy. The market is significantly less developed than the online market for books, auctions, music, software and numerous other consumer products. Even if use of the Internet and electronic commerce continues to increase, the rate of growth, if any, of the online drugstore market could be significantly less than the online market for other products. Our rate of revenue growth could therefore be significantly less than other online merchants. Our Sales Could be Negatively Affected if We Are Required to Charge Taxes on Sales We do not collect sales or other similar taxes in respect of goods sold by drugstore.com, except from purchasers located in the State of Washington. However, one or more states or the federal government may seek to impose sales tax collection obligations on out-of-state companies (such as drugstore.com) that engage in or facilitate online commerce, and a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce, and could adversely affect our opportunity to derive financial benefit from such activities. Moreover, one or more states could begin to impose sales taxes on sales of prescription products (which are not generally taxed at this time); if so, customers who order prescriptions at our Web site and pick them up at a local Rite Aid store would be required to pay state sales tax. A successful assertion by one or more states or the federal government that we should collect further sales or other taxes on the sales of products through drugstore.com could negatively affect our revenues and business. If We Do Not Respond to Rapid Technological Changes, Our Services Could Become Obsolete and Our Business Would Be Seriously Harmed As the Internet and online commerce industry evolve, we must license leading technologies useful in our business, enhance our existing services, develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement new technologies or adapt our Web store, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to do so, it could adversely impact our ability to build the drugstore.com brand and attract and retain customers. Governmental Regulation of the Internet and Data Transmission Over the Internet Could Affect Our Business Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The most recent session of the U.S. Congress resulted in Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. In particular, many government agencies and consumers are focused on the privacy and security of medical and pharmaceutical records. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing privacy, libel and taxation apply to Internet stores such as ours. The rapid growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online and in particular companies that fill prescriptions or maintain medical or pharmaceutical records. The adoption or modification of laws or regulations relating to Internet businesses could adversely affect our ability to attract and serve customers. 21

Risks Related to this Offering Our Stock Price is Likely to Continue to Fluctuate, Which Could Result in Substantial Losses for Investors The market price of our common stock has been and is likely to continue to be extremely volatile. Our stock price could be subject to wide fluctuations in response to a number of factors, some of which are beyond our control, and these fluctuations could result in substantial losses for investors. Factors that could cause our stock price to fluctuate include: . Quarterly variations in operating results; . Changes in financial estimates by securities analysts; . Announcements by us or our competitors, of new products, significant contracts, acquisitions or strategic relationships; . Publicity about our company, our products and services, our strategic partners, our competitors, the online pharmacy industry, or e-commerce in general; . Additions or departures of key personnel; . Any future sales of our common stock or other securities; and . Stock market price and volume fluctuations of publicly-traded companies in general and Internet-related companies in particular. The trading prices of Internet-related companies and e-commerce companies in particular have been especially volatile and many are at or near historical highs. Investors may be unable to resell their shares of our common stock at or above the offering price. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results. Future Sales of Shares by Existing Stockholders Could Affect Our Stock Price If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall, potentially resulting in substantial losses to investors. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Based on shares outstanding as of February 3, 2000, upon completion of this offering, we will have outstanding 50,522,560 shares of common stock, assuming no exercise of the underwriters' over-allotment option. Of these shares, the 6,020,000 shares sold in this offering and the 5,750,000 shares sold in our initial public offering will be freely tradeable unless held by our affiliates. Of the remaining 38,752,560 shares, 35,972,222 shares will be subject to lock-up agreements of at least 90 days with Morgan Stanley & Co. Incorporated, as representative of the underwriters of this offering. After these agreements expire, at the end of the lock-up period or earlier at the discretion of Morgan Stanley & Co. Incorporated, as representative of the underwriters, these shares will be generally freely tradeable, subject to the limitations of Rule 144 under the Securities Act. The holders of 34,762,722 shares of our common stock outstanding after this offering have the right, under certain circumstances, to require us to register their shares of common stock for public resale. See "Shares Eligible for Future Sale" for a further description regarding shares that will become eligible for sale at future dates after this offering. New Stockholders Will Incur Substantial Dilution as a Result of This Offering The assumed public offering price of $29.3125 per share is substantially higher than the book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate substantial dilution. In addition, we have issued options to acquire common stock at prices significantly below the public offering price. To the extent such outstanding options are ultimately exercised, there will be further dilution to investors in this offering. See "Dilution" for a more detailed description of how new stockholders will incur dilution. 22

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance and include, but are not limited to, statements concerning: . The anticipated benefits and risks of our key strategic partnerships, business relationships and acquisitions; . Our ability to attract and retain customers; . The anticipated benefits and risks associated with our business strategy, including those relating to our distribution and fulfillment strategy and our current and future product and service offerings; . Our future operating results and the future value of our common stock; . The anticipated size or trends of the market segments in which we compete and the anticipated competition in those markets; . Potential government regulation; and . Our future capital requirements and our ability to satisfy our capital needs. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward- looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations. 23

USE OF PROCEEDS Net proceeds from the sale of the 4,500,000 shares of common stock offered by drugstore.com hereby, at an assumed public offering price of $29.3125 per share, are estimated to be approximately $124.6 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment options are exercised in full, we estimate that our net proceeds will be approximately $146.4 million. We intend to use the proceeds of this offering for general corporate purposes, including working capital to fund anticipated operating losses and purchases of inventory for our new distribution center, and capital expenditures. We may also use a portion of the net proceeds to acquire complementary technologies or businesses; however, we currently have no commitments or agreements with respect to any such transactions. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment grade securities. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol "DSCM" since our initial public offering on July 27, 1999. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low reported intraday sales prices per share of our common stock.
Common Stock Price --------------High Low ------- -------

Fiscal Year Ended January 2, 2000: Third Quarter (from July 27, 1999)............................ $70 $32 1/2 Fourth Quarter................................................ $55 $27 1/8 Fiscal Year Ended December 31, 2000: First Quarter (through February 7, 2000)...................... $39 3/8 $27

On February 7, 2000, the reported last sale price of our common stock on the Nasdaq National Market was $29.3125 per share. On February 3, 2000, there were approximately 208 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 24

CAPITALIZATION The following table sets forth our capitalization as of January 2, 2000 on an actual, pro forma and pro forma as adjusted basis: . The "Actual" column reflects our capitalization as of January 2, 2000, without any adjustments for subsequent or anticipated events; . The "Pro Forma" column reflects our capitalization as of January 2, 2000, with adjustments to give effect to (1) our sale of 1,066,667 shares of common stock to Amazon.com on January 24, 2000 in a private placement transaction for approximately $30 million and the application of the proceeds therefrom and (2) our acquisition of Beauty.com on February 2, 2000; and . The "Pro Forma As Adjusted" column reflects our pro forma capitalization, with adjustments to give effect to the sale of the 4,500,000 shares of common stock offered by drugstore.com hereby at an assumed public offering price of $29.3125 per share, and the application of the proceeds therefrom after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This table should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this prospectus.
As of January 2, 2000 --------------------------------Pro Forma Actual Pro Forma As Adjusted --------- --------- ----------(in thousands, except share data) $ 2,687 $ 2,687

Capital lease obligations, less current portion...................................... $ 2,687 Stockholders' equity: Preferred stock, $.0001 par value; authorized 10,000,000 shares; issued and outstanding: none actual, pro forma and pro forma as adjusted............ -Common stock, $.0001 par value; stated at amounts paid in; authorized 250,000,000 shares; issued and outstanding: 43,508,808 shares actual, 45,841,764 pro forma and 50,341,764 pro forma as adjusted................................... 485,377 Deferred stock-based compensation............. (10,770) Accumulated deficit........................... (123,858) --------Total stockholders' equity.................. 350,749 --------Total capitalization........................ $ 353,436 =========

--

--

555,790 (27,978) (123,858) -------403,954 -------$406,641 ========

680,401 (27,978) (123,858) -------528,565 -------$531,252 ========

The number of issued and outstanding shares of common stock in the table above excludes 11,289,747 shares of common stock reserved for issuance under our stock option and stock purchase plans, of which 5,850,658 shares were subject to outstanding options as of January 2, 2000 at a weighted average exercise price of $16.4875 per share. On January 20, 2000, we granted options to purchase 946,940 shares of common stock at an exercise price of $27.1875 per share. See "Management--Incentive Stock Plans" and Note 8 of Notes to Consolidated Financial Statements. 25

DILUTION The net tangible book value of drugstore.com as of January 2, 2000 was $150 million, or approximately $3.45 per share. Net tangible book value per share is determined by dividing our net tangible book value (total tangible assets minus total liabilities) by the number of shares of our common stock outstanding. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to (1) our sale of the 4,500,000 shares of common stock in this offering at an assumed public offering price of $29.3125 per share, and the application of the net proceeds therefrom, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (2) our sale of 1,066,667 shares of common stock to Amazon.com for approximately $30 million and the application of the proceeds therefrom, and (3) our acquisition of Beauty.com, the net tangible book value of drugstore.com at January 2, 2000 would have been $296.1 million, or approximately $5.88 per share. This represents an immediate increase in net tangible book value of $2.43 per share to existing stockholders as of January 2, 2000 and an immediate dilution of $23.43 per share to new investors of common stock in this offering. The following table illustrates this dilution on a per share basis:
Assumed public Net tangible Increase per Decrease per Increase per offering price per share................................ $29.31 book value per share as of January 2, 2000......... 3.45 share attributable to Amazon.com................... .59 share attributable to Beauty.com................... (.30) share attributable to investors in this offering... 2.14 ---Pro forma net tangible book value per share after this offering........ 5.88 -----Dilution per share to new investors.................................... $23.43 ======

The table above excludes 11,289,747 shares of common stock reserved for issuance under our stock option and stock purchase plans, of which 5,850,658 shares were subject to outstanding options as of January 2, 2000 at a weighted average exercise price of $16.4875 per share. On January 20, 2000, we granted options to purchase 946,940 shares of common stock at an exercise price of $27.1875 per share. See "Management--Incentive Stock Plans" and Note 8 of Notes to Consolidated Financial Statements. 26

SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of drugstore.com and the Notes thereto included elsewhere in this prospectus. The consolidated statement of operations data set forth below for the period from April 2, 1998 (inception) to December 31, 1998 and for the fiscal year ended January 2, 2000, and the selected consolidated balance sheet data as of December 31, 1998 and January 2, 2000, have been derived from the audited financial statements of drugstore.com included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, Independent Auditors. The historical results are not necessarily indicative of results to be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Period from April 2, 1998 (Inception) to Year Ended December 31, 1998 January 2, 2000 ----------------- --------------(in thousands, except share and per share data) $ -$ 34,848

Consolidated Statements of Operations Data: Net sales.................................... Cost and expenses: Cost of sales.............................. Marketing and sales........................ Technology and content..................... General and administrative................. Charitable contribution.................... Amortization of intangible assets.......... Amortization of stock-based compensation... Total cost and expenses.................. Operating loss............................... Other income (expense): Interest income............................ Interest expense........................... Net loss..................................... Basic and diluted net loss per share......... Weighted average shares outstanding used to compute basic and diluted net loss per share....... Pro forma basic and diluted net loss per share (unaudited)(1)........................ Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited)(1)......................

-3,092 2,178 1,861 -33 1,037 ------8,201 ------(8,201) 177 (3) ------$(8,027) ======= $(14.70) ======= 546,149 =======

38,440 61,492 14,918 11,126 3,600 10,640 15,375 ---------155,591 ---------(120,743) 5,036 (124) ---------$ (115,831) ========== $ (6.13) ========== 18,880,969 ========== $ (3.73) ==========

Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities.................................. Working capital.............................. Total assets................................. Capital lease obligations, less current portion..................................... Total stockholders' equity...................

31,045,835 ========== December 31, 1998 January 2, 2000 ----------------- --------------(in thousands) $14,408 17,050 22,517 975 19,347 $ 132,754 106,960 395,708 2,687 350,749

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of weighted average shares used to compute pro forma net loss per share amounts. 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes contained elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this prospectus. Overview drugstore.com is a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products and information. We offer a larger selection of products than typical store-based retailers at competitive prices, along with a wealth of health-related information, buying guides and other tools designed to help consumers make more educated purchasing decisions. We were incorporated in April 1998 and commercially launched our Web site on February 24, 1999. From the period from inception through the commercial launch of our site, our primary activities consisted of: . Developing our business model; . Raising funds and developing strategic alliances; . Designing and developing our Web site; . Recruiting and training employees; . Selecting our fulfillment partners and integrating their systems and processes with ours; . Negotiating advertising contracts with several of the major Web portals; and . Developing the drugstore.com brand. Since the commercial launch of our site, we have continued these operating activities and have also focused on acquiring and retaining customers, expanding our product offerings, building vendor relationships, promoting our brand name, improving the efficiency of our order fulfillment processes, establishing customer service operations and developing our own distribution capabilities. All customer orders are processed through our Web store and can be either shipped to the customer or, in the case of refills of existing Rite Aid prescriptions, picked up by the customer at any Rite Aid store in the United States. Orders are either billed to the customer's credit card or, in the case of prescriptions covered by insurance, billed to third parties. Sales of pharmaceutical products covered by third parties are recorded at the net amount to be received. Generally, we collect cash from credit card sales in two to five days from the date the order is shipped. Amounts billed to third parties are, on average, collected in approximately 30 days; however, such timing can vary depending on the payor. Sales billed to third party insurance companies and PBMs through our relationships with Rite Aid and PCS currently represent a significant percentage of our pharmacy sales. We expect that sales billed to these third parties will continue to represent a significant percentage of our pharmacy sales for the forseeable future. We routinely offer discounts and coupons to customers. In addition, if a customer is not satisfied with a particular product or the level of customer service we provide, we generally refund all or a portion of the sale. Allowances for refunds and sales price incentives, including discounts and coupons, are netted against the related sales price in net sales. We may in the future expand or increase the coupons and discounts we offer to our customers. In January 2000, we began limited operations at our own 290,000 square foot distribution center, and we are in the process of transitioning our distribution capabilities for pharmaceutical and non-pharmaceutical 28

products from third party distributors to our center. In connection with opening our distribution center, we also opened our own pharmacy as part of our agreement with Rite Aid. Operating our own distribution facility will require us, in the near term, to hire and train a significant number of new employees, increase inventory levels substantially and establish a significant number of direct relationships with manufacturers. In addition, as we transition to our own distribution center, order fulfillment through multiple channels and underutilization of our own distribution capacity could result in cost and service level inefficiencies. Currently, we purchase substantially all of our pharmaceutical products from RxAmerica and more than half of our nonpharmaceutical products from Walsh. We also purchase pharmaceutical products from Rite Aid. Products are purchased from RxAmerica, Walsh and Rite Aid after the customer submits an order, and we maintain an inventory of nonpharmaceutical products that are not available from Walsh. As we transition customer order fulfillment to our own distribution center, we intend to establish relationships directly with product manufacturers, and we expect that order fulfillment through Walsh will cease by the end of the second quarter of 2000. In addition, in connection with establishing our own distribution center, we are obligated to buy our pharmaceutical products from Rite Aid, unless we are able to obtain better overall terms from other vendors. As the number of orders filled out of the pharmacy operation in our distribution center increases, we expect that purchases from Rite Aid will account for an increasingly significant portion of our total pharmaceutical product purchases. On February 2, 2000, we acquired Beauty.com, a Web store specializing in prestige beauty products, and entered into an agreement to retain the employment of its founder, Roger Barnett, for a total of 1,266,289 shares of drugstore.com common stock (approximately $40.4 million based on the price of our common stock on January 12, 2000, the date the transaction was announced). Beauty.com maintains an inventory of all products that it sells and we expect our inventory to increase significantly relative to our current levels as a result of the acquisition. Beauty.com currently outsources its fulfillment operations to Keystone Corporation and we expect to begin integrating Beauty.com's fulfillment operations into our own while keeping the Beauty.com Web store intact. A significant portion of the shares of common stock that we issued under the acquisition agreement are subject to the terms of an escrow agreement and will be forfeited by Mr. Barnett if he does not remain employed at Beauty.com for the two year period following the acquisition. We will account for the acquisition as a purchase. We have incurred net losses of $123.9 million from inception to January 2, 2000. We believe that we will continue to incur net losses for at least the next four years (and possibly longer) and that the rate at which we will incur such losses will likely increase significantly from current levels. We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses, and difficulties encountered by companies in their early stage of development, particularly companies in new and rapidly-evolving markets, such as e- commerce. See "Risk Factors" for a more complete description of the many risks we face. In view of our limited operating history and the rapidly evolving nature of our business, we believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as an indication of future performance. It is likely that in some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may fall significantly. The Securities and Exchange Commission and the Emerging Issues Task Force of the Financial Accounting Standards Board are reviewing the financial statement classification of, and accounting for, fulfillment and order processing costs and other items by a number of e-commerce companies, including drugstore.com. Our fulfillment and order processing costs include distribution center equipment and packaging supplies, per-unit fulfillment fees charged by third parties, and payroll and related expenses for personnel engaged in customer service, purchasing, and distribution and fulfillment activities, including pharmacists engaged in prescription verification activities and warehouse personnel. These expenses also include rent expense and depreciation related to our distribution center. We classify all of these costs in marketing and sales expense. The SEC has 29

advised us that it may decide to require that some or all of our fulfillment and order processing costs be classified as costs of sales. In addition, the SEC may require us to capitalize certain of these costs in inventory. We currently expense these costs as incurred. We will adjust our accounting and classification of fulfillment and order processing costs if required by the SEC. Any such adjustments or reclassifications are not expected to have a significant impact on our sales, operating profit or loss, net income or loss, or cash flow, although such adjustments or reclassifications could result in an increase in our cost of sales as a percentage of our net sales. Net Sales. Net sales includes gross revenues from sales of products and related shipping fees, net of discounts and provisions for sales returns, third-party reimbursement and other allowances. We generally refund all or a portion of the selling price, including related shipping fees, if applicable, in the event the customer is not satisfied with the product purchased or the quality of customer service provided. Sales returns and allowances have not been significant to date. Revenues from sales of products shipped to customers, and related shipping fees, are recognized upon shipment. We arrange for shipment of products to customers through various contractual relationships with third-party fulfillment partners. Revenues from sales of certain pharmaceutical products ordered through our Web store for delivery at a Rite Aid store are recognized when the product is delivered to the customer. Upon receiving and validating a customer's order for products that will be purchased by us from a fulfillment partner, and subsequently shipped or delivered to the customer by that fulfillment partner, we submit relevant order information and, if applicable, shipping instructions to that fulfillment partner for processing. We believe we act as a principal in connection with orders shipped or delivered to customers by fulfillment partners on our behalf because, among other things, we establish the retail prices of our non-pharmaceutical and non-insured pharmaceutical products (and accept contractual reimbursement amounts from third-party payors for insured pharmaceutical products) and shipping fees; contractually take title to, and assume risk of loss of, products prior to their shipment; bear credit and collection risk from the customer or, in the case of certain pharmaceutical sales, third-party payors; and bear the risk that the product will be returned. Title to products ordered by customers and shipped or delivered by a fulfillment partner passes to us at the fulfillment partners' distribution center or, for certain pharmaceutical sales, when the pharmaceuticals are made available for customer retrieval at a Rite Aid store. In the future, the level of our net sales will depend on a number of factors including, but not limited to, the following: . The number of customers we are able to obtain; . The frequency of our customers' purchases; . The quantity and mix of products our customers purchase; . The quantity of the types of products we are able to offer for sale; . The price we charge for our products; . The amount we charge for shipping; . The extent of sales price incentives, including coupons and discounts we offer; . The extent of reimbursement available from third-party payors; . The level of customer returns we experience; and . The seasonality that we may experience in our business. Cost of Sales. Cost of sales consists primarily of the cost of products sold to our customers, including allowances for shrinkage and slow moving and expired inventory, as well as outbound and inbound shipping costs. Payments that we expect to receive from vendors in connection with joint merchandising activities, net of related costs, will be netted against cost of sales in the period in which the related inventory is sold. We expect 30

cost of sales to increase in absolute dollars to the extent that our sales volume increases. Cost of sales as a percentage of net sales will fluctuate based on a number of factors, including, but not limited to, the following: . The cost of our products, including the extent of promotional allowances, payments for joint merchandising activities and purchase volume discounts that we are able to obtain from suppliers; . Our pricing strategy relative to the cost of our products, including the extent to which we offer coupons or promotional discounts; . The mix of products our customers purchase; . The mix of consignment service fees vs. product sales; . The mix of cash payments vs. insurance reimbursement for our pharmacy products; . Our shipping pricing strategy relative to the cost of shipping; and . The extent to which we are able to control product damage, shrinkage and expiration though inventory management practices. Marketing and Sales. Marketing and sales expenses consist primarily of fulfillment and order processing expenses and customer acquisition and marketing expenses. Fulfillment and order processing expenses include distribution center equipment and packaging supplies, per-unit fulfillment fees charged by third parties, and payroll and related expenses for personnel engaged in customer service, purchasing, and distribution and fulfillment activities, including pharmacists engaged in prescription verification activities and warehouse personnel. These expenses also include rent expense and depreciation related to our distribution center. We expect fulfillment and order processing expenses to increase during the next two quarters due to duplicative costs that we will incur while we complete the transition of our customer order fulfillment operations from third party distributors, including those operated on behalf of Beauty.com, to our own distribution facilities. Additionally, to the extent that our sales volume increases in future periods, we expect fulfillment and order processing expenses to increase in absolute dollars as we expand the accompanying distribution and fulfillment activities. Customer acquisition and marketing expenses include advertising and marketing expenses, promotional expenditures, credit card processing fees and payroll and related expenses for personnel engaged in marketing and merchandising activities. Promotional expenses include the cost of certain items we give away to our customers in connection with our customer acquisition and retention activities and our branding campaign. These items include sample merchandise in sizes or quantities not normally sold on our Web site, certain drugstore.com-branded products and the cost of products given away in our one cent sales promotions. Advertising expenses include media, agency and production costs associated with our branding campaign. We intend to continue to pursue an aggressive branding and marketing campaign and, therefore, we expect customer acquisition and marketing expenses to increase significantly in absolute dollars. Customer acquisition and marketing expenses may also vary considerably from quarter to quarter, depending on the timing of our advertising campaigns. We currently intend to pursue an independent branding and marketing strategy for the Beauty.com Web store. Accordingly, we expect that customer acquisition and marketing expenses will increase after the Beauty.com acquisition is consummated. Technology and Content. Technology and content expenses consist primarily of payroll and related expenses for personnel engaged in maintaining and making minor upgrades and enhancements to our Web site and content. These expenses also include payroll and related expenses for information technology personnel, Internet access and hosting charges and Web site content and design expenses. Over the next several months, we expect that our technology and content expenses will increase as we: . Continue to make minor upgrades to improve our systems relating to in- store prescription pickup at Rite Aid stores; . Make minor enhancements to our Web site to display additional product offerings; and . Maintain our Web site product listings and content. 31

We believe that continued investment in these areas is critical to attaining our strategic objectives and, as a result, we expect technology and content expenses to increase significantly in absolute dollars. General and Administrative. General and administrative expenses consist of payroll and related expenses for executive and administrative personnel, corporate facility expenses, professional services expenses, travel and other general corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we expand our staff and incur additional costs related to the anticipated growth of our business and being a public company. Amortization of Intangible Assets. In July 1999, we consummated a series of agreements with Rite Aid and GNC to issue 12,282,599 shares of Series E preferred stock in exchange for an aggregate of $10 million in cash and other consideration, including access to insurance coverage, advertising commitments, exclusivity agreements, a technology licensing agreement and other obligations with an estimated fair value of $233.9 million. The $233.9 million non-cash portion of the consideration from the Rite Aid and GNC agreements was allocated to the following components based on a valuation obtained from an independent valuation expert (in millions):
Access to insurance coverage .................................... $182.0 Advertising commitments.......................................... 22.9 Vendor agreement................................................. 29.0 -----$233.9 ======

The access to insurance coverage and the vendor agreement have been classified as intangible assets and the advertising commitments have been classified within prepaid marketing expenses. All of the assets are being amortized on a straight-line basis over their contractual lives of 10 years, which is also their estimated useful lives. Amortization of the advertising commitments is included in marketing and sales expense. As a result of our acquisition of Beauty.com, we expect that amortization of intangible assets will increase substantially from current levels. We intend to obtain an independent valuation in order to allocate the purchase price to the net assets acquired, including any goodwill. We expect that such valuation will be completed in the first quarter of 2000. Amortization of Stock-based Compensation. We have recorded total deferred stock-based compensation of $27,596,000 in connection with stock options granted and restricted stock issued to our employees. The deferred stock-based compensation amounts represent the difference between the exercise price of stock option grants and the deemed fair value of our common stock at the time of such grants. In the case of restricted stock, the deferred stock-based compensation represents the difference between the purchase price of the restricted stock and the deemed fair value of our common stock on the date of purchase. Such amounts are amortized to expense over the vesting periods of the applicable agreements, resulting in amortization of stock-based compensation totaling $1,037,000 for the period from April 2, 1998 (inception) to December 31, 1998 and $15,375,000 for the fiscal year ended January 2, 2000. The amortization expense relates to options awarded to employees in all operating expense categories. Deferred stock-based compensation as of January 2, 2000 for stock options and restricted stock issued to our employees will be subsequently recognized as expense for each of the next five fiscal years as follows:
Fiscal Year ----------2000 2001 2002 2003 2004 Amount -------------(in thousands) $5,715 2,976 1,500 468 111

32

We expect that a significant percentage of the consideration for the Beauty.com acquisition will be deemed to be deferred stock-based compensation. Any deferred stock-based compensation will be amortized over a two-year period and, accordingly, we expect that amortization of stock-based compensation for fiscal 2000 and 2001 will be significantly higher than the amounts in the above table. Interest Income and Expense. Interest income consists of earnings on our cash and cash equivalents and interest expense consists of interest associated with capital lease obligations. Income Taxes. There was no provision or benefit for income taxes for any period since inception due to our operating losses. As of January 2, 2000, we had approximately $98.4 of net operating loss carryforwards for federal income tax purposes, which expire beginning in 2018. In 1999, due to the issuance and sale of Series D and Series E preferred stock, we incurred ownership changes pursuant to applicable regulations in effect under the Internal Revenue Code of 1986, as amended. Therefore, our use of losses incurred through the date of these ownership changes will be limited during the carryforward period. We estimate that the use of the approximately $53.9 million of net operating losses incurred prior to the date of the ownership change would be limited to approximately $6.6 million per year in order to offset future taxable income. To the extent that any single-year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. Our initial public offering did not cause an additional ownership change that would result in additional limitations on the utilization of net operating loss carryforwards. We do not expect that this offering will cause additional ownership changes. We have provided a full valuation allowance on the deferred tax asset, consisting primarily of such net operating loss carryforwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carryforward period. See Note 6 of Notes to Consolidated Financial Statements. 33

Quarterly Results of Operations Because we were a development stage company prior to the launch of our Web site in February 1999 and have a short operating history, we believe that period-to-period comparisons for periods prior to 1999 are less meaningful than an analysis of recent quarterly operating results. Accordingly, we are providing a discussion and analysis of our results of operations that is focused on the seven quarters ended January 2, 2000. The following table sets forth unaudited quarterly statement of operations data for the seven quarters ended January 2, 2000. This unaudited quarterly information has been derived from our unaudited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of such information in accordance with accounting principles generally accepted in the United States. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
Quarter Ended ----------------------------------------------------------------Sept. Dec. June 30, 30, 31, April 4, July 4, Oct. 3, Jan. 2, 1998 1998 1998 1999 1999 1999 2000 -------- ------- ------- -------- -------- -------- -------(in thousands) Net sales............... $ -$ -$ -$ 652 $ 3,550 $ 12,158 $ 18,488 Cost and expenses: Cost of sales......... ---672 4,879 14,066 18,823 Marketing and sales... -313 2,779 5,189 11,328 16,471 28,504 Technology and content.............. 104 522 1,552 2,713 3,229 4,232 4,744 General and administrative....... 71 511 1,279 1,713 2,204 3,120 4,089 Charitable contribution......... -----3,600 -Amortization of intangible assets.... 8 10 15 18 20 5,300 5,302 Amortization of stockbased compensation... 166 350 521 1,257 2,326 9,267 2,525 ----------- ------- -------- -------- -------- -------Total cost and expenses............ 349 1,706 6,146 11,562 23,986 56,056 63,987 ----------- ------- -------- -------- -------- -------Operating loss.......... (349) (1,706) (6,146) (10,910) (20,436) (43,898) (45,499) Other income (expense): Interest income....... -36 141 332 701 1,958 2,045 Interest expense...... --(3) (14) (26) (33) (51) ----------- ------- -------- -------- -------- -------Net loss................ $(349) $(1,670) $(6,008) $(10,592) $(19,761) $(41,973) $(43,505) ===== ======= ======= ======== ======== ======== ========

Quarterly Periods from Inception to April 4, 1999 Net Sales and Cost of Sales. We commercially launched our Web site on February 24, 1999. There were no net sales or cost of sales prior to the quarter ended April 4, 1999. Net sales approximated the cost of sales in the quarter ended April 4, 1999 due to promotional sales discounts and coupons associated with the commercial launch of the Web site. Marketing and Sales. Marketing and sales expenses increased in each of the four quarters ended April 4, 1999, primarily due to expenses associated with the addition of marketing and merchandising personnel. We also increased our advertising on major Web portals, including AOL, Excite and Yahoo!, in the quarter ended April 4, 1999 in connection with the commercial launch of our Web site. Additionally, we recognized $1,007,000 of non-cash advertising expenses under our technology license and advertising agreement with Amazon.com in the quarter ended April 4, 1999. Technology and Content. Technology and content expenses increased in each of the four quarters ended April 4, 1999, primarily due to increased expenses associated with the addition of information technology personnel and additional use of consultants and contract labor to help maintain the systems supporting our Web site. 34

General and Administrative. General and administrative expenses increased in each of the four quarters ended April 4, 1999, primarily due to increased expenses associated with the addition of general and administrative personnel, additional professional fees and the cost of corporate facilities. Amortization of Intangible Assets. Amortization of intangible assets during the four quarters ended April 4, 1999 primarily represented the amortization of the technology license obtained from Amazon.com and certain domain names owned by us. Amortization of Stock-based Compensation. Amortization of stock-based compensation increased in each of the four quarters ended April 4, 1999, primarily due to the grant of stock options to new employees prior to our initial public offering on July 27, 1999, as well as an increase in the difference between the grant price and the deemed fair value of our common stock, particularly in the quarter ended April 4, 1999. Three Quarterly Periods Ended January 2, 2000 Net Sales and Cost of Sales. We have been operating our Web store for three full fiscal quarters. The following table sets forth net sales for each of these quarters by category:
Quarter Ended -----------------------------------July 4, Oct. 3, Jan. 2, 1999 1999 2000 ---------- ----------- ----------Amount % Amount % Amount % ------ --- ------- --- ------- --(dollars in thousands) $1,094 31% $ 7,107 58% $10,453 57% 2,456 69 5,051 42 8,035 43 ------ --- ------- --- ------- --$3,550 100% $12,158 100% $18,488 100% ====== === ======= === ======= === 150,000 260,000 267,000 26% 33% 44%

Category -------Pharmaceutical products................. Non-pharmaceutical products and other... Total................................. New customers........................... Orders from repeat customers as a percentage of total orders.............

Our net sales in each category have increased in each quarter since we commenced operations due to increases in new customers and increased repeat orders. The substantial increase in pharmaceutical product sales as a percent of total net sales in the quarter ended October 3, 1999 was primarily related to the commencement of the Rite Aid in-store pickup service for prescription refills. Consignment fees related to our agreement with GNC are included in net sales of non-pharmaceutical products and other and were insignificant relative to the total. Cost of sales exceeded net sales in each of the three quarters ended January 2, 2000. Such excess was primarily the result of a decrease in net sales due to sales price incentives offered to customers, including promotional coupons and discounts. We continue to offer promotional coupons and discounts as a strategy to attract new customers, although such discounts and coupons have decreased over time as a percentage of net sales. Promotional coupons can only be used by customers to offset the price of non- pharmaceutical products. Additionally, our shipping costs exceeded the amount we charged our customers for shipping in each of the three quarters ended January 2, 2000. We expect to continue to subsidize a portion of our shipping costs for the foreseeable future as a strategy to attract and retain customers. Marketing and Sales. Marketing and sales expenses increased in each of the three quarters ended January 2, 2000 due to increases in both fulfillment and order processing expenses and customer acquisition and marketing expenses. Fulfillment and order processing expenses increased in each of the three quarters ended January 2, 2000 primarily due to the increases in order volume. Volume-related expenses primarily responsible for the increased costs include permanent and temporary labor required to validate prescriptions and fulfill both pharmaceutical and non-pharmaceutical orders, per-unit fulfillment fees charged by our fulfillment partners, depreciation expense related to additional capital investments and packaging materials. 35

The increases in customer acquisition and marketing expenses are primarily attributable to increased media, agency and production costs associated with our branding campaign which commenced in the quarter ended July 4, 1999. Additionally, the cost of promotional items given to new and existing customers has increased in each quarter. We expect to continue to pursue an aggressive branding and marketing campaign for the foreseeable future and expect such expenditures to increase accordingly. Included in customer acquisition and marketing expenses are $2,293,000, $1,074,000 and $573,000 of non-cash advertising expenses incurred under our agreements with Amazon.com and Rite Aid for the second, third and fourth quarters of fiscal 1999, respectively. Technology and Content. Technology and content expenses increased in each of the three quarters ended January 2, 2000, primarily due to increased expenses associated with the addition of information technology personnel and additional use of consultants and contract labor. Such personnel assisted in maintaining and making minor upgrades and enhancements to our Web store as well as maintaining the systems supporting the Web site. General and Administrative. General and administrative expenses increased in each of the three quarters ended January 2, 2000 primarily due to increased expenses associated with the addition of general and administrative personnel, additional professional fees and the cost of corporate facilities. Charitable Contribution. In the third quarter of fiscal 1999, we donated 200,000 shares of our common stock to a foundation established by us and recognized an expense of $3,600,000 in that quarter based on the fair value of the donated common stock. Amortization of Intangible Assets. Amortization of intangible assets increased significantly in the quarters ended October 3, 1999 and January 2, 2000, to $5,300,000 and $5,302,000, respectively, primarily due to the amortization of intangible assets received in connection with the Rite Aid and GNC transactions completed in July 1999. Amortization of Stock-based Compensation. Amortization of stock-based compensation increased in the third quarter of fiscal 1999, primarily due to a separation agreement we entered into with our founder. Liquidity and Capital Resources In July 1999, we completed our initial public offering and issued 5,750,000 shares of our common stock at an initial public offering price of $18.00 per share. Net cash proceeds to us from the initial public offering were approximately $94.6 million. Concurrently with our initial public offering, we received $10 million in cash from our private placement of 555,555 shares of our common stock with Amazon.com. From our inception until our initial public offering, we financed our operations primarily through private sales of preferred stock which yielded net cash proceeds of $106.8 million. We have incurred net losses of $123.9 million from inception to January 2, 2000. We believe that we will continue to incur net losses for the foreseeable future and that the rate at which we will incur such losses will increase significantly from current levels. Net cash used in operating activities was $56.8 million for the year ended January 2, 2000, and $6.3 million in the period from April 2, 1998 (inception) to December 31, 1998. Net cash used in operating activities for each of these periods primarily reflects our net losses offset by a net source of funds from working capital. Net cash used in investing activities was $120.0 million for the year ended January 2, 2000, and $1.5 million in the period from April 2, 1998 (inception) to December 31, 1998. Net cash used in investing activities for the year ended January 2, 2000 was primarily related to the investment of the proceeds from our initial public offering in marketable securities with an original maturity greater than 90 days. Additionally, net cash used in investing activities for both periods included leasehold improvements and purchases of equipment and systems, including warehouse handling equipment, computer equipment and fixtures and furniture. 36

For the year ended January 2, 2000, net cash provided by financing activities was $188.9 million and consisted primarily of $104.6 million in net proceeds from the issuance of common stock in our initial public offering and the concurrent private placement, and $84.6 million in net proceeds from the issuance of convertible preferred stock. During the period from April 2, 1998 (inception) to December 31, 1998, net cash provided by financing activities was $22.2 million, consisting primarily of cash proceeds of $4.0 million from the issuance of 10,000,000 shares of Series A preferred stock and cash proceeds of $18.2 million from the issuance of 5,446,268 shares of Series B preferred stock. As of January 2, 2000, we had $132.8 million of cash, cash equivalents and marketable securities. As of that date, our principal commitments consisted of obligations outstanding under capital and operating leases and marketing agreements with certain Web portals, including America Online, MSNBC and Discovery Channel, aggregating approximately $80.0 million through 2012. Subsequent to January 2, 2000, we entered into a strategic agreement with Amazon.com to integrate various shopping features of our Web sites and create a persistent drugstore.com shopping presence on Amazon.com's Web site. Under the terms of the agreement, we agreed to pay Amazon.com a total of $105 million over a three-year period, of which $30 million was paid at the time the agreement was executed. In addition, in January 2000, we provided letters of credit totaling $16.4 million as security for leases and certain other operating agreements. These letters of credit must be fully collateralized by an equivalent amount of our cash. If our cash balance falls below $25 million we are contractually obligated to increase these letters of credit and related cash collateral to $20.7 million. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. We recently began limited operations at our own distribution center to improve the customer experience by locating closer to a greater percentage of our customers, exerting greater control over the distribution process and ensuring adequate supplies of products to our customers. We also expect to devote substantial resources to technology and systems upgrades to support the new distribution center and our ability to provide in-store prescription pick up at Rite Aid stores as well as to advertising and promotional activities. During 2000, we expect to incur approximately $15 million of additional costs for these technology and systems upgrades and toward the new distribution center. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next twelve months. We may need to raise additional funds prior to the expiration of such period if, for example, we pursue business or technology acquisitions or experience operating losses that exceed our current expectations. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience additional dilution. We cannot be certain that additional financing will be available to us on acceptable terms when required, or at all. Year 2000 Many existing computer programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. Prior to the end of 1999, we completed a review of the year 2000 compliance of our internally developed proprietary software, including testing to determine how our systems will function at and beyond the year 2000. Based upon our assessment, we believe that our internally developed proprietary software is year 2000 compliant. In addition, we assessed the year 2000 readiness of our third-party supplied software, computer technology and other services, which include software for use in our accounting, database and security systems, and implemented corrective actions that we believed were necessary to address potential year 2000 issues in these areas. To date, we have not experienced any year 2000-related problems with our internally developed software or our third-party supplied software and computer systems, and we are not aware of any failure by our third-party suppliers to be year 2000 compliant that could impact our 37

business or operations. In addition, to date, we are not aware of any failure by Rite Aid, RxAmerica or Walsh Distribution to be year 2000 compliant that could impact our business or operations. However, such problems or failures could arise or become apparent in the future, and any such problems or failures could have negative consequences for us. Such consequences could include difficulties in operating our Web site effectively, taking customer orders, making product deliveries or conducting other fundamental parts of our business. Quantitative and Qualitative Disclosures About Market Risk We have assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash, cash equivalents and marketable securities. Due to the short-term nature of these investments and our investment policies and procedures, we have determined that the risk associated with interest rate fluctuations related to these financial instruments does not pose a material risk to the Company. 38

BUSINESS Overview drugstore.com is a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products. As of January 2, 2000, we have sold our products to approximately 695,000 customers. We designed our store to provide a convenient, private and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. Our Web site can be accessed 24 hours a day, seven days a week from anywhere that a consumer has Internet access. We believe we offer a larger selection of products than typical store-based retailers, along with a wealth of health-related information, buying guides and other tools designed to help consumers make more educated purchasing decisions. Our shopping lists and e-mail reminders are designed to make it easier for our customers to regularly purchase their preferred products. We believe that our online store provides a customer with a superior shopping experience, making buying What Every Body Needs(TM) less of a chore. Industry Background The Growth of the Internet and Electronic Commerce The Internet has become an important medium for communicating, finding information and purchasing products and services. International Data Corporation (IDC) estimates that there were approximately 51 million Web users in the United States at the end of 1998 and, although we cannot be certain of any future growth, IDC anticipates this number will grow to approximately 135 million users by the end of 2002. We believe this increased usage is due to a number of factors including: . The large installed base of personal computers in the workplace and home; . Advances in the performance and reductions in the cost of personal computers and modems; . Improvements in the ease of use and security of the Internet; . The availability of a broader range of online products, information and services; and . Growing awareness among consumers and businesses of the benefits of online shopping. The Internet has unique and powerful characteristics that differentiate it from traditional distribution channels and have facilitated its use as a purchasing medium. IDC estimates that worldwide business-to-consumer sales over the Internet will increase from approximately $11 billion in 1998 to approximately $93 billion by 2002; however, we cannot be certain that such projection will be achieved. We believe consumers using the Internet to purchase goods expect a more information-intensive experience than when they shop at a traditional retail store. We believe the ability to obtain relevant, up-to-date information makes the consumer better prepared to make a purchase. Accessing the Internet from a computer in the home or office allows a consumer to easily scroll through and search articles, pages of product data and related topics. This allows consumers to research and then purchase products at their convenience. Healthcare Trends on the Internet Healthcare is one of the largest segments of the U.S. economy, representing an annual expenditure of roughly $1 trillion, and health and medical information is one of the fastest growing areas of interest on the Internet. According to a recent Forrester Research report, 32% of online consumers shop for healthcare products online. Cyber Dialogue estimates that the number of adults in the United States searching online for health and medical information will grow from approximately 17.1 million during the twelve month period ended July 1998 to approximately 30.0 million during the twelve month period ending July 2000; however, we cannot be certain that such projection will be achieved. 39

The drugstore.com Market The market we address can be divided into five primary categories: health, beauty, wellness, personal care and pharmacy. Many products in this market are personal (being used on a person's skin or in a person's body) and essential, and often are purchased repeatedly. In this market, vendors frequently introduce new products, and consumers seek comprehensive product information. Consumers currently shop for these products primarily in chain drugstores (such as Walgreen's, CVS, Rite Aid and Eckerd), mass market retailers (such as Wal-Mart, Kmart and Target), supermarkets, warehouse clubs and independent drugstores. However, category-specific retailers and catalogs also serve each of these categories. Overall, distribution of products in our primary market categories is fragmented. Key aspects of the primary categories of the drugstore.com market are as follows: Health. The health category includes over-the-counter remedies (such as cough, cold, allergy and pain relief medications), first aid, medical devices for home healthcare, contraceptives and other products related to the body's health needs. Based on estimates from Information Resources, Inc. and Frost & Sullivan, we believe that sales of health products in the U.S. we currently offer grew from approximately $15.0 billion in 1996 to approximately $16.3 billion in 1998. We believe that the aging U.S. population, along with a greater portion of prescription drugs becoming available as over-the-counter medications, will contribute to growth in this market category. Consumers in the health category often seek significant amounts of product information to determine which products will meet their health needs. Consumers generally buy health products from chain drugstores, mass market retailers, supermarkets, and warehouse clubs as well as from locally-owned, independent drugstores and convenience stores. Representative brands carried in our health product category include Advil, Tylenol, Pepcid, Bausch & Lomb and Metamucil. Beauty. The beauty category includes cosmetics, fragrances and a variety of skin care products. Based on estimates from Information Resources, Inc. and Frost & Sullivan, we believe that sales of beauty products in the U.S. we currently offer grew from approximately $10.7 billion in 1996 to approximately $12.8 billion in 1998. Some of the factors driving consumer demand for beauty products include regular and seasonal new product introductions, as well as changing fashion trends. Consumers often seek advice regarding these trends or the functionality of new products. The beauty category can be broadly classified into two subcategories: mass market and prestige products. Consumers for mass market beauty products typically purchase such products in mass market retailers, drugstores and supermarkets. Consumers for prestige products generally shop in department stores (such as Nordstrom, Macys, May and Dillard's), beauty specialty stores (such as Aveda or Sally's), or spas and salons (such as Elizabeth Grady or Elizabeth Arden). Representative brands carried in our beauty product category include Revlon, L'Oreal, Cover Girl and Neutrogena. Wellness. The wellness category includes vitamins, nutritional supplements, herbs, homeopathy, and other natural products. Based on estimates from various sources including Information Resources, Inc., Frost & Sullivan, Packaged Facts and Beyond Data, we believe that sales of wellness products in the U.S. we currently offer totaled approximately $9.0 billion in 1998 and is growing at an annual rate of over 17%. We believe that increasing consumer interest in nutritional and wellness products to improve physical and mental well-being has contributed to growth in this category. We believe supplemental product information is important to these consumers because they are interested in the intended physiological effects of these products. Consumers can obtain these products at chain drugstores, mass market retailers, supermarkets, warehouse clubs, and specialty stores as well as through catalogs or online vitamin and nutrition stores. Representative brands carried in our wellness product category include Centrum, One-A-Day, Nature Made, Twinlab, Natrol and Nature's Way. We are also the exclusive online retailer of GNC wellness products. Personal Care. The personal care market category includes products related to hair, body and eye care, shaving, oral hygiene and feminine needs. Based on estimates from Information Resources, Inc. and Frost & Sullivan, we believe that sales of personal care products in the U.S. we currently offer grew from approximately $20.7 billion in 1996 to approximately $23.5 billion in 1998. New product introductions drive most of the growth in this category. The personal care category is comprised of a number of different product groups that consumers 40

typically shop for at mass market retailers, chain drugstores, supermarkets, warehouse clubs and specialty stores. Representative brands carried in our personal care product category include Gillette, Colgate, Johnson & Johnson, Rogaine and Pampers. Pharmacy. Based on estimates from various sources including Information Resources, Inc., Frost & Sullivan, and the National Association of Chain Drug Stores we believe that the pharmacy category in the U.S. we address totaled approximately $103.0 billion in 1998 and is growing at an annual rate of approximately 14.8%. This category consists of prescription medication for chronic illnesses, such as high blood pressure, osteoporosis and depression, which represents approximately 73% of the U.S. prescription drug market according to Advanstar Communications. AC Nielsen and IMS Health estimate that out of the $101.7 billion of prescription sales, over 75%, or $76.4 billion are distributed through retail channels. The number of prescriptions written for chronic illnesses is expected to continue to grow due to an aging population and the increasing utilization of pharmaceuticals in medical management. The principal source of pharmaceuticals for chronic illnesses has been retail pharmacies. However, over the past ten years, mail order pharmacies have become an increasingly important source of pharmaceuticals for chronic illnesses. Forrester Research estimated in February 1999 that 13% of HMO prescriptions would be filled by a mail-order pharmacy by the end of 1999. Limitations on Traditional Channels of Distribution Traditional channels of retail distribution for health, beauty, wellness, personal care and pharmacy products have many limitations, including: Inconvenience. Consumers often view shopping for many of these products as a chore. Shopping at a physical store can be highly inconvenient. It generally involves time-consuming activities such as making a trip to the store, finding a parking space, searching for the desired products, and waiting in line to fill a prescription or make a purchase. This process can be especially difficult for customers with disabilities or parents with young children. To increase convenience for consumers, traditional store-based retailers often need to open new stores, which is time-consuming and expensive. Each new store results in significant investments in inventory, real estate, building improvements and the hiring and training of store personnel. The required investment may limit the ability of traditional store-based retailers to serve geographic areas that are not densely populated. Also, an existing store may face substantial added costs if it attempts to build more parking spaces or hire more clerks in order to reduce parking and waiting inconveniences. Narrow Selection. Consumers value the opportunity to select items from a broad range of products that best fit their needs. However, consumers must often choose from a narrow product selection at traditional store-based retailers. Stores may not carry a full range of products, especially prestige, specialty or regional products, or carry a full assortment of sizes. Desired items may be out of stock. Overcoming these difficulties can be prohibitively expensive for traditional retail stores, usually due to shelf space limitations, the cost of carrying inventory and the resulting need to allocate inventory dollars to popular products. To the extent that mass market retailers allocate physical store space to items such as alcohol, lawn furniture, motor oil and snack foods, they may have to reduce the number of health, beauty, wellness and personal care products that they offer. Product selection in traditional store-based retailers cannot be tailored to individual needs because it is driven by aggregate demand. Limited Information and Communication. Consumers buying health, beauty, wellness, personal care and pharmacy products often seek information and knowledgeable advice to assist them in making purchasing decisions. Many traditional store-based retailers do not provide consumers with access to useful product information or readily-available on-site experts who can provide helpful advice. Employees at traditional store-based retailers, especially supermarkets and mass market retailers, may have limited if any interaction with their customers. Often there is no direct contact, except at the check-out line. Customers may also face difficulties following up with questions after a purchase. While traditional store-based retailers could take steps to increase the availability of customized information and on-site experts, such steps would involve substantial investments in printing and training. In addition, it is difficult for a traditional retail store to use information about a particular consumer to personalize that consumer's shopping experience. 41

Lack of Privacy. Because many health, beauty, wellness, personal care and pharmacy products are inherently personal, consumers often desire ways to preserve the anonymity of their purchases and the confidentiality of the information transferred in the buying process. Many consumers may feel uncomfortable purchasing certain drugstore products, such as birth control devices, feminine care products, and incontinence products, in a traditional retail store. Many consumers have encountered the unpleasant experience of placing such a product on a checkout stand's conveyor belt in front of store clerks and other waiting customers. Consumers may hesitate to ask store personnel questions about which product best meets a need, or how to use a product, especially if either the question or the answer is embarrassing or may be overheard by others. Overcoming this limitation is very difficult for traditional retail stores because the consumer must visit a physical store frequented by other customers and must interact in person with store employees. The markets for health, beauty, wellness, personal care and pharmacy products have grown despite the lack of convenience, selection, information and privacy associated with a trip to a traditional store-based retailer. Consequently, we believe there is a significant market opportunity for an online store that can offer consumers an enhanced shopping experience through convenient and private access to detailed information about a broad range of products, and an easy way to buy them. The drugstore.com Solution We are a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products. We designed our store to provide a convenient, private and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. We believe our online store provides customers with a superior shopping experience, making buying What Every Body Needs(TM) less of a chore. We draw and retain consumers by emphasizing key attributes of our store: Convenience. Our user-friendly Web store may be reached from wherever the shopper has Internet access, such as the shopper's home or office. Further convenience advantages at our store include: . Shopping 24 hours a day, seven days a week; . Direct delivery to the shopper's home or office, avoiding the need for a trip to a physical store; . The opportunity for customers to order refills of their existing Rite Aid prescriptions on our Web site for pick up at a local Rite Aid store or for delivery using one of our standard delivery options; . A personal shopping list for every customer, allowing for quick and easy reordering in future visits; . Simplified searching for products and information using advanced search technology; . Confidential access by a customer to his or her individual medication profiles at any time; and . Ability to purchase and send products easily to others. Selection. Because we do not have shelf-space limitations, we believe we offer a significantly greater number of products than are available in a traditional chain drugstore. Not only do we offer traditional chain drugstore items (prescription drugs, over-the-counter medications and personal care), we offer a broad selection of health, beauty and wellness products. Many traditional chain drugstores do not carry a wide range of these products. We believe that we offer one of the largest selections of drugstore products available on the Internet. We are also the only online retailer that offers GNC wellness products. Information. Because the Web has become an increasingly important tool for researching healthcare topics, we believe that providing useful information is a critical aspect of enabling consumers to make informed purchasing decisions. We have assembled a broad array of information on our Web site that can enable our consumers to make informed purchasing decisions. This information is focused on key aspects of our market segments and is produced in-house, by third-party expert sources or submitted to our Web site's Test Drive 42

feature by customers who test our products. Consumers can either access our information directly, through a number of content features on our Web site, or can get free help directly from our advisors and experts by contacting them through e-mail. Our information services include: . Full Product Packaging Information. Almost every product available on our Web site can be viewed in an expanded format where all package information, including ingredients, directions and warnings, can be read next to an enlarged photograph of the product. We believe we are the only online retailer to provide all the information that is normally found on the products' packaging. . Solutions. Our Solutions area provides an easy way for customers to find the information they need to make an informed purchasing decision. It includes buying guides, reference information, interactive shopping advisors and articles on beauty trends and products. . Easy Access to Drug Information and Personalized Pharmacy Advice. Consumers can access our extensive drug information library directly at our Web site, anytime at their own convenience. Patient information and drugstore.com drug prices can be accessed via our drug index. We provide information to help consumers understand generic drug alternatives. We also provide health- and pharmacy-related editorial content in our online Solutions area. Our pharmacists can provide personal guidance by phone or e-mail to ensure that each customer understands the correct usage, possible side effects and expected beneficial outcomes of a prescription or an over-the-counter medication. Communication. We can communicate with customers on a regular basis through the convenience of e-mail. In addition to our Ask Your Pharmacist and Ask Your Beauty Expert features, we offer the following means of communication with our store: . Reminders. We have the ability to e-mail a customer when a prescription or non-prescription product is about to run out, reminding him or her to order a replacement product or a prescription refill. Customers simply tell us how often they need a product and we can send them a notice before it is scheduled to run out. . Specialized Customer Care. To ensure timely and high-quality customer service, we have established specialty teams within the drugstore.com customer care department. Our Web site, product and insurance specialists respond to customer e-mails and calls that are related to shopping orders, insurance, prices, and shipping. Once an order is made, customers can view order-tracking information on our Web site. . Personalized Communications. As customers use our Web site, they can provide us with information about their buying preferences and habits. We can use this information to develop personalized communications and deliver useful newsletters, special offers and new product announcements to our customers via e-mail and other means. In addition, we use e-mail to alert customers to important developments and merchandising initiatives. Privacy. Customers can shop in the privacy of their own homes or offices. When shopping at a physical store, many shoppers feel embarrassed or uncomfortable buying items that may reveal personally-sensitive aspects of their health or lifestyle to store personnel or other shoppers. Shoppers at drugstore.com avoid these problems. Through features such as Ask Your Pharmacist and Ask Your Beauty Expert, customers can obtain answers to questions that they would otherwise be uncomfortable asking in public. Pharmacy. We employ licensed pharmacists and are able to ship prescription products to all 50 U.S. states, and we offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick-up at a conveniently located Rite Aid store or for delivery using one of our standard delivery options. Through our relationships with Rite Aid, insurance companies and PBMs, we are able to obtain insurance reimbursement coverage for many insured prescriptions. Customers can ask our pharmacists about medications and receive other information about prescriptions drugs and health-related products using the Ask Your Pharmacist feature of our Web site. 43

Although we believe we offer significant advantages over traditional chain drugstores, certain customers may feel that traditional chain drugstores offer several advantages over our service, and we may not be able to meet the needs of some customers. For example, we cannot serve emergency needs and we cannot serve customers who do not have access to the Internet. Some customers may also prefer to touch and see products in person, rather than view them on a computer screen or prefer to talk to a pharmacist in person. Some customers may also have general concerns about the privacy and security of information transmitted over the Internet and will therefore prefer to shop in physical stores. See "Risk Factors--Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products May Not Accept Our Solution, Which Would Harm Our Revenues and Prevent Us From Becoming Profitable" for a further description of the challenges we face in this area. Business Strategy Our objective is to become one of the world's leading retailers of health, beauty, wellness, personal care and pharmacy products. To achieve our objective, we intend to attract a growing base of customers and provide them a superior shopping experience. Key elements of our strategy include: Strengthen the drugstore.com Brand. We intend to establish drugstore.com as the leading consumer brand for buying health, beauty, wellness, personal care and pharmacy products. To date, we have promoted our Web site on major Internet destinations such as Amazon.com, America Online and Yahoo!, as well as on other sites our customers are likely to visit, including ThirdAge, InteliHealth, OnHealth, Medscape and Women.com. To further strengthen our brand, we intend to continue to cultivate a reputation for excellent quality of service and continue to pursue an aggressive marketing strategy, both through the Internet and traditional media, as well as through our relationships with Rite Aid and GNC. Continuously Improve Our Web Store and Service. We seek to combine wide product selection and helpful information with the unique aspects of the Internet to deliver a convenient and personalized shopping experience. We strive to develop long-term relationships with our customers to build loyalty and encourage repeat purchases. To improve our site, we intend to continue to expand our product selection and enhance our existing offerings such as shopping lists, individual medication profiles, e-mail reminders and targeted special offers, as well as develop new personalization features as we learn more about our customers and their needs. In addition, as part of our relationship with Rite Aid, customers are able to order refills of their existing Rite Aid prescriptions on our Web site for pick-up at a local Rite Aid store or for delivery using one of our standard delivery options. We intend to expand this service to enable our customers to order any prescription on our Web site for pick-up at a Rite Aid store. Take Advantage of Repeat Purchasing Patterns. We intend to maximize repeat purchases by our customers. To achieve this objective, we have developed personalized tools and features that are designed to allow consumers to satisfy their replenishment purchasing needs easily. We believe that our focus on prescriptions for chronic conditions and products that must be regularly replenished will allow us to benefit from repeat purchase patterns. We also plan to continue to expand the functionality of our Web site to further facilitate repeat purchases. Maintain Our Technology Focus and Expertise. We intend to use technology to enhance our product and service offerings and take advantage of the benefits of the Internet. We have developed a proprietary, scalable architecture designed to support secure and reliable online shopping in an intuitive easy- to-navigate format. We intend to seek ways to increase the efficiency of pharmacy transaction processing and order fulfillment activities. For example, we participate in a certification program to define guidelines for the receipt of electronic prescriptions by online pharmacies. We also intend to develop features to further personalize the consumer's shopping experience and enhance the customer's ability to find products and useful information. Ensure Quick and Efficient Distribution. We intend to continuously increase the automation and efficiency of our fulfillment and distribution activities. For example, we will seek ways to improve the efficiency of the prescription fulfillment process in areas such as receiving prescriptions from doctors and billing the customer or his or her insurance company. In addition, we intend to continue to work with our distributors and vendors to find more ways to ensure prompt deliveries to our customers. As part of this effort, we have recently established 44

our own 290,000 square foot distribution center, and we will continue to review and formulate our long-term distribution strategy. Our goals in this area include reducing shipping costs, ensuring adequate future capacity and ensuring reliable and prompt deliveries to our customers. Enhance and Form Key Relationships. We intend to enhance our existing strategic relationships with leading product manufacturers, content providers and insurance and pharmacy benefit management companies, as well as develop new strategic relationships. We intend to continue to develop marketing relationships with leading insurance and pharmacy benefit management companies, including our relationships with PCS and ProVantage, to enhance customer awareness of our Web site. We also believe having strong relationships with product manufacturers will enable us to provide more and better product information to our customers. In addition, as part of our long- term distribution strategy, we will be required to develop direct manufacturer relationships to ensure the availability of adequate volumes of products ordered by our customers. We also intend to continue to pursue key relationships with leading providers of health, beauty and wellness information. We believe this strategy will enhance our product offerings and allow us to serve more customers. Shopping at drugstore.com Shoppers at drugstore.com see a home page that highlights our five product departments, as well as editorial content and promotions. A shopper can browse through the store by clicking on the permanently displayed department names, move directly to a department's home page and view promotions and featured products. All product lists allow a shopper to select products based on brand or unique attributes of the category, such as tartar control or whitening for toothpaste, or color for lipstick or eye shadow. Shoppers can also search the site by entering text in the search box at the top of any page. A customer can select products to purchase by clicking on the "buy" button in the product list. The products are then added to the customer's shopping bag. If a customer needs more information to make a purchase, we supply interactive tools and content to aid in the decision, such as: . Solutions. Our Solutions area provides an easy way for customers to find the information they need to make an informed purchasing decision. Some of the components of the Solutions area include: Shopping Advisors. Our shopping advisors consist of interactive tools to help consumers find the right products for their needs. We currently feature a cold and cough advisor, a skin care advisor and a vitamin and supplement advisor. Through an easy-to-use interactive format, a customer provides information about what he or she needs, and the advisor provides information that enables the customer to choose the appropriate product. Buying Guides. Our buying guides help consumers make informed buying decisions. We currently feature buying guides on condoms, birth control pills, cold and cough medicine, toothpaste, shampoo and sunscreen. The buying guides provide helpful information about the key benefits and characteristics of each of these products. . Your List. Returning customers can easily view their previous purchases by consulting their personalized shopping lists through our Your List feature. The shopping lists make buying regularly-replenished items even easier to purchase because the customer can move products into their shopping bag directly from their personalized shopping list, without browsing the site. If requested by the customer, we also send e-mail reminders to consumers when items on their lists are scheduled to run out and need to be replenished. . Quick Lists. Our Quick Lists feature provides customers a starting point for finding frequently used products for different product categories, such as a medicine cabinet, beauty essentials and a travel bag. Within each product category, the customer can choose a specific product and move the product into his or her shopping bag. The customer can then move directly from his or her shopping bag back to the Quick Lists and choose another product or list. . Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to ask our pharmacists questions about over-the-counter and wellness products as well as prescription drugs. 45

. Ask Your Beauty Expert. Our Ask Your Beauty Expert feature allows customers to ask our beauty experts questions about beauty needs. Our beauty experts respond to questions via e-mail and seek to answer questions within one business day. . Getting Help. From every page of our Web site, a customer can click on a "help" button to go to our customer care area. In this area, we assist customers in searching for, shopping for, ordering and returning our products. In addition, we provide customers with answers to the most frequently asked questions and encourage our visitors to send us feedback and suggestions via e-mail. When the customer finishes selecting the desired products, he or she goes to checkout. The only information required to checkout is an e-mail identification, password (to protect account privacy), shipping address and a valid credit card number. All of this information is maintained in a secure format and remains available for the customer's future access. Pharmacy Services The pharmacy services at drugstore.com are provided by experienced clinical professionals using advanced information technologies. We employ licensed pharmacists who ensure private, personal customer service. We have received Verified Internet Pharmacy Practice Sites (VIPPS) certification from the National Association of Boards of Pharmacy. The VIPPS program sets standards for Internet pharmacies and informs the public of those Web sites that have agreed to comply with its standards. We are able to ship prescription products to all 50 U.S. states, and through our arrangement with Rite Aid, customers may also order refills of their existing Rite Aid prescriptions on our Web site for pick-up at any of the over 3,800 Rite Aid stores in the United States or for delivery using one of our standard delivery options. In connection with opening our distribution center, we also expanded our pharmacy operations through our arrangement with Rite Aid. Services. We seek to provide a high level of responsiveness and customer support. In addition to our extensive drug information, specialized customer care features and refill reminders, our pharmacy services include: . Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to ask our pharmacists questions about medication, dosage, delivery systems, common side effects and other information about prescription drugs and health-related products. Our pharmacists seek to provide an initial answer via e-mail within one business day. . Private Access to drugstore.com Prescription History. Customers who fill their prescriptions at drugstore.com can access their secure, individual medication profiles at any time. A written patient information document accompanies all medications dispensed to drugstore.com customers. This service enables customers to maintain a record of their prescription purchases for clinical, insurance and tax reporting purposes. Filling Prescriptions. We only accept prescriptions from licensed health care providers. We do not prescribe medications or otherwise practice medicine. We focus on dispensing medications used by consumers on a chronic basis. Advanstar Communications, Inc. estimates that such medications comprised approximately 73% of all prescription drugs taken in the United States in 1998. For acute care needs, meaning when a customer has a single episode of a short-term illness or an exacerbation of a chronic condition in either case requiring immediate attention, we recommend that customers pick up their prescriptions from a local pharmacy because the treatment of acute care needs are extremely time sensitive and the delivery time required by online purchases could be too slow for the customer's needs. Medications used for acute care needs include antibiotics and pain medications. We also do not dispense certain controlled substances known as Schedule II pharmaceuticals at this time because there are increased risks associated with their dispensation, such as fraud, illegal resale of prescription drugs, and special storage shipping and handling requirements. Schedule II Pharmaceuticals are drugs classified by the Controlled Substance Act of 1970 as having a high potential for abuse, such as opiates (including morphine) and products that contain oxycodone stimulants (including amphetamine and 46

methylphenidate) and depressants (including secobarbital and amobarbital). We accept, verify and cross-check prescriptions much like traditional retail and mail service pharmacies: . Accepting Prescriptions. For new prescriptions, customers can direct their physicians to call or fax their prescriptions to us at 1-800DRUGSTORE, or request that we contact their physician directly to obtain prescription information. For transfers, customers can direct their pharmacy to transfer their prescriptions or request us to contact their pharmacy to transfer the prescription to drugstore.com. For refills, customers may order directly from our Web site or respond to one of our e-mail refill reminders. . Verifying Prescriptions. Our pharmacists verify the validity and completeness of prescription drug orders utilizing the same methodology as community-based pharmacists. The standard practice for verification of prescription drug orders is that the pharmacist will contact the physician's office by telephone or fax if there is any reason to question the validity, accuracy or authenticity of any order. In addition, our pharmacists call and verify the validity of prescription drug orders for allowable controlled substances, i.e., Schedule III-V drugs. In addition, our pharmacists verify that all legally required information is recorded on the prescription drug order and utilize a database to verify physician identifying information, if necessary. . Drug Utilization Review. To use our prescription drug services, all customers are asked to provide our pharmacists with information regarding drug allergies, current medical conditions and current medications. Our pharmacists use advanced technologies to cross-check every prescription against the information we receive from the customer for drug-, disease- and allergy-drug interactions. Payment. Customers may pay for their prescriptions with cash, by credit card or by entering insurance information that shows that they are covered by a managed care organization, insurance plan or PBM with whom we have a contract. To date, the majority of our prescriptions have been submitted by customers with insurance coverage. As a result of our relationship with Rite Aid, we are able to fill prescriptions for most customers with pharmacy benefits covered by a plan accepted by Rite Aid. In addition, we participate in substantially all of the current and future retail pharmacy networks managed by PCS, one of the leading pharmacy benefit management companies in the United States that claims to provide pharmacy benefit management services for more than 50 million individuals in the United States. Pharmacy Supply. Since inception, a substantial majority of our pharmaceutical products have been supplied by RxAmerica. Upon the opening of our own distribution center, we became obligated to purchase all of our pharmaceutical products from Rite Aid, unless we are able to obtain better overall terms from another vendor. We expect that Rite Aid will account for an increasingly significant portion of our pharmaceutical product purchases. This purchase commitment will continue for the term of the Rite Aid relationship. Marketing and Promotion of Our Site Our marketing and promotion strategy is designed to build brand recognition, increase customer traffic to our store, add new customers, build strong customer loyalty, maximize repeat purchases and develop incremental revenue opportunities. Our advertising campaigns target both online and traditional audiences and are designed to promote an enhanced customer experience. Our online advertising efforts have been focused on highly-visited Internet portals, health-related Web sites and other highly-visited Web sites. We also have strategic relationships with Amazon.com, Rite Aid and GNC, who all promote our Web site. We believe that the marketing benefits of our relationship with Amazon.com include the integration of various shopping features of our Web sites, the creation of a persistent drugstore.com shopping presence on Amazon.com's Web site, and the promotion of our site by one of the premier e- commerce companies. In addition, Rite Aid has agreed to include drugstore.com in a significant portion of Rite Aid's own advertisements, as well as on shopping bags, prescription vial caps, in-store signs and permanent links from its Web site. In addition, we advertise on America Online and Yahoo!, as well on other sites where our customers are likely to visit, including ThirdAge, InteliHealth, OnHealth, Medscape 47

and Women.com. We also extend our market presence through our Associates Program, which enables associated Web sites to make our products and services available to their audiences through a link to our Web site. We intend to continue to use the unique resources of the Internet as a means of marketing in an effort to drive traffic and repeat purchases. For example, we recently entered into a five-year agreement with ProVantage, a healthcare knowledge and benefit management company, to co-develop and market Internet-based products and programs. Under the agreement, the ProVantage Web site will act as a portal to the drugstore.com site, enabling ProVantage members to fill prescriptions and access new Internet-based programs and products. We have also used traditional marketing and promotion efforts, including special product promotions, print, television and radio advertising in selected markets, promotional press releases and public appearances by our executives. We intend to further intensify our advertising efforts through traditional media channels to continue building our brand recognition. Merchandising Strategy We believe that the breadth and depth of our product selection, together with the flexibility of our online store and our range of helpful and useful shopping services, enables us to pursue a strong merchandising strategy. Aspects of this strategy include: Easy Access to a Wide Selection of Products. Our easy-to-use Web site and robust search capabilities enable customers to browse our product selection by brand, age, product and price, as well as combinations of these categories. For example, a customer can easily search for all aspirin products or for Tylenol for children without consulting store personnel or searching traditional store shelves. Combination searching allows customers to find desired items easily among our large selection of products. Dynamic Product Offering. Our online store gives us flexibility to change featured products or promotions without having to alter the physical layout of a store. We are also able to dynamically adjust our product mix in response to changing customer demand, new seasons or upcoming holidays and introduce special promotions. Specialty Stores. We are establishing specialty stores in each of our product categories. Our first specialty store, the boutique, sells high-end cosmetics. We have also established the GNC LiveWell Store, which is dedicated to GNC nutritional products and other products typically sold in GNC stores. We are the exclusive distributor of GNC brand products on the Internet subject to our meeting performance parameters during the third and fifth years of the relationship. Extensive Product Information. A key component of our merchandising strategy is the ability to use information as a tool for consumers. We combine manufacturer information with editorial information or buying guides to allow customers to make more informed buying decisions and to more easily comparison shop for products. In addition, our Web site allows us to market products to customers in many different ways, such as by product category or by product characteristics, such as price or ingredients. Targeted Promotions. We have the ability to offer products to individual customers based on their affinities or conditions. In addition, we can present merchandise to a customer tailored to personal interests and shopping histories. We also cross-sell a brand across our departments to promote impulse buying by customers. For example, we might promote mothers' products in our Pregnancy and Infant Center. Sampling. We have programs that allow us to provide samples of products to customers as trials. We may also use sampling to work with manufacturers to introduce new products. Information Objectives Our editorial strategy is to present helpful, value-added information to consumers in a readable, user-friendly format. Our editors create, source and maintain health, beauty, wellness, personal care and pharmacy 48

related content for our Web site. Our editors assemble content to provide both reference and product-related information. To date, we have established relationships with several leading information providers who provide content for our site. We will continue to direct our editorial efforts toward enhancing existing features as well as sourcing new content to help our customers. For example, we have launched a variety of health and special interest content areas, such as our Pregnancy and Infant Center, Breast Health Center, and Cold and Flu Center. Working in conjunction with our pharmacists, we have created a searchable database of over 500 answers to frequently asked health questions. We also have published over 260 product reviews by our customers through a feature called Test Drive. Delivery of Our Customer's Orders In January 2000, we began limited operations at our own 290,000 square foot distribution center in New Jersey, and we are in the process of transitioning our distribution capabilities for pharmaceutical and non-pharmaceutical products from third party distributors to our center. We currently outsource a substantial majority of our distribution and fulfillment operations on a non- exclusive basis through Walsh Distribution and RxAmerica, although we expect that the transition to our own distribution facilities will be completed by the end of the second quarter of 2000. We believe that operating our own distribution center will allow us to achieve greater control over the distribution process and help us to ensure adequate supplies of products to our customers. In connection with opening our distribution center, we also expanded our pharmacy operations through our arrangement with Rite Aid. Operating our own distribution facility will require us, in the near term, to hire and train a significant number of new employees, increase inventory levels substantially and establish a significant number of direct relationships with manufacturers. In addition, as we transition to our own distribution center, order fulfillment through multiple channels and underutilization of our own distribution capacity could result in cost and service level inefficiencies. For the period from inception to January 2, 2000, Walsh Distribution accounted for 68% of our cost of sales for health, beauty, wellness and personal care products. As we transition customer order fulfillment to our own distribution center, we intend to establish relationships directly with product manufacturers, and we expect that order fulfillment through Walsh Distribution will cease by the end of the second quarter of 2000. At the Walsh facility, our employees package for shipment all customer orders, including drugstore.com inventory purchased directly from other vendors that Walsh holds for us at their facility. We staff our own customer care specialists at the Walsh facility to monitor quality control and order fulfillment. Walsh provides inventory and services under a supply and services agreement that expires on March 31, 2000. This agreement may be extended for three months at our sole discretion and may be terminated earlier by us upon accelerated payment of minimum fees that would not exceed approximately $1 million. We currently purchase substantially all of our pharmaceutical products from one vendor, RxAmerica, in accordance with a pharmacy services agreement. In connection with establishing our own distribution center, we became obligated to buy our pharmaceutical products from Rite Aid, unless we are able to obtain better overall terms from other vendors. As the number of orders filled out of the pharmacy operation in our distribution center increases, we expect that purchases from Rite Aid will account for an increasingly significant portion of our total pharmaceutical product purchases. We staff our own pharmacists, pharmacy technicians and customer care specialists at the RxAmerica facility. For prescriptions filled at the RxAmerica facility, our pharmacists perform all aspects of the prescription fulfillment process and all aspects of customer service, except for the physical filling and packaging of prescription drugs, which is performed by RxAmerica pharmacists. For prescriptions filled through the pharmacy we operate under our arrangement with Rite Aid, our pharmacists perform all of these functions working together with a Rite Aid "pharmacist in charge." drugstore.com and RxAmerica are licensed and in good standing in each state where licensure is required by law. The pharmacy services agreement with RxAmerica has a one-year term (to February 2000) and has been extended to June 2000. The agreement is non- exclusive and does not prevent us from using other vendors for pharmaceutical products. Our warehouse management system, which is integrated with RxAmerica's and Walsh's information systems, provides us real-time data on inventory receiving, shipping, inventory quantities and inventory location. 49

This enables us to notify customers on a real-time basis if the product is in stock. In addition, we offer an order tracking system for our customers on our Web site. The inventories of Rite Aid, RxAmerica and Walsh consist of items typically found in traditional chain drugstores. We charge our customers a shipping charge that covers all or a portion of our expenses of shipping. Walsh purchases substantially all of its inventory directly from the manufacturers of the products. Rite Aid and RxAmerica purchases their pharmaceutical products from a variety of manufacturers as well as wholesalers. We offer a variety of shipping options, including next-day delivery for orders received during the business week. We ship to anywhere in the United States served by the United Parcel Service or the U.S. Postal Service. Priority orders are flagged and expedited through our fulfillment processes. For non-prescription product orders received before 9:00 p.m. Central time Monday through Friday or before 5:00 p.m. Central time on Saturday, our goal is to ship the product the same day. For prescription products, our goal is to ship the product as soon as the prescription has been verified and our pharmacists have completed drug utilization review. In addition, customers are able to order refills of their existing Rite Aid prescriptions online at our Web site for pick-up at their choice of any one of the over 3,800 Rite Aid stores or for delivery using one of our standard delivery options. We intend to expand this service to enable our customers to order any prescription on our Web site for pick-up at a Rite Aid store. Customer Care We believe that a high level of customer service and support is critical to retaining and expanding our customer base. Our customer care specialists are available 24 hours a day, 7 days a week to provide assistance via e-mail or phone. We strive to answer all customer inquiries within 24 hours. Our customer care specialists handle questions about orders and how to use our Web site, assist customers in finding desired products and register customers' credit card information over the telephone. Our customer care specialists are a valuable source of feedback regarding user satisfaction. Our Web site also contains a customer care page that outlines store policies and provides answers to frequently asked questions. In addition, our pharmacists can provide advice to our customers about medication, dosage, delivery systems, common side effects and other information about prescription drugs. Operations and Technology We have implemented a broad array of services and systems for site management, searching, customer interaction, transaction processing and fulfillment. We use a set of software applications for: . Accepting and validating customer orders; . Organizing, placing and managing orders with vendors and fulfillment partners; . Receiving product and assigning it to customer orders; and . Managing shipment of products to customers based on various ordering criteria. These services and systems use a combination of our own proprietary technologies and commercially available, licensed technologies. We focus our internal development efforts on creating and enhancing the specialized, proprietary software that is unique to our business. To enhance the online and offline experience for Rite Aid and drugstore.com customers, we have integrated certain of our information and pharmacy systems with Rite Aid's. Rite Aid has granted us a nonexclusive, fully-paid license to the Rite Aid systems that are integrated with our systems, subject to third party rights to such technology. We also have a technology license and advertising agreement with Amazon.com under which we mutually agreed to license certain existing and future technology used in the operation of our Web sites as long as we do not use the technology to compete with each other. We currently are not using any Amazon.com technology but could do so in the future if it would benefit us. See "--Relationship with Amazon.com" for a further description of our agreements with Amazon.com. 50

Our core merchandise catalog, customer interaction, order collection, fulfillment and back-end systems are proprietary to drugstore.com, but are available to Amazon.com under our agreement with them. Our software platform and architecture are integrated with an Oracle database system. The systems were designed to provide real-time connectivity to the distribution center systems for pharmacy and the non-pharmacy products. These include an inventory-tracking system, real-time order tracking system, executive information system and replenishment system. Our Internet servers use Verisign digital certificates to help conduct secure communications and transactions. Our systems infrastructure is hosted at Exodus Communications in Tukwila, Washington, which provides communication lines from multiple providers including UUNet and AT&T, as well as 24 hour monitoring and engineering support. Exodus has its own generators and multiple back up systems in Tukwila. We maintain customer care centers in our Bellevue, Washington office and in our prescription distribution facilities in Texas and New Jersey, and use a real time interactive voice response system with transfer capabilities between our customer care centers in these locations. We also operate a toll-free number, 1-800-DRUGSTORE, through which customers can place orders and receive information. In addition, customers who choose not to transmit their credit card information via the Internet have the option of submitting their credit card information by telephone. Competition The online commerce market is new, rapidly evolving and intensely competitive. In particular, the health, beauty, wellness, personal care and pharmacy categories are intensely competitive and are also highly fragmented, with no clear dominant leader in any of our market categories. Our competitors can be divided into several groups: chain drugstores, such as Walgreen's, CVS and Eckerd; mass market retailers such as Wal-Mart, Kmart and Target; supermarkets, such as Safeway, Albertson's and Kroger; warehouse clubs; online retailers of health, beauty, wellness, personal care and/or pharmaceutical products such as PlanetRx.com, MotherNature.com, VitaminShoppe.com and More.com; mail order pharmacies; prescription benefits managers, such as Express Scripts and Merck-Medco; Internet-portals and online service providers that feature shopping services such as America Online, Yahoo!, Excite and Lycos; cosmetics departments at major department stores, such as Nordstrom, Macys and Bloomingdale's; and hair salons. Each of these competitors operate within one or more of the health, beauty, wellness, personal care and pharmacy product categories. In addition, nearly all of our competitors have, or have announced their intention to have, the capability to accept orders for products online. In particular, Walgreen's, CVS, Albertson's and Wal-Mart already are accepting prescription refill or other orders on their Web sites. We believe that the following are principal competitive factors in our market: . Brand recognition; . Selection; . Convenience; . Price; . Web site performance and accessibility; . Customer service; . Quality of information services; and . Reliability and speed of order shipment. Many of our current and potential traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially more 51

resources to their Web site and systems development than we can. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors or drugstore retailers as the use of the Internet and other online services increases. Some of our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Traditional store-based retailers can also sell products to address immediate, acute care needs, which we and other online sites cannot do. Some of our competitors such as Walgreen's and Wal-mart have significantly greater experience in selling drugstore products. Relationship with Amazon.com We have a strategic relationship with Amazon.com whereby Amazon.com advertises our Web service. We believe that the benefits of our relationship with Amazon.com include their advertising our Web site and the beneficial aspects of our being associated with one of the premier e-commerce companies. Amazon.com is our largest shareholder, and Jeffrey P. Bezos, Amazon.com's chairman of the board and chief executive officer is a member of our board of directors. As part of our relationship with Amazon.com, we entered into a technology license and advertising agreement. This agreement extends for ten years and can be terminated for breach or in the event that we are acquired by a competitor of Amazon.com. This agreement contains provisions generally relating to the sharing of technology and technical support; however, we have decided to develop our own technology and there has been no exchange of technology by either party to date. Specifically, this agreement provides for the license of substantially all of each company's technology to the other for use within their respective businesses that may be developed through August 10, 2008. Neither company may use the other's technology to compete against the other. In addition, each party has committed to providing the other with advertising on our respective Web sites through the term of the agreement as mutually agreed upon. In addition, we agreed not to place advertisements competitive to Amazon.com's business on our site. We have also agreed not to sell advertising on our Web site to, link our Web site to, or promote on our Web site any company that sells products or services competitive with those which Amazon.com offers or which Amazon.com is preparing to produce or market. We are currently restricted with respect to books, music, videos electronics, toys, home improvement products, software, gift centers, cards, auctions and third party marketplace services through which third parties may advertise and sell products or services. If Amazon.com expands into other areas this may further limit the companies we can promote on our Web site. If we are acquired by an Amazon.com competitor and Amazon.com does not vote in favor of the transaction, we would lose our rights to advertise on Amazon.com's website, to restrict Amazon.com's ability to compete in the online drugstore business, and to use Amazon.com's technology (if we are then using any). On January 24, 2000, we entered into an agreement with Amazon.com to integrate various shopping features of our Web sites and to create a persistent drugstore.com shopping presence on Amazon.com's Web site. Amazon.com has agreed to promote the drugstore.com health and beauty product section of its Web site to its customer base in a manner similar to its efforts with respect to its other product sections. Under the agreement, the parties will also work to implement additional features on the Amazon.com Web site designed to improve customer shopping experiences, including integrated search and browse capabilities and a shared shopping basket. The agreement also contains exclusivity provisions restricting (1) the percentage of total revenues we can obtain from the sale on our Web site of products or services other than health, beauty (including cosmetics, fragrance, bathing and hair and skin care products), wellness, personal care and prescription drug products, and (2) the percentage of revenues Amazon.com or any other Amazon.com marketing partner can receive from the sale of these types of products on its Web site other than through its relationship with us. We will pay Amazon.com a total of $105 million over the three-year term of the agreement. The agreement may be terminated for breach or in certain other events. Concurrently with this agreement, we sold Amazon.com 1,066,667 shares of our common stock in a private placement transaction for $28.125 per share, or approximately $30 million in the aggregate. See "Executive Officers and Directors," "Certain Relationships and Related Transactions" and "Principal and Selling Stockholders" for further background on Amazon's relationship with us. 52

Relationship With Rite Aid In June 1999, we entered into a strategic relationship with Rite Aid. Under the relationship, customers are able to order refills of their existing Rite Aid prescriptions from us at our site and either use our standard delivery options or pick up the prescriptions at the more than 3,800 Rite Aid stores nationwide. We recognize revenues on all orders filled by us or picked up at Rite Aid stores where our customer has used our Web site to order prescriptions. In the case of orders from customers who have elected to pick up their prescriptions in a Rite Aid store, we pay Rite Aid for the cost of such products based on a contractually agreed upon price. In addition, Rite Aid and drugstore.com have agreed to promote each other's services both online and offline, including a link from Rite Aid's Web site to our Web site. We believe that potential benefits of our relationship with Rite Aid include additional revenue and traffic generated by customers who visit our Web site, the pharmacy benefit coverage provided by the insurance companies and PBMs with which Rite Aid has a relationship, including PCS, and the co-promotion and co-branding activities both companies have undertaken. In connection with this relationship, Rite Aid also became one of our largest stockholders, and will hold approximately 15.5% of our outstanding common stock following this offering (approximately 14.5% if the underwriters' over-allotment options are exercised in full). In addition, Mary Sammons, Rite Aid's president and chief operating officer, is a member of our board of directors. As part of the relationship, both Rite Aid and drugstore.com agreed to certain exclusivity provisions that limit drugstore.com's ability to promote or affiliate with any other physical retail drugstore and from operating a traditional physical drugstore, and preclude Rite Aid from offering or selling products or services on the Internet other than through our Web site. In addition, the agreement provides that if we establish our own distribution center, we will be obligated to purchase all of our pharmaceutical requirements from Rite Aid unless we are able to obtain better overall terms from another vendor. The agreement contains additional provisions providing for the licensing by Rite Aid to drugstore.com of information technology systems and the integration of the information technology and pharmacy systems of the two companies. This agreement extends for ten years, but can be terminated for breach prior to such time. See "Executive Officers and Directors," "Certain Relationships and Related Transactions" and "Principal and Selling Stockholders" for further background on Rite Aid's relationship with us. Relationship With GNC In June 1999, we entered into a relationship with General Nutrition Companies, Inc. (GNC) whereby we are the exclusive online provider of GNC- branded products. We have the exclusive right to sell GNC's nutrition products over the Internet, including the PharmAssure brand of pharmacist recommended vitamins and nutritional supplements, subject to our meeting performance parameters based on traffic to our Web site and sales of GNC products in the third and fifth year of the relationship. As long as we have the exclusive right to distribute GNC's products over the Internet, we will not promote any other retail health food store or operate a physical retail health food store. If the exclusivity provisions of the agreement terminate, we have the non- exclusive right to sell these products for the remaining term of the agreement. As part of this relationship, we have created a separate part of our Web site called the GNC LiveWell Store that is dedicated to selling on a consignment basis GNC products. We are entitled to retain a percentage of the gross revenues that we collect from sales of GNC products and will recognize only the net amount retained as revenues. In connection with this relationship, GNC acquired 2,947,853 shares of our Series E preferred stock (all of which was converted into common stock, on a one-for-one basis, at the closing of our initial public offering). GNC and drugstore.com also agreed to co-promote each other's products and services in both their traditional and online marketing efforts, including GNC's placement of a link to our Web site on their Web site. The agreement extends for ten years, but can be terminated for breach prior to such time. In August 1999, GNC was acquired by Royal Numico N.V., a European maker of nutrition products. See "Certain Relationships and Related Transactions" and "Principal and Selling Stockholders" for further background on GNC's relationship with us. Governmental Regulation Our business is subject to extensive federal, state and local regulations. In particular, entities engaging in the practice of pharmacy are subject to federal and state regulatory and licensing requirements. For example, 53

pursuant to the Omnibus Budget Reconciliation Act of 1990 and related state and local regulations, pharmacists are required to offer counseling, without additional charge, to customers about medication, dosage, delivery systems, common side effects, adverse effects or interactions and therapeutic contraindications, proper storage, prescription refill, and other information deemed significant. Entities that distribute "controlled substances" are also subject to the Controlled Substances Act and regulations issued by the federal Drug Enforcement Administration. Entities engaged in the practice of medicine are also subject to state and local regulatory and licensing requirements. We also sell dietary supplements, medical devices, cosmetics, conventional foods, drug products (prescription, over-the-counter, and homeopathic), and consumer products subject to regulation by the Food and Drug Administration (FDA), Federal Trade Commission (FTC), Consumer Product Safety Commission (CPSC), and state regulatory authorities. In addition to regulating the claims made for specific types of products, the FDA and FTC may also attempt to regulate the format of Web sites that offer products to consumers. As we expand our product and service offerings, more of our products and services will likely be subject to FDA, FTC, CPSC, and state regulation. We have structured our business, and entered into arrangements with our business partners, in order to comply with pharmacy regulatory and licensing requirements, requirements applicable to distributors of controlled substances, and requirements associated with the practice of medicine. We have also structured our business in order to comply with FDA, FTC, CPSC, and state regulatory requirements applicable to the sale of products to consumers. Regulations in all of the above-mentioned areas often require subjective interpretation, and we cannot be certain that our attempts to comply with the above regulations will be deemed sufficient by the appropriate regulatory agencies. Violations of any regulations could result in various civil and criminal penalties, including but not limited to suspension or revocation of any applicable licenses or registrations, seizure of our inventory, or monetary fines that could adversely affect our operations. Regulatory requirements to which we are subject may expand over time. For example, the U.S. House of Representatives' Committee on Commerce recently held a one-day hearing on the benefits and risks of online pharmacies, especially focused on those sites that sell prescriptions based upon information solicited in a brief questionnaire filled out by the customer online. The U.S. General Accounting Office is conducting a review of online pharmacies, including the current laws that govern pharmacy operations, and the potential for abuses by some online sites, again focusing on those that do not require the submission of a valid prescription issued by the customer's physician. In addition, a federal interagency task force is preparing a report on the effectiveness of current laws, and the availability of technology to law enforcement, in addressing possible unlawful activity over the Internet, including in connection with the sale of prescription drugs. In December 1999, the Clinton Administration announced a proposal to eliminate the illegal sale of prescription drugs over the Internet by unlicensed Web site operators. If approved by Congress, the proposal would, among other things, establish new federal requirements for Internet pharmacies to ensure that they comply with state and federal laws, create new civil penalties for the illegal sale of pharmaceuticals, and authorize additional federal enforcement powers. We believe we are in compliance with existing federal and state requirements for pharmacy licensing and registration, and with laws relating to dispensing of prescription drugs, security, record-keeping and reporting of pharmacy sales. Thus, we believe that our business would not be negatively affected by any laws or regulations that result from this government oversight or the Clinton Administration's proposal. However, we do believe that any resulting laws or regulations will likely increase our reporting and monitoring requirements. The National Association of Boards of Pharmacy (NABP), a coalition of state pharmacy boards, has developed the Verified Internet Pharmacy Practice Sites (VIPPS) program, a model for voluntary regulation for online pharmacies that provides certification of compliance with all state laws and regulations and other criteria established to ensure good pharmacy practice. We have received VIPPS program certification. Legislation and regulations currently being considered at the federal and state level could affect our business, including legislation or regulations relating to confidentiality of patient records, electronic access and storage. In addition, various state legislatures are considering new legislation related to the regulation of nonresident pharmacies. 54

The inclusion of prescription drugs as a Medicare benefit has been the subject of numerous bills in the U.S. Congress. Should legislation on prescription drug coverage for Medicare recipients be enacted into law, we would be subject to compliance with any corresponding rules and regulations. For a description of the risks we face with regard to these government regulations, please see "Risk Factors--Governmental Regulation of the Health Care and Pharmacy Industries Could Affect Our Business." Intellectual Property We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success and rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with our vendors, fulfillment partners and strategic partners to limit access to and disclosure of our proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. For example, as noted above, we have licensed our technology to Amazon.com and we have also granted nonexclusive rights to our trademarks in connection with advertising and affiliate relationships. While we attempt to ensure that the quality of the drugstore.com products brand is maintained by such licensees, we cannot assure that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. We also rely on technologies that we license from third parties, such as Oracle and Microsoft, the suppliers of key database technology, the operating system and specific hardware components for our service. As part of our relationship with Rite Aid, we have also licensed information technology systems from Rite Aid. We cannot be certain that these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could harm our business. We have filed applications for the registration of some of our trademarks and service marks in the United States and in some other countries, including for drugstore.com(TM), although we have not secured registration of any of our marks to date. We may be unable to secure such registered marks. It is also possible that our competitors or others will use marks similar to ours, which could impede our ability to build brand identity and lead to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term drugstore.com(TM). Any claims or customer confusion related to our trademark, or our failure to obtain trademark registration, would negatively affect our business. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts to protect our intellectual property rights may not prevent misappropriation of our content. Our failure or inability to protect our proprietary rights could substantially harm our business. Professional Advisory Board We have a professional advisory board with whom we consult on our programs, strategies and overall store development, as well as product selection and product presentation. Certain members contribute periodic editorial features and have assisted in public relations efforts as well. The advisory board will meet as a whole approximately once a year and individual members are consulted as needed. Our professional advisory board includes the following individuals: . Martha Stewart, a media personality who specializes in applying creative and practical principles in the home and garden; . Kim Alexis, a well-known fashion model, actress and athlete; 55

. Barry Sears, Ph.D., a scientist and author of several popular books on health and dieting, including the New York Times best-seller, The Zone; . Loraine Stern, M.D., an associate clinical professor of pediatrics at the University of California at Los Angeles and spokesperson for children's health issues; . Jennifer Jacobs, M.D., M.P.H., a clinical assistant professor of epidemiology at the University of Washington School of Public Health and Community Medicine and the President-elect of the American Institute of Homeopathy; and . Peter Thomas Roth, a New York-based beauty industry executive and namesake for a line of prestige clinical skin care products. Employees As of January 2, 2000, we had 408 full-time employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good. Facilities Our principal executive offices are located in Bellevue, Washington, where we lease approximately 55,000 square feet under a lease that expires in July 2005. In addition, we have entered into a lease for additional executive office space of approximately 49,000 square feet in Bellevue, Washington that we expect to occupy during the first quarter of 2000. We also lease an approximately 18,750 square feet facility in Redmond, Washington, which we vacated after moving to our new Bellevue facility, under a lease that expires in September 2003. We have subleased the Redmond facility for a 12 month period ending in May 2000 and currently intend to sublease such space thereafter, if possible. We anticipate that we will require additional space as more personnel are hired and as we establish other facilities. In addition, our distribution facility is located in Bridgeport, New Jersey, where we lease approximately 290,000 square feet for a five-year term, with options to renew for two additional five-year periods, pursuant to a lease executed in September 1999. 56

MANAGEMENT Executive Officers and Directors The following table sets forth information with respect to our executive officers and directors as of January 2, 2000:
Name Age Position ------------Peter M. Neupert(1).... 43 Chairman of the Board of Directors, President and Chief Executive Officer Kal Raman.............. 31 Senior Vice President and Chief Operating Officer David E. Rostov........ 34 Vice President, Chief Financial Officer and Treasurer Mark L. Silverman...... 35 Vice President, Business Development, General Counsel and Secretary Christopher G. Hauser.. 49 Vice President, Operations Judith H. McGarry...... 39 Vice President, Strategic Relationships Jeffrey P. Bezos....... 35 Director Brook H. Byers(2)...... 54 Director L. John Doerr.......... 48 Director Melinda French Gates... 35 Director Mary Sammons........... 53 Director William D. Savoy(2).... 35 Director Howard Schultz(1)...... 46 Director

(1) Member of compensation committee (2) Member of audit committee Peter M. Neupert has served as a director and the President and Chief Executive Officer of drugstore.com since July 1998 and as chairman of the board of directors since July 1999. From March 1987 to July 1998, he worked for Microsoft Corporation in several positions, most recently as Vice President of News and Publishing for Microsoft's interactive media group. Mr. Neupert holds an M.B.A. from the Amos Tuck School of Business at Dartmouth College and a B.A. from Colorado College. Kal Raman (formerly known as Kalyanaraman Srinivasan) has served as Senior Vice President and Chief Operating Officer of drugstore.com since November 1999. He served as Vice President, Technology and Chief Information Officer of drugstore.com from August 1998 to May 1999, as Vice President, Technology and Operations and Chief Information Officer from March 1999 to May 1999 and as Senior Vice President, Operations and Chief Information Officer from May 1999 to November 1999. From March 1998 to August 1998, Mr. Raman served as the Chief Information Officer and Vice President of Nations Rent and from February 1997 to March 1998, he served as Senior Director, Information Systems of Blockbuster Inc. From May 1992 to February 1997, Mr. Raman served as Director, International Division of Wal-Mart Stores Inc. David E. Rostov has served as Vice President and Chief Financial Officer of drugstore.com since January 1999 and as Treasurer since July 1999. From January 1996 to January 1999, he worked for Nextel International, Inc. as Chief Financial Officer. From 1992 to 1995, he served in various capacities at McCaw Cellular Communications, Inc. Mr. Rostov holds an M.B.A. and a Master's in Public Policy from the University of Chicago Graduate School of Business and a B.A. from Oberlin College. Mark L. Silverman has served as Secretary of drugstore.com since our inception in April 1998, as Vice President and General Counsel of drugstore.com since January 1999, as Vice President, Health Services from March 1999 to September 1999 and as Vice President, Business Development since September 1999. From December 1995 to January 1999, he was a lawyer with the Venture Law Group, A Professional Corporation, becoming a director in January 1998. Mr. Silverman was an attorney with Heller, Ehrman, White & McAuliffe from December 1992 to November 1995. Mr. Silverman holds a J.D. from the University of California, Los Angeles and a B.A. from the University of California, Berkeley. 57

Christopher G. Hauser has served as Vice President, Operations of drugstore.com since July 1999. Prior to that time, he was Senior Vice President, Information Technologies and Operations for Multiple Zones International. From 1994 to 1996, Mr. Hauser was Director of Distribution for Fingerhut Companies, Inc., and from 1991 to 1994, he commanded the largest distribution center in the U.S. Department of Defense. Mr. Hauser received an M.S. in Logistics Operations and an M.B.A. from the United States Naval Academy. Judith H. McGarry has served as Vice President, Strategic Relationships of drugstore.com since January 2000. From July 1994 to December 1999, she was a partner with Stone Communications. Ms. McGarry holds an M.B.A. from the Amos Tuck School of Business at Dartmouth College and a B.A. from Middlebury College. Jeffrey P. Bezos has served as a director of drugstore.com since August 1998. Mr. Bezos, a founder of Amazon.com, has served as Chairman of the Board of Directors of Amazon.com since its inception in 1994, Chief Executive Officer of Amazon.com since May 1996, President of Amazon.com from inception to June 1999 and Treasurer and Secretary of Amazon.com from May 1996 to March 1997. From December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw & Co., a Wall Street investment firm, becoming Senior Vice President in 1992. From April 1988 to December 1990, Mr. Bezos was employed by Bankers Trust Company, becoming Vice President in February 1990. Mr. Bezos received his B.S. in Electrical Engineering and Computer Science from Princeton University. Brook H. Byers has served as a director of drugstore.com since May 1998. Mr. Byers is a partner of Kleiner Perkins Caufield & Byers, a private venture capital firm, and has been a technology venture capital investor since 1972. He has served on the Board of Directors of over twenty companies, and he is currently a director of Chemdex.com and several private companies. He also served as the founding President and Chairman of Idec Pharmaceuticals, Ligand Pharmaceuticals, Athena Neurosciences and Insite Vision Opthalmics. Mr. Byers serves on the boards of the California Healthcare Institute and the Foundation of the University of California at San Francisco Medical Center. Mr. Byers received a degree in Electrical Engineering from Georgia Institute of Technology and an M.B.A. from the Stanford Graduate School of Business. L. John Doerr has served as a director of drugstore.com since November 1998. Mr. Doerr has been a general partner of Kleiner Perkins Caufield & Byers, a private venture capital firm, since September 1980. In 1974, he joined Intel Corporation and held various engineering, marketing and management assignments. Mr. Doerr is also a director of Amazon.com, Excite@Home, Healtheon Corporation, Intuit, Inc., Platinum Software, Inc., and SunMicrosystems, as well as several private companies. Mr. Doerr received his M.E.E. and B.S.E.E. from Rice University and his M.B.A. from Harvard University Graduate School of Business. Melinda French Gates has served as a director of drugstore.com since August 1999. Mrs. Gates worked at Microsoft Corporation from 1987 to May 1996 in a variety of positions, including serving as both product manager and general manager for the development of several multi-media products and other software programs. Since leaving Microsoft in 1996, Mrs. Gates has focused on philanthropic work in the areas of global health and learning. She is a founder of the Gates Library Foundation and is involved in the William H. Gates Foundation. She is also a co-chair of the Governor of Washington's Washington State Early Learning Commission and is on the advisory board of Third Age Media. Mrs. Gates holds a B.A. from Duke University and an M.B.A. from The Fuqua School of Business at Duke University, and is a member of the Duke University Board of Trustees. Mary Sammons has served as a director of drugstore.com since January 2000. Ms. Sammons has been president and chief operating officer of Rite Aid Corporation since December 1999. Previously, Ms. Sammons was president and chief executive officer of Fred Meyer Stores, a food, drug and general merchandise chain in the Pacific northwest, since January 1998, and had been an Executive Vice President of Fred Meyer Stores prior thereto. She has served Fred Meyer Stores in various capacities since 1973. Ms. Sammons received a degree in French from Marylhurst College. William D. Savoy has served as a director of drugstore.com since July 1999. Mr. Savoy is President of Vulcan Northwest Inc., managing the personal finances of Paul Allen, and Vice President of Vulcan Ventures Inc., a 58

venture capital fund wholly owned by Paul Allen. From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and became its President in 1988. Mr. Savoy serves on the Advisory Board of DreamWorks SKG and also serves as director of CNET, Inc., Go2Net, Inc., Harbinger Corporation, High Speed Access Corporation, Metricom, Inc., Telescan, Inc., Ticketmaster Online-CitySearch, USA Networks, Inc. and Value America, Inc. Mr. Savoy holds a B.S. in Computer Science, Accounting, and Finance from Atlantic Union College. Howard Schultz has served as a director of drugstore.com since November 1998. Mr. Schultz, the founder of Starbucks Corporation, has served as Chairman of the Board and Chief Executive Officer of Starbucks since its inception in 1985. From 1985 to June 1994, Mr. Schultz also served as President of Starbucks. Mr. Schultz is one of two founding members of Maveron LLC, a company providing advisory services to consumer-based businesses, and is one of two members of a limited liability company that serves as a general partner of its affiliated venture capital fund, Maveron Equity Partners, L.P. Mr. Schultz is a governor on the National Association of Securities Dealers, Inc. Board of Governors, and he is a director of Ebay, Inc. Mr. Schultz received his B.S. degree from Northern Michigan University. At any stockholder meeting involving the election of directors, Peter Neupert, several of our major prior investors, and Jed Smith, one of our founders who owned 950,000 shares of our common stock at January 2, 2000, have agreed to vote their shares to elect one director designated by Amazon.com. The major prior investors who are parties to this agreement are Kleiner Perkins Caufield & Byers, Amazon.com, Vulcan Ventures, Rite Aid and GNC. The parties' obligations to elect an Amazon.com designee terminate if Amazon.com owns less than 5% of our voting stock. Our board of directors currently consists of eight members. Each director is elected for a period of one year at our annual meeting of stockholders and serves until the next annual meeting or until his or her successor is duly elected and qualified. The board of directors elects executive officers on an annual basis. Executive officers serve until their successor has been duly elected and qualified. There are no family relationships among any of the directors, officers or key employees of drugstore.com. Board Committees The board of directors has a compensation committee, a stock option subcommittee and an audit committee. Compensation Committee. The compensation committee of the board of directors, which is effective upon this offering, will review and make recommendations to the board regarding all forms of compensation and benefits provided to our officers. In addition, the compensation committee establishes and reviews general policies relating to the compensation and benefits of all of our employees. The current members of the compensation committee are Peter M. Neupert and Howard Schultz. Since the current members of the compensation committee do not meet the definition of "non-employee directors" for purposes of SEC Rule 16b-3, the full board of directors will continue to approve stock option grants for our officers in order to qualify the option grants for an exemption from short-swing trading rules. Stock Option Subcommittee. The stock option subcommittee of the compensation committee has authority to grant stock options to optionees who are not executive officers or directors of drugstore.com. Peter M. Neupert is the sole member of the stock option subcommittee. ESPP Subcommittee. The ESPP subcommittee of the compensation committee has authority to administer our 1999 employee stock purchase plan. Peter M. Neupert is the sole member of the ESPP subcommittee. Audit Committee. The audit committee of the board of directors reviews and monitors our internal accounting procedures, corporate financial reporting, external and internal audits, the results and scope of the annual audit and other services provided by our independent auditors, and our compliance with legal matters that have a significant impact on our financial reports. Brook H. Byers and William D. Savoy are the members of the audit committee. 59

Compensation Committee Interlocks and Insider Participation The board of directors established its compensation committee in May 1999. Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No interlocking relationship exists between our board of directors or our compensation committee and the board of directors or compensation committee of any other company, and no interlocking relationship existed in the past. Director Compensation We currently do not provide any cash compensation to our directors for their service as members of the board of directors, although we do reimburse the directors for certain expenses in connection with attendance at board and committee meetings. Under our 1998 stock plan, nonemployee directors are eligible to receive stock option grants at the discretion of the board or any other administrator of the plan. In September 1999, we granted to Melinda French Gates, one of our nonemployee directors, options to purchase 25,000 shares of common stock at an exercise price of $53.875 per share. One-half of these options vest one year after the date of grant and the remaining options vest in two equal installments at the end of the next two six-month periods. Executive Compensation The following table sets forth the compensation received for services rendered to drugstore.com for fiscal 1998 and 1999 by our chief executive officer and the four other individuals who were the most highly compensated executive officers in fiscal 1999 of those earning more than $100,000 in salary and bonus. Summary Compensation Table
Long-Term Compensation Awards Securities Underlying All Other Options (#) Compensation(1) ------------ --------------1,000,000 $ 397 -170

Name and Principal Position -----------------Peter M. Neupert....... President, Chief Executive Officer and Chairman of the Board of Directors

Year ---1999 1998

Annual Compensation ----------------Salary Bonus -------- -------$249,184 $250,000 107,692 --

Kal Raman.............. 1999 $174,171 $ 36,954 Senior Vice President 1998 60,577 129,692(2) and Chief Operating Officer David E. Rostov........ 1999 $123,797 $ 21,615 Vice President, Chief Financial Officer and Treasurer Mark L. Silverman...... 1999 $171,564 $ 60,083(4) Vice President, Business Development, General Counsel and Secretary Suzan K. DelBene(5).... 1999 $135,092 $ Former Vice President, Marketing 1998 44,217 and Store Development 6,879 5,255

350,000 150,000

$ 278 5,895(3)

275,000

$

190

275,000

$

272

-150,000

$

214 101

(1) Represents premium paid for term life insurance for the benefit of the named executive officer. (2) Includes a $120,000 signing bonus received by Mr. Raman in 1998. (3) Includes a $5,400 reimbursement for relocation expenses. (4) Includes a $35,000 signing bonus paid to Mr. Silverman in 1999. (5) Ms. DelBene resigned as an officer of drugstore.com effective October 15, 1999. 60

Option Grants The following table provides summary information regarding stock options granted to the individuals named in the summary compensation table during the year ended January 2, 2000. Option Grants in Last Fiscal Year
Individual Grants ------------------------Number of Securities Underlying Options Granted (1)(#) ------------1,000,000 75,000 275,000 --------350,000 150,000 125,000 --------275,000 150,000 125,000 --------275,000 --

Name ---Peter M. Neupert........ Kal Raman...............

David E. Rostov.........

Mark L. Silverman.......

Suzan K. DelBene(4).....

Potential Realizable % of Total Value at Assumed Options Annual Rates of Granted to Stock Appreciation Employees For Option Term (3) in Fiscal Exercise Expiration ----------------------Year (2) Price Date 5% 10% ---------- -------- ---------- ----------- ----------20.5% $32.4375 12/28/09 $20,399,769 $51,697,021 1.6 7.8300 4/26/09 1,611,758 2,914,302 5.6 35.1250 11/18/09 6,074,729 15,394,556 -------------- ----------7.2% 7,686,487 18,308,858 3.1 0.4500 1/28/09 4,330,515 6,935,605 2.6 35.1250 11/18/09 2,761,241 6,997,525 -------------- ----------5.7% 7,091,756 13,933,130 3.1 0.4500 1/18/09 4,330,515 6,935,605 2.6 35.1250 11/18/09 2,761,241 6,997,525 -------------- ----------5.7% 7,091,756 13,933,130 ------

(1) As long as the optionee maintains continuous employment with drugstore.com, options granted to the individuals above vest as follows: options granted to Mr. Neupert vest monthly over a ten-year period at an annual rate of one-tenth of the total number of shares subject to the option; options granted to Mr. Raman with an expiration date of April 26, 2009 vest over a five-year period at a rate of one-fourth of the total number of shares subject to the option on the sixteen-month anniversary of the date of grant with the remaining shares subject to the option vesting in equal installments at the end of each six-month period thereafter; options granted to Mr. Raman with an expiration date of November 18, 2009 vest over a five-year period at a rate of one-fourth the total number of shares subject to the option on the first anniversary of the date of grant with the remaining shares subject to the option vesting in equal installments at the end of each six-month period thereafter; options granted to Mr. Rostov and Mr. Silverman vest over a four-year period (with respect to options with an expiration date in January 2009) or a five-year period (with respect to options with an expiration date in November 2009) at a rate of one-fourth the total number of shares subject to the option on the first anniversary of the date of grant with the remaining shares subject to the option vesting in equal installments at the end of each six-month period thereafter. (2) Based on an aggregate of 4,880,075 shares underlying options granted by drugstore.com during the fiscal year ended January 2, 2000 to our employees. (3) Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the fair market value of the common stock on the date of grant or, in the case of options granted prior to our initial public offering, the initial public offering price of $18.00 per share, assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire ten-year term of the option and subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. (4) Suzan DelBene resigned as an officer of drugstore.com effective October 15, 1999. 61

Option Exercises and Holdings The following table provides summary information concerning options exercised during the year ended January 2, 2000, and exercisable and unexercisable options held as of January 2, 2000, by the individuals named in the summary compensation table above. Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options at Number of Fiscal Year-End (#) Fiscal Year-End (1) Shares Acquired Value ------------------------- ------------------------on Exercise Realized Unexercisable Exercisable Unexercisable Exercisable --------------- ---------- ------------- ----------- ------------- ----------- ----958,334 41,666 $3,593,753 $ 156,248 500 $ 14,230 462,500 37,000 6,485,594 1,337,458 --275,000 -5,493,438 ---275,000 -5,493,438 -57,500 2,182,700 92,500 -3,343,644 --

Name ---Peter M. Neupert........ Kal Raman............... David E. Rostov......... Mark L. Silverman....... Suzan K. DelBene(2).....

(1) Based on a value of $36.1875 per share, the share price on January 2, 2000, minus the per share exercise price, multiplied by the number of shares underlying the option. (2) Suzan DelBene resigned as an officer of drugstore.com effective October 15, 1999. Stock Plans 1998 Stock Plan. Our 1998 stock plan provides for the grant of incentive stock options to employees and nonstatutory stock options and stock purchase rights to employees, directors and consultants to acquire shares of common stock. The purposes of the 1998 stock plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. Our board of directors originally adopted the 1998 stock plan in July 1998 and our stockholders approved the plan in July 1998. The 1998 stock plan was amended, with the approval of our stockholders, in January 1999, April 1999 and July 1999 to increase the total number of shares of common stock reserved for issuance to 11,000,000 shares and to incorporate certain other changes. Unless terminated earlier by the board of directors, the 1998 stock plan will terminate in July 2008. As of January 2, 2000, options to purchase 5,850,658 shares of common stock were outstanding at a weighted average exercise price of $16.4875 per share, 8,000 shares had been issued pursuant to restricted stock purchase agreements, 202,253 shares had been issued upon exercise of outstanding options, and 4,939,089 shares remained available for future grant. On January 20, 2000, we granted options to purchase 946,940 shares of common stock at an exercise price of $27.1875 per share. The 1998 stock plan may be administered by the board of directors, a committee appointed by the board of directors or a combination of the board of directors and a committee, as determined by the board of directors. The administrator determines the terms of options granted under the 1998 stock plan, including the number of shares subject to the option, exercise price, term and exercisability. In no event, however, may an individual receive option grants for more than 2,500,000 shares of common stock under the 1998 stock plan in any fiscal year. Incentive stock options granted under the 1998 stock plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of grant and at least 110% of such fair market value in the case of an optionee who holds more than 10% of the total voting power of all classes of our stock. Nonstatutory stock options granted under the 1998 stock plan will have an exercise price as determined by the administrator. Payment of the exercise price may be made in cash or such other consideration as determined by the administrator. The administrator determines the term of options, which may not exceed 10 years or 5 years in the case of an incentive stock option granted to a holder of more than 10% of the total voting power of all classes of our stock. No option may be transferred by the optionee other than by will or the laws of descent or distribution, provided, however, that the administrator may in its discretion provide for the transferability of nonstatutory 62

stock options granted under the 1998 stock plan if the common stock is listed or approved for listing on a national securities exchange or designated as a national market system security by the National Association of Securities Dealers, Inc. Each option may be exercised during the lifetime of the optionee only by such optionee or permitted transferee. The administrator determines when options become exercisable. Options granted under the 1998 stock plan generally must be exercised within 3 months after the termination of the optionee's status as an employee, director or consultant of drugstore.com, or within 6 months if such termination is due to the death or within 12 months if such termination is due to disability of the optionee, but in no event later than the expiration of the option's term. Options granted under the 1998 stock plan generally vest over a four-year or five-year period at a rate of one- fourth of the total number of shares subject to the option twelve months after the date of grant, with the remaining shares vesting in equal installments at the end of each six month period thereafter. In the event of our merger with or into another corporation, the successor corporation may assume each option and outstanding stock purchase right or may substitute an equivalent option or stock purchase right. However, if the successor corporation does not agree to this assumption or substitution, the option or stock purchase right will terminate. The board of directors has the authority to amend or terminate the 1998 stock plan provided that no action that impairs the rights of any holder of an outstanding option may be taken without the holder's consent. In addition, we will obtain requisite stockholder approval for any action requiring stockholder approval under the applicable law. In addition to stock options, the administrator may issue stock purchase rights under the 1998 stock plan to employees, directors and consultants. The administrator determines the number of shares, price, terms, conditions and restrictions related to a grant of stock purchase rights and the purchase price of a stock purchase right granted under the 1998 stock plan. The administrator also determines the period during which the stock purchase right is held open, but in no case shall such period exceed 30 days. Unless the administrator determines otherwise, the recipient of a stock purchase right must execute a restricted stock purchase agreement granting an option to repurchase the unvested shares at cost upon termination of such recipient's relationship with us. 1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999 employee stock purchase plan in April 1999 and our stockholders approved the employee stock purchase plan in July 1999. A total of 500,000 shares of common stock has been reserved for issuance under the purchase plan plus an annual increase on the first day of each of our fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of the following: . 500,000 shares; . 3% of our shares outstanding on the last day of the immediate preceding fiscal year; or . such lesser number of shares as is determined by the board. The purchase plan is intended to qualify under Section 423 of the Internal Revenue Code. The initial offering period began on the date of the closing of our initial public offering and will end on January 31, 2000. Each subsequent offering period will have a duration of six months. Each offering period after the first offering period will commence on February 1 and August 1 of each year. The board of directors or a committee appointed by the board will administer the purchase plan. Employees, including officers and employee directors, of drugstore.com or of any majority-owned subsidiary designated by the board, are eligible to participate in the purchase plan if they are employed by drugstore.com or any such subsidiary for at least 20 hours per week and more than 5 months per year. The purchase plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 20% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of our common stock at the beginning or end of the offering period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment. If not terminated earlier, the purchase plan will have a term of 10 years. The purchase plan provides that in the event of our merger with or into another corporation or a sale of all or substantially all of our assets, the successor corporation will assume each right to purchase stock under the 63

purchase plan or will substitute an equivalent right. If the successor corporation does not agree to an assumption or substitution, the offering period then in progress will be shortened so that employees' rights to purchase stock under the purchase plan are exercised prior to the merger or sale of assets. The board of directors has the power to amend or terminate the purchase plan as long as that action does not adversely affect any outstanding rights to purchase stock under the plan. We may, however, terminate the purchase plan or an offering period if continuation of the purchase plan or the offering period would cause us to incur adverse accounting charges. 401(k) Plan Effective April 1999, we adopted the drugstore.com, inc. 401(k) plan covering our full-time employees. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions to the 401(k) plan by employees or by drugstore.com, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) plan, and so that contributions by drugstore.com, if any, will be deductible by drugstore.com when made. Under the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1999) and to have the amount of such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not require, additional matching contributions to the 401(k) plan by drugstore.com on behalf of all participants in the 401(k) plan. To date, we have not made any matching contributions to the 401(k) plan. Agreements with Named Executive Officers Peter M. Neupert's employment offer letter provides for an initial annual salary of $250,000 and an initial annual bonus of up to $125,000. We also granted Mr. Neupert a one-time right to purchase 1,260,000 shares of our common stock at a purchase price of $.04 per share. We have a lapsing right to repurchase Mr. Neupert's unvested shares. As of February 3, 2000, our right to repurchase has lapsed with respect to 498,750 shares of stock and will continue to lapse with respect to 26,250 shares each month while he remains employed, with all of these shares becoming fully vested on the 27th of the month following his fourth anniversary of employment. If we are acquired by another entity or sell substantially all our assets, and Mr. Neupert is not offered a position with the surviving corporation with responsibilities similar to those held at drugstore.com, our right of repurchase will lapse with respect to all of these shares. Mr. Neupert's employment is for no specified length of time, and either party has the right to terminate Mr. Neupert's employment at any time for any reason. If we terminate Mr. Neupert's employment other than for "cause" (which is defined in his agreement to mean gross negligence or willful misconduct in the performance of his duties, the failure to obey our board of directors, defrauding or stealing from drugstore.com, or being convicted of a crime that harms the business or reputation of drugstore.com), our right of repurchase will lapse on an additional 236,250 shares of the then-unvested portion. The offer letter also provides that in the event Mr. Neupert's employment is terminated for any reason, he will continue to receive his then-current base salary and benefits for a period of nine months. Kal Raman's employment offer letter provides for an initial annual salary of $175,000, a $100,000 signing bonus (which was grossed up to $120,000 to negate the effect of applicable taxes), reimbursement of $5,000 for a lost down payment on a house in Florida and an annual bonus of up to 15% of his salary. We also offered Mr. Raman an option to purchase shares of common stock under our 1998 stock plan. In the offer letter, we agreed to guarantee a loan from a bank in the amount of $250,000. However, instead of guaranteeing a bank loan, we and Mr. Raman agreed that we would loan $250,000 directly to Mr. Raman. See "Certain Relationships and Related Transactions" for a description of our loan arrangement with Mr. Raman. Mr. Raman's employment is for no specified length of time, and either party has the right to terminate the agreement at any time for any reason. Mark L. Silverman's employment offer letter provides for an initial annual base salary of $175,000, a $35,000 signing bonus and a bonus at the discretion of the chief executive officer commensurate with other officers of drugstore.com. We also offered Mr. Silverman an option to purchase shares of our common stock under our 1998 stock plan. If we are acquired by another entity or sell substantially all of our assets and Mr. Silverman is not offered a position with the surviving corporation with responsibilities similar to those held 64

at drugstore.com or if his employment is terminated for other than "cause" (which is defined in his agreement to mean gross negligence or willful misconduct in the performance of his duties, the failure to obey our board of directors or chief executive officer, defrauding or stealing from drugstore.com, or being convicted of a crime that harms the business or reputation of drugstore.com), the option with respect to all then-unvested shares shall vest. Mr. Silverman's employment is for no specified length of time, and either party has the right to terminate Mr. Silverman's employment at any time for any reason. The offer letter also provides that, in the event Mr. Silverman's employment is terminated without cause, he will continue to receive his then-current base salary and benefits for a period of twelve months. Suzan K. DelBene resigned as Vice President, Marketing and Store Development of drugstore.com effective as of October 15, 1999 pursuant to a separation agreement and release. Under the terms of her agreement Ms. DelBene will continue to receive her regular base salary and benefits until April 8, 2000. In addition, we accelerated the vesting of options to purchase 20,000 shares of our common stock to October 1, 1999. Limitations on Directors' Liability and Indemnification Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that drugstore.com shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors and officers, in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and officers for expenses specified in the agreements, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding arising out of such person's services as a director or officer of drugstore.com, any subsidiary of drugstore.com or any other company or enterprise to which the person provides services at the request of drugstore.com. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. 65

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to our initial public offering, we issued and sold shares of our capital stock as follows: a total of 2,265,000 shares of common stock at a price of $.04 per share in June, July and August 1998, a total of 10,000,000 shares of Series A preferred stock at a price of $.80 per share in June and August 1998, a total of 5,446,268 shares of Series B preferred stock at a price of $3.35 per share in October, November and December 1998, a total of 4,472,844 shares of Series C preferred stock at a price of $7.825 per share in January and March 1999, a total of 2,266,289 shares of Series D preferred stock at a price of $17.65 per share in June 1999, a total of 12,282,599 shares of Series E preferred stock in July 1999. All shares of our preferred stock were converted into common stock on a 1-for-1 basis upon the closing of our initial public offering. In addition, concurrently with our initial public offering, we issued and sold 555,555 shares of our common stock to Amazon.com in a private placement transaction at the initial public offering price of $18 per share, and on January 24, 2000, we issued and sold 1,066,667 shares of our common stock to Amazon.com in a private placement transaction at a price of $28.125 per share. The following table summarizes the shares of capital stock purchased by executive officers, directors and five-percent stockholders and their affiliates in these transactions:
Series A Series B Series C Series D Series E Common Preferred Preferred Preferred Preferred Preferred Stock Stock Stock Stock Stock Stock --------- --------- --------- --------- --------- ---------- 4,937,500 1,582,089 511,182 1,622,222 5,000,000 3,177,612 2,555,911 -1,260,000 --------417,910 268,657 ---766,773 319,489 -------2,266,289 -------9,334,746 2,947,853

Investor(1) ----------Kleiner Perkins Caufield & Byers(2)(3).......... Amazon.com, Inc.(2)(4).. Maveron Equity Partners, L.P.(2)(5)............. Peter M. Neupert(2)(6).. Vulcan Ventures Incorporated(2)(7)..... Rite Aid Corporation(2)(8)...... General Nutrition Investment Company (2)(9).........

(1) Shares held by affiliated persons and entities have been added together for the purposes of this chart. See "Principal and Selling Stockholders" for a chart of beneficial owners. (2) Holder of 5% or more of a class of our capital stock. (3) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P. (KPCB VIII), KPCB VIII Founders Fund, L.P., and KPCB Life Sciences Zaibatsu Fund II, L.P. KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled by KPCV VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is wholly controlled by KPCB VII Associates, L.P., Brook H. Byers and L. John Doerr, each a general partner of KPCB VIII Associates and KPCB VII Associates, L.P., are both directors of drugstore.com. Mr. Byers and Mr. Doerr each disclaim beneficial ownership of shares held by these entities except to the extent of their pecuniary interest therein. In November 1998, drugstore.com and Kleiner Perkins Caufield & Byers agreed to rescind the purchase of 89,552 of such shares and refund the $299,999.20 purchase price. As a result, after November 1998, Kleiner Perkins Caufield & Byers held 1,582,089 shares of Series B preferred stock. (4) In consideration of Amazon.com's obligations under a technology license and advertising agreement, we issued Amazon.com 5,000,000 shares of our Series A preferred stock. We issued these shares primarily in exchange for Amazon.com's early marketing and support efforts in connection with and after our launch. Jeffrey P. Bezos, chairman of the board and chief executive officer of Amazon.com, became a director of drugstore.com upon completion of the issuance. (5) Howard Schultz, a director of drugstore.com, is one of the two founding members of Maveron LLC, and is one of two members of a limited liability company that serves as a general partner of its affiliated venture capital fund, Maveron Equity Partners, L.P. (6) Mr. Neupert's shares of preferred stock are held jointly by Mr. Neupert and Sheryl Neupert. 66

(7) In May 1999, we issued a convertible promissory note convertible into 2,266,289 shares of Series D preferred stock to Vulcan Ventures in exchange for $40 million in cash and an obligation to provide cable television advertising valued at $5 million. The note was converted into 2,266,289 shares of Series D preferred stock in June 1999. William D. Savoy, vice president of Vulcan Ventures, became a director of drugstore.com in July 1999. (8) In July 1999, we issued Rite Aid 9,334,746 shares of Series E preferred stock for $7.6 million in cash and additional consideration. Mary Sammons, one of our directors, is the president and chief operating officer of Rite Aid. (9) In July 1999, we issued General Nutrition Investment Company, a wholly owned subsidiary of GNC, 2,947,853 shares of Series E preferred stock for $2.4 million in cash and additional consideration. A provision of the investors' rights agreement dated May 19, 1999 between drugstore.com and some of our stockholders precludes Kleiner Perkins Caufield & Byers, Amazon.com and Maveron Equity Partners from purchasing additional shares of our common stock without our prior approval if the purchase would cause any of them to hold individually more than 40% of our outstanding common stock (calculated on a fully diluted basis to include outstanding options and shares reserved under our stock plans). This restriction lasts until August 2002. Pursuant to a June 17, 1999 addendum, Rite Aid and GNC were made parties to this agreement and are subject to its provisions. In May 1999, we issued a convertible promissory note convertible into 2,266,289 shares of Series D preferred stock to Vulcan Ventures in exchange for $40 million in cash and an obligation by Vulcan to provide cable television advertising valued at $5 million based on comparable transactions with unaffiliated third parties. The advertising is expected to be aired over a three-year period and will be expensed in the period in which the airtime is used. The note was converted into 2,266,289 shares of Series D preferred stock in June 1999. William D. Savoy, vice president of Vulcan Ventures, became a director of drugstore.com in July 1999. On January 24, 2000, we entered into an agreement with Amazon.com to integrate various shopping features of our Web sites and create a persistent drugstore.com shopping presence on Amazon.com's Web site. The agreement also covers various advertising and cross-promotion initiatives and obligates the parties to undertake the development of additional features designed to further integrate their Web sites, including with respect to search and browse capabilities and a shared shopping basket. We agreed to pay Amazon.com a total of $105 million over the three-year term of the agreement, of which $30 million was paid at the time the agreement was executed. See "Business-- Relationship with Amazon.com." In June 1999, we entered into a strategic relationship with Rite Aid whereby customers are able to refill prescriptions at our Web site and either use our standard delivery options or pick up the prescriptions at Rite Aid stores. In addition, Rite Aid and drugstore.com will promote each others' services both online and offline, including a link from Rite Aid's Web site to our Web site. In addition, we will participate in substantially all of the current and future retail pharmacy networks managed by PCS Health Systems, Inc., a wholly-owned subsidiary of Rite Aid, which claims to provide pharmacy benefit management services for more than 50 million individuals in the United States. We have a separate ten-year agreement with PCS. As part of the relationship, both Rite Aid and drugstore.com agreed to certain exclusivity provisions that limit our ability to promote or affiliate with any other physical retail drugstore and from operating a traditional physical drugstore, and will preclude Rite Aid from offering or selling products or services on the Internet other than through our Web site. In addition, the agreement provides that if we establish our own distribution center, we will purchase all of our pharmaceutical requirements from Rite Aid. The agreement contains additional provisions providing for the licensing by Rite Aid to drugstore.com of information technology systems and the integration of the information technology and pharmacy systems of the two companies. This agreement extends for ten years, but can be terminated for breach prior to such time. In connection with this relationship, Rite Aid acquired 9,334,746 shares of Series E preferred stock (all of which was converted into common stock at the time of our initial public offering) for $7.6 million in cash and additional consideration. Under the terms of the Third Amended and Restated Voting Agreement dated June 17, 1999, Rite Aid has the right to nominate one member to our board of directors, and Mary Sammons, Rite Aid's president and chief operating officer, is currently a member of our 67

board of directors. Rite Aid is offering 1,500,000 shares of common stock in this offering. Following this offering, Rite Aid will own approximately 15.5% of our outstanding common stock (14.5% if the underwriters' over-allotment options are exercised in full). In June 1999, we entered into a relationship with GNC whereby we are the exclusive online provider of GNC-branded products. We have the exclusive right to sell GNC's nutrition products over the Internet, including the PharmAssure brand of pharmacist recommended vitamins and nutritional supplements, subject to our meeting performance parameters based on traffic to our Web site and sales of GNC's products over the Internet in the third and fifth year of the relationship. As long as we have the exclusive right to distribute GNC's products over the Internet, we will not promote any other retail health food store or operate a physical retail health food store. If the exclusivity provisions of the agreement terminate, we have the non-exclusive right to sell these products for the remaining term of the agreement. As part of this relationship, we have created a separate part of our Web site called the GNC LiveWell Store which is dedicated to selling on a consignment basis GNC products. In connection with this relationship, GNC acquired 2,947,853 shares of our Series E preferred stock (all of which was converted into common stock at the time of our initial public offering). As part of our relationship with GNC, GNC and drugstore.com agreed to co-promote each other's products and services in both their traditional and online marketing efforts, including GNC putting a link to our Web site on their Web site. The agreement extends for ten years, but can be terminated for breach prior to such time. We have entered into offer letters with several of our executive officers. See "Management--Agreements With Named Executive Officers" for a description of the offer letters. On December 3, 1998, we loaned $250,000 to Kal Raman, our Senior Vice President, Technology and Operations. In our offer letter to Mr. Raman, we agreed to guarantee a loan for $250,000, and, in connection with this obligation, chose to provide the loan directly to Mr. Raman. The loan is with full recourse and bears interest at 7% and is further secured by the shares issuable upon exercise of Mr. Raman's stock option. All principal and accrued interest under the loan remains outstanding and is due and payable on the earlier of December 3, 1999, or within 15 days after ceasing to provide substantial services to drugstore.com. The board of directors has approved the extension of the term of this loan, and all principal and interest under the loan remains outstanding and is due and payable on the earlier of December 31, 2000, or within 15 days after Mr. Raman ceases to provide substantial services to drugstore.com. The highest aggregate amount of principal and interest outstanding under this loan since December 3, 1998 and through January 2, 2000 was approximately $268,938. All future transactions, including any loans from us to our officers, directors, principal stockholders or affiliates, will be approved by a majority of our board of directors, including a majority of the independent and disinterested members of the board, and if required by law, a majority of disinterested stockholders. In the event that drugstore.com merges or is acquired by another company and Peter M. Neupert is not offered a similar position with similar responsibilities by the surviving entity, or if the surviving entity's principal office is located more than 50 miles from his residence, all of Mr. Neupert's unvested shares will be released from our option to repurchase these shares. drugstore.com Foundation In July 1999, we donated 200,000 shares of our common stock to drugstore.com Foundation, a foundation established by us. The foundation will make grants to charitable organizations. We intend to involve our employees in determining the charitable purposes for this foundation. The drugstore.com Foundation is offering 20,000 shares of common stock in this offering. 68

PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of February 3, 2000, and as adjusted to reflect the sale of common stock offered hereby, by: . each stockholder known by us to own beneficially more than 5% of our common stock; . each director; . each individual named in the summary compensation table; . all directors and executive officers as a group; and . each selling stockholder. As of February 3, 2000, we had 46,022,560 shares of common stock outstanding and 208 stockholders of record. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after February 3, 2000 are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Shares Beneficially Shares Beneficially Owned Prior to this Owned After this Offering Shares Offering --------------------Being --------------------Number Percentage Offered Number Percentage ---------- ---------- --------- ---------- ---------12,355,745 26.8% -- 12,355,745 24.5%

Name and Address of Beneficial Owner ------------------Amazon.com, Inc.(1)..... 1516 2nd Avenue Seattle, WA 98101 Rite Aid Corporation(2)......... 30 Hunter Lane Camp Hill, PA 17011 Kleiner Perkins Caufield & Byers(3)............. 2750 Sand Hill Road Menlo Park, CA 94025 General Nutrition Investment Company(4).. 1002 South 63rd Avenue At Buckeye Phoenix, AZ 15222 Vulcan Ventures, Incorporated(5)........ 110 110th Avenue NE, Suite 550 Bellevue, WA 98004 Peter M. Neupert(6)..... 13920 Southeast Eastgate Way Suite 300 Bellevue, WA 98005 Maveron Equity Partners, L.P.(7)................ Jeffrey P. Bezos(1)..... Brook H. Byers(3)....... L. John Doerr(3)........ Melinda French Gates.... Mary Sammons(8)......... William Savoy(5)........ Howard Schultz(7)....... Kal Raman(9)............ David E. Rostov(10).....

9,334,746

20.3

1,500,000

7,834,746

15.5

7,033,271

15.3

--

7,033,271

13.9

2,947,853

6.4

--

2,947,853

5.8

2,266,289

4.9

--

2,266,289

4.5

1,931,479

4.2

--

1,931,479

3.8

1,187,183 12,355,745 7,033,271 7,033,271 -9,334,746 2,276,289 1,187,183 62,050 48,500

2.6 26.8 15.3 15.3 -20.3 4.9 2.6 * *

-1,187,183 -- 12,355,745 -7,033,271 -7,033,271 --1,500,000 7,834,746 -2,276,289 -1,187,183 -62,050 -48,500

2.3 24.5 13.9 13.9 -15.5 4.5 2.3 * *

69

Name and Address of Beneficial Owner ------------------Mark L. Silverman(11).. All directors and executive officers as a group (13 persons)(12)........ drugstore.com Foundation............ 13920 Southeast Eastgate Way Bellevue, WA 98005

Shares Beneficially Owned Prior to this Shares Beneficially Owned Offering Shares After this Offering --------------------Being -----------------------------Number Percentage Offered Number Percentage ---------- ---------- --------- --------------- -------------52,000 * -52,000 *

34,290,096 200,000

74.2 *

1,500,000 20,000

32,790,096 180,000

64.7 *

* Less than 1% (1) Includes 1,066,667 shares of common stock issued and sold to Amazon.com on January 24, 2000 in a private placement transaction. Jeffrey P. Bezos is a director of drugstore.com and is the chairman of the board and chief executive officer of Amazon.com, Inc. (2) Consists of shares held by Rite Investments Corp., a wholly owned subsidiary of Rite Aid Corporation. Under the terms of the Third Amended and Restated Voting Agreement dated June 17, 1999, Rite Aid has the right to nominate one member to our board of directors. (3) Consists of 6,313,633 shares held by Kleiner Perkins Caufield & Byers VIII, L.P. (KPCB VIII), 365,600 shares held by KPCB VIII Founders Fund, L.P. 351,538 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P. and 2,500 shares held by KPCB IX Associates, L.P. KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled by KPCB VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is wholly controlled by KPCB VII Associates, L.P. Brook H. Byers and L. John Doerr, each a general partner of KPCB VIII Associates and KPCB VII Associates, L.P., are both directors of drugstore.com. Mr. Byers and Mr. Doerr each disclaim beneficial ownership of shares held by these entities except to the extent of his pecuniary interest in those shares. (4) In August 1999, General Nutrition Companies, Inc., the parent company of General Nutrition Investment Company, was acquired by Royal Numico N.V., a European maker of nutrition products. (5) Includes 2,266,289 shares held by Vulcan Ventures Incorporated. William D. Savoy is a director of drugstore.com and is the vice president of Vulcan Ventures, a venture capital firm wholly-owned by Paul Allen. Mr. Savoy disclaims beneficial ownership of shares held by Vulcan Ventures except to the extent of his pecuniary interest in those shares. (6) As of February 3, 2000, 761,250 of such shares are subject to a right of repurchase at cost in the event Peter M. Neupert ceases to be an employee of drugstore.com. Mr. Neupert's shares of common stock are held jointly by Mr. Neupert and Sheryl Neupert. Includes 66,666 shares subject to options exercisable within 60 days of February 3, 2000. (7) Howard Schultz is a director of drugstore.com and one of two founding members of Maveron LLC and is one of two members of a limited liability company that serves as a general partner of its affiliated venture capital fund, Maveron Equity Partners, L.P. Mr. Schultz disclaims beneficial ownership of shares held by these entities except to the extent of his pecuniary interest in those shares. (8) Consists of shares held by Rite Investments Corp., a wholly owned subsidiary of Rite Aid Corporation. Mary Sammons is the president and chief operating officer of Rite Aid Corporation. (9) Includes 55,250 shares subject to options exercisable within 60 days of February 3, 2000. (10) Includes 1,000 shares held by Mr. Rostov as custodian for his two children and 32,500 shares subject to options exercisable within 60 days of February 3, 2000. (11) Includes 37,500 shares subject to options exercisable within 60 days of February 3, 2000. (12) 191,916 shares subject to options held by the directors and officers are exercisable within 60 days of February 3, 2000. 70

DESCRIPTION OF CAPITAL STOCK As of February 3, 2000, there were 46,022,560 shares of common stock outstanding. We are authorized to issue 250,000,000 shares of common stock, $.0001 par value, and 10,000,000 shares of undesignated preferred stock, $.0001 par value. The following description of drugstore.com's capital stock is not complete and is qualified in its entirety by drugstore.com's certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Common Stock The holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy" for a description of drugstore.com's policy of distribution of dividends. In the event of a liquidation, dissolution or winding up of drugstore.com, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued by us upon the closing of this offering will be fully paid and nonassessable. Preferred Stock Our board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock and delaying or preventing a change in control of drugstore.com without further action by the stockholders. drugstore.com has no present plans to issue any shares of preferred stock. Registration Rights Following this offering, the holders of 34,762,722 shares of common stock (the "registrable securities") or their permitted transferees will be entitled to certain rights with respect to registration of such shares under the Securities Act pursuant to the terms of an agreement between drugstore.com and the holders of the registrable securities. Under these registration rights, holders of at least 33% of the then-outstanding registrable securities may require on two occasions that drugstore.com register their shares for public resale. We are obligated to register these shares only if the shares to be registered would have an anticipated public offering price of at least $5,000,000. In addition, holders of then-outstanding registrable securities with an aggregate offering price of at least $40 million may require that we register their shares for public resale on Form S-3 or similar short-form registration, provided we are eligible to use Form S-3 or similar short-form registration statement and provided further that the value of the securities to be registered is at least $500,000. Furthermore, in the event we elect to register any of our shares of common stock for purposes of effecting any public offering, the holders of registrable securities are entitled to include their shares of common stock in the registration, subject however to our right to reduce the number of shares proposed to be registered in view of market conditions. All expenses in connection with any registration (other than underwriting discounts and commissions) will be borne by us. The registration rights of all holders other than Rite Aid and GNC will terminate five years after the date of our initial 71

public offering or, with respect to each holder of registrable securities, at such time as the holder is entitled to sell all of its shares in any three month period under Rule 144 of the Securities Act. The registration rights of Rite Aid and GNC terminate ten years after the date of our initial public offering. In addition, subject to certain limitations, including the release of such shares from escrow arrangements, the holders of all 1,266,289 shares of common stock issued in connection with our acquisition of Beauty.com are entitled to include their shares in any registration we initiate covering the sale by us of shares of our common stock, on the same terms and subject to the same conditions as the holders of the registrable securities. A provision of the investors' rights agreement between drugstore.com and some of our stockholders precludes Kleiner Perkins Caufield & Byers, Amazon.com, Maveron Equity Partners, Rite Aid and GNC from purchasing additional shares of our common stock without our prior approval if the purchase would cause them to hold more than 40% of our outstanding common stock (calculated on a fully-diluted basis to include outstanding options and shares reserved under our stock plans). This restriction lasts until August 2002. Delaware and Washington Antitakeover Law and Certain Charter and Bylaw Provisions Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of drugstore.com by a third party and the removal of incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of drugstore.com to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure drugstore.com outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless: . the board of directors approved the transaction in which such stockholder became an interested stockholder prior to the date the interested stockholder attained such status; . upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, he or she owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers and shares in employee stock plans in which the participants have no right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to such date the business combination is approved by the board of directors and authorized by 66 2/3% vote at an annual or special meeting of stockholders. A business combination generally includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The laws of the State of Washington, where our principal executive offices are located, also impose restrictions on certain transactions between certain foreign corporations and significant stockholders. Chapter 23B.19 of the Washington Business Corporation Act (the WBCA) prohibits a "target corporation," with certain exceptions, from engaging in certain "significant business transactions" with a person or group of persons who beneficially own 10% or more of the voting securities of the target corporation (an "acquiring person") for a period of five years after such acquisition, unless the transaction or acquisition of such shares is approved by a majority of the members of the target corporation's board of directors prior to the time of 72

acquisition. Such prohibited transactions include, among other things, a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person, termination of 5% or more of the employees of the target corporation as a result of the acquiring person's acquisition of 10% or more of the shares or allowing the acquiring person to receive disproportionate benefit as a stockholder. After the five- year period, a significant business transaction may take place as long as it complies with certain fair price provisions of the statute. A "target corporation" includes a foreign corporation if (1) the corporation has a class of voting stock registered pursuant to Section 12 or 15 of the Exchange Act, (2) the corporation's principal executive office is located in Washington, (3) any of (a) more than 10% of the corporation's stockholders of record are Washington residents, (b) more than 10% of its shares are owned of record by Washington residents, or (c) 1,000 or more of its stockholders of record are Washington residents, (4) a majority of the corporation's employees are Washington residents or more than 1,000 Washington residents are employees of the corporation, and (5) a majority of the corporation's tangible assets are located in Washington or the corporation has more than $50.0 million of tangible assets located in Washington. A corporation may not "opt out" of this statute and, therefore, we anticipate this statute will apply to us. Depending upon whether we meet the definition of a target corporation, Chapter 23B.19 of the WBCA may have the effect of delaying, deferring or preventing a change in control of us. Our certificate of incorporation permits the board of directors to issue preferred stock with voting or other rights without any stockholder action. The authorization of undesignated preferred stock makes it possible for the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of drugstore.com. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of drugstore.com. Transfer Agent and Registrar The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services LLC. 73

SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have 50,522,560 shares of common stock outstanding. Of these shares, the 6,020,000 shares sold in the offering plus any shares issued upon exercise of the underwriters' over-allotment options, and the 5,750,000 shares sold in our initial public offering, will be freely tradable without restriction under the Securities Act, unless held by our "affiliates" as that term is defined in Rule 144 under the Securities Act (generally, officers, directors or 10% stockholders). Of the remaining shares, a total of 38,373,261 shares held by our existing stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the restricted shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the common stock. Our directors, officers, the selling stockholders and certain other stockholders have entered into lock-up agreements in connection with this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of at least 90 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, the representative of the underwriters. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be salable until such agreements expire or are waived by the designated underwriters' representative. Morgan Stanley & Co. Incorporated has notified us that it currently has no plans to release any portion of the securities subject to lock-up agreements. Taking into account the lock-up agreements, and assuming Morgan Stanley & Co. Incorporated does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: . As of the date hereof, approximately 1,124,750 shares are eligible for sale in the public market pursuant to Rule 701 and Rule 144, assuming no exercise of options, of which 162,500 shares held on February 3, 2000 by Jed Smith, one of our founders, are subject to a lock-up agreement with us that will be released in eight equal quarterly installments beginning on March 31, 2000. . Beginning 90 days after the date of this prospectus, approximately 23,387,401 shares will be eligible for sale in the public market pursuant to Rule 701 and Rule 144, assuming no exercise of options, of which 761,250 shares held by Peter M. Neupert at February 3, 2000 are subject to repurchase by us if his employment terminates under certain circumstances. . The following shares of common stock will become eligible for sale in the public market pursuant to Rule 144 on the following dates: 2,266,289 shares on May 19, 2000 (subject to the expiration of the lock-up agreement referred to above); 10,782,599 shares on July 8, 2000; 555,555 shares on August 2, 2000; 1,066,667 shares on January 24, 2001; and 1,266,289 shares on February 2, 2001 (subject to the release of such shares from escrow arrangements). Any such shares that are held by our "affiliates" are subject to the volume restrictions of Rule 144 described below. In addition, the holders of 36,029,011 shares of our common stock are entitled to certain rights with respect to registration of such shares of common stock for offer and sale to the public. See "Description of Capital Stock-- Registration Rights." In general, under Rule 144, and beginning after the expiration of the applicable lock-up agreements, a person, or persons whose shares are combined, who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the following: . one percent of the number of shares of common stock then outstanding (which will equal approximately 505,226 shares immediately after this offering); or . the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. 74

Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any of our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirement of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. We filed registration statements under the Securities Act covering a total of 13,992,000 shares of common stock issuable under our employee benefit plans. As a result, any options exercised under the 1998 stock plan, the 1999 employee stock purchase plan or any other benefit plan are freely tradable in the public market, except that shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resalable under Rule 701. As of February 3, 2000, there were outstanding options for the purchase of 6,731,054 shares of our common stock under the 1998 stock plan and 3,965,616 shares were available for future grant. Future sales of substantial amounts of common stock (including shares issued upon exercise of outstanding options) in the public market could adversely affect prevailing market price of our common stock and impair our ability to raise equity capital in the future. 75

UNDERWRITERS Under the terms and subject to conditions contained in the underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Salmon Smith Barney Inc. and Thomas Weisel Partners LLC are acting as representatives, have severally agreed to purchase, and drugstore.com and the selling stockholders have agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of such underwriters below:
Number of Name Shares -----------Morgan Stanley & Co. Incorporated.................................. Donaldson, Lufkin & Jenrette Securities Corporation................ Salomon Smith Barney Inc. ......................................... Thomas Weisel Partners LLC......................................... --------Total............................................................ 6,020,000 =========

The underwriters are offering the shares subject to their acceptance of the shares from drugstore.com and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any such shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page of the prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and the dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain other dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. drugstore.com has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 782,400 additional shares of common stock at the public offering price set forth on the cover page hereof, less estimated underwriting discounts and commissions. One of the selling stockholders has granted to the underwriters a similar option to purchase up to an aggregate of 120,600 additional shares of common stock. The underwriters may exercise these options solely for the purpose of covering over-allotments, if any, made in connection with this offering of common stock, and any exercise must be on a pro rata basis. To the extent these over-allotment options are exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares of common stock as the number set forth next to each underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. Each of drugstore.com, its officers and directors, the selling stockholders and certain other stockholders has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, or otherwise during the period ending at least 90 days after the date of this prospectus it will not: (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or (2) enter into any swap or similar arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; whether any such transaction described above is to be settled by delivery of common stock or such other securities after the date of this prospectus. Morgan Stanley & Co. Incorporated informed drugstore.com that they do not presently intend to release any person from these agreements. Our common stock is traded on the Nasdaq National Market under the symbol "DSCM." 76

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover any over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. drugstore.com, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. The following disclosure is included because Thomas Weisel Partners LLC was organized within the past three years. Since December 1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 110 filed public offerings of equity securities, of which 79 have been completed, and has acted as a syndicate member in an additional 54 public offerings of equity securities. Thomas Weisel Partners LLC does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us under the underwriting agreement entered into in connection with this offering. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for drugstore.com by Shearman & Sterling, San Francisco, California. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements as of January 2, 2000 and December 31, 1998 and for the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998 and as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits thereto. For further information with respect to drugstore.com and such common stock, we refer you to the registration statement and to the exhibits filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. A copy of the registration statement may be inspected by anyone without charge at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the registration statement may be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 77

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................... Consolidated Balance Sheets................................................. Consolidated Statements of Operations....................................... Consolidated Statements of Stockholders' Equity............................. Consolidated Statements of Cash Flows....................................... Notes to Consolidated Financial Statements.................................. F-2 F-3 F-4 F-5 F-6 F-7

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders drugstore.com, inc. We have audited the accompanying consolidated balance sheets of drugstore.com, inc. as of January 2, 2000 and December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of drugstore.com, inc. at January 2, 2000 and December 31, 1998, and the consolidated results of its operations and its cash flows for the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Seattle, Washington January 21, 2000, except as to Note 10, as to which the date is February 2, 2000 F-2

DRUGSTORE.COM, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
January 2, 2000 ---------$ 26,526 106,228 December 31, 1998 -----------$14,408 ---4,317 520 ------19,245 2,616 230 -250 176 ------$22,517 =======

Assets Current assets: Cash and cash equivalents............................ Marketable securities................................ Accounts receivable, less allowance for doubtful accounts and sales returns of $251.................. Inventories.......................................... Prepaid marketing expenses........................... Other current assets................................. Total current assets............................... Fixed assets, net of accumulated depreciation of $3,179 and $66............................................... Intangible assets, net of accumulated amortization of $10,673 and $33....................................... Prepaid marketing expenses............................. Note receivable from officer........................... Deposits and other assets.............................. Total assets........................................... Liabilities and Stockholders' Equity Current liabilities: Accounts payable, including amounts due to related parties of $4,483 as of January 2, 2000............................... Accrued compensation................................. Accrued marketing expenses, including amounts due to related party of $1,500............................. Other current liabilities............................ Current portion of capital lease obligations......... Total current liabilities.......................... Capital lease obligations, less current portion........ Commitments and contingencies (See Note 5) Stockholders' equity: Preferred stock, $.0001 par value: Authorized shares--10,000,000 Series A preferred stock Issued and outstanding shares--None and 10,000,000 as of January 2, 2000 and December 31, 1998, respectively...................................... Series B preferred stock Issued and outstanding shares--None and 5,446,268 as of January 2, 2000 and December 31, 1998, respectively...................................... Common stock, $.0001 par value, stated at amounts paid in: Authorized shares--250,000,000 Issued and outstanding shares--43,508,808 and 2,323,000 as of January 2, 2000 and December 31, 1998, respectively................................ Deferred stock-based compensation..................... Accumulated deficit................................... Total stockholders' equity......................... Total liabilities and stockholders' equity.............

4,273 2,862 8,010 1,333 --------149,232 25,208 200,742 19,465 269 792 --------$ 395,708 =========

$

25,788 4,231

$ 1,254 327 -142 472 ------2,195 975

8,520 1,245 2,488 --------42,272 2,687

--

7,986

--

18,237

485,377 (10,770) (123,858) --------350,749 --------$ 395,708 =========

5,080 (3,929) (8,027) ------19,347 ------$22,517 =======

See accompanying notes to consolidated financial statements. F-3

DRUGSTORE.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Period from April 2, 1998 Year Ended (Inception) to January 2, 2000 December 31, 1998 --------------- ----------------Net sales....................................... $ 34,848 $ -Cost and expenses: Cost of sales................................. 38,440 -Marketing and sales........................... 61,492 3,092 Technology and content........................ 14,918 2,178 General and administrative.................... 11,126 1,861 Charitable contribution....................... 3,600 -Amortization of intangible assets............. 10,640 33 Amortization of stock-based compensation...... 15,375 1,037 ---------------Total cost and expenses..................... 155,591 8,201 ---------------Operating loss.................................. (120,743) (8,201) Other income (expense): Interest income............................... 5,036 177 Interest expense.............................. (124) (3) ---------------Net loss........................................ $ (115,831) $(8,027) ========== ======= Basic and diluted net loss per share............ $ (6.13) $(14.70) ========== ======= Weighted average shares outstanding used to compute basic and diluted net loss per share... 18,880,969 546,149 ========== ======= Pro forma basic and diluted net loss per share (unaudited).................................... $ (3.73) ========== Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited).......................... 31,045,835 ==========

See accompanying notes to consolidated financial statements. F-4

DRUGSTORE.COM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Preferred Stock -------------------------------------------------------------------------------------------------------------Series A Series B Series C Series D Series E -------------------- --------------------- --------------------- ------------------- --------------------Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ----------- ------- ----------- -------- ----------- -------- ---------- ------- ----------- --------

Initial issuance of common shares to founders in exchange for cash and intellectual property........ Issuance of Series A preferred stock, net of offering costs of $14.... Issuance of Series A preferred stock in exchange for Technology License and Advertising Agreement....... Issuance of Series B preferred stock, net of offering costs of $8..... Exercise of common stock options......... Deferred stockbased compensation.... Amortization of stock-based compensation.... Net loss and comprehensive loss............ Balance at December 31, 1998............ Issuance of Series C preferred stock, net of offering costs of $19.... Issuance of Series D preferred stock, net of offering costs of $18.......... Issuance of Series E preferred stock, net of offering costs of $396... Conversion of preferred stock to common stock in conjunction with initial public offering........ Issuance of common stock for cash in initial public offering, net of offering costs of $8,921.......... Private placement of common stock.... Contribution of common stock to charitable foundation...... Issuance of warrants to purchase common stock........... Exercise of common stock options and warrants........ Deferred stockbased compensation.... Amortization of stock-based compensation.... Cancellation of common stock options......... Net loss and comprehensive loss............ Balance at January 2,

--

$

--

--

$

--

--

$

--

--

$

--

--

$

--

5,000,000

3,986

--

--

--

--

--

--

--

--

5,000,000

4,000

--

--

--

--

--

--

--

--

---------------10,000,000 ----------7,986

5,446,268 --------------5,446,268

18,237 -----------18,237

-----------------

--------------

----------------

-------------

-----------------

--------------

--

--

--

--

4,472,844

34,981

--

--

--

--

--

--

--

--

--

--

2,266,289

44,982

--

--

--

--

--

--

--

--

--

--

12,282,599

243,567

(10,000,000)

(7,986)

(5,446,268)

(18,237)

(4,472,844)

(34,981) (2,266,289) (44,982) (12,282,599) (243,567)

---

---

---

---

---

---

---

---

---

---

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

----------------

------------

----------------

-------------

----------------

-------------

---------------

------------

----------------

-------------

2000............

-===========

Initial issuance of common shares to founders in exchange for cash and intellectual property........ Issuance of Series A preferred stock, net of offering costs of $14.... Issuance of Series A preferred stock in exchange for Technology License and Advertising Agreement....... Issuance of Series B preferred stock, net of offering costs of $8..... Exercise of common stock options......... Deferred stockbased compensation.... Amortization of stock-based compensation.... Net loss and comprehensive loss............ Balance at December 31, 1998............ Issuance of Series C preferred stock, net of offering costs of $19.... Issuance of Series D preferred stock, net of offering costs of $18.......... Issuance of Series E preferred stock, net of offering costs of $396... Conversion of preferred stock to common stock in conjunction with initial public offering........ Issuance of common stock for cash in initial public offering, net of offering costs of $8,921.......... Private placement of common stock.... Contribution of common stock to charitable foundation...... Issuance of warrants to purchase common stock........... Exercise of common stock options and warrants........ Deferred stockbased compensation.... Amortization of stock-based compensation.... Cancellation of common stock options......... Net loss and comprehensive loss............ Balance at January 2, 2000............

-$ --=========== ======== =========== Deferred StockCommon Stock based Accumu-------------------- Compensalated Shares Amount tion Deficit Total ---------- --------- ---------- ---------- ----------

$ -=======

$ -========

-==========

$ -=======

-===========

$ -========

2,315,000 $

113

$

--

$

--

$

113

--

--

--

--

3,986

--

--

--

--

4,000

-8,000 ---

-1 4,966 --

--(4,966) 1,037

-----

18,237 1 -1,037

---(8,027) (8,027) ---------- --------- ---------- ---------- ---------2,323,000 5,080 (3,929) (8,027) 19,347

--

--

--

--

34,981

--

--

--

--

44,982

--

--

--

--

243,567

34,468,000

349,753

--

--

--

5,750,000 555,555

94,579 10,000 ---

94,579 10,000

200,000

3,600

--

--

3,600

--

24

--

--

24

212,253 ----

125 22,630 -(414)

-(22,630) 15,375 414

-----

125 -15,375 --

---(115,831) (115,831) ---------- --------- ---------- ---------- ---------43,508,808 $485,377 $(10,770) $(123,858) $ 350,749 ========== ========= ========== ========== ==========

See accompanying notes to consolidated financial statements. F-5

DRUGSTORE.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from April 2, 1998 Year Ended (Inception) to January 2, 2000 December 31, 1998 --------------- ----------------$(115,831) $(8,027)

Operating Activities: Net loss..................................... Adjustments to reconcile net loss to net cash used in operating activities: Non-cash expenses: Depreciation............................... Marketing and sales........................ Charitable contributions................... Amortization of intangible assets.......... Amortization of stock-based compensation... Changes in: Accounts receivable........................ Inventories................................ Prepaid marketing expenses................. Other current assets....................... Deposits and other assets.................. Accounts payable and accrued expenses...... Other...................................... Net cash used in operating activities........ Investing Activities: Purchases of marketable securities........... Sales of marketable securities............... Purchases of fixed assets.................... Purchases of intangible assets............... Issuance of note receivable to officer....... Net cash used in investing activities........ Financing Activities: Proceeds from sales of common stock.......... Proceeds from exercise of stock options and warrants.................................... Net proceeds from sales of preferred stock... Proceeds from capital lease obligations...... Principal payments on capital lease obligations................................. Net cash provided by financing activities.... Net increase in cash and cash equivalents.... Cash and cash equivalents at beginning of period...................................... Cash and cash equivalents at end of period... Supplemental Cash Flow Information: Cash paid for interest....................... Equipment acquired through capital lease agreements.................................. Issuance of common stock in exchange for intellectual property....................... Issuance of Series A preferred stock in exchange for technology license and advertising agreement....................... Issuance of Series D preferred stock in exchange for cable television advertising... Issuance of Series E preferred stock in exchange for access to insurance coverage, advertising commitments, and a vendor agreement................................... Issuance of warrants to purchase common stock in exchange for intangible asset............

3,242 4,947 3,600 10,640 15,375 (4,273) (2,862) (161) (857) (616) 30,079 (103) --------(56,820) (881,072) 774,844 (13,630) (95) ---------(119,953) 104,578 126 84,598 538 (949) --------188,891 --------12,118 14,408 --------$ 26,526 ========= $ $ $ $ $ 108 4,138 --5,000

57 58 -33 1,037 --(552) (484) (176) 1,723 -------(6,331) --(1,202) (90) (250) ------(1,542) 90 1 22,223 -(33) ------22,281 ------14,408 -------$14,408 ======= $ 48

$ 1,480 $ 23

$ 4,000 $ --

$ 233,932 $ 24

$ $

---

See accompanying notes to consolidated financial statements. F-6

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company and Summary of Significant Accounting Policies The Company drugstore.com, inc. and its subsidiaries, (collectively, the Company) are engaged in the development of Internet-based retailing opportunities focused on filling needs for health, wellness, beauty, personal care and pharmacy products and related information. The Company was incorporated on April 2, 1998 and launched its Web store and commenced commercial operations on February 24, 1999. The Company was previously considered a development stage company. All customer orders are processed through the Company's Web store. The Company has contracts with RxAmerica LLC (RxAmerica) and Rite Aid Corporation (Rite Aid) to purchase and distribute substantially all of its pharmaceutical products, and with Walsh Distribution, Inc. (Walsh) to purchase a majority of its non-pharmaceutical products. Under the terms of the Rite Aid agreement, customers may order existing Rite Aid prescriptions for pick up at a local Rite Aid store. In the first quarter of 2000, the Company opened its own distribution center and will be transitioning its distribution capabilities for pharmaceutical and non-pharmaceutical products from third-party fulfillment partners to its own distribution center. In addition, customers will be able to order new prescriptions on the Company's Web store and pick them up at a local Rite Aid store or have the prescriptions shipped from the Company's distribution center to the customer. Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include those of drugstore.com, inc. and its subsidiaries. All material intercompany transactions and balances have been eliminated. On January 1, 1999, the Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31. The 1999 fiscal year ends on January 2, 2000, with each of the fiscal quarters representing a 13-week period. The effect of the change on prior periods is insignificant. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of its holdings of cash and marketable securities. The Company's credit risk is managed by investing its cash and marketable securities in high-quality money market instruments and securities of the U.S. government and its agencies, foreign governments and high-quality corporate issuers. The Company's credit risk is managed through monitoring the stability of the financial institutions utilized and diversification of its financial resources. At January 2, 2000, the Company has no significant concentrations of credit risk. F-7

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial Instruments Financial instruments consist of cash and cash equivalents, marketable securities and capital lease obligations. The fair value of all financial instruments approximates the carrying amount based on the current rate offered for similar instruments. At January 2, 2000, marketable securities consist primarily of commercial paper and short-term obligations and corporate notes and bonds and were carried at cost, which approximates market value. Unrealized holding gains and losses at January 2, 2000 were not significant. Approximately $8,983,000 of the Company's marketable securities mature in greater than one year. Accounts Receivable Accounts receivable consists primarily of the net amounts to be collected from third parties including managed care organizations and pharmacy benefit management and insurance companies as well as amounts collectible related to credit card purchases. Under the terms of the Company's agreement with Rite Aid, Rite Aid collects insurance reimbursement payments on the Company's behalf. As of January 2, 2000, accounts receivable includes $3,839,000 being collected by Rite Aid on the Company's behalf. Accounts receivable is recorded net of an allowance for doubtful accounts and sales returns. Inventories Inventories are stated at the lower of cost (using the weighted average cost method) or market. The Company has contracts with RxAmerica and Rite Aid to purchase and distribute substantially all of its pharmaceutical products and with Walsh to purchase a majority of its non-pharmaceutical products. The agreement with RxAmerica is for a one-year term ending February 2000, which will automatically extend for an additional year unless either party gives written notice of termination. The agreement with Walsh ends on March 31, 2000. This agreement is extendible for an additional three months at the sole discretion of the Company. The agreement includes a penalty not to exceed $1 million if the Company does not process a minimum number of orders through Walsh. The Company is currently in the process of establishing its own distribution center for both pharmaceutical and non-pharmaceutical products. The Company is obligated to purchase all of its pharmaceutical inventory for its own distribution center from Rite Aid unless it can obtain better overall terms from other vendors. Fixed Assets Fixed assets are stated at cost less accumulated depreciation and amortization, which includes the amortization of assets recorded under capital leases. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the related assets, which range from two to seven years. Fixed assets purchased under capital leases and leasehold improvements are amortized over the shorter of the lease term or estimated useful life. Intangible Assets Intangible assets consists of assets received in conjunction with agreements between the Company and Rite Aid and GNC including access to insurance coverage and a vendor agreement, and other intangibles including a technology license agreement, domain names and trademarks. Intangible assets are being amortized over their expected useful lives, generally ten years. Long-Lived Assets Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing F-8

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances where impairment is determined to exist, the Company will write down the asset to its fair value based on the present value of estimated expected future cash flows. To date, no such impairment has been indicated. Net Sales Net sales includes gross revenues from sales of product and related shipping fees, net of discounts and provision for sales returns, third-party reimbursement and other allowances. The Company generally refunds to customers all or a portion of the selling price, including related shipping fees if applicable, in the event a customer is not satisfied with the product purchased or the quality of customer service provided. Sales returns and allowances have not been significant to date. Revenues from sales of product shipped to customers, and related shipping fees, are recognized upon shipment. The Company arranges for shipment of product to customers through various contractual relationships with third party fulfillment partners. Revenues from sales of certain pharmaceutical products ordered through the Company's Web store for delivery at a Rite Aid store are recognized when the product is delivered to the customer. Upon receiving and validating a customer's order for products that will be purchased by the Company from a fulfillment partner, and subsequently shipped or delivered to the customer by that fulfillment partner, the Company submits relevant order information and, if applicable, shipping instructions to that fulfillment partner for processing. The Company believes it acts as a principal in connection with orders shipped or delivered to customers by fulfillment partners on the Company's behalf because, among other things, the Company establishes the retail prices of its non-pharmaceutical and non- insured pharmaceutical products (and accepts contractual reimbursement amounts from third-party payors for insured pharmaceutical products) and shipping fees; contractually takes title to, and assumes risk of loss of, products prior to their shipment; bears credit and collection risk from the customer or, in the case of certain pharmaceutical sales, third-party payors; and bears the risk that the product will be returned. Title to products ordered by customers and shipped or delivered by a fulfillment partner passes to the Company at the fulfillment partners' distribution center or, for certain pharmaceutical sales, when the pharmaceuticals are made available for customer retrieval at a Rite Aid store. Net sales also includes consignment service fees earned under arrangements where the Company does not take title to the inventory and cannot establish pricing. Consignment service fees earned have not been significant to date. Net sales for the fiscal year ended January 2, 2000 included $18,782,000 related to pharmaceutical products and $16,066,000 related to nonpharmaceutical products and other. Cost of Sales Cost of sales consists primarily of the cost of products sold to our customers, including allowances for shrinkage and slow moving and expired inventory, as well as outbound and inbound shipping costs. Payments that the Company expects to receive from vendors in connection with joint merchandising activities, net of related costs, will be netted against cost of sales in the period in which the related inventory is sold. Marketing and Sales Marketing and sales expenses consist primarily of fulfillment and order processing expenses and customer acquisition and marketing expenses. Fulfillment and order processing expenses include distribution center equipment and packaging supplies, per-unit fulfillment fees charged by third parties, and payroll and related F-9

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) expenses for personnel engaged in customer service, purchasing, and distribution and fulfillment activities, including pharmacists engaged in prescription verification activities and warehouse personnel. These expenses also include rent expense and depreciation related to the Company's distribution center. Customer acquisition and marketing expenses include advertising and marketing expenses, promotional expenditures, credit card processing fees and payroll and related expenses for personnel engaged in marketing and merchandising activities. Promotional expenses include the cost of certain items the Company gives away to our customers in connection with the Company's customer acquisition and retention activities and branding campaign. These items include sample merchandise in sizes or quantities not normally sold on the Company's Web site, certain drugstore.com-branded products and the cost of products given away in the Company's one cent sales promotions. Advertising production costs are expensed as incurred. Costs of communicating advertising associated with television, radio, print and other media are expensed when such services are used. Costs associated with Web portal advertising contracts are amortized on a straight-line basis over the period such advertising is expected to be used. Advertising expense for the year ended January 2, 2000 and the period ended December 31, 1998, was $28,567,000 and $1,638,000, respectively. Technology and Content Technology and content expenses consist primarily of payroll and related expenses for personnel engaged in maintaining and making minor upgrades and enhancements to the Company's Web site and content. These expenses also include payroll and related expenses for information technology personnel, Internet access and hosting charges and Web site content and design expenses. Income Taxes The Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123 (see Note 8). The Company accounts for stock issued to non- employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Net Loss Per Share Net loss per share is computed using the weighted average number of shares of common stock outstanding less the number of shares subject to repurchase. Shares associated with stock options, warrants and the F-10

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) convertible preferred stock are not included in the calculation of diluted net loss per share because they are antidilutive. Pro forma net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of all outstanding convertible preferred stock into shares of common stock effective upon the closing of the Company's initial public offering as if such conversion occurred at the date of original issuance. The following table sets forth the computation of basic and diluted net loss per share and pro forma basic and diluted net loss per share for the periods indicated:
Period from April 2, 1998 Year Ended (Inception) to January 2, 2000 December 31, 1998 --------------- ----------------$(115,831,000) ============= 20,005,233 (1,124,264) ------------18,880,969 $(8,027,000) =========== 1,462,311 (916,162) ----------546,149 ===========

Numerator: Net loss............................... Denominator: Weighted average common shares outstanding........................... Less weighted average common shares issued subject to repurchase agreements............................ Denominator for basic and diluted calculation........................... Weighted average effect of pro forma conversion of Securities: Series A convertible preferred stock............................... Series B convertible preferred stock............................... Series C convertible preferred stock............................... Series D convertible preferred stock............................... Series E convertible preferred stock............................... Denominator for pro forma basic and diluted calculation (unaudited)....... Net loss per share: Basic and diluted...................... Pro forma basic and diluted (unaudited)...........................

5,694,824 3,101,553 2,193,765 438,437 736,287 ------------31,045,835 ============= $ (6.13) ============= $ (3.73) ============= $ (14.70) ===========

At January 2, 2000 and December 31, 1998 there were 5,850,658 and 1,515,334 stock options, respectively, that were excluded from the computation of actual and pro forma diluted net loss per share as their effect was antidilutive. If the Company had reported net income, the calculation of these per share amounts would have included the dilutive effect of these common stock equivalents using the treasury stock method. Segment and Geographic Information The Company operates in one principal business segment in the United States. No geographic area accounted for more than 10% of net sales in the year ended January 2, 2000. There were no transfers between geographic areas during the year ended January 2, 2000. All of the Company's operating results and identifiable assets are in the United States. New Accounting Pronouncements In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB No. 101), which provides guidance on the F-11

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 did not impact the Company's revenue recognition policies. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The Company does not expect that the adoption of SFAS No. 133 will have a material impact on its financial statements because it does not currently hold any derivative instruments. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 2. Fixed Assets Fixed assets consists of the following:
January 2, December 31, 2000 1998 ---------- -----------(in thousands) $ 9,208 $ 492 2,148 711 102 20 2,694 89 14,235 1,370 -----------28,837 2,682 (3,179) (66) -----------$25,208 $2,616 ======= ======

Computers and equipment.............................. Purchased software................................... Furniture and fixtures............................... Leasehold improvements............................... Construction in progress............................. Less accumulated depreciation........................

Included in computers and equipment and purchased software as of January 2, 2000 are assets acquired under capital leases with an original cost of approximately $5,791,000 and $365,000, respectively. Included in construction in progress and purchased software as of December 31, 1998 are assets acquired under capital leases with an original cost of $1,115,000 and $385,000, respectively. Accumulated amortization on the leased assets as of January 2, 2000 and December 31, 1998 was approximately $794,000 and $10,000, respectively. The Company expects to spend approximately an additional $15 million in order to place the fixed assets under construction as of January 2, 2000 into service. 3. Intangible Assets Intangible assets consists of the following:
January 2, December 31, 2000 1998 ---------- -----------(in thousands) $182,042 $-28,990 -383 263 ----------211,415 263 (10,673) (33) ----------$200,742 $230 ======== ====

Access to insurance.................................. Vendor agreements.................................... Technology license, domain names and other........... Less accumulated amortization........................

F-12

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Note Receivable from Officer On December 3, 1998, the Company loaned an officer $250,000 evidenced by a full recourse promissory note bearing 7% interest. 5. Commitments and Contingencies The Company leases office and distribution center facilities under noncancelable operating leases, which call for fixed rental payments through 2012. In addition, the Company leases various office equipment under operating leases. The Company has the option to extend some of these leases for additional terms ranging from three to five years. Total rent expense under operating leases for the year ended January 2, 2000 and period ended December 31, 1998 approximated $2,054,000 and $127,000, respectively. The Company also leases computer equipment under noncancelable capital leases. Capital lease obligations bear interest at rates ranging from 4% to 7% and mature 24 to 36 months from the date of funding. At January 2, 2000, the Company had additional financing available under certain agreements of approximately $2.8 million. The Company has entered into certain advertising agreements with various Web portals, including America On-Line, MSNBC and the Discovery Channel, which require the Company to make fixed payments to such portals over the term of the agreements. The costs associated with these Web portal advertising contracts are amortized on a straight-line basis over the period such advertising is expected to be used. Subsequent to January 2, 2000, the Company provided letters of credit totaling $16,430,000 and collateralized by an equivalent amount of cash and cash equivalents as security for leases and certain other operating agreements. If the Company's cash, cash equivalents and marketable securities balance falls below $25,000,000, the Company is contractually obligated to increase these letters of credit and the related cash collateral to $20,680,000. At December 31, 1998, there were no letters of credit outstanding. Future minimum commitments at January 2, 2000 are as follows:
Operating Marketing Leases Agreements --------- ---------(in thousands) $ 2,736 $ 3,938 $7,781 1,879 4,156 239 899 7,509 166 -7,018 166 -6,689 138 -36,665 ------------------5,514 $65,975 $8,490 ======= ====== (339) ------5,175 (2,488) ------Capital Leases -------

2000......................................... 2001......................................... 2002......................................... 2003......................................... 2004......................................... Thereafter................................... Total minimum lease payments................. Less amounts representing interest........... Present value of minimum payments............ Less current portion of capital lease obligations.................................

Noncurrent portion of capital lease obligations................................. $ 2,687 =======

The Company is party to routine claims and litigation incidental to its business. The Company believes the ultimate resolution of these routine matters will not have a material adverse effect on its financial position and results of operations or cash flows. F-13

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Income Taxes The Company did not provide any current or deferred United States federal income tax provision or benefit for any of the periods presented because it has experienced operating losses since inception. The Company provided a full valuation allowance on the net deferred tax asset, consisting primarily of net operating loss carryforwards and research and development credit carryforwards, because management has determined that it is more likely than not that the Company will not earn income sufficient to realize the deferred tax assets during the carryforward period. At January 2, 2000, the Company had approximately $98.4 million of net operating loss carryforwards that will expire beginning in 2018. In 1999, due to the issuance and sale of Series D and Series E preferred stock, the Company incurred ownership changes pursuant to applicable regulations in effect under the Internal Revenue Code of 1986, as amended. Therefore, the Company's use of losses incurred through the date of these ownership changes will be limited during the carryforward period. The Company estimates that the use of approximately $53.9 million of net operating losses incurred through the date of the ownership change would be limited to approximately $6.6 million per year in order to offset future taxable income. To the extent that any single- year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. The initial public offering did not cause an additional ownership change that would result in additional limitations on the utilization of net operation loss carryforward. Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Since the Company's utilization of these deferred tax assets is dependent on future profits which are not assured, a valuation allowance equal to the deferred tax assets has been provided. Significant components of the Company's deferred tax assets are as follows:
January 2, December 31, 2000 1998 ---------- -----------(in thousands) $ 33,449 32 1,547 1,224 279 -------36,531 (36,531) -------$ -======== $ 2,291 32 -79 ------2,402 (2,402) ------$ -=======

Deferred tax assets: Net operating loss carryforward................... Research and development credit carryforward...... Amortization of intangible assets................. Charitable contribution........................... Other temporary differences....................... Total gross deferred tax assets..................... Less valuation allowance............................ Net deferred tax assets.............................

A reconciliation of income taxes computed at the statutory rate to the income tax amount recorded is as follows:
January 2, December 31, 2000 1998 ---------- -----------(in thousands) $ 39,378 $ 2,729 (5,228) (351) (21) (8) -32 (34,129) (2,402) -------------$ -$ -======== =======

Income tax benefit at statutory rate................. Stock-based compensation............................. Other permanent differences.......................... Research and development credit...................... Increase in valuation allowance...................... Income tax benefit...................................

F-14

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Stockholders' Equity Issuance of Warrants In February 1999, the Company issued a warrant to purchase 10,000 shares of its common stock at $7.83 per share in exchange for the right to use the 1- 800-DRUGSTORE and related iterations of telephone numbers. Such warrant was exercised in July 1999. The fair value of such warrant was estimated at $24,000 and was recorded as an intangible asset. Convertible Preferred Stock In June and August 1998, the Company issued 10,000,000 shares of Series A preferred stock in a private placement offering in exchange for gross cash proceeds of $4,000,000, and a Technology License and Advertising Agreement with Amazon.com that provides for the right to license certain technology and receive certain technological and advertising support from Amazon.com. In addition, the Company agreed to license its technology to Amazon.com and participate in mutually agreed upon advertising activities. No cash payments are required under the Technology License and Advertising Agreement with Amazon.com. The Company valued the right to license certain technology and receive such technological and advertising support at $4,000,000 based on the value of Series A preferred stock issued concurrently for cash. Such value was allocated to prepaid marketing expense, license rights and prepaid technical consulting services in the amount of $3,765,000, $150,000 and $85,000, respectively, based on their estimated fair value. The prepaid marketing expense was amortized over five months commencing in February 1999. The license rights and prepaid technical consulting are being amortized over five years and approximately eight months, respectively, commencing on the date of the agreement. For the year ended January 2, 2000 and the period ended December 31, 1998, the Company recognized expenses under such agreement totaling $3,830,000 and $58,000 respectively. In October, November and December 1998, the Company issued 5,446,268 shares of Series B preferred stock in a private placement offering in exchange for gross cash proceeds of $18,245,000. In January and March 1999, the Company issued 4,472,844 shares of Series C preferred stock in a private placement offering in exchange for gross cash proceeds of $35,000,000. In June 1999, the Company issued 2,266,289 shares of Series D preferred stock to a new investor in exchange for $40 million in cash and $5 million in cable television advertising obligations. The cable television advertising is expected to be aired within the next 12 months and has been classified as a current asset in prepaid marketing expenses. In July 1999, the Company consummated a series of agreements with Rite Aid and General Nutrition Companies, Inc. (GNC) to issue 12,282,599 shares of Series E preferred stock in exchange for an aggregate of $10 million in cash and other consideration, including access to insurance coverage, advertising commitments and a vendor agreement with an estimated fair value of $233.9 million. The $233.9 million non-cash portion of the consideration from the Rite Aid and GNC agreements was allocated to the following components based on a valuation obtained from an independent valuation expert (in millions):
Access to insurance coverage..................................... $182.0 Advertising commitments.......................................... 22.9 Vendor agreement................................................. 29.0 -----$233.9 ======

F-15

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The access to insurance coverage and the vendor agreement have been classified as intangible assets and the advertising commitments have been classified within prepaid marketing expenses. All of the assets are to be amortized on a straight-line basis over their contractual life of 10 years. Common Stock On July 27, 1999, the Company completed its initial public offering of 5,750,000 shares of common stock resulting in approximately $94.6 million in net proceeds. In connection with the closing of the offering, all of the outstanding convertible preferred stock was converted into an aggregate of 34,468,000 shares of common stock. Through a separate private placement transaction, the Company also issued 555,555 shares of common stock to Amazon.com, Inc., resulting in proceeds of approximately $10 million. Subsequent to the Company's initial public offering, the total number of authorized shares was changed to 260,000,000 shares, of which 250,000,000 shares are common stock and 10,000,000 shares are undesignated preferred stock. Additionally, the par value of the Company's common and preferred stock was changed to $.0001 per share. The accompanying financial statements have been restated to reflect the change in the par value of the common stock. A portion of the Company's shares outstanding are subject to repurchase by the Company over a three year period. As of January 2, 2000, there were 787,500 shares subject to repurchase rights at $0.04 per share. In July 1999, the Company donated 200,000 shares of its common stock to the drugstore.com Foundation, a separately organized 501(c)(3) organization in which the Company is neither a trustee or beneficiary, and recognized the fair market value of the shares donated as a $3,600,000 charitable contribution expense. 8. Employee Benefit Plans Defined Contribution Plan Effective April 1999, the Company adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code which covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. Under the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1999) and to have the amount of such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not require, additional matching contributions to the 401(k) plan by the Company on behalf of all participants in the 401(k) plan. To date, the Company has not made any matching contributions to the 401(k) plan. 1998 Stock Plan Under the terms of the 1998 stock plan, the board of directors may grant incentive and nonqualified stock options to employees, officers, directors, agents, consultants, and independent contractors of the Company. In connection with the introduction of the 1998 stock plan, 2,735,000 shares of common stock were reserved for future issuance. During 1999, the Company increased the number of shares reserved for future issuance under such plan by 8,265,000, bring the total shares reserved for future issuance to 11,000,000. Generally, the Company grants stock options with exercise prices equal to the fair market value of the common stock on the date of grant, as determined by the board of directors. Options generally vest over a four to five year period and expire ten years from the date of grant. F-16

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes activity under the Company's stock plan:
Outstanding Options --------------------------Shares Available Number of Weighted-Average for Grant Shares Exercise Price ---------------- --------- ---------------2,735,000 --(1,683,584) 1,683,584 $ .17 -(8,000) $ .12 160,250 (160,250) $ .04 -----------------1,211,666 8,265,000 (4,958,075) -420,498 ---------4,939,089 ========== 1,515,334 -4,958,075 (202,253) (420,498) --------5,850,658 ========= $ .18 -$19.99 $ .23 $ 6.84

Initial Options Options Options

authorization....... granted............. exercised........... canceled............

Outstanding at December 31, 1998......................... Additional authorizations... Options granted............. Options exercised........... Options canceled............ Outstanding at January 2, 2000.........................

$16.49

The following table summarizes information regarding stock options outstanding and exercisable as of January 2, 2000:
Outstanding Options -------------------------- Vested and Weighted-Average Exercisable Number of Remaining Number of Shares Contractual Life Shares --------- ---------------- ----------2,041,308 8.9 years 285,375 1,187,325 9.4 years 35,000 370,050 9.6 years -2,030,950 9.9 years 43,334 221,025 9.7 years 200 --------------5,850,658 9.4 years 363,909 ========= =======

Exercise Price -------------$.01 to $.45 $6.28 to $9.00 $16.00 to $28.50 $31.69 to $38.75 $40.94 to $67.50 Total

Under APB No. 25, no compensation expense is recognized when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant. Deferred stock-based compensation is recorded for those situations where the exercise price of an option or the purchase price of restricted stock was lower than the deemed fair value for financial reporting purposes of the underlying common stock. For the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998, the Company recorded aggregate deferred stock-based compensation of $22,630,000 and $4,966,000, respectively. The deferred stock- based compensation is being amortized over the vesting period of the underlying options and restricted stock. For the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998, total amortization of stock-based compensation recognized was $15,375,000 and $1,037,000, respectively. Amortization of stock-based compensation is allocable to employees in the following expense categories:
Period from April 2, 1998 Year Ended (Inception) to January 2, December 31, 2000 1998 ---------- -------------Marketing and sales............................ 24% 18% Technology and content......................... 21 20 General and administrative..................... 55 62 ----100% 100% === ===

F-17

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Had the stock-based compensation for the Company's stock option plan and restricted stock agreements been determined based on the Black-Scholes model using the multiple-option approach, the Company's net loss would have been adjusted to the following pro forma amount for the year ended January 2, 2000 and the period ended December 31, 1998:
Period from April 2, 1998 Year ended (Inception) to January 2, December 21, 2000 1998 ---------- -------------(in thousands, except per share data) $(115,831) $(8,027) (2,589) --------$(118,420) ========= $ (6.13) ========= $ (6.27) ========= $ (3.73) --------$ (3.81) ========= (12) ------$(8,039) ======= $(14.70) ======= $(14.72) =======

Net loss--as reported.............................. Incremental pro forma compensation expense under SFAS No. 123...................................... Net loss--pro forma................................ Basic and diluted net loss per share--as reported.. Basic and diluted net loss per share--pro forma.... Pro forma basic and diluted net loss per share--as reported.......................................... Pro forma basic and diluted net loss per share--pro forma.............................................

The weighted-average fair value of options granted during the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998 was $14.87 and $1.41, respectively, for options granted at fair market value. The initial impact on pro forma net loss may not be representative of compensation expense in future years, when the effect of amortization of multiple awards would be reflected in pro forma earnings. The fair value at each option grant is estimated on the date of grant using the Black-Scholes option pricing model, assuming no expected dividends. The volatility of the Company's stock prior to its initial public offering was estimated based on a review of a peer group of Internet companies at a comparable developmental stage. Subsequent to the Company's initial public offering, the volatility of the Company's stock was based on actual stock prices subsequent to the initial month of trading. The following weighted average assumptions were utilized in arriving at the fair value of each option grant:
July 27, 1999 to January 2, 2000 ---------6.5% 3 years 80% January 1, 1999 to July 26, 1999 ---------6.5% 3 years 50% Period from April 2, 1998 (Inception) to December 31, 1998 -------------4.5% 3 years 50%

Average risk-free interest rate........................ Average expected life........ Volatility...................

1999 Employee Stock Purchase Plan The Company's 1999 employee stock purchase plan was adopted by the board of directors in 1999, and was effective upon the completion of the Company's initial public offering of its common stock. A total of 500,000 shares of common stock has been reserved for issuance under the employee stock purchase plan plus an annual increase on the first day of each of the fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of (1) 500,000 shares, (2) three percent (3%) of our shares outstanding on the last day of the immediate preceding fiscal year, or (3) such lesser number of shares as is determined by the board of directors. Eligible employees may purchase common stock at 85% of the lesser of the fair market value of the Company's common stock on the first or the last day of the applicable six month purchase period. F-18

DRUGSTORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Related Parties The Company purchased $10,636,000 of inventory and fulfillment-related services and recognized $1,145,000 of marketing and sales expense during the year ended January 2, 2000 in connection with the agreements between the Company and Rite Aid Corporation and General Nutrition Companies, Inc. Approximately $4,483,000 relating to the purchase of inventory and fulfillment-related services was payable as of January 2, 2000. The Company recognized marketing and sales expense in connection with its strategic relationship with Amazon.com totaling approximately $5,265,000 and $58,000 for the year ended January 2, 2000 and the period ended December 31, 1998, respectively. Approximately $1,500,000 of these expenses were payable as of January 2, 2000. 10. Subsequent Events Proposed Secondary Public Offering of Common Stock In January 2000, the board of directors authorized the Company to proceed with a secondary public offering of its common stock. Acquisition of Beauty.com On February 2, 2000, the Company acquired Beauty.com, Inc., a leading online retailer of prestige beauty products, and entered into an agreement to retain the employment of its founder, for consideration totaling approximately $40.7 million comprised of approximately 1.3 million shares of the Company's stock. The Company intends to account for the acquisition as a purchase. Agreements with Amazon.com On January 24, 2000, the Company reached an agreement with Amazon.com to provide certain advertising services over a three year term for $105 million. Concurrently, Amazon.com agreed to purchase 1,066,667 shares of the Company's common stock for $28.125 per share, or approximately $30 million in a private placement transaction. F-19

The fourth page of the gatefold includes: drugstore.com Makes Shopping Easy The following text is placed on the top left of the page: HELP ON A PERSONAL LEVEL The advantage of the Internet allows drugstore.com to offer customers help on a personal level. Customers can shop from their home or office any time of the day or night. They can get useful information to make informed product decisions. They can ask a pharmacist questions in privacy. drugstore.com provides the information and interaction that makes shopping easy. [PICTURE OF THE SHOPPING ADVISOR PAGE] [PICTURE OF THE SOLUTIONS PAGE] [PICTURE OF A YOUR LIST PAGE] [PICTURE OF THE QUICK LISTS PAGE] The following text appears to the left of the picture of the Shopping Advisor page: SHOPPING ADVISOR drugstore.com helps customers who are not sure about what product to buy. The customer provides information about what he or she needs, and the Shopping Advisors help identify the right products. The following text appears to the right of the picture of the Solutions page: SOLUTIONS An easy way for customers to find the information they need in order to make informed product decisions, the Solutions area includes Ask Your Pharmacist, Health and Wellness Guides, Shopping Advisors and more. The following text appears under the picture of the Your List page: YOUR LIST Buying regularly-replenished items is easy because customers can move products into their shopping bag directly from their personalized shopping list. The following text appears to the left of the picture of the Quick Lists page: QUICK LISTS An easy way to find what you need and assist you in stocking up on frequently used items.

[drugstore.com logo]

PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market entry and listing fee.
Amount to be Paid ---------$ 53,003 19,776 17,500 250,000 150,000 150,000 3,000 3,000 53,721 -------$700,000 ========

SEC registration fee........................................... NASD filing fee................................................ Nasdaq National Market filing fee.............................. Printing and engraving expenses................................ Legal fees and expenses........................................ Accounting fees and expenses................................... Blue Sky qualification fees and expenses....................... Transfer Agent and Registrar fees.............................. Miscellaneous fees and expenses................................ Total........................................................

Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the Act). Article XIII of registrant's certificate of incorporation and sections 6.1 and 6.2 of Article VI of registrant's bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, registrant has entered into indemnification agreements with its directors and officers. The indemnification agreements may require registrant, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities arising from willful misconduct of culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' insurance if available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto) also provides for cross indemnification among drugstore.com and the underwriters with respect to certain matters, including matters arising under the Act. Item 15. Recent Sales of Unregistered Securities (a) Since inception in April 1998, registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: (1) June, July and August 1998, registrant issued and sold 2,265,000 shares of common stock to a total of 5 investors for an aggregate purchase price of $90,600. (2) In June 1998 and August 1998, registrant issued and sold shares of Series A preferred stock convertible into an aggregate of 10,000,000 shares of common stock to a total of 5 investors for an aggregate purchase price of $8,000,000. (3) In October, November and December 1998, registrant issued and sold shares of Series B preferred stock convertible into an aggregate of 5,446,268 shares of common stock to a total of 6 investors for an aggregate purchase price of $18,244,997.80. II-1

(4) In January 1999, registrant issued and sold shares of Series C preferred stock convertible into an aggregate of 1,457,891 shares of common stock to a total of 5 investors for an aggregate purchase price of $11,407,997.07. (5) In January 1999, registrant issued and sold two convertible promissory notes convertible into shares of Series C preferred stock and further convertible into an aggregate of 3,014,953 shares of common stock to a total of 2 investors for an aggregate purchase price of $23,592,007.22. These notes were converted into shares of Series C preferred stock in March 1999. (6) In February 1999, registrant issued a warrant to purchase 10,000 shares of common stock in connection with a corporate partnership agreement. (7) In May 1999, registrant issued and sold a convertible promissory note convertible into shares of Series D preferred stock and further convertible into 2,266,289 shares of common stock to one investor for an aggregate purchase price of $40,000,000.85 and an obligation to provide cable advertising valued at $5,000,000. This note was converted to shares of Series D preferred stock in June 1999. (8) In July 1999, registrant issued 12,282,599 shares of Series E preferred stock to Rite Aid and a wholly owned subsidiary of GNC. Under the agreement, registrant issued Rite Aid 9,334,746 shares of Series E preferred stock in exchange for $7.6 million in cash and additional non- cash consideration, and registrant issued GNC 2,947,853 shares of Series E preferred stock for $2.4 million in cash and additional non-cash consideration. (9) In July 1999, registrant issued 200,000 shares of common stock to a charitable foundation established by the registrant. (10) In July 1999, registrant issued 10,000 shares of common stock to Dial 800, LLC upon the exercise of warrants that had previously been issued in connection with a corporate partnership agreement. The aggregate exercise price for the warrants was $78,000. (11) In August 1999, concurrently with registrant's initial public offering, registrant issued 555,555 shares of common stock to Amazon.com for a purchase price of $10,000,000. (12) In January 2000, registrant issued 1,066,667 shares of common stock to Amazon.com for a purchase price of $30,000,009.38. (13) In February 2000, registrant issued 1,266,289 shares of common stock to the stockholders of Beauty.com in connection with the acquisition by registrant of Beauty.com. (14) As of July 28, 1999, 8,000 shares of fully vested common stock had been issued pursuant to restricted stock purchase agreements and 3,750 shares of common stock had been issued upon exercise of options. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). The issuances described in Items 15(a)(1)-(13) were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering. The issuances described in Item 15(a)(14) were deemed to be exempt from registration under the Act in reliance upon Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. In addition, such issuances were deemed to be exempt from registration under Section 4(2) of the Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends where affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the registrant, to information about the registrant. II-2

Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit No. ------1.1* Form of Underwriting Agreement. 3.2 3.3 5.1 10.1 Item ----

Amended and Restated Certificate of Incorporation of drugstore.com. Amended and Restated Bylaws. Opinion of Shearman & Sterling. Form of Indemnification Agreement between drugstore.com and each of its officers and directors (Incorporated by reference to exhibit number 10.1 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). 1998 Stock Plan, as amended (Incorporated by reference to exhibit number 10.2 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 20, 1999). 1999 Employee Stock Purchase Plan as amended. Restricted Stock Purchase Agreement with Jed A. Smith dated June 19, 1998 (Incorporated by reference to exhibit number 10.4 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Restricted Stock Purchase Agreement with Peter M. Neupert dated July 23, 1998 (Incorporated by reference to exhibit number 10.5 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series A Preferred Stock Purchase Agreement dated June 22, 1998 (Incorporated by reference to exhibit number 10.7 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Series B Preferred Stock Purchase Agreement dated October 9, 1998 (Incorporated by reference to exhibit number 10.8 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Series B Preferred Stock Rescission Agreement dated November 23, 1998 between drugstore.com and entities affiliated with Kleiner Perkins Caufield & Byers. (Incorporated by reference to exhibit number 10.9 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series C Preferred Stock and Convertible Note Purchase Agreement dated January 29, 1999 (Incorporated by reference to exhibit number 10.10 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series D Preferred Stock and Convertible Note Purchase Agreement dated May 19, 1999 (Incorporated by reference to exhibit number 10.11 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Fourth Amended and Restated Investors' Rights Agreement dated May 19, 1999 (Incorporated by reference to exhibit number 10.12 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed July 8, 1999). Sublease Agreement dated January 29, 1999 between drugstore.com and The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite 300, Bellevue, Washington (Incorporated by reference to exhibit number 10.13 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999).

10.2

10.3 10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

II-3

Exhibit No. Item ---------10.13 Lease Agreement dated August 30, 1999 between DS Distribution, Inc. and the Northwestern Mutual Life Insurance Company (Incorporated by reference to exhibit number 10.1 to drugstore.com's quarterly report on form 10-Q (file number 000-26137), dated November 2, 1999). 10.14 Amended and Restated Technology License and Advertising Agreement between drugstore.com and Amazon.com (Incorporated by reference to exhibit number 10.14 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 26, 1999). Pharmacy Service Agreement dated February 8, 1999 with RxAmerica. (Incorporated by reference to exhibit number 10.15 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 25, 1999). Service & Supply Agreement dated January 29, 1999 with Walsh Distribution, Inc (Incorporated by reference to exhibit number 10.16 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 25, 1999). Offer Letter dated June 29, 1998 with Peter M. Neupert (Incorporated by reference to exhibit number 10.17 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Offer Letter dated July 28, 1998 with Kal Raman (Incorporated by reference to exhibit number 10.18 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Offer Letter dated December 4, 1998 with Mark L. Silverman (Incorporated by reference to exhibit number 10.19 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Fifth Amended and Restated Voting Agreement dated December 23, 1999. Letter Agreement dated May 19, 1999 with Amazon.com (Incorporated by reference to exhibit number 10.22 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures Incorporated (Incorporated by reference to exhibit number 10.23 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series E Preferred Stock Purchase Agreement dated June 17, 1999 (Incorporated by reference to exhibit number 10.24 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Addendum to Fourth Amended and Restated Investors' Rights Agreement dated June 17, 1999 (Incorporated by reference to exhibit number 10.25 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Main Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.27 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Main Agreement dated June 17, 1999 with General Nutrition Companies, Inc. (Incorporated by reference to exhibit number 10.28 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed June 28, 1999). Governance Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.29 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999).

10.15+

10.16+

10.17

10.18

10.19

10.20 10.21

10.22

10.23

10.24

10.26

10.27

10.28

II-4

Exhibit No. Item ---------10.29 Governance Agreement dated June 17, 1999 with General Nutrition Companies, Inc. and General Nutrition Investment Company (Incorporated by reference to exhibit number 10.30 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). 10.30 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.31 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed June 28, 1999). Second Addendum to Fourth Amended and Restated Investors' Rights Agreement dated July 26, 1999 (Incorporated by reference to exhibit number 10.32 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 20, 1999). Office Lease Agreement dated November 22, 1999 between WRC Sunset North LLC and drugstore.com. Agreement dated January 24, 2000 between Amazon.com Commerce Services Inc. and drugstore.com, inc. Performance Guarantee dated January 24, 2000 by Amazon.com, Inc. of Amazon.com Commerce Services, Inc.'s obligations under the Agreement dated January 24, 2000 between Amazon.com Commerce Services, Inc. and drugstore.com, inc. Stock Purchase Letter Agreement dated January 24, 2000 between drugstore.com, inc. and Amazon.com, Inc. Third Addendum to Fourth Amended and Restated Investors' Rights Agreement dated January 24, 2000. Subsidiaries. Consent of Ernst & Young LLP, Independent Auditors. Consent of Shearman & Sterling (see Exhibit 5.1). Power of Attorney (included on page II-7). Financial Data Schedule (EDGAR-filed version only). Report of Ernst & Young LLP, Independent Auditors, on financial statement schedule.

10.33

10.34 10.35 10.36

10.37 10.38 21.1 23.1 23.2 24.1 27.1 99.1

* To be filed by amendment. + Portions of these exhibits have been granted confidential treatment by the Securities and Exchange Commission. Such confidential portions are marked by an asterisk (*) in the Exhibit filed. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts The Company has included in this filing, on page S-1, Schedule II -- Valuation and Qualifying Accounts. All other financial statement schedules not listed are omitted because they are inapplicable or the requested information is shown in the financial statements of the registrant or the related notes to the financial statements. Item 17. Undertakings The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (Act) may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the II-5

registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4), or 497(h) under the Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each posteffective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bonafide offering thereof. II-6

SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bellevue, State of Washington, on February 9, 2000. drugstore.com, inc.
/s/ Peter M. Neupert By: _________________________________ Peter M. Neupert, President and Chief Executive Officer

POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David E. Rostov and Mark L. Silverman, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all registration statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this registration statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys- in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:
Signature Title ------------/s/ Peter M. Neupert President, Chief Executive ______________________________________ Officer and Director (Peter M. Neupert) (Principal Executive Officer) /s/ David Rostov Vice President and Chief ______________________________________ Financial Officer (David Rostov) (Principal Financial and Accounting Officer) ______________________________________ (Jeffrey P. Bezos) Director Date ---February 9, 2000

February 9, 2000

February

, 2000

/s/ Brook H. Byers Director ______________________________________ (Brook H. Byers) /s/ L. John Doerr Director ______________________________________ (L. John Doerr) /s/ Melinda French Gates Director ______________________________________ (Melinda French Gates)

February 9, 2000

February 9, 2000

February 9, 2000

II-7

Signature --------______________________________________ (Mary Sammons) ______________________________________ (William D. Savoy) Director

Title -----

Date ---February , 2000

Director

February

, 2000

/s/ Howard Schultz Director ______________________________________ (Howard Schultz)

February 9, 2000

II-8

DRUGSTORE.COM, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Charged to Balance at Revenue, Beginning Costs or of Period Expenses ---------- ---------Charged Balance to Other at End Accounts Deductions of Period -------- ---------- ---------

Period from April 2, 1998 (Inception) to December 31, 1998 Allowance for uncollectible accounts............... Allowance for sales returns................ Reserve for inventory obsolescence........... Year Ended January 2, 2000 Allowance for uncollectible accounts............... Allowance for sales returns................ Reserve for inventory obsolescence...........

$-$-$--

$-$-$--

$-$-$--

$-$-$--

$-$-$--

$-$-$--

$385 $336 $606

$-$-$--

$215(A) $255(B) $ 50(C)

$170 $ 81 $556

(A) Deductions consist of write-offs of uncollectible accounts, net of recoveries. (B) Deductions consist of sales credits to customers for product returns. (C) Deductions consist of write-off of obsolete inventory. S-1

EXHIBIT INDEX
Exhibit No. ------1.1* Form of Underwriting Agreement. 3.2 3.3 5.1 10.1 Item ----

Amended and Restated Certificate of Incorporation of drugstore.com. Amended and Restated Bylaws. Opinion of Shearman & Sterling. Form of Indemnification Agreement between drugstore.com and each of its officers and directors (Incorporated by reference to exhibit number 10.1 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). 1998 Stock Plan, as amended (Incorporated by reference to exhibit number 10.2 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 20, 1999). 1999 Employee Stock Purchase Plan as amended. Restricted Stock Purchase Agreement with Jed A. Smith dated June 19, 1998 (Incorporated by reference to exhibit number 10.4 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Restricted Stock Purchase Agreement with Peter M. Neupert dated July 23, 1998 (Incorporated by reference to exhibit number 10.5 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series A Preferred Stock Purchase Agreement dated June 22, 1998 (Incorporated by reference to exhibit number 10.7 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Series B Preferred Stock Purchase Agreement dated October 9, 1998 (Incorporated by reference to exhibit number 10.8 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Series B Preferred Stock Rescission Agreement dated November 23, 1998 between drugstore.com and entities affiliated with Kleiner Perkins Caufield & Byers. (Incorporated by reference to exhibit number 10.9 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series C Preferred Stock and Convertible Note Purchase Agreement dated January 29, 1999 (Incorporated by reference to exhibit number 10.10 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series D Preferred Stock and Convertible Note Purchase Agreement dated May 19, 1999 (Incorporated by reference to exhibit number 10.11 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Fourth Amended and Restated Investors' Rights Agreement dated May 19, 1999 (Incorporated by reference to exhibit number 10.12 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed July 8, 1999). Sublease Agreement dated January 29, 1999 between drugstore.com and The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite 300, Bellevue, Washington (Incorporated by reference to exhibit number 10.13 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999).

10.2

10.3 10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

Exhibit No. Item ---------10.13 Lease Agreement dated August 30, 1999 between DS Distribution, Inc. and the Northwestern Mutual Life Insurance Company (Incorporated by reference to exhibit number 10.1 to drugstore.com's quarterly report on form 10-Q (file number 000-26137), dated November 2, 1999). 10.14 Amended and Restated Technology License and Advertising Agreement between drugstore.com and Amazon.com (Incorporated by reference to exhibit number 10.14 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 26, 1999). Pharmacy Service Agreement dated February 8, 1999 with RxAmerica. (Incorporated by reference to exhibit number 10.15 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 25, 1999). Service & Supply Agreement dated January 29, 1999 with Walsh Distribution, Inc (Incorporated by reference to exhibit number 10.16 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 25, 1999). Offer Letter dated June 29, 1998 with Peter M. Neupert (Incorporated by reference to exhibit number 10.17 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Offer Letter dated July 28, 1998 with Kal Raman (Incorporated by reference to exhibit number 10.18 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Offer Letter dated December 4, 1998 with Mark L. Silverman (Incorporated by reference to exhibit number 10.19 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Fifth Amended and Restated Voting Agreement dated December 23, 1999. Letter Agreement dated May 19, 1999 with Amazon.com (Incorporated by reference to exhibit number 10.22 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed May 19, 1999). Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures Incorporated (Incorporated by reference to exhibit number 10.23 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed May 19, 1999). Series E Preferred Stock Purchase Agreement dated June 17, 1999 (Incorporated by reference to exhibit number 10.24 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Addendum to Fourth Amended and Restated Investors' Rights Agreement dated June 17, 1999 (Incorporated by reference to exhibit number 10.25 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Main Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.27 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). Main Agreement dated June 17, 1999 with General Nutrition Companies, Inc. (Incorporated by reference to exhibit number 10.28 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed June 28, 1999). Governance Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.29 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999).

10.15+

10.16+

10.17

10.18

10.19

10.20 10.21

10.22

10.23

10.24

10.26

10.27

10.28

Exhibit No. Item ---------10.29 Governance Agreement dated June 17, 1999 with General Nutrition Companies, Inc. and General Nutrition Investment Company (Incorporated by reference to exhibit number 10.30 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed June 28, 1999). 10.30 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite Aid Corporation (Incorporated by reference to exhibit number 10.31 to drugstore.com's registration statement on Form S-1 (file number 33378813) filed June 28, 1999). Second Addendum to Fourth Amended and Restated Investors' Rights Agreement dated July 26, 1999 (Incorporated by reference to exhibit number 10.32 to drugstore.com's registration statement on Form S-1 (file number 333-78813) filed July 20, 1999). Office Lease Agreement dated November 22, 1999 between WRC Sunset North LLC and drugstore.com. Agreement dated January 24, 2000 between Amazon.com Commerce Services Inc. and drugstore.com, inc. Performance Guarantee dated January 24, 2000 by Amazon.com, Inc. of Amazon.com Commerce Services, Inc.'s obligations under the Agreement dated January 24, 2000 between Amazon.com Commerce Services, Inc. and drugstore.com, inc. Stock Purchase Letter Agreement dated January 24, 2000 between drugstore.com, inc. and Amazon.com, Inc. Third Addendum to Fourth Amended and Restated Investors' Rights Agreement dated January 24, 2000. Subsidiaries. Consent of Ernst & Young LLP, Independent Auditors. Consent of Shearman & Sterling (see Exhibit 5.1). Power of Attorney (included on page II-7). Financial Data Schedule (EDGAR-filed version only). Report of Ernst & Young LLP, Independent Auditors, on financial statement schedule.

10.33

10.34 10.35 10.36

10.37 10.38 21.1 23.1 23.2 24.1 27.1 99.1

* To be filed by amendment. + Portions of these exhibits have been granted confidential treatment by the Securities and Exchange Commission. Such confidential portions are marked by an asterisk (*) in the Exhibit filed.

Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DRUGSTORE.COM, INC. The undersigned, Peter M. Neupert and Mark L. Silverman, hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of drugstore.com, inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on April 2, 1998. 3. The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows: ARTICLE I "The name of this corporation is drugstore.com, inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name of its registered agent at such address is Corporation Service Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV (1) Classes of Stock. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Two Hundred Sixty Million (260,000,000) shares, each with a par value of $0.0001 per share. Two Hundred Fifty Million (250,000,000) shares shall be Common Stock and Ten Million (10,000,000) shares shall be Preferred Stock. (2) Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in one or more series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The

authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (1) The designation of the series, which may be by distinguishing number, letter or title. (2) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (3) The amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative. (4) Dates at which dividends, if any, shall be payable. (5) The redemption rights and price or prices, if any, for shares of the series. (6) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (7) The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation. (8) Whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made. (9) Restrictions on the issuance of shares of the same series or of any other class or series. (10) The voting rights, if any, of the holders of shares of the series. (C) Common Stock. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as may otherwise be provided in this Amended and Restated Certificate of Incorporation, in a Preferred Stock Designation or by applicable law, the holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to vote at or receive notice of any meeting of stockholders. -2-

The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. ARTICLE V In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered to adopt, alter, amend or repeal the Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (3) To the fullest extent permitted by the General Corporation Law of the State of Delaware, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (4) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VIII The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Amended and Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article." *** -3-

The foregoing Amended and Restated Certificate of Incorporation, which both amends and restates the certificate of incorporation of the Corporation, as heretofore amended and restated, has been duly adopted by the Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Sections 242 and 245, and by written consent of stockholders pursuant to Section 228, of the General Corporation Law of the State of Delaware. Executed at Bellevue, Washington on August 2, 1999.
/s/ Peter M. Neupert ---------------------------------------Peter M. Neupert, President

/s/ Mark L. Silverman ---------------------------------------Mark L. Silverman, Secretary

-4-

Exhibit 3.3 AMENDED AND RESTATED BYLAWS OF DRUGSTORE.COM, INC. Dated August 2, 1999

TABLE OF CONTENTS ----------------Page ----

ARTICLE I CORPORATE OFFICES 1.1 1.2 Registered Office............................................. Other Offices.................................................

1 1

ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 Place Of Meetings............................................. Annual Meeting................................................ Special Meeting............................................... Notice Of Stockholders' Meetings.............................. Manner Of Giving Notice; Affidavit Of Notice.................. Quorum........................................................ Adjourned Meeting; Notice..................................... Conduct Of Business........................................... Voting........................................................ Waiver Of Notice.............................................. Stockholder Action By Written Consent Without A Meeting....... Record Date For Stockholder Notice; Voting; Giving Consents... Proxies....................................................... Notice of Stockholder Business and Nominations................ 1 1 1 2 2 2 2 2 3 3 3 4 5 5

ARTICLE III DIRECTORS 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 Powers........................................................ Number Of Directors........................................... Qualification And Term Of Office Of Directors................. Resignation................................................... Place Of Meetings; Meetings By Telephone...................... Regular Meetings.............................................. Special Meetings; Notice...................................... Quorum........................................................ Waiver Of Notice.............................................. Board Action By Written Consent Without A Meeting............. Fees And Compensation Of Directors............................ Approval Of Loans To Officers................................. Chairman Of The Board Of Directors............................ -i8 8 8 8 8 8 9 9 9 9 10 10 10

ARTICLE IV COMMITTEES 4.1 4.2 4.3 Committees Of Directors....................................... Committee Minutes............................................. Meetings And Action Of Committees............................. 10 11 11

ARTICLE V OFFICERS 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 Officers...................................................... Appointment Of Officers....................................... Subordinate Officers.......................................... Removal And Resignation Of Officers........................... Vacancies In Offices.......................................... Chief Executive Officer....................................... President..................................................... Vice Presidents............................................... Secretary..................................................... Chief Financial Officer....................................... Representation Of Shares Of Other Corporations................ Authority And Duties Of Officers.............................. 11 11 12 12 12 12 12 13 13 13 14 14

ARTICLE VI INDEMNIFICATION 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. Right to Indemnification...................................... Prepayment of Expenses........................................ Claims........................................................ Nonexclusivity of Rights...................................... Other Sources................................................. Amendment or Repeal........................................... Other Indemnification and Prepayment of Expenses.............. 14 15 15 15 15 15 16

ARTICLE VII RECORDS AND REPORTS 7.1 7.2 Maintenance Of Records........................................ Annual Statement To Stockholders.............................. 16 16

ARTICLE VIII GENERAL MATTERS 8.1 Checks........................................................ -ii16

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11

Execution Of Corporate Contracts And Instruments.............. Stock Certificates; Partly Paid Shares........................ Special Designation On Certificates........................... Lost Certificates............................................. Dividends..................................................... Fiscal Year................................................... Seal.......................................................... Transfer Of Stock............................................. Stock Transfer Agreements..................................... Registered Stockholders.......................................

16 17 17 18 18 18 18 18 19 19

-iii-

AMENDED AND RESTATED BYLAWS OF DRUGSTORE.COM, INC. ARTICLE I CORPORATE OFFICES 1.1 Registered Office. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is Corporation Service Company. 1.2 Other Offices. The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 Place Of Meetings. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 Annual Meeting. To the extent required by applicable law, an annual meeting of stockholders shall be held on such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 Special Meeting. A special meeting of the stockholders may be called at any time by the Board of Directors or the chairman of the board. -1-

2.4 Notice Of Stockholders' Meetings. All notices of meetings with stockholders shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to notice of such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 Manner Of Giving Notice; Affidavit Of Notice. Notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 Quorum. The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 Adjourned Meeting; Notice. When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 Conduct Of Business. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the -2-

chairman of any meeting of stockholders shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. 2.9 Voting. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of the State of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 Waiver Of Notice. Whenever notice is required to be given under any provision of the General Corporation Law of the State of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 Stockholder Action By Written Consent Without A Meeting. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number -3-

of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders or members to take the action were delivered to the corporation as provided in subsection (c) of Section 228 of the General Corporation Law of the State of Delaware. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of the State of Delaware. 2.12 Record Date For Stockholder Notice; Voting; Giving Consents. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting (to the extent permitted by the certificate of incorporation), or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting (to the extent permitted by the certificate of incorporation), shall not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than sixty (60) days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (to the extent permitted by the certificate of incorporation), when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stock-4-

holders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.13 Proxies. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of the State of Delaware. 2.14 Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or (c) by any stockholder of the corporation who was a stockholder of record of the corporation at the time the notice provided for in this Section 2.14 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.14. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 2.14, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and any such proposed business other than the nominations of persons for election to the Board of Directors must constitute a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the ninetieth day nor earlier than the close of business on the one hundred twentieth day prior to the first anniversary of the preceding year's annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than seventy days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the corporation). In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (and such person's written consent to being named in the proxy statement as a nominee and to serving as a director -5-

if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 2.14 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation at an annual meeting is increased and there is no public announcement by the corporation naming the nominees for the additional directorships at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 2.14 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time the notice provided for in this Section 2.14 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 2.14. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the corporation's notice of -6-

meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 2.14 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.14 shall be eligible to be elected at an annual or special meeting of stockholders of the corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.14. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.14 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by clause (A)(2)(c)(iv) of this Section 2.14) and (b) if any proposed nomination or business was not made or proposed in compliance with this Section 2.14, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. (2) For purposes of this Section 2.14, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 2.14, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the certificate of incorporation. -7-

ARTICLE III DIRECTORS 3.1 Powers. Subject to the provisions of the General Corporation Law of the State of Delaware and any limitations in the certificate of incorporation, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 Number Of Directors. The number of directors constituting the entire Board of Directors shall be nine. 3.3 Qualification And Term Of Office Of Directors. Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of the stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 Resignation. Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. 3.5 Place Of Meetings; Meetings By Telephone. The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. -8-

3.7 Special Meetings; Notice. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone, sent by first-class mail, telegram, or telecopier or otherwise given by other lawful means (including by electronic mail) to each director. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, or by telegram, telecopier or other lawful means (including by electronic mail), it shall be delivered at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 Quorum. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.9 Waiver Of Notice. Whenever notice is required to be given under any provision of the General Corporation Law of the State of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 Board Action By Written Consent Without A Meeting. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as -9-

the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 Fees And Compensation Of Directors. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 Approval Of Loans To Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 Removal of Directors. Unless otherwise restricted by statue or by the certificate of incorporation, any director or the entire Board of Directors may be removed, with or without cause by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 Chairman Of The Board Of Directors. The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 Committees Of Directors. -10-

The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these Bylaws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to stockholders for approval or (ii) adopting, amending or repealing any Bylaw of the corporation. 4.2 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 Meetings And Action Of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the governance of any committee not inconsistent with the provisions of these Bylaws. -11-

ARTICLE V OFFICERS 5.1 Officers. The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer (who shall also serve as the treasurer of the corporation). The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 Appointment Of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 Removal And Resignation Of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies In Offices. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors or by an officer duly authorized to do so. -12-

5.6 Chief Executive Officer. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. 5.7 President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 Vice Presidents. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 Secretary. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares and the number and date of cancellation of every certificate surrendered for cancellation. -13-

The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 Chief Financial Officer. The chief financial officer and treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer and treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 Representation Of Shares Of Other Corporations. The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 Authority And Duties Of Officers. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. -14-

ARTICLE VI INDEMNIFICATION 6.1. Right to Indemnification. The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a "Covered Person") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except as otherwise provided in Section 6.3, the corporation shall be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized by the Board of Directors of the corporation. 6.2. Prepayment of Expenses. The corporation shall pay the expenses (including attorneys' fees) incurred by a Covered Person in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced if it should be ultimately determined that the Covered Person is not entitled to be indemnified under this Article VI or otherwise. 6.3. Claims. If a claim for indemnification or advancement of expenses under this Article VI is not paid in full within thirty days after a written claim therefor by the Covered Person has been received by the corporation, the Covered Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Covered Person is not entitled to the requested indemnification or advancement of expenses under applicable law. 6.4. Nonexclusivity of Rights. The rights conferred on any Covered Person by this Article VI shall not be exclusive of any other rights which such Covered Person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. -15-

6.5. Other Sources. The corporation's obligation, if any, to indemnify or to advance expenses to any Covered Person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Covered Person may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise. 6.6. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any Covered Person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.7. Other Indemnification and Prepayment of Expenses. This Article VI shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Covered Persons when and as authorized by appropriate corporate action. ARTICLE VII RECORDS AND REPORTS 7.1 Maintenance Of Records. The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books and other records. 7.2 Annual Statement To Stockholders. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 Checks. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. -16-

8.2 Execution Of Corporate Contracts And Instruments. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 Stock Certificates; Partly Paid Shares. The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 Special Designation On Certificates. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in -17-

Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 Lost Certificates. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 Dividends. The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of the State of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation and meeting contingencies. 8.7 Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.8 Seal. The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.9 Transfer Of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation, subject to any -18-

applicable restrictions on transfer noted conspicuously thereon, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction in its books. 8.10 Stock Transfer Agreements. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of the State of Delaware. 8.11 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the corporation may be adopted, amended or repealed as set forth in the certificate of incorporation -19-

EXHIBIT 5.1 [Letterhead of Shearman & Sterling] February 9, 2000 drugstore.com, inc. 13920 Southeast Eastgate Way Suite 300 Bellevue, Washington 98005 We have acted as special counsel to drugstore.com, inc., a Delaware corporation (the "Company"), in connection with the proposed offering (the "Offering") of up to 6,923,000 shares of the Company's common stock, par value $0.0001 per share (the "Shares"), by the Company and the selling stockholders (the "Selling Stockholders"), as described in the Registration Statement on Form S-1 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). The Shares are to be sold to the public pursuant to the terms of an underwriting agreement among the Company, the Selling Stockholders and the Underwriters named therein (the "Underwriting Agreement"), the form of which will be filed as an exhibit to the Registration Statement. In connection with this opinion, we have (i) examined and relied upon the originals or copies certified or otherwise identified to our satisfaction of such records, documents, certificates, and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below, and (ii) assumed that the Shares will be sold by the Underwriters at a price approved by the Company's Board of Directors. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals and the conformity to the originals of all documents presented to us as copies. Our opinion expressed herein is limited to the General Corporation Law of the State of Delaware. Based upon the foregoing, we are of the opinion that the Shares to be sold in the Offering (including Shares, if any, registered in a registration statement relating to the Offering filed by the Company pursuant to Rule 462(b) under the Securities Act) when issued and delivered in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Registration Statement. We hereby also consent to the incorporation by reference of this opinion and consent to a registration statement, if any, relating to the Offering filed by the Company pursuant to Rule 462(b) under the Securities Act. In giving this consent, we do not thereby concede that we come within the category of persons whose consent is required by the Securities Act or the General Rules and Regulations promulgated thereunder. Very truly yours,
/s/ SHEARMAN & STERLING

Exhibit 10.3 DRUGSTORE.COM 1999 EMPLOYEE STOCK PURCHASE PLAN (As amended by the Board of Directors ______, 2000) The following constitute the provisions of the 1999 Employee Stock Purchase Plan of drugstore.com. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means drugstore.com, a Delaware corporation. (e) "Compensation" means total cash compensation received by an Employee from the Company or a Designated Subsidiary. By way of illustration, but not limitation, Compensation includes regular compensation such as salary, wages, overtime, shift differentials, bonuses, commissions and incentive compensation, but excludes relocation, expense reimbursements, tuition or other reimbursements and income realized as a result of participation in any stock option, stock purchase, or similar plan of the Company or any Designated Subsidiary. (f) "Continuous Status as an Employee" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (g) "Contributions" means all amounts credited to the account of a participant pursuant to the Plan.

(h) "Corporate Transaction" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "Designated Subsidiaries" means the Subsidiaries that have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided however that the Board shall only have the discretion to designate Subsidiaries if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "Employee" means any person, including an Officer, who is an Employee of the Company for tax purposes and who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Offering Date" means the first business day of each Offering Period of the Plan, except that in the case of an individual who becomes an eligible Employee after the first business day of an Offering Period but prior to the first business day of the fourth calendar month within such Offering Period, the term "Offering Date" means the first business day of such fourth calendar month coinciding with or next succeeding the day on which that individual becomes an eligible Employee. Options granted after the first business day of an Offering Period will be subject to the same terms and conditions as the options granted on the first business day of such Offering Period except that they will have a different grant date (and thus, potentially, a different Purchase Price) and, because they expire at the same time as the options granted on the first business day of such Offering Period, a shorter term. (m) "Offering Period" means a period of six (6) months commencing on February 1 and August 1 of each year, other than the first Offering Period as set forth in Section 4. (n) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Plan" means this 1999 Employee Stock Purchase Plan. (p) "Purchase Date" means the last day of each Offering Period of the Plan. (q) "Purchase Price" means with respect to an Offering Period an amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) of any stockholder- approved increase in the number of Shares available for issuance under the Plan, and (ii) all or a portion of such additional Shares are to be issued with -2-

respect to the Offering Period that is underway at the time of such increase ("Additional Shares"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase (the "Approval Date Fair Market Value") is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to Additional Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (s) "Share" means a share of Common Stock, as adjusted in accordance with Section 19 of the Plan. (t) "Subsidiary" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate that exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. -3-

4. Offering Periods. The Plan shall be implemented by a series of Offering Periods of six (6) months' duration, with new Offering Periods commencing on or about February 1 and August 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common Stock (the "IPO Date") and continue until January 31, 2000. The Plan shall continue until terminated in accordance with Section 19 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement and any other required documents ("Enrollment Documents") provided by the Company and submitting them to the Company's Human Resources Department or the a stock brokerage or other financial services firm designated by the Company ("Designated Broker") prior to the applicable Offering Date, unless a later time for submission of the Enrollment Documents is set by the Board for all eligible Employees with respect to a given Offering Period. The Enrollment Documents and their submission may be electronic, as directed by the Company. The Enrollment Documents shall set forth the percentage of the participant's Compensation (subject to Section 6(a) below) to be paid as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the date of the first paycheck paid following the Offering Date and shall end on the date of the last paycheck paid on or prior to the Purchase Date of the Offering Period to which the Enrollment Documents are applicable, unless sooner terminated by the participant as provided in Section 10. 6. Method of Payment of Contributions. (a) A participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than twenty percent (20%) (or such greater percentage as the Board may establish from time to time before an Offering Date) of such participant's Compensation on each payday during the Offering Period. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during an Offering Period may increase or decrease the rate of his or her Contributions with respect to the Offering Period by completing and filing with the Company new Enrollment Documents authorizing a change in the payroll deduction rate. The change in rate shall be effective as of the beginning of the next payroll period following the date of filing of the new Enrollment Documents, if the documents are completed at least five (5) business days prior to such date and, if not, as of the beginning of the next succeeding payroll period. -4-

(c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased during any Offering Period scheduled to end during the current calendar year to 0%. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period that is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. In addition, a participant's payroll deductions may be decreased by the Company to 0% at any time during an Offering Period in order to avoid unnecessary payroll contributions as a result of application of the maximum share limit set forth in Section 7(a), in which case payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the next Offering Period, unless terminated by the participant as provided in Section 10. 7. Grant of Option. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price; provided however that the maximum number of Shares an Employee may purchase during each Offering Period shall be 2,500 Shares (subject to any adjustment pursuant to Section 18 below), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12. (b) The fair market value of the Company's Common Stock on a given date (the "Fair Market Value") shall be determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal. For purposes of the Offering Date that coincides with the IPO Date, the Fair Market Value of a share of the Common Stock of the Company shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. Fractional Shares shall be issued, as necessary. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. -5-

9. Delivery. As promptly as practicable after a Purchase Date, the number of Shares purchased by each participant upon exercise of his or her option shall be deposited into an account established in the participant's name with the Designated Broker. Any payroll deductions accumulated in a participant's account that are not applied toward the purchase of Shares on a Purchase Date due to limitations imposed by the Plan shall be returned to the participant. 10. Voluntary Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to a Purchase Date by submitting a completed "Notice of Withdrawal" form to the Company's Human Resources Department or electronically completing the required documentation provided by the Company through the Designated Broker, as directed by the Company's Human Resources Department. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, whether voluntary or involuntary, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan that may hereafter be adopted by the Company. 11. Interest. No interest shall accrue on the Contributions of a participant in the Plan. 12. Stock. (a) Subject to adjustment as provided in Section 18, the maximum number of Shares that shall be made available for sale under the Plan shall be 500,000 Shares, plus an annual increase on the first day of each of the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of (i) 500,000 Shares, (ii) three percent (3%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. If the Board determines that, on a given -6-

Purchase Date, the number of shares with respect to which options are to be exercised may exceed (1) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (2) the number of shares available for sale under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the Company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue the Plan as then in effect, or (y) that the Company shall make a pro rata allocation of the Shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate the Plan pursuant to Section 19 below. The Company may make a pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. (b) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 14. Designation of Beneficiary. (a) A participant may designate a beneficiary who is to receive any Shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering Period but prior to delivery to him or her of such Shares and cash. In addition, a participant may designate a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Purchase Date of an Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. Beneficiary designations under this Section 14(a) shall be made as directed by the Human Resources Department of the Company, which may require electronic submission of the required documentation with the Designated Broker. (b) Such designation of beneficiary may be changed by the participant (and his or her spouse, if any) at any time by submission of the required notice, which required notice may be electronic. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall -7-

deliver such Shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 14) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. Use of Funds. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be provided to participating Employees by the Company or the Designated Broker at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate Transactions. (a) Adjustment. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan that has not yet been exercised, the number of Shares that have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), the maximum number of Shares of Common Stock that may be purchased by a participant in an Offering Period, the number of Shares of Common Stock set forth in Section 12(a)(i) above, and the price per Share of Common Stock covered by each option under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) Corporate Transactions. In the event of a dissolution or liquidation of the Company, any Offering Period then in progress will terminate immediately prior to the -8-

consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 18, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided for in this Section 18); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. 19. Amendment or Termination. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination of the Plan may affect options previously granted, provided that the Plan or an Offering Period may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering Period then in progress if the Board determines that termination of the Plan and/or the Offering Period is in the best interests of the Company and the stockholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan. Except as provided in Section 18 and in this Section 19, no amendment to the Plan shall make any change in any option previously granted that adversely affects the rights of any participant. In addition, to the extent necessary to comply with Rule 16b-3 under the -9-

Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable that are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan; Effective Date. The Plan shall become effective upon approval by the Company's stockholders. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19. 23. Additional Restrictions of Rule 16b-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 -10-

to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -11-

DRUGSTORE.COM 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 20% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless my employment is terminated prior to the Purchase Date or I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 4. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can increase or decrease the rate of my Contributions on one occasion only with respect to each rate change during any Offering Period by completing and filing a new Subscription Agreement with such increase or decrease taking effect as of the beginning of the payroll period following the date of filing of the new Subscription Agreement, if filed at least five (5) business days prior to the beginning of such payroll period. Further, I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period.

5. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "drugstore.com 1999 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only):

7. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ---------------------------------------(First) (Middle) (Last) ---------------------------------------(Address) ----------------------------------------

----------------------------(Relationship)

8. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price that I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition, and I will make adequate provision for federal, state or other tax withholding obligations, if any, that arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 9. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price that I paid for the shares under the option, or (2) 15% of the fair market value of the shares -2-

on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to change. I further understand that I should consult a tax advisor concerning the tax implications of the purchase and sale of stock under the Plan. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE: SOCIAL SECURITY #: DATE: SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):

(Signature)

(Print name) -3-

DRUGSTORE.COM 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the Offering Period that began on _________ ___, _____. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement.
Dated: ------------------------------------------------------------Signature of Employee ---------------------------------------Social Security Number

Exhibit 10.20 DRUGSTORE.COM, INC. FIFTH AMENDED AND RESTATED VOTING AGREEMENT This Fifth Amended and Restated Voting Agreement (this "Agreement") is made as of December 23, 1999, by and among drugstore.com, inc., a Delaware corporation (the "Company"), Jed A. Smith (the "Founder"), Peter M. Neupert ("Neupert") and the holders of shares of the Company's Common Stock listed on Exhibit A together with any affiliates (as defined in the Securities Act of 1933) of such holders to which such the shares are assigned or transferred (collectively, the "Investors" and each individually, an "Investor") and terminates and supersedes in all respects that certain Fourth Amended and Restated Voting Agreement dated July 9, 1999, by and among the Company and certain of the Investors (the "Prior Agreement"). RECITAL To correctly reflect the intentions of the parties at the time of the execution of the Third Amended and Restated Voting Agreement; to clarify certain matters regarding removal of the legend required by Section 2.3 of the Prior Agreement; and pursuant to Section 4.2 of the Prior Agreement, this Agreement is being executed by the Company, the Founder, and holders of at least two- thirds (2/3) of the Company's capital stock held by the Investors who were parties to the Prior Agreement, thereby permitting the Prior Agreement to be terminated and superseded by this Agreement. AGREEMENT The parties agree as follows: 1. Election of Directors. The number of authorized directors of the Company will initially be set at nine (9). At each annual meeting of the stockholders of the Company, or at any meeting of the stockholders of the Company at which members of the Company's Board of Directors (the "Board") are to be elected, or wherever members of the Board are to be elected by written consent, the Founder, Neupert and the Investors agree to vote or act with respect to their shares so as to elect: (a) Two (2) persons designated by Kleiner Perkins Caufield & Byers VIII ("KPCB"). One such designee may be made at KPCB's sole discretion and the other such designee shall be reasonably acceptable to a majority of the remaining Board members (excluding the KPCB designees). Such persons shall initially be John Doerr and Brook Byers. Notwithstanding the foregoing, the parties hereto shall not be obligated to vote or act to elect any representative of KPCB if KPCB, together with all of its affiliates, does not hold at least 2,000,000 shares of Series A Preferred Stock (as adjusted for any future stock splits, stock dividends, recapitalizations and the like);

(b) Two (2) persons designated by Amazon.com, Inc. ("Amazon.com"). One such designee may be made at Amazon.com's sole discretion and the other such designee shall be reasonably acceptable to a majority of the remaining Board members (excluding the Amazon.com designees). Such persons shall initially be Jeffrey Bezos and such other designee as may be named at any time by Amazon.com; (c) One (1) person designated by Vulcan Ventures Incorporated ("Vulcan"). Such person shall initially be William Savoy. Notwithstanding the foregoing, the parties hereto shall not be obligated to vote or act to elect any representative of Vulcan (i) until that certain convertible Promissory Note, dated May 19, 1999 (the "Vulcan Note") is converted into shares of the Company's equity securities and (ii) if Vulcan, together with all of its affiliates, does not hold at least 2,000,000 shares of Series D Preferred Stock (as adjusted for any future stock splits, stock dividends, recapitalizations and the like after May 19, 1999); (d) One (1) person designated by Rite Aid on or after January 1, 2000. Notwithstanding the foregoing, the parties hereto shall not be obligated to elect any representative of Rite Aid if (x) Rite Aid does not beneficially own at least 5% of the then-outstanding securities of the Company entitled to vote for the election of directors of the Company or (y) each of the Main Agreement dated as of June 17, 1999 between the Company and Rite Aid, the Governance Agreement dated as of June 17, 1999 between the Company and Rite Aid ("Rite Aid Governance Agreement") and the Pharmacy Supply and Services Agreement dated as of June 17, 1999 between the Company and Rite Aid shall have terminated; (e) Jed Smith, unless the Board has determined by majority vote (excluding Mr. Smith) that Mr. Smith is no longer a valuable contributor to the Company and therefore should no longer continue to serve as a director; and (f) Peter Neupert, unless the Board has determined by majority vote (excluding Mr. Neupert) that Mr. Neupert is no longer a valuable contributor to the Company and therefore should no longer continue to serve as a director. Notwithstanding the provisions of paragraphs (a) and (b) above, at any time after the date of this Agreement, either KPCB or Amazon.com may (by written notice to the other party and the Company) withdraw its right to designate two Board members. In such event, KPCB and Amazon.com shall each cause one of its designees to resign from the Board; thereafter, KPCB and Amazon.com shall each have the right to designate one Board member, selected in such party's sole discretion. In the event of any termination, removal or resignation of any director (other than as provided in the previous paragraph), the parties hereto shall take all actions necessary and appropriate to cause such vacancy to be filled in the manner by which such director was elected pursuant to the terms of this Agreement. 2

2. Additional Representations and Covenants. 2.1 No Revocation. The voting agreements contained herein are coupled with an interest and may not be revoked during the term of this Agreement. 2.2 Change in Number of Directors. The Founder and the Investors will not vote for any amendment or change to the Company's Sixth Amended and Restated Certificate of Incorporation or Bylaws providing for the election of more than nine (9) directors, or any other amendment or change to the Certificate of Incorporation or Bylaws inconsistent with the terms of this Agreement. 2.3 Legends. Each certificate representing shares of the Company's capital stock held by the Founder or the Investors shall bear the following legend: "THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT." 2.4 Vulcan Director. The parties hereto agree to take reasonable steps to fill the vacancy on the Board with the person nominated by Vulcan pursuant to Section 1(c) as soon as practicable following the conversion of the Vulcan Note into equity securities of the Company. 3. Termination. 3.1 Termination Events. (a) This Agreement shall terminate when the Company shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) where the stockholders of the Company own less than fifty percent (50%) of the voting power of the surviving entity after such merger or consolidation, provided that this subsection shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company. (b) The rights and obligations of the Founder, Neupert and the Investors pursuant to Sections 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) shall terminate upon the consummation of an underwritten public offering by the Company of shares of its Common Stock pursuant to a registration statement filed under the Securities Act of 1933, which results in gross proceeds in excess of $15,000,000 and the public offering price of which is at least $5.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization); provided, however, that on the first business day following the termination of Amazon.com's rights under Section 1(b) pursuant to this Section 3.1(b), the Company will cause the Board to nominate, recommend and solicit proxies (if necessary) for election to the Board of one person 3

designated by Amazon.com, provided that this obligation shall be deemed fulfilled in the event an Amazon.com designated director is already sitting on the Board at such time. Thereafter, in the event of a vacancy in an Amazon.com Board seat, or in any Board election in which an Amazon.com designated director is up for re-election, unless a second Amazon.com designated director is then serving on the Board, the Company will cause the vacancy to be filled with an Amazon.com designated director or will cause such Amazon.com designated director to be included on the slate of directors proposed by the Board at such election and cause the Board to recommend and solicit proxies (if necessary) in favor of such Amazon.com designated director. Notwithstanding any of the foregoing, the Company's obligations under this Section 3.1(b) will terminate on the earlier of: (i) the date Amazon.com ceases to beneficially own at least 5% of the then-outstanding shares of Common Stock; and (ii) termination of this Agreement for any reason including, a termination pursuant to Section 3.1(a). (c) The rights and obligations of the Founder, Neupert and the Investors pursuant to Sections 1(a), 1(c), 1(e) and 1(f) shall terminate when the Company shall effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, provided that this subsection shall not apply to any transaction or series of related transactions effected exclusively for purpose of changing the domicile of the Company, provided that this subsection shall not apply to a transaction or series of transactions effected exclusively for the purpose of changing the domicile of the Company. (d) Notwithstanding the termination of the rights and obligations of the Founder, Neupert and the Investors pursuant to Section 3.1(b) of this Agreement, following any such termination Founder, Neupert and the Investors (but not any transferee of any shares held by the Founder, Neupert and the Investors) agree to vote or act with respect to their shares so as to elect the nominee for director who is designated by Amazon.com in accordance with Section 3.1(b) of this Agreement and the nominee for director designated by Rite Aid in accordance with Section 3.1 of the Rite Aid Governance Agreement. 3.2 Removal of Legend. Any assignee of the Founder or Investors that holds a stock certificate legended pursuant to Section 2.3 may surrender such certificate to the Company for removal of the legend and the Company will duly reissue a new certificate without the legend. At any time after the termination of this Agreement in accordance with Section 3.1, any holder of a stock certificate legended pursuant to Section 2.3 may surrender such certificate to the Company for removal of the legend, and the Company will duly reissue a new certificate without the legend. 4

4. Miscellaneous. 4.1 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 4.2 Amendments and Waivers. Any term hereof may be amended or waived only with the written consent of the Company, the Founder, Neupert, and at least two-thirds (2/3) of the Company's capital stock held by the Investors (including, in the case of Amazon.com, any wholly-owned subsidiary of Amazon.com); provided, however, that (i) any amendment to Section 1(c) or Section 2.4 shall require the consent of Vulcan, (ii) any amendment to Section 1(d) or Section 3.1 shall require the consent of Rite Aid and (iii) any amendment to Section 1(b) or Section 3.1 shall require the consent of Amazon.com. Any amendment or waiver effected in accordance with this Section 4.2 shall be binding upon the Company, the Investors and any holder of the Founder's shares, and each of their respective successors and assigns. 4.3 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth on the signature page or on Exhibit A hereto, or as subsequently modified by written notice. 4.4 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 4.5 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 4.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 4.7 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5

The parties hereto have executed this Fifth Amended and Restated Voting Agreement as of the date first written above.
COMPANY: DRUGSTORE.COM, INC. By: /s/ Peter M. Neupert ---------------------------------------Peter M. Neupert Chairman of the Board, President and Chief Executive Officer INVESTORS: RITE AID CORPORATION /s/ Elliot S. Gerson ----------------------------------------Elliot S. Gerson --------------------------------------Title: Senior Executive Vice President -------------------------------------Address: 30 Hunter Lane Camp Hill, PA 17011 Name: With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP New York, NY 10022-3607 Attention: Nancy Lieberman, Esq. By:

Address: 13920 SE Eastgate Way Suite 300 Bellevue, WA 98005

FOUNDER: By: /s/ Jed A. Smith ---------------------------------------Jed Smith Founder By:

RITE INVESTMENTS CORP. /s/ Elliot S. Gerson ----------------------------------------Name: Elliot S. Gerson --------------------------------------Title: Senior Vice President -------------------------------------Address: 30 Hunter Lane Camp Hill, PA 17011 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP New York, NY 10022-3607 Attention: Nancy Lieberman, Esq.

Address: 227 Summit Ave. #E405 --------------------------------------------Brookline, MA 02446 -----------------------------------------------------------------------------------------

SIGNATURE PAGE TO FIFTH AMENDED AND RESTATED VOTING AGREEMENT

GENERAL NUTRITION COMPANIES, INC.
By: /s/ James M. Sander -------------------------------Name: James M. Sander -----------------------------Title: V.P. Law, Chief Legal Officer ----------------------------and Secretary -----------------------------

Address: General Nutrition Companies, Inc. 300 Sixth Avenue Pittsburgh, PA 15222 GENERAL NUTRITION INVESTMENT COMPANY
By: /s/ James M. Sander -------------------------------Name: James M. Sander -----------------------------Title: V.P. Law, Chief Legal Officer ----------------------------and Secretary -----------------------------

Address: General Nutrition Companies, Inc. 300 Sixth Avenue Pittsburgh, PA 15222 VULCAN VENTURES INCORPORATED
By: /s/ William D. Savoy -------------------------------Name: William D. Savoy -----------------------------Title: Vice President -----------------------------

Address:

110 110th Avenue Northeast Suite 550 Bellevue, WA 98004 SIGNATURE PAGE TO FIFTH AMENDED AND RESTATED VOTING AGREEMENT

KLEINER PERKINS CAUFIELD & BYERS VIII, L.P. By: KPCB VIII Associates, L.P., its General Partner
By: /s/ L. John Doerr ------------------------------Name: L. John Doerr ----------------------------a General Partner

Address:

2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII FOUNDERS FUND, L.P. By: KPCB VIII Associates, L.P., its General Partner
By: /s/ L. John Doerr ------------------------------Name: L. John Doerr ----------------------------a General Partner

Address:

2750 Sand Hill Road Menlo Park, CA 94025 KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P. By: KPCB VII Associates, L.P., its General Partner
/s/ L. John Doerr ------------------------------Name: L. John Doerr ----------------------------a General Partner By:

Address:

2750 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO FIFTH AMENDED AND RESTATED VOTING AGREEMENT

AMAZON.COM, INC.
/s/ Mark Britto ------------------------------Name: Mark Britto ----------------------------Title: Vice President ---------------------------By:

Address:

1200 12th Avenue S., Ste. 1200 Seattle, WA 98144 NEUPERT:
By: /s/ Peter M. Neupert ------------------------------Peter M. Neupert

Address:

1603 Evergreen Point Road Bellevue, WA 98004 SIGNATURE PAGE TO FIFTH AMENDED AND RESTATED VOTING AGREEMENT

EXHIBIT A INVESTORS Name and Address Kleiner Perkins Caufield & Byers VIII 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII Founders Fund, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 KPCB Life Sciences Zaibatsu Fund II, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 Amazon.com, Inc. 1200 12th Avenue, Suite 1200 Seattle, WA 98144 Attn: General Counsel David Whorton c/o Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Vulcan Ventures Incorporated 110 110th Avenue Northeast, Suite 550 Bellevue, Washington 98004 Rite Aid Corporation, through its wholly owned subsidiary Rite Investments Corp. 30 Hunter Lane Camp Hill, PA 17011 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP New York, NY 10022-3607 Attention: Nancy Lieberman, Esq.

General Nutrition Companies, Inc., through its wholly owned subsidiary General Nutrition Investment Company 300 6th Avenue Pittsburgh, PA 15222 Attention: General Counsel

Exhibit 10.34 SUNSET NORTH BELLEVUE, WASHINGTON OFFICE LEASE AGREEMENT BETWEEN WRC SUNSET NORTH LLC ("LANDLORD") AND DRUGSTORE.COM, INC., a Delaware corporation

("TENANT")

TABLE OF CONTENTS
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. XIX. XX. XXI. XXII. XXIII. XXIV. XXV. XXVI. XXVII. XXVIII. XXIX. XXX. XXXI. XXXII. Basic Lease Information.......................... Lease Grant...................................... Adjustment of Commencement Date; Possession...... Rent............................................. Compliance with Laws; Use........................ Security Deposit................................. Services to be Furnished by Landlord............. Leasehold Improvements........................... Repairs and Alterations.......................... Use of Electrical Services by Tenant............. Entry by Landlord................................ Assignment and Subletting........................ Liens............................................ Indemnity and Waiver of Claims................... Insurance........................................ Subrogation...................................... Casualty Damage.................................. Condemnation..................................... Events of Default................................ Remedies......................................... Limitation of Liability.......................... No Waiver........................................ Quiet Enjoyment.................................. Relocation....................................... Holding Over..................................... Subordination to Mortgages; Estoppel Certificate. Attorneys' Fees.................................. Notice........................................... Excepted Rights.................................. Surrender of Premises............................ Miscellaneous.................................... Entire Agreement................................. 1 4 4 5 10 10 12 13 14 15 16 16 18 18 19 20 20 21 21 22 23 23 24 24 24 24 25 25 25 26 26 28

OFFICE LEASE AGREEMENT This Office Lease Agreement (the "Lease") is made and entered into as of the 22/nd/ day of November, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and DRUGSTORE.COM, INC., a Delaware corporation ("Tenant"). I. Basic Lease Information. A. "Buildings" shall mean the office buildings commonly known as Building 3, Building 4 and Building 5 of Sunset North Corporate Campus, located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. "Building" means any one of the Buildings, individually. B. "Property" shall mean the Buildings and the parcel(s) of land on which they are located, all other property in the Sunset North Corporate Campus, the garages serving the Buildings, and all other improvements owned by Landlord and serving the Buildings and the tenants thereof and the parcel(s) of land on which they are located. The legal description of the Property is set forth on Exhibit A-2, attached hereto and incorporated herein by this reference. C. "Rentable Square Footage of the Property" is deemed to be 460,629 square feet. D. "Premises" shall mean the areas shown on Exhibit A to this Lease. The Premises are located on the floors of the Buildings set forth below, and the "Rentable Square Footage of the Premises" is approximately 57,436 square feet, consisting of the areas set forth below.
Building 3 4 5 Total Location 2nd Floor 1st Floor 1st Floor Rentable Area 10,000 26,663 20,773 57,436 Usable Area 8,649 24,341 17,967 50,957

The precise square footage of the Premises shall be determined by Landlord and Tenant based upon Tenant's Final Plans, and once so determined shall not be further adjusted except to reflect additions to or other modifications of the Premises. Once the area of the Premises is so determined, the area of the Premises, Base Rent, Tenant's Pro Rata Share and the Allowance shall be appropriately adjusted and confirmed in writing by Landlord and Tenant. If the Premises include one or more floors in their entirety, all corridors and restroom facilities located on such full floor(s) shall be considered part of the Premises. "Rentable Area," "rentable square feet" and similar terms shall mean Rentable Area as determined in accordance with the American National Standard Method of measuring floor space in office buildings as published by the

Building Owners and Managers Association International dated June 7, 1996 ("BOMA"). "Usable Area "and "usable square feet" shall mean Usable Area as determined in accordance with BOMA. E. "Base Rent":
Period Years 1 through 3 Annual Rate Per Square Foot $22.50 Annual Base Rent $1,292,310.00 Monthly Base Rent $107,692.50

F. "Tenant's Pro Rata Share": 12.4690%. G. "Term": A period of approximately thirty six (36) months, commencing on the later to occur of (i) March 1, 2000 (the "Target Commencement Date") and (ii) the date on which the Landlord Work is Substantially Complete, as determined by Section III.A. The Termination Date shall be the last day of the calendar month in which the third anniversary of the Commencement Date occurs. If Landlord fails to Substantially Complete the Landlord Work by the Target Commencement Date, it shall not be a default by Landlord or otherwise render Landlord liable for damages. Notwithstanding the foregoing, if there have been no Tenant Delays and the Commencement Date does not occur by June 1, 2000 (the "Outside Completion Date"), Tenant, as its sole remedy, may terminate this Lease by giving Landlord written notice of termination on or before the earlier to occur of: (i) five (5) Business Days after the Outside Completion Date; and (ii) the Commencement Date. In such event, this Lease shall be deemed null and void and of no further force and effect and Landlord shall promptly refund any prepaid Rent and Security Deposit previously advanced by Tenant under this Lease and, so long as Tenant has not previously defaulted under any of its obligations under the Work Letter, the parties hereto shall have no further responsibilities or obligations to each other with respect to this Lease. Landlord and Tenant acknowledge and agree that: (i) the determination of the Commencement Date shall take into consideration the effect of any Tenant Delays by Tenant; and (ii) the Outside Completion Date shall be postponed by the number of days the Commencement Date is delayed due to events of Force Majeure. Notwithstanding anything herein to the contrary, if Landlord determines that it will be unable to cause the Commencement Date to occur by the Outside Completion Date, Landlord shall have the right to immediately cease its performance of the Landlord Work and provide Tenant with written notice (the "Outside Extension Notice") of such inability, which Outside Extension Notice shall set forth the date on which Landlord reasonably believes that the Commencement Date will occur. Upon receipt of the Outside Extension Notice, Tenant shall have the right to terminate this Lease by providing written notice of termination to Landlord within five (5) Business Days after the date of the Outside Extension Notice. In the event that Tenant does not terminate this Lease within such five (5) Business Day period, the Outside Completion Date shall automatically be amended to be the date set forth in Landlord's Outside Extension Notice. Promptly after the determination of the Commencement Date, Landlord and Tenant shall enter into a commencement letter agreement in the form attached as Exhibit C. 2

H. Tenant allowance(s): $27.50 per square foot of usable area in the Premises. See Exhibit D. I. "Security Deposit": $200,000 J. "Guarantor(s)": None. K. "Broker(s)": Geoff Boguch of Colliers International representing Tenant, and John Black of Broderick Group, Inc. representing Landlord. L. "Permitted Use": General office uses, and any other legally permitted use suitable for the Building, considering the business of the other tenants in the Building and the Building's prestige. M. "Notice Addresses": Tenant: notices shall be sent to Tenant at the following address: drugstore.com, inc. Attention: Office Manager 13920 SE Eastgate Way, Suite 300 Bellevue, WA 98005 Fax: (425) 372-3800 And to: drugstore.com, inc. Attention: Director of Finance 13920 SE Eastgate Way, Suite 300 Bellevue, WA 98005 Fax: (425) 372-3800 Landlord: WRC Sunset North LLC 1191 Second Avenue, Suite 2000 Seattle, WA 98101 Attention: Building Manager With a copy to: Equity Office Properties Trust Two North Riverside Plaza, Suite 2200 Chicago, IL 60606 Attention: Regional Counsel -- West Region 3

Payments of Rent shall be made payable to the order of: WRC Sunset North LLC at the address of the Landlord set forth above, or such other address as may be specified in the Commencement Letter delivered to Tenant pursuant to Section I.G. N. "Business Day(s)" are Monday through Friday of each week, exclusive of New Year's Day, Martin Luther King, Jr. Day, President's Day, Memorial Day, Independence Day, Labor Day, Veterans' Day, Thanksgiving Day and Christmas Day ("Holidays"). Landlord may designate additional Holidays, provided that the additional Holidays are commonly recognized by other office buildings in the area where the Buildings are located. O. "Landlord Work" means the work, if any, that Landlord is obligated to perform in the Premises pursuant to a separate work letter agreement (the "Work Letter"), if any, attached as Exhibit D. P. "Law(s)" means all applicable statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity. Q. "Normal Business Hours" for the Buildings are 7:00 a.m. to 6:00 p.m. on Business Days and 8:00 a.m. to 1:00 p.m. on Saturdays. II. Lease Grant. Landlord leases the Premises to Tenant and Tenant leases the Premises from Landlord, together with the right in common with others to use any portions of the Property that are designated by Landlord for the common use of tenants and others, such as sidewalks, driveways, parking structures, unreserved parking areas, common corridors, elevator foyers, restrooms, vending areas and lobby areas (the "Common Areas"). III. Adjustment of Commencement Date; Possession. A. The Landlord Work shall be deemed to be "Substantially Complete" on the date that all Landlord Work has been performed, other than any details of construction, mechanical adjustment or any other similar matter, the noncompletion of which does not materially interfere with Tenant's use of the Premises. However, if Landlord is delayed in the performance of the Landlord Work as a result of any Tenant Delay(s) (defined below), the Landlord Work shall be deemed to be Substantially Complete on the date that Landlord could reasonably have been expected to Substantially Complete the Landlord Work absent any Tenant Delay. "Tenant Delay" means any act or omission of Tenant or its agents, employees, vendors or contractors that actually delays the Substantial Completion of the Landlord Work, including, without limitation: (1) Tenant's failure to furnish information or approvals within any time period specified in this Lease, including the failure to prepare or approve preliminary or final plans by any applicable due date; (2) Tenant's selection of equipment or materials that have long lead times after first being informed by Landlord that the selection may result in a delay; (3) changes requested or made by Tenant to previously approved plans and specifications; (4) performance of work in the Premises by Tenant or Tenant's contractor(s) during the performance of the Landlord Work; or (5) if the performance of any portion of the Landlord 4

Work depends on the prior or simultaneous performance of work by Tenant, a delay by Tenant or Tenant's contractor(s) in the completion of such work. B. Subject to (i) Landlord's obligation to perform Landlord Work (including punchlist items) and Landlord's obligations under Section IX.B., and (ii) latent structural or systemic defects in the Buildings, the Premises are accepted by Tenant in "as is" condition and configuration. By taking possession of the Premises, Tenant agrees that the Premises are in good order and satisfactory condition, except as may otherwise be noted by Tenant to Landlord in writing within thirty (30) days after the Commencement Date, and that there are no representations or warranties by Landlord regarding the condition of the Premises or the Buildings. If Landlord is delayed delivering possession of the Premises or any other space due to the holdover or unlawful possession of such space by any party, Landlord shall use reasonable efforts to obtain possession of the space. Any claim by Tenant with respect to Landlord Work or a latent or structural defect must be made in writing and delivered to Landlord within one (1) year after the Commencement Date; thereafter Tenant shall have no right to make any such claim. C. If Tenant takes possession of the Premises before the Commencement Date, such possession shall be subject to the terms and conditions of this Lease and Tenant shall pay Rent (defined in Section IV.A.) to Landlord for each day of possession before the Commencement Date. Notwithstanding the foregoing, Tenant shall have the right to enter the Premises at no cost for up to fifteen (15) days prior to the Commencement Date for purposes of installing furniture, fixtures, cabling, wiring and equipment (the "Installation Period"), provided that the Installation Period shall not delay the Commencement Date. Tenant shall coordinate its work with the Shell and Core Contractor and the Tenant Improvements Contractor and shall not interfere with any such contractors or their subcontractors. Tenant shall not be charged Rent during the Installation Period unless Tenant has occupied the Premises during such period for normal business operations. IV. Rent. A. Payments. As consideration for this Lease, Tenant shall pay Landlord, without any setoff or deduction, except as expressly permitted hereunder, the total amount of Base Rent and Additional Rent due for the Term. "Additional Rent" means all sums (exclusive of Base Rent) that Tenant is required to pay Landlord. Additional Rent and Base Rent are sometimes collectively referred to as "Rent". Tenant shall pay and be liable for all rental, sales and use taxes (but excluding income taxes), if any, imposed upon or measured by Rent under applicable Law. Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand, provided that the installment of Base Rent for the first full calendar month of the Term shall be payable upon the execution of this Lease by Tenant. All other items of Rent shall be due and payable by Tenant on or before 30 days after billing by Landlord. All payments of Rent shall be by good and sufficient check or by other means (such as automatic debit or electronic transfer) acceptable to Landlord. If Tenant fails to pay any item or installment of Rent when due, Tenant shall pay Landlord an administration fee equal to 5% of the past due Rent, provided that Tenant shall be entitled to a grace period of 5 days for the first 2 late payments of Rent in a given calendar year. If the Term commences on a day other than the first day of a calendar month or terminates on a 5

day other than the last day of a calendar month, the monthly Base Rent and Tenant's Pro Rata Share of Expenses (defined in Section IV.C.) and Taxes (defined in Section IV.D.) for the month shall be prorated based on the number of days in such calendar month. Landlord's acceptance of less than the correct amount of Rent shall be considered a payment on account of the earliest Rent due. No endorsement or statement on a check or letter accompanying a check or payment shall be considered an accord and satisfaction, and either party may accept the check or payment without prejudice to that party's right to recover the balance or pursue other available remedies. Tenant's covenant to pay Rent is independent of every other covenant in this Lease. B. Payment of Tenant's Pro Rata Share of Expenses and Taxes. Tenant shall pay Tenant's Pro Rata Share of the total amount of Expenses (defined in Section IV.C.) and Taxes (defined in Section IV.D.) for each calendar year during the Term. Landlord shall endeavor to provide Tenant with a good faith estimate of the total amount of Expenses and Taxes for each calendar year during the Term no later than March 31 of each year. On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one- twelfth of Tenant's Pro Rata Share of Landlord's estimate of the total amount of Expenses and Taxes. If Landlord determines that its good faith estimate was incorrect by over five percent (5%), Landlord shall provide Tenant with a revised estimate. After its receipt of the revised estimate, Tenant's monthly payments shall be based upon the revised estimate. If Landlord does not provide Tenant with an estimate of the total amount of Expenses and Taxes by January 1 of a calendar year, Tenant shall continue to pay monthly installments based on the previous year's estimate until Landlord provides Tenant with the new estimate. Upon delivery of the new estimate, an adjustment shall be made for any month for which Tenant paid monthly installments based on the previous year's estimate. Tenant shall pay Landlord the amount of any underpayment within 30 days after receipt of the new estimate. Any overpayment shall be refunded to Tenant within 30 days or credited against the next due future installment(s) of Additional Rent. As soon as is practical following the end of each calendar year, Landlord shall furnish Tenant with a statement of the actual amount of Expenses and Taxes for the prior calendar year and Tenant's Pro Rata Share of the actual amount of Expenses and Taxes for the prior calendar year. If the estimated amount of Expenses and Taxes for the prior calendar year is more than the actual amount of Expenses and Taxes for the prior calendar year, Landlord shall apply any overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall promptly refund any overpayment to Tenant after first deducting the amount of Rent due. If the estimated amount of Expenses and Taxes for the prior calendar year is less than the actual amount of Expenses and Taxes for such prior year, Tenant shall pay Landlord, within 30 days after its receipt of the statement of Expenses and Taxes, any underpayment for the prior calendar year. C. Expenses Defined. "Expenses" means all costs and expenses incurred in each calendar year in connection with operating, maintaining, repairing, and managing the Property, including, but not limited to: 1. Labor costs, including, wages, salaries, social security and employment taxes, medical and other types of insurance, uniforms, training, and retirement and 6

pension plans, but only to the extent the personnel representing such labor costs devote their time to the Buildings and the Property. 2. Management fees (not to exceed market rates), the cost of equipping and maintaining a management office, accounting and bookkeeping services, legal fees not attributable to financing, sale, leasing or collection activity or defense of Landlord's title, and other administrative costs. Landlord, by itself or through an affiliate, shall have the right to directly perform or provide any services under this Lease (including management services), provided that the cost of any such services shall not exceed the cost that would have been incurred had Landlord entered into an arms-length contract for such services with an unaffiliated entity of comparable skill and experience. 3. The cost of services, including amounts paid to service providers and the rental and purchase cost of parts, supplies, tools and equipment, but only to the extent that such services, parts, supplies, tools and equipment were used in connection with the Property. 4. Premiums and deductibles paid by Landlord for insurance, including workers' compensation, fire and extended coverage, earthquake, general liability, rental loss, elevator, boiler and other insurance customarily carried from time to time by owners of comparable office buildings. 5. Electrical Costs (defined below) and charges for water, gas, steam and sewer, but excluding those charges for which Landlord is reimbursed by tenants. "Electrical Costs" means: (a) charges paid by Landlord for electricity; and (b) costs incurred in connection with an energy management program for the Property. Electrical Costs shall be adjusted as follows: (i) amounts received by Landlord as reimbursement for above standard electrical consumption shall be deducted from Electrical Costs; (ii) the cost of electricity incurred to provide overtime HVAC to specific tenants (as reasonably estimated by Landlord) shall be deducted from Electrical Costs; and (iii) if Tenant is billed directly for the cost of building standard electricity to the Premises as a separate charge in addition to Base Rent, the cost of electricity to individual tenant spaces in the Property shall be deducted from Electrical Costs. 6. The amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) made to the Property which are: (a) performed primarily to reduce operating expense costs or otherwise improve the operating efficiency of the Property; or (b) required to comply with any Laws that are enacted, or first interpreted to apply to the Property, after the date of this Lease. The cost of capital improvements shall be amortized by Landlord over the lesser of the Payback Period (defined below) or 5 years. The amortized cost of capital improvements may, at Landlord's option, include actual or imputed interest at the rate that Landlord would reasonably be required to pay to finance the cost of the capital improvement. "Payback Period" means the reasonably estimated period of time that it takes for the cost savings resulting from a capital improvement to equal the total cost of the capital improvement. Notwithstanding the foregoing, the portion of the annual amortized costs to be included in Expenses in any calendar year with respect to a capital 7

improvement which is intended to reduce expenses or improve the operating efficiency of the Property or Building shall equal the lesser of: a) such annual amortized costs; and b) the projected annual amortized reduction in expenses for that portion of the amortization period of the capital improvement which falls within the Term (based on the total cost savings for such period, as reasonably estimated by Landlord). If Landlord incurs Expenses for the Property together with one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, the shared costs and expenses shall be equitably prorated and apportioned between the Property and the other buildings or properties. Expenses shall not include: the cost of capital improvements (except as set forth above); depreciation; interest (except as provided above for the amortization of capital improvements); principal payments of mortgage and other non-operating debts of Landlord; the cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds or to the extent made to correct or mitigate any defect in design, materials or workmanship of the Buildings, or the Common Areas, or to the extent necessitated by the negligence or misconduct of Landlord; costs in connection with leasing space in the Property, including brokerage commissions and advertising costs; lease concessions, including rental abatements and construction allowances, granted to specific tenants; costs incurred in connection with the sale, financing or refinancing of the Property; fines, interest and penalties incurred due to the late payment of Taxes (defined in Section IV.D.) or Expenses; organizational expenses associated with the creation and operation of the entity which constitutes Landlord; any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Property under their respective leases; Landlord's general overhead expenses not related to the Buildings; costs (including permit, license and inspection fees) incurred in renovating or otherwise improving, decorating, painting or altering (1) vacant space (excluding common areas) in the Buildings or (2) space for tenants or other occupants in the Buildings; costs incurred due to a violation by Landlord of the terms and conditions of a lease; expenses incurred as a result of allowing any other tenant of a Building or any other person or entity to use the roof of a Building for any purpose; any recalculation of or addition of Expenses actually incurred more than two (2) years prior to the year in which Landlord proposes that such costs be included; rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, if purchased, except equipment not affixed to a Building; costs arising from Landlord's political or charitable contributions; or costs for acquisitions or sculpture, paintings or other objects of art (but the expense of maintaining such items shall be included). Landlord shall not collect in excess of one hundred percent (100%) of Operating Expenses and shall not recover any item of cost more than once. If the Property is not at least 95% occupied during any calendar year or if Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Property at any time during a calendar year, Expenses that vary based on occupancy, such as utilities and janitorial services provided to areas other than Common Areas (and at Landlord's option, Taxes) shall, at Landlord's option, be determined as if the Property had been 95% occupied and Landlord had been supplying services to 95% of the Rentable Square Footage of the Property during that calendar year. The extrapolation of Expenses under this Section shall be performed by appropriately adjusting the cost of those components of Expenses that are impacted by changes in the occupancy of the Property. 8

D. Taxes Defined. "Taxes" shall mean: (1) all real estate taxes and other assessments on the Property, including, but not limited to, assessments for special improvement districts and building improvement districts, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Property's share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Property; (2) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Property; and (3) all costs and fees incurred in connection with seeking reductions in any tax liabilities described in (1) and (2), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall not include any income, capital levy, franchise, capital stock, gift, estate or inheritance tax. If an assessment is payable in installments, Taxes for the year shall include the amount of the installment and any interest due and payable during that year. For all other real estate taxes, Taxes for that year shall, at Landlord's election, include either the amount accrued, assessed or otherwise imposed for the year or the amount due and payable for that year, provided that Landlord's election shall be applied consistently throughout the Term. If a change in Taxes is obtained for any year of the Term, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment. E. Audit Rights. Tenant may, within 120 days after receiving Landlord's statement of Expenses, give Landlord written notice ("Review Notice") that Tenant intends to review Landlord's records of the Expenses for that calendar year. Within a reasonable time after receipt of the Review Notice, Landlord shall make all pertinent records available for inspection that are reasonably necessary for Tenant to conduct its review. If any records are maintained at a location other than the office of the Building, Tenant may either inspect the records at such other location or pay for the reasonable cost of copying and shipping the records. If Tenant retains an agent to review Landlord's records, the agent must be with a licensed CPA firm. Landlord agrees that Tenant may retain a third party agent to review Landlord's books and records which third party agent is not a CPA firm, so long as the third party agent retained by Tenant shall have expertise in and familiarity with general industry practice with respect to the operation of and accounting for a first class office building and whose compensation shall in no way be contingent upon or correspond to the financial impact on Tenant resulting from the review. Tenant shall be solely responsible for all costs, expenses and fees incurred for the audit. Within 60 days after the records are made available to Tenant, Tenant shall have the right to give Landlord written notice (an "Objection Notice") stating in reasonable detail any objection to Landlord's statement of Expenses for that year. If Tenant fails to give Landlord an Objection Notice within the 60 day period or fails to provide Landlord with a Review Notice within the 90 day period described above, Tenant shall be deemed to have approved Landlord's statement of Expenses and shall be barred from raising any claims regarding the Expenses for that year. If Tenant provides Landlord with a timely Objection Notice, Landlord and Tenant shall work together in good faith to resolve any issues raised in Tenant's Objection Notice. If Landlord and Tenant determine that Expenses for the calendar year are less than reported, Landlord shall provide Tenant with a credit against the next installment of Rent in the amount of the overpayment by Tenant. Likewise, if Landlord and Tenant determine that Expenses for the calendar year are greater than reported, Tenant shall pay Landlord the amount of any underpayment within 30 days. In addition, if Landlord and Tenant determine that Basic Costs for the Building for the year in question were less than stated by more than five percent (5%), 9

Landlord, within thirty (30) days after its receipt of paid invoices therefor from Tenant, shall reimburse Tenant for any reasonable amounts paid by Tenant to third parties in connection with such review by Tenant. The records obtained by Tenant shall be treated as confidential. In no event shall Tenant be permitted to examine Landlord's records or to dispute any statement of Expenses unless Tenant has paid and continues to pay all Rent when due. V. Compliance with Laws; Use. The Premises shall be used only for the Permitted Use and for no other use whatsoever. Tenant shall not use or permit the use of the Premises for any purpose which is illegal, dangerous to persons or property or which, in Landlord's reasonable opinion, unreasonably disturbs any other tenants of the Buildings or interferes with the operation of the Buildings. Tenant shall comply with all Laws, including the Americans with Disabilities Act, regarding the operation of Tenant's business and the use, condition, configuration and occupancy of the Premises. Tenant, within 10 days after receipt, shall provide Landlord with copies of any notices it receives regarding a violation or alleged violation of any Laws. Tenant shall comply with the rules and regulations of the Buildings attached as Exhibit B and such other reasonable rules and regulations adopted by Landlord from time to time after prior written notice to Tenant. Tenant shall also cause its agents, contractors, subcontractors, employees, customers, and subtenants to comply with all rules and regulations. Landlord shall not knowingly discriminate against Tenant in Landlord's enforcement of the rules and regulations. VI. Security Deposit. The Security Deposit shall be in the form of cash or a letter of credit, as Tenant may elect. If Tenant elects to deposit a letter of credit, the terms of Section VI.B. below shall apply. A. Applicable Terms. The Security Deposit shall be delivered to Landlord upon the execution of this Lease by Tenant and shall be held by Landlord without liability for interest (unless required by Law) as security for the performance of Tenant's obligations. The Security Deposit may be in the form of a letter of credit, in which case the terms of Section VI.B. below shall apply. The Security Deposit is not an advance payment of Rent or a measure of Tenant's liability for damages. Landlord may, from time to time following a default and the expiration of any applicable notice and cure period, without prejudice to any other remedy, use all or a portion of the Security Deposit to satisfy past due Rent or to cure any uncured default by Tenant. If Landlord uses the Security Deposit, Tenant shall on demand restore the Security Deposit to its original amount. Landlord shall return any unapplied portion of the Security Deposit to Tenant within 45 days after the later to occur of: (1) the determination of Tenant's Pro Rata Share of Expenses and Taxes for the final year of the Term; (2) the date Tenant surrenders possession of the Premises to Landlord in accordance with this Lease; or (3) the Termination Date. If Landlord transfers its interest in the Premises, Landlord may assign the Security Deposit to the transferee and, following the assignment, Landlord shall have no further liability for the return of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts. Notwithstanding anything to the contrary contained in this Article VI, and provided that Tenant has not been in default beyond any 10

applicable cure period under the Lease as of the second (2nd) anniversary of the Commencement Date, Landlord shall return the Security Deposit (whether in the form of cash or letter of credit) to Tenant within five (5) business days following such second (2nd) anniversary of the Commencement Date. B. Letter of Credit. 1. Security Amounts. If Tenant elects to provide a letter of credit for the Security Deposit, Tenant shall, concurrently with the execution of this Lease, deposit with Landlord, and shall keep on deposit at all times during the term hereof, as security for the faithful performance of all the terms, conditions and covenants of this Lease, one or more unconditional and irrevocable letters of credit in form satisfactory to Landlord in its sole discretion (each, a "Letter of Credit" and collectively, the "Letters of Credit"), in the principal amount of Two Hundred Thousand Dollars ($200,000). 2. Terms of Payment. The Letters of Credit shall be payable at sight, upon draft of Landlord, accompanied by the Letter of Credit and a certificate signed by a duly authorized officer of Landlord that "Tenant has committed an 'event of default' as defined in this Lease, as Tenant, beyond applicable notice and cure periods", and stating the amount then due and owing to Landlord. 3. Term of Each Credit Facility. The first Letter of Credit may be for a term less than the term of this Lease. The first Letter of Credit shall be deposited with Landlord upon execution of this Lease, and any subsequent Letter of Credit shall be deposited with Landlord no later than forty-five (45) days prior to the expiration of the preceding Letter of Credit. 4. Actions Upon Non-Renewal. Notwithstanding Subsection 3 above, upon Tenant's receipt of any notice from the issuing bank that it will not renew or replace the Letter of Credit in the scheduled amount, as required hereunder, for the succeeding period, Tenant shall promptly notify Landlord of such notice and provide Landlord with a copy thereof. If such Letter of Credit is not, in fact, renewed or replaced with a Letter of Credit from another qualified issuer pursuant hereto, or replaced with a $200,000 cash deposit, not later than thirty (30) days prior to expiration of such Letter of Credit, such event shall also be an event of default hereunder, without the necessity of further written notice or time to cure. If Tenant fails to renew or replace the then existing Letter of Credit prior to such forty- five (45) day period, Landlord may draw upon such existing Letter of Credit and hold such funds as security until a new Letter of Credit in the amount required under the corresponding period as outlined in the schedule set forth in subsection 1 above has been provided to Landlord, at which time Landlord shall return to Tenant without interest the amount previously drawn against the prior Letter of Credit. Any draw upon a Letter of Credit by Landlord pursuant to this Section shall not relieve Tenant from its obligation to provide Landlord with a Letter of Credit in the appropriate amount in future years. 11

5. Issuer. The Letters of Credit shall be issued by a banking association acceptable to Landlord. The Letters of Credit shall be assignable and transferable by Landlord. 6. Purpose of Credit Facility. Tenant acknowledges that the Letters of Credit are intended to provide Landlord with the same unconditional and unhinderable access to such security as it would have if Tenant were to deliver to Landlord cash funds as a Security Deposit. 7. Draws on Credit Facility. If, at any time during the Term, Tenant has committed an event of default in the payment or performance of any provision of this Lease, beyond any applicable notice and cure periods, Landlord shall have the right to draw on the then-current or any succeeding Letter of Credit in whole or in part and use the proceeds, or so much as is necessary, in payment of any rent or other sums due from Tenant and in default hereunder, reimbursement of any expense incurred by Landlord, and in payment of any damages incurred by Landlord by reason of Tenant's default. The Letter of Credit shall provide that the issuing bank agrees with the drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of the Letter of Credit that such drafts will be duly honored on presentation to the drawee. Drafts on the last Letter of Credit deposited hereunder must be drawn and presented to the issuing bank not later than sixty (60) days after the Termination Date. 8. Obligation to Restore. If Landlord draws an amount under a Letter of Credit, the issuing bank shall endorse the amount paid to Landlord on the reverse side of the Letter of Credit, and Tenant and Tenant's issuing bank shall promptly restore such Letter of Credit to the original amount and shall immediately return the Letter of Credit so endorsed and re-funded to Landlord. 9. Refunds. If the Letter of Credit is not used as aforesaid, the last Letter of Credit, or so much as has not been used, shall be refunded to Tenant, without interest, upon full performance of this Lease by Tenant (or after the second anniversary of the Commencement Date, as provided by, and subject to the terms of, Section VI.A. above). 10. Claims in Excess of Proceeds. If claims of Landlord under the terms of the Lease exceed the proceeds of the Letter of Credit, Tenant shall remain liable for the balance of such claims, as provided for herein and in the Lease. VII. Services to be Furnished by Landlord. A. Landlord agrees to furnish Tenant with the following services seven (7) days per week, twenty four (24) hours per day, unless otherwise specified: (1) Water service for use in the drinking fountains and lavatories on each floor on which the Premises are located and in any lunchroom or kitchen facility within the Premises; (2) Heat and air conditioning during Normal Business Hours, at such temperatures and in such amounts as are standard for comparable buildings or as required by governmental authority. Tenant, upon such advance notice as is reasonably required by Landlord, shall have the right to receive HVAC service during hours other than Normal Business Hours. Tenant shall pay Landlord the actual cost for 12

the additional service (including additional wear and tear on equipment) as reasonably determined by Landlord from time to time, which charge is currently $14.00 per hour; (3) Maintenance and repair of the Property as described in Section IX.B.; (4) Janitor service on Business Days. If Tenant's use, floor covering or other improvements require special services in excess of the standard services for the Buildings, Tenant shall pay the additional cost attributable to the special services; (5) Elevator service; (6) Electricity to the Premises for general office use, in accordance with and subject to the terms and conditions in Article X; and (7) such other services as Landlord reasonably determines are necessary or appropriate for the operation of the Property as a first class office facility. B. Landlord's failure to furnish, or any interruption or termination of, services due to the application of Laws, the failure of any equipment, the performance of repairs, improvements or alterations, or the occurrence of any event or cause beyond the reasonable control of Landlord (a "Service Failure") shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises, or a portion of the Premises, is made untenantable for a period in excess of three (3) consecutive days, or more than six (6) periods of at least twenty four (24) hours each in any ninety (90) day period, as a result of the Service Failure, then Tenant, as its sole remedy, shall be entitled to receive an abatement of Rent payable hereunder during the period beginning on the 4th consecutive day of the Service Failure, or the fourth (4th) day of such Service Failure within such 90-day period, as the case may be, and ending on the day the service has been restored. If the entire Premises has not been rendered untenantable by the Service Failure, the amount of abatement that Tenant is entitled to receive shall be prorated based upon the percentage of the Premises rendered untenantable and not used by Tenant. In no event, however, shall Landlord be liable to Tenant for any loss or damage, including the theft of Tenant's Property (defined in Article XV), arising out of or in connection with a Service Failure. In case of a Service Failure caused by Landlord's fault or neglect, or which is otherwise within Landlord's reasonable control, Tenant may abate Rent as provided above except that Tenant's abatement right shall begin one (1) day after the Service Failure. Landlord shall use reasonable efforts to restore any Service Failure as soon as reasonably possible in order to minimize the disruption to Tenant caused by the Service Failure. VIII. Leasehold Improvements. All improvements to the Premises (collectively, "Leasehold Improvements") shall be owned by Landlord and shall remain upon the Premises without compensation to Tenant. However, Landlord, by written notice to Tenant within 30 days prior to the Termination Date, may require Tenant to remove, at Tenant's expense, any Leasehold Improvements that are performed by or for the benefit of Tenant and, in Landlord's reasonable judgment, are of a nature that would require removal and repair costs that are materially in excess of the removal and repair costs associated with standard office improvements (collectively referred to as "Required Removables"). Without limitation, it is agreed that Required Removables include internal stairways, raised floors, personal baths and showers, vaults, rolling file systems and structural alterations and modifications of any type, but shall not include Cable (defined in Section IX.A.). The Required Removables designated by Landlord shall be removed by Tenant before the Termination Date, provided that upon prior written notice to Landlord, Tenant may remain in the 13

Premises for up to 5 days after the Termination Date for the sole purpose of removing the Required Removables. Tenant's possession of the Premises shall be subject to all of the terms and conditions of this Lease, including the obligation to pay Rent on a per diem basis at the rate in effect for the last month of the Term. Tenant shall repair damage caused by the installation or removal of Required Removables. Upon Tenant's removal of the Required Removables, Landlord and Tenant shall jointly inspect the Premises and agree in writing upon the satisfactory completion of the Required Removables. If Tenant fails to remove any Required Removables or perform related repairs in a timely manner, Landlord, at Tenant's expense, may remove and dispose of the Required Removables and perform the required repairs. Tenant, within 30 days after receipt of an invoice, shall reimburse Landlord for the reasonable costs incurred by Landlord. Notwithstanding the foregoing, Tenant, at the time it requests approval for a proposed Alteration (defined in Section IX.C.), may request in writing that Landlord advise Tenant whether the Alteration or any portion of the Alteration will be designated as a Required Removable. Within 10 days after receipt of Tenant's request, Landlord shall advise Tenant in writing as to which portions of the Alteration, if any, will be considered to be Required Removables. IX. Repairs and Alterations. A. Tenant's Repair Obligations. Tenant shall, at its sole cost and expense, promptly perform all maintenance and repairs to the Premises that are not Landlord's express responsibility under this Lease, and shall keep the Premises in good condition and repair, reasonable wear and tear and damage from insured casualty excepted. Tenant's repair obligations include, without limitation, repairs to: (1) floor covering; (2) interior partitions; (3) doors; (4) the interior side of demising walls; (5) electronic, phone and data cabling and related equipment (collectively, "Cable") that is installed by or for the exclusive benefit of Tenant and located in the Premises or other portions of the Buildings; (6) supplemental air conditioning units, private showers and kitchens, including hot water heaters, plumbing, and similar facilities serving Tenant exclusively; and (7) Alterations performed by contractors retained by Tenant, including related HVAC balancing. All work shall be performed in accordance with the rules and procedures described in Section IX.C. below. If Tenant fails to make any repairs to the Premises for more than 15 days after written notice from Landlord (although notice shall not be required if there is an emergency), Landlord may make the repairs, and Tenant shall pay the reasonable cost of the repairs to Landlord within 30 days after receipt of an invoice. B. Landlord's Repair Obligations. Landlord shall keep and maintain in good repair and working order and make repairs to and perform maintenance upon: (1) structural elements of the Buildings; (2) mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Buildings and Premises in general; (3) Common Areas; (4) the roofs of the Buildings; (5) exterior windows of the Buildings; and (6) elevators serving the Buildings. Landlord shall promptly make repairs (considering the nature and urgency of the repair) for which Landlord is responsible. C. Alterations. Tenant shall not make alterations, additions or improvements to the Premises or install any Cable in the Premises or other portions of the Buildings (collectively referred to as "Alterations") without first obtaining the written consent of Landlord 14

in each instance, which consent shall not be unreasonably withheld or delayed. However, Landlord's consent shall not be required for any Alteration that satisfies all of the following criteria (a "Cosmetic Alteration"): (1) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (2) is not visible from the exterior of the Premises or Buildings; (3) will not affect the systems or structure of the Buildings; and (4) does not require work to be performed inside the walls or above the ceiling of the Premises. However, even though consent is not required, the performance of Cosmetic Alterations shall be subject to all the other provisions of this Section IX.C. Prior to starting work, Tenant shall furnish Landlord with plans and specifications reasonably acceptable to Landlord; names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to Building systems); copies of contracts; necessary permits and approvals; evidence of contractor's and subcontractor's insurance in amounts reasonably required by Landlord; and any security for performance that is reasonably required by Landlord. Changes to the plans and specifications must also be submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike manner using materials of a quality that is at least equal to the quality designated by Landlord as the minimum standard for the Buildings. Landlord may designate reasonable rules, regulations and procedures for the performance of work in the Buildings and, to the extent reasonably necessary to avoid disruption to the occupants of the Buildings, shall have the right to designate the time when Alterations may be performed. Tenant shall reimburse Landlord within 30 days after receipt of an invoice for sums paid by Landlord for third party examination of Tenant's plans for non-Cosmetic Alterations. In addition, within 30 days after receipt of an invoice from Landlord, Tenant shall pay Landlord a fee for Landlord's oversight and coordination of any non-Cosmetic Alterations equal to 10% of the cost of the non-Cosmetic Alterations. Upon completion, Tenant shall furnish "as-built" plans (except for Cosmetic Alterations), completion affidavits, full and final waivers of lien and receipted bills covering all labor and materials. Tenant shall assure that the Alterations comply with all insurance requirements and Laws. Landlord's approval of an Alteration shall not be a representation by Landlord that the Alteration complies with applicable Laws or will be adequate for Tenant's use. X. Use of Electrical Services by Tenant. A. Electricity used by Tenant in the Premises shall, at Landlord's option, be paid for by Tenant either: (1) through inclusion in Expenses (except as provided in Section X.B. for excess usage); (2) by a separate charge payable by Tenant to Landlord within 30 days after billing by Landlord; or (3) by separate charge billed by the applicable utility company and payable directly by Tenant. Electrical service to the Premises may be furnished by one or more companies providing electrical generation, transmission and distribution services, and the cost of electricity may consist of several different components or separate charges for such services, such as generation, distribution and stranded cost charges. Landlord shall have the exclusive right to select any company providing electrical service to the Premises, to aggregate the electrical service for the Property and Premises with other buildings, to purchase electricity through a broker and/or buyers group and to change the providers and manner of purchasing electricity. Landlord shall not charge any other fees specifically related to providing electricity to the Property. Landlord shall not charge Tenant for electricity at above-market rates. 15

B. Tenant's use of electrical service shall not exceed, either in voltage, rated capacity, use beyond Normal Business Hours or overall load, that which Landlord deems to be standard for the Buildings. If Tenant requests permission to consume excess electrical service, Landlord may condition consent upon conditions that Landlord reasonably elects (including, without limitation, the installation of utility service upgrades, meters, submeters, air handlers or cooling units), and the additional usage (to the extent permitted by Law), installation and maintenance costs shall be paid by Tenant. Landlord shall have the right to separately meter electrical usage for the Premises and to measure electrical usage by survey or other commonly accepted methods. XI. Entry by Landlord. Landlord, its agents, contractors and representatives may enter the Premises to inspect or show the Premises, to clean and make repairs, alterations or additions to the Premises, and to conduct or facilitate repairs, alterations or additions to any portion of the Buildings, including other tenants' premises. Entry to the Premises for purposes of showing the Premises to prospective tenants shall be limited to the last twelve (12) months of the Lease term. Except in emergencies or to provide janitorial and other Building services after Normal Business Hours, Landlord shall provide Tenant with reasonable prior notice of entry into the Premises (except in case of emergency), which may be given orally, but which also must be given in writing at least twenty four (24) hours in advance, and if Tenant so requires, with a representative of Tenant present. If reasonably necessary for the protection and safety of Tenant and its employees, Landlord shall have the right to temporarily close all or a portion of the Premises to perform repairs, alterations and additions. However, except in emergencies, Landlord will not close the Premises if the work can reasonably be completed on weekends and after Normal Business Hours. Entry by Landlord shall not constitute constructive eviction or entitle Tenant to an abatement or reduction of Rent. Notwithstanding the foregoing, if Landlord temporarily closes the Premises as provided above for a period in excess of three (3) consecutive days, Tenant, as its sole remedy, shall be entitled to receive a per diem abatement of Base Rental during the period beginning on the fourth (4th) consecutive day of closure and ending on the date on which the Premises are returned to Tenant in a tenantable condition. Tenant, however, shall not be entitled to an abatement if the repairs, alterations and/or additions to be performed are required as a result of the acts or omissions of Tenant, its agents, employees or contractors, including, without limitation, a default by Tenant in its maintenance and repair obligations under the Lease. XII. Assignment and Subletting. A. Except in connection with a Permitted Transfer (defined in Section XII.E. below), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use any portion of the Premises (collectively or individually, a "Transfer") without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed if Landlord does not elect to exercise its termination rights under Section XII.B. below. Without limitation, it is agreed that Landlord's consent shall not be considered unreasonably withheld if: (1) the proposed transferee's financial condition does not meet the criteria Landlord uses to select Building tenants having similar leasehold obligations; (2) the proposed transferee's business is not suitable for the Building considering the business of 16

the other tenants and the Building's prestige, or would result in a violation of another tenant's rights; (3) the proposed transferee is a governmental agency or occupant of the Building; (4) Tenant is then in default after the expiration of the notice and cure periods in this Lease; or (5) any portion of the Buildings or Premises would likely become subject to additional or different Laws as a consequence of the proposed Transfer. Any attempted Transfer in violation of this Article shall, at Landlord's option, be void. Consent by Landlord to one or more Transfer(s) shall not operate as a waiver of Landlord's rights to approve any subsequent Transfers. In no event shall any Transfer or Permitted Transfer release or relieve Tenant from any obligation under this Lease. B. As part of its request for Landlord's consent to a Transfer, Tenant shall provide Landlord with financial statements for the proposed transferee, a complete copy of the proposed assignment, sublease and other contractual documents and such other information as Landlord may reasonably request. Landlord shall, by written notice to Tenant within thirty (30) days of its receipt of the required information and documentation, either: (1) consent to the Transfer by the execution of a consent agreement in a form reasonably designated by Landlord or reasonably refuse to consent to the Transfer in writing; or (2) notify Tenant of its intention to exercise its right to terminate this Lease with respect to the portion of the Premises that Tenant is proposing to assign or sublet. If Tenant does not withdraw its request for the proposed transfer within ten (10) days after receiving Landlord's notice of its election to terminate, then Landlord may terminate the Lease, and any such termination shall be effective on the proposed effective date of the Transfer for which Tenant requested consent. Tenant shall pay Landlord a review fee of $750.00 for Landlord's review of any Permitted Transfer or requested Transfer, provided if Landlord's actual reasonable costs and expenses (including reasonable attorney's fees) exceed $750.00, Tenant shall reimburse Landlord for its actual reasonable costs and expenses in lieu of a fixed review fee. C. Tenant shall pay Landlord 100% of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlord's share of any excess within 30 days after Tenant's receipt of such excess consideration. Tenant may deduct from the excess all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer (other than Landlord's review fee), including brokerage fees, legal fees, construction costs and, to the extent paid to the new tenant as a lease concession, moving costs. If Tenant is in Monetary Default (defined in Section XIX.A. below), Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of any payments received (less Landlord's share of any excess). D. Except as provided below with respect to a Permitted Transfer, if Tenant is a corporation, limited liability company, partnership, or similar entity, and if the entity which owns or controls a majority of the voting shares/rights at any time changes for any reason (including but not limited to a merger, consolidation or reorganization), such change of ownership or control shall constitute a Transfer. The foregoing shall not apply so long as Tenant is an entity whose outstanding stock is listed on a recognized security exchange, or if at least 80% of its voting stock is owned by another entity, the voting stock of which is so listed. 17

E. Notwithstanding anything herein to the contrary, Landlord hereby consents to an assignment of this Lease, or a subletting of all or part of the Premises (a "Permitted Transfer"), to (i) any entity that controls, is controlled by, or is under common control with, Tenant (control meaning the ability to direct the management policy of the entity in question), (ii) any corporation in whom or with which Tenant may be merged or consolidated, or (iii) any entity to whom Tenant sells all or substantially all of its assets, provided that in each such instance such entity expressly assumes all of Tenant's obligations hereunder, and provided further that in instance (ii) and (iii) such entity has a net worth at least equal to the greater of (A) the net worth of Tenant on the date hereof or (B) the net worth of Tenant immediately prior to such assignment or transaction. With respect to the transactions described in Subsections (ii) above, such net worth may be on a consolidated basis with Tenant's affiliated entity, and every net worth determination hereunder shall be made on a balance sheet (not on a market capitalization or other basis). An initial public offering of Tenant's stock and any subsequent transfers shall not be considered a Transfer hereunder. XIII. Liens. Tenant shall not permit mechanic's or other liens to be placed upon the Property, Premises or Tenant's leasehold interest in connection with any work or service done or purportedly done by or for benefit of Tenant. If a lien is so placed, Tenant shall, within fifteen (15) days of notice from Landlord of the filing of the lien, fully discharge the lien by settling the claim which resulted in the lien or by bonding or insuring over the lien in the manner prescribed by the applicable lien Law. If Tenant fails to discharge the lien, then, in addition to any other right or remedy of Landlord, Landlord may bond or insure over the lien or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by Landlord to bond or insure over the lien or discharge the lien, including, without limitation, reasonable attorneys' fees (if and to the extent permitted by Law) within 30 days after receipt of an invoice from Landlord. XIV. Indemnity and Waiver of Claims. A. Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties (defined below), Tenant shall indemnify, defend and hold Landlord, its trustees, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagee(s) (defined in Article XXVI) and agents ("Landlord Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by Law), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties and arising out of or in connection with any damage or injury occurring in the Premises or any acts or omissions (including violations of Law) of Tenant, the Tenant Related Parties (defined below) or any of Tenant's transferees, contractors or licensees. B. Except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Related Parties (defined below), Landlord shall indemnify, defend and hold Tenant, its trustees, members, principals, beneficiaries, partners, officers, directors, employees and agents ("Tenant Related Parties") harmless against and from all liabilities, 18

obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by Law), which may be imposed upon, incurred by or asserted against Tenant or any of the Tenant Related Parties and arising out of or in connection with the acts or omissions (including violations of Law) of Landlord, the Landlord Related Parties or any of Landlord's contractors. C. Landlord and the Landlord Related Parties shall not be liable for, and Tenant waives, all claims for loss or damage to Tenant's business or loss, theft or damage to Tenant's Property or the property of any person claiming by, through or under Tenant resulting from: (1) wind or weather; (2) the failure of any sprinkler, heating or air-conditioning equipment, any electric wiring or any gas, water or steam pipes; (3) the backing up of any sewer pipe or downspout; (4) the bursting, leaking or running of any tank, water closet, drain or other pipe; (5) water, snow or ice upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Buildings; (6) any act or omission of any party other than Landlord or Landlord Related Parties; and (7) any causes not reasonably within the control of Landlord. Tenant shall insure itself against such losses under Article XV below. XV. Insurance. Tenant shall carry and maintain the following insurance ("Tenant's Insurance"), at its sole cost and expense: (1) Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of $2,000,000.00; (2) All Risk Property/Business Interruption Insurance, including flood and earthquake, written at replacement cost value and with a replacement cost endorsement covering all of Tenants trade fixtures, equipment furniture and other personal property within the Premises ("Tenant's Property"); (3) Workers' Compensation Insurance as required by the state in which the Premises is located and in amounts as may be required by applicable statute; and (4) Employers Liability Coverage of at least $1,000,000.00 per occurrence. Any company writing any of Tenants Insurance shall have an A.M. Best rating of not less than A-VIII. All Commercial General Liability Insurance policies shall name Tenant as a named insured and Landlord (or any successor), Equity Office Properties Trust, a Maryland real estate investment trust, EOP Operating Limited Partnership, a Delaware limited partnership, Wright Runstad Associates Limited Partnership, a Washington limited partnership, any Mortgagee(s), and their respective members, principals, beneficiaries, partners, officers, directors, employees, and agents, and other designees of Landlord as the interest of such designees shall appear, as additional insureds. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least 30 days' advance written notice of any change, cancellation, termination or lapse of insurance. Tenant shall provide Landlord with a certificate of insurance evidencing Tenant's Insurance prior to the earlier to occur of the Commencement Date or the date Tenant is provided with possession of the Premises for any reason, and upon renewals at least 15 days prior to the expiration of the insurance coverage. So long as the same is available at commercially reasonable rates, Landlord shall maintain so called All Risk property insurance on the Buildings at replacement cost value, as reasonably estimated by Landlord. Except as specifically provided to the contrary, the limits of either party's' insurance shall not limit such party's liability under this Lease. 19

XVI. Subrogation. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant shall cause their respective insurance carriers to waive any and all rights of recovery, claim, action or causes of action against the other and their respective trustees, principals, beneficiaries, partners, officers, directors, agents, and employees, for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to Tenant's Property, the Buildings, the Premises, any additions or improvements to the Buildings or Premises, or any contents thereof, including all rights of recovery, claims, actions or causes of action arising out of the negligence of Landlord or any Landlord Related Parties or the negligence of Tenant or any Tenant Related Parties, which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance. XVII. Casualty Damage. A. If all or any part of the Premises is damaged by fire or other casualty, Tenant shall immediately notify Landlord in writing. During any period of time that all or a material portion of the Premises is rendered untenantable as a result of a fire or other casualty, the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant. Landlord shall have the right to terminate this Lease if: (1) the Building shall be damaged so that, in Landlord's reasonable judgment, substantial alteration or reconstruction of the Building shall be required (whether or not the Premises has been damaged); (2) Landlord is not permitted by Law to rebuild the Building in substantially the same form as existed before the fire or casualty; (3) the Premises have been materially damaged and there is less than one (1) year of the Term remaining on the date of the casualty; (4) any Mortgagee requires that the insurance proceeds be applied to the payment of the mortgage debt; or (5) a material uninsured loss to the Building occurs. Landlord may exercise its right to terminate this Lease by notifying Tenant in writing within 90 days after the date of the casualty. In addition to Landlord's rights to terminate as provided herein, Tenant shall have the right to terminate this Lease if: (a) a substantial portion of the Premises has been damaged by fire or other casualty and such damage cannot reasonably be repaired within sixty (60) days after the date of such fire or other casualty; (b) there is less than one (1) year of the Lease Term remaining on the date of such casualty; (c) the casualty was not caused by the negligence or willful misconduct of Tenant or its agents, employees or contractors; and (d) Tenant provides Landlord with written notice of its intent to terminate within thirty (30) days after the date of the fire or other casualty. If neither Landlord nor Tenant elect to terminate this Lease, Landlord shall commence and proceed with reasonable diligence to repair and restore the Building and the Leasehold Improvements (excluding any Alterations that were performed by Tenant in violation of this Lease). However, in no event shall Landlord be required to spend more than the insurance proceeds received by Landlord. Landlord shall not be liable for any loss or damage to Tenant's Property or to the business of Tenant resulting in any way from the fire or other casualty or from the repair and restoration of the damage. Landlord and Tenant hereby waive the provisions of any Law relating to the matters addressed in this Article, and agree that their respective rights for damage to or destruction of the Premises shall be those specifically provided in this Lease. B. If all or any portion of the Premises shall be made untenantable by fire or other casualty, Landlord shall, with reasonable promptness, cause an architect or general 20

contractor selected by Landlord to provide Landlord and Tenant with a written estimate of the amount of time required to substantially complete the repair and restoration of the Premises and make the Premises tenantable again, using standard working methods ("Completion Estimate"). If the Completion Estimate indicates that the Premises cannot be made tenantable within 210 days from the date the repair and restoration is started, then regardless of anything in Section XVII.A. above to the contrary, either party shall have the right to terminate this Lease by giving written notice to the other of such election within 30 days after receipt of the Completion Estimate. Tenant, however, shall not have the right to terminate this Lease if the fire or casualty was caused by the negligence or intentional misconduct of Tenant, Tenant Related Parties or any of Tenant's transferees, contractors or licensees. XVIII. Condemnation. Either party may terminate this Lease if the whole or any material part of the Premises shall be taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a "Taking"). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Property which would leave the remainder of the Building unsuitable for use as an office building in a manner comparable to the Building's use prior to the Taking. In order to exercise its right to terminate the Lease, Landlord or Tenant, as the case may be, must provide written notice of termination to the other within 45 days after the terminating party first receives notice of the Taking. Any such termination shall be effective as of the date the physical taking of the Premises or the portion of the Building or Property occurs. If this Lease is not terminated, the Rentable Square Footage of the Building, the Rentable Square Footage of the Premises and Tenant's Pro Rata Share shall, if applicable, be appropriately adjusted. In addition, Rent for any portion of the Premises taken or condemned shall be abated during the unexpired Term of this Lease effective when the physical taking of the portion of the Premises occurs. All compensation awarded for a Taking, or sale proceeds, shall be the property of Landlord, any right to receive compensation or proceeds being expressly waived by Tenant. However, Tenant may file a separate claim at its sole cost and expense for Tenant's Property and Tenant's reasonable relocation expenses, provided the filing of the claim does not diminish the award which would otherwise be receivable by Landlord. XIX. Events of Default. Tenant shall be considered to be in default of this Lease upon the occurrence of any of the following events of default: A. Tenant's failure to pay when due all or any portion of the Rent, if the failure continues for 3 days after written notice to Tenant ("Monetary Default"). B. Tenant's failure (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, if the failure is not cured within 30 days after written notice to Tenant. However, if Tenant's failure to comply cannot reasonably be cured within 30 days, Tenant shall be allowed additional time (not to exceed 60 days) as is reasonably necessary to cure the failure so long as: (1) Tenant commences to cure the failure within 30 days, and (2) Tenant diligently pursues a course of action that will cure the failure and bring Tenant back 21

into compliance with the Lease. However, if Tenant's failure to comply creates a hazardous condition, the failure must be cured immediately upon notice to Tenant. In addition, if Landlord provides Tenant with notice of Tenant's failure to comply with any particular term, provision or covenant of the Lease on 3 occasions during any 12 month period, Tenant's subsequent violation of such term, provision or covenant shall, at Landlord's option, not require a thirty (30) day cure period. C. Tenant or any Guarantor becomes insolvent, makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts when due. D. The leasehold estate is taken by process or operation of Law. XX. Remedies. A. Upon any default, Landlord shall have the right without notice or demand (except as provided in Article XIX) to pursue any of its rights and remedies at Law or in equity, including any one or more of the following remedies: 1. Terminate this Lease, in which case Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises, Landlord may, in compliance with applicable Law and without prejudice to any other right or remedy, enter upon and take possession of the Premises and expel and remove Tenant, Tenant's Property and any party occupying all or any part of the Premises. Tenant shall pay Landlord on demand the amount of all past due Rent and other losses and damages which Landlord may suffer as a result of Tenant's default, whether by Landlord's inability to relet the Premises on satisfactory terms or otherwise, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises. "Costs of Reletting" shall include all costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, reasonable legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowances granted to a new tenant. 2. Terminate Tenant's right to possession of the Premises and, in compliance with applicable Law, expel and remove Tenant, Tenant's Property and any parties occupying all or any part of the Premises. Landlord may relet all or any part of the Premises, without notice to Tenant, for a term that may be greater or less than the balance of the Term and on such conditions (which may include concessions, free rent and alterations of the Premises) and for such uses as Landlord in its reasonable business judgment shall determine. Landlord may collect and receive all rents and other income from the reletting. Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease unless a written notice of termination is given to Tenant. Landlord shall make reasonable efforts to mitigate its damages as required by law or equity following a default by Tenant. 22

3. In lieu of calculating damages under Sections XX.A.1. or XX.A.2. above, Landlord may elect to receive as damages the sum of (a) all Rent accrued through the date of termination of this Lease or Tenant's right to possession, and (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at the Prime Rate (defined in Section XX.B. below) then in effect, minus the then present fair rental value of the Premises for the remainder of the Term, similarly discounted, after deducting the proportionate share of the anticipated Costs of Reletting attributable to the period between the Lease termination date and the last day of the Lease term. B. Unless expressly provided in this Lease, the repossession or re- entering of all or any part of the Premises shall not relieve Tenant of its liabilities and obligations under the Lease. No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity. If Landlord declares Tenant to be in default, Landlord shall be entitled to receive interest on any unpaid item of Rent at a rate equal to the Prime Rate plus 4%. For purposes hereof, the "Prime Rate" shall be the per annum interest rate publicly announced as its prime or base rate in the "Money Rates" column of the Wall Street Journal. Forbearance by Landlord to enforce one or more remedies shall not constitute a waiver of any default. XXI. Limitation of Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE PROPERTY. TENANT SHALL LOOK SOLELY TO LANDLORD'S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) (DEFINED IN ARTICLE XXVI BELOW) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN ARTICLE XXVI BELOW) ON THE PROPERTY, BUILDING OR PREMISES, NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. IN ADDITION, TENANT ACKNOWLEDGES THAT ANY ENTITY MANAGING THE BUILDING ON BEHALF OF LANDLORD, OR WHICH EXECUTES THIS LEASE AS AGENT FOR LANDLORD, IS ACTING SOLELY IN ITS CAPACITY AS AGENT FOR LANDLORD AND SHALL NOT BE LIABLE FOR ANY OBLIGATIONS, LIABILITIES, LOSSES OR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE LANDLORD'S OBLIGATIONS UNDER THIS LEASE, ALL OF WHICH ARE EXPRESSLY WAIVED BY TENANT. XXII. No Waiver. Either party's failure to declare a default immediately upon its occurrence, or delay in taking action for a default shall not constitute a waiver of the default, nor shall it 23

constitute an estoppel. Either party's failure to enforce its rights for a default shall not constitute a waiver of its rights regarding any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance or surrender of the Premises. XXIII. Quiet Enjoyment. Tenant shall, and may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease, provided Tenant pays the Rent and fully performs all of its covenants and agreements. This covenant and all other covenants of Landlord shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Buildings, and shall not be a personal covenant of Landlord or the Landlord Related Parties. XXIV. Relocation. [Intentionally omitted.] XXV. Holding Over. Except for any permitted occupancy by Tenant under Article VIII, if Tenant fails to surrender the Premises at the expiration or earlier termination of this Lease, occupancy of the Premises after the termination or expiration shall be that of a tenancy at sufferance. Tenant's occupancy of the Premises during the holdover shall be subject to all the terms and provisions of this Lease and Tenant shall pay an amount (on a per month basis without reduction for partial months during the holdover) equal to 150% of the greater of: (1) the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover; or (2) the fair market gross rental for the Premises as reasonably determined by Landlord. No holdover by Tenant or payment by Tenant after the expiration or early termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. In addition to the payment of the amounts provided above, if Landlord is unable to deliver possession of the Premises to a new tenant, or to perform improvements for a new tenant, as a result of Tenant's holdover and Tenant fails to vacate the Premises within 30 days after Landlord notifies Tenant of Landlord's inability to deliver possession, or perform improvements, Tenant shall be liable to Landlord for all damages, including, without limitation, consequential damages, that Landlord suffers from the holdover. XXVI. Subordination to Mortgages; Estoppel Certificate. Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Buildings or the Property, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a "Mortgage"). The party having the benefit of a Mortgage shall be referred to as a "Mortgagee". This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall execute a subordination agreement in the form of Exhibit F attached hereto or in other commercially reasonable form containing a nondisturbance clause. In lieu of having the Mortgage be superior to this Lease, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. If requested by a successor-in-interest to all or a part of 24

Landlord's interest in the Lease, Tenant shall, without charge, attorn to the successor-in-interest. Landlord and Tenant shall each, within 10 days after receipt of a written request from the other, execute and deliver an estoppel certificate to those parties as are reasonably requested by the other (including a Mortgagee or prospective purchaser). The estoppel certificate shall include a statement certifying that this Lease is unmodified (except as identified in the estoppel certificate) and in full force and effect, describing the dates to which Rent and other charges have been paid, representing that, to such party's actual knowledge, there is no default (or stating the nature of the alleged default) and indicating other matters with respect to the Lease that may reasonably be requested. Tenant approves the form of Estoppel Certificate attached hereto as Exhibit G. Landlord shall use commercially reasonable efforts to furnish Tenant with an executed Subordination Agreement in the form of Exhibit F within thirty (30) days after mutual execution of this Lease. XXVII. Attorneys' Fees. If either party institutes a suit against the other for violation of or to enforce any covenant or condition of this Lease, or if either party intervenes in any suit in which the other is a party to enforce or protect its interest or rights, the prevailing party shall be entitled to all of its costs and expenses, including, without limitation, reasonable attorneys' fees. XXVIII. Notice. If a demand, request, approval, consent or notice (collectively referred to as a "notice") shall or may be given to either party by the other, the notice shall be in writing and delivered by hand or sent by registered or certified mail with return receipt requested, or sent by overnight or same day courier service or sent by facsimile (with electric confirmation of receipt) at the party's respective Notice Address(es) set forth in Article I, except that if Tenant has vacated the Premises (or if the Notice Address for Tenant is other than the Premises, and Tenant has vacated such address) without providing Landlord a new Notice Address, Landlord may serve notice in any manner described in this Article or in any other manner permitted by Law. Each notice shall be deemed to have been received or given on the earlier to occur of actual delivery or the date on which delivery is refused, or, if Tenant has vacated the Premises or the other Notice Address of Tenant without providing a new Notice Address, three (3) days after notice is deposited in the U.S. mail or with a courier service in the manner described above. Either party may, at any time, change its Notice Address by giving the other party written notice of the new address in the manner described in this Article. XXIX. Excepted Rights. This Lease does not grant any rights to light or air over or about the Buildings. Landlord excepts and reserves exclusively to itself the use of: (1) roofs, (2) telephone, electrical and janitorial closets, (3) equipment rooms, Building risers or similar areas that are used by Landlord for the provision of Building services, (4) rights to the land and improvements below the floor of the Premises, (5) the improvements and air rights above the Premises, (6) the improvements and air rights outside the demising walls of the Premises, and (7) the areas within the Premises used for the installation of utility lines and other installations serving occupants of 25

the Buildings. Landlord has the right to change the Building's name or address. Landlord also has the right to make such other changes to the Property and Buildings as Landlord deems appropriate, provided the changes do not materially affect Tenant's ability to use the Premises for the Permitted Use. Landlord shall also have the right (but not the obligation) to temporarily close the Buildings if Landlord reasonably determines that there is an imminent danger of significant damage to the Buildings or of personal injury to Landlord's employees or the occupants of the Buildings. The circumstances under which Landlord may temporarily close the Buildings shall include, without limitation, electrical interruptions, hurricanes and civil disturbances. A closure of the Buildings under such circumstances shall not constitute a constructive eviction nor entitle Tenant to an abatement or reduction of Rent. XXX. Surrender of Premises. At the expiration or earlier termination of this Lease or Tenant's right of possession, Tenant shall remove Tenant's Property (defined in Article XV) from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage from casualty excepted. Tenant shall also be required to remove the Required Removables in accordance with Article VIII. If Tenant fails to remove any of Tenant's Property within 2 days after the termination of this Lease or of Tenant's right to possession, Landlord, at Tenant's sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant's Property. Landlord shall not be responsible for the value, preservation or safekeeping of Tenant's Property. Tenant shall pay Landlord, upon demand, the expenses and storage charges incurred for Tenant's Property. In addition, if Tenant fails to remove Tenant's Property from the Premises or storage, as the case may be, within 30 days after written notice, Landlord may deem all or any part of Tenant's Property to be abandoned, and title to Tenant's Property shall be deemed to be immediately vested in Landlord. XXXI. Miscellaneous. A. This Lease and the rights and obligations of the parties shall be interpreted, construed and enforced in accordance with the Laws of the state of Washington and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state. If any term or provision of this Lease shall to any extent be invalid or unenforceable, the remainder of this Lease shall not be affected, and each provision of this Lease shall be valid and enforced to the fullest extent permitted by Law. The headings and titles to the Articles and Sections of this Lease are for convenience only and shall have no effect on the interpretation of any part of the Lease. B. Tenant shall not record this Lease or any memorandum without Landlord's prior written consent. C. Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant, the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, civil disturbances and other causes beyond the reasonable control of the performing party ("Force Majeure"). However, events of Force Majeure shall not extend any 26

period of time for the payment of Rent or other sums payable by either party or any period of time for the written exercise of an option or right by either party. D. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations under this Lease and in the Buildings and/or Property referred to herein, and upon such transfer Landlord shall be released from any future, unaccrued obligations hereunder, and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations. E. 1. Tenant represents that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Tenant shall indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. Landlord agrees to pay a brokerage commission to Broker in accordance with the terms of a written commission agreement between Landlord and Broker. 2. Agency Disclosure. At the signing of this Lease, Landlord's leasing agent John Black, of Broderick Group, Inc., represented Landlord. At the signing of this Lease, Tenant's agent, Geoff Boguch of Colliers International, represented Tenant. Each party signing this document confirms that the prior oral and/or written disclosure of agency was provided to such party in this transaction, as required by RCW 18.86.030(l)(g). 3. Landlord and Tenant, by their execution of this Lease, each acknowledge and agree that they have timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(1)(f). F. Tenant covenants, warrants and represents that: (1) each individual executing, attesting and/or delivering this Lease on behalf of Tenant is authorized to do so on behalf of Tenant; (2) this Lease is binding upon Tenant; and (3) Tenant is duly organized and legally existing in the state of its organization and is qualified to do business in the state in which the Premises are located. If there is more than one Tenant, or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities. Notices, payments and agreements given or made by, with or to any one person or entity shall be deemed to have been given or made by, with and to all of them. G. Time is of the essence with respect to Tenant's exercise of any expansion, renewal or extension rights granted to Tenant. This Lease shall create only the relationship of landlord and tenant between the parties, and not a partnership, joint venture or any other relationship. This Lease and the covenants and conditions in this Lease shall inure only to the benefit of and be binding only upon Landlord and Tenant and their permitted successors and assigns. H. The expiration of the Term, whether by lapse of time or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to 27

accrue after the expiration or early termination of this Lease. Without limiting the scope of the prior sentence, it is agreed that Tenant's obligations under Sections IV.A., IV.B., VIII, XIV, XX, XXV and XXX shall survive the expiration or early termination of this Lease. I. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery of it does not constitute an offer to Tenant or an option. This Lease shall not be effective against any party hereto until an original copy of this Lease has been signed by such party. J. All understandings and agreements previously made between the parties are superseded by this Lease, and neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by Landlord and Tenant. K. Tenant, within 15 days after request, shall provide Landlord with a current financial statement and such other information as Landlord may reasonably request in order to create a "business profile" of Tenant and determine Tenant's ability to fulfill its obligations under this Lease. Landlord, however, shall not require Tenant to provide such information unless Landlord is requested to produce the information in connection with a proposed financing or sale of the Buildings. Upon written request by Tenant, Landlord shall enter into a commercially reasonable confidentiality agreement covering any confidential information that is disclosed by Tenant. XXXII. Entire Agreement. This Lease and the following exhibits and attachments constitute the entire agreement between the parties and supersede all prior agreements and understandings related to the Premises, including all lease proposals, letters of intent and other documents: Exhibit A (Outline and Location of Premises), Exhibit A-2 (Legal Description of Property), Exhibit B (Rules and Regulations), Exhibit C (Commencement Letter), Exhibit D (Work Letter Agreement, if required), Exhibit E (Additional Provisions, if required), Exhibit F (Subordination Agreement; Acknowledgment of Lease Assignment, Estoppel, Attornment and Non- Disturbance Agreement); and Exhibit G (Tenant Estoppel Certificate). 28

Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: WRC SUNSET NORTH LLC, a Washington limited liability company By: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, its Manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its general partner By: Its: EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By: Its: 29

TENANT: drugstore.com, inc., a Delaware corporation By: Its: LANDLORD ACKNOWLEDGMENTS
STATE OF WASHINGTON COUNTY OF KING ) ) ) ss:

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of Wright Runstad & Company, the general partner of Wright Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: Printed Name: Residing at: My Commission expires: 30

STATE OF _______________ COUNTY OF ______________

) ) )

ss:

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of Equity Office Properties Trust, the general partner of EOP Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: Printed Name: Residing at: My Commission expires: 31

TENANT ACKNOWLEDGMENT
STATE OF WASHINGTON COUNTY OF KING ) ) ) ss:

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of drugstore.com, inc., a Delaware corporation, the Tenant in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: Printed Name: Residing at: My Commission expires: 32

EXHIBIT A-1 PREMISES This Exhibit is attached to and made a part of the Lease dated November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and drugstore.com, inc., a Delaware corporation ("Tenant") for space in the Buildings located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. Exhibit A-1, Page 1

EXHIBIT A-2 LEGAL DESCRIPTION OF PROPERTY This Exhibit is attached to and made a part of the Lease dated November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and drugstore.com, inc., a Delaware corporation ("Tenant") for space in the Buildings located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING COUNTY; EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER RECORDING NO. 9101280422; TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9601091040; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9107260572; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9309292404; SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON. Exhibit A-2, Page 1

EXHIBIT B BUILDING RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the Premises, the Buildings, the parking garage (if any), the Property and the appurtenances. Capitalized terms have the same meaning as defined in the Lease. 1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material shall he placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant's employees to loiter in Common Areas or elsewhere about the Buildings or Property. 2. Plumbing fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the fixtures or appliances. Damage resulting to fixtures or appliances by Tenant, its agents, employees or invitees, shall be paid for by Tenant, and Landlord shall not be responsible for the damage. 3. No signs, advertisements or notices shall be painted or affixed to windows, doors or other parts of the Buildings, except those of such color, size, style and in such places as are first approved in writing by Landlord and except those that are within the interior of the Premises and not visible from outside the Premises. All tenant identification and suite numbers at the entrance to the Premises shall be installed by Landlord, at Tenant's cost and expense, using the standard graphics for the Buildings. Except in connection with the hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be inserted into any part of the Premises or Buildings except by the Building maintenance personnel. 4. Landlord shall provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board or other directory device listing tenants, and no other directory shall be permitted unless previously consented to by Landlord in writing. 5. Tenant shall not place any lock(s) on any door in the Premises or Buildings without Landlord's prior written consent and Landlord shall have the right to retain at all times and to use keys to all locks within and into the Premises. A reasonable number of keys to the locks on the entry doors in the Premises shall be furnished by Landlord to Tenant at Tenant's cost, and Tenant shall not make any duplicate keys. All keys shall be returned to Landlord at the expiration or early termination of this Lease. 6. All contractors, contractors representatives and installation technicians performing work in the Buildings shall be subject to Landlord's prior approval (which shall not be unreasonably withheld) and shall be required to comply with Landlord's standard rules, regulations, policies and procedures, which may be revised from time to time following prior written notice to Tenant. Exhibit B, Page 1

7. Movement in or out of the Buildings of furniture or office equipment, or dispatch or receipt by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas or loading dock areas, shall be restricted to hours designated by Landlord. Tenant shall obtain Landlord's prior approval by providing a detailed listing of the activity. If approved by Landlord, the activity shall be under the supervision of Landlord and performed in the manner required by Landlord. Tenant shall assume all risk for damage to articles moved and injury to any persons resulting from the activity. If equipment, property, or personnel of Landlord or of any other party is damaged or injured as a result of or in connection with the activity, Tenant shall be solely liable for any resulting damage or loss. 8. Landlord shall have the right to approve the weight, size, or location of heavy equipment or articles in and about the Premises. Damage to the Buildings by the installation, maintenance, operation, existence or removal of property of Tenant shall be repaired at Tenant's sole expense. 9. Corridor doors, when not in use, shall be kept closed. 10. Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or odors in the Buildings, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute, or cause to be distributed, in any portion of the Buildings, handbills, promotional materials or other advertising; or (3) conduct or permit other activities in the Buildings that might, in Landlord's sole opinion, constitute a nuisance. 11. No animals, except those assisting handicapped persons, shall be brought into the Buildings or kept in or about the Premises. 12. No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant in the Premises, Buildings or about the Property except for those properly stored and typically associated with office use, including cleaning supplies, and except for samples of pharmaceuticals, and other products stored and disposed of in compliance with all applicable laws and regulations. Tenant shall not, without Landlord's prior written consent, use, store, install, spill, remove, release or dispose of, within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental Law which may now or later be in effect. Tenant shall comply with all Laws pertaining to and governing the use of these materials by Tenant, and shall remain solely liable for the costs of abatement and removal. 13. Tenant shall not use or occupy the Premises in any manner or for any purpose which might injure the reputation or impair the present or future value of the Premises or the Buildings. Tenant shall not use, or permit any part of the Premises to be used, for lodging, sleeping or for any illegal purpose. 14. Tenant shall not take any action which would violate Landlord's labor contracts or which would cause a work stoppage, picketing, labor disruption or dispute, or interfere with Landlord's or any other tenant's or occupant's business or with the rights and Exhibit B, Page 2

privileges of any person lawfully in the Buildings ("Labor Disruption"). Tenant shall take the actions necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request of Landlord, immediately terminate any work in the Premises that gave rise to the Labor Disruption, until Landlord gives its written consent for the work to resume. Tenant shall have no claim for damages against Landlord or any of the Landlord Related Parties, nor shall the date of the commencement of the Term be extended as a result of the above actions. 15. Tenant shall not install, operate or maintain in the Premises or in any other area of the Buildings, electrical equipment that would overload the electrical system beyond its capacity for proper, efficient and safe operation as determined solely by Landlord. Tenant shall not furnish cooling or heating to the Premises, including, without limitation, the use of electronic or gas heating devices, without Landlord's prior written consent, or as provided in Exhibit D. Tenant shall not use more than its proportionate share of telephone lines and other telecommunication facilities available to service the Buildings. Current base Building design for telephone capacity is 300 lines per floor, as provided by U.S. West, although Tenant may arrange with that service provider to increase that capacity at Tenant's expense. 16. Tenant shall not operate or permit to be operated a coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except for machines for the exclusive use of Tenant's employees, and then only if the operation does not violate the lease of any other tenant in the Buildings. 17. Bicycles and other vehicles are not permitted inside the Buildings or on the walkways outside the Buildings, except in areas designated by Landlord. 18. Landlord may from time to time adopt systems and procedures for the security and safety of the Buildings, its occupants, entry, use and contents. Tenant, its agents, employees, contractors, guests and invitees shall comply with Landlord's systems and procedures. 19. Landlord shall have the right to prohibit the use of the name of the Buildings or any other publicity by Tenant that in Landlord's sole opinion may impair the reputation of the Buildings or their desirability. Upon written notice from Landlord, Tenant shall refrain from and discontinue such publicity immediately. 20. Tenant shall not canvass, solicit or peddle in or about the Buildings or the Property. 21. Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or permit smoking in the Common Areas, unless the Common Areas have been declared a designated smoking area by Landlord, nor shall the above parties allow smoke from the Premises to emanate into the Common Areas or any other part of the Buildings. Landlord shall have the right to designate the Buildings (including the Premises) as a non-smoking building. 22. Landlord shall have the right to designate and approve standard window coverings for the Premises and to establish rules to assure that the Buildings present a uniform Exhibit B, Page 3

exterior appearance. Tenant shall ensure, to the extent reasonably practicable, that window coverings are closed on windows in the Premises while they are exposed to the direct rays of the sun. 23. Deliveries to and from the Premises shall be made only at the times, in the areas and through the entrances and exits reasonably designated by Landlord. Tenant shall not make deliveries to or from the Premises in a manner that might interfere with the use by any other tenant of its premises or of the Common Areas, any pedestrian use, or any use which is inconsistent with good business practice. 24. The work of cleaning personnel shall not be hindered by Tenant after 6:00 p.m., and cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles to prevent unreasonable hardship to the cleaning service. Exhibit B, Page 4

EXHIBIT C COMMENCEMENT LETTER Date Tenant Address Re: Commencement Letter with respect to that certain Lease dated ____________________ by and between WRC SUNSET NORTH LLC, a Washington limited liability company, as Landlord, drugstore.com, inc., a Delaware corporation, as Tenant for 57,436 square feet of Rentable Area in the Buildings located at Northeast comer of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. Dear _______________: In accordance with the terms and conditions of the above referenced Lease, Tenant hereby accepts possession of the Premises and agrees as follows: 1. The Commencement Date of the Lease is __________________; 2. The Termination Date of the Lease is ___________________. Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all three (3) copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention. Sincerely, Property Manager Agreed and Accepted: Tenant:__________________________________ By:______________________________________ Name:____________________________________ Title:___________________________________ Date:____________________________________ Exhibit C, Page 1

EXHIBIT D WORK LETTER This Exhibit is attached to and made a part of the Lease dated November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and drugstore.com, inc., a Delaware corporation ("Tenant") for space on the Buildings located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. Defined terms used in this Exhibit D shall have the same meanings given them in the attached Lease. I. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord agrees to provide improvements to the Buildings and the Premises pursuant to the attached Exhibit D-1, Base Building Condition (together with the Tenant Improvements, as defined below, the "Landlord Work"), on or before the date the Tenant Improvement Contractor commences construction of the Tenant Improvements. II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and construction of all improvements in the Premises beyond those listed on Exhibit D-1 (the "Tenant Improvements") shall be provided at Tenant's expense. Landlord shall pay the cost of such additional improvements up to an amount equal to $27.50 per square foot of "Tenant's Usable Area" as outlined on the floor plan(s) in Exhibit A, for a total payment by Landlord, based on a usable area of 50,957 square feet, of $1,401,317.50 (the "Allowance"). The Allowance shall be applied only to the cost of design and construction of such improvements, including but not be limited to: architectural and engineering design, partitions (including one-half (1/2) the cost of any public corridor or demising partitions enclosing the Tenant's Usable Area), doors, door frames, hardware, paint, wall coverings, base, ceilings, lights, mechanical distribution, diffusers, thermostats, sprinkler distribution, sprinkler heads, emergency speakers, fire extinguishers and cabinets, telephone and electrical outlets, light switches, floor coverings, and all applicable permit fees and sales tax. Notwithstanding anything to the contrary contained herein, the Allowance may only be applied to Building Standard tenant improvements unless otherwise approved in writing by Landlord. Landlord shall obtain all permits and government approvals and assume specific responsibility for delivery of the Premises as defined in the Lease and this Exhibit D, provided Tenant shall have met the drawing delivery dates herein. If Tenant does not initially select a contractor, then Landlord shall manage the bidding of tenant improvements to at least three (3) firms acceptable to Landlord, one of which shall be Landlord's Contractor. The contractor selected by Tenant to construct the Tenant Improvements, Turner Construction, Inc., shall be hereinafter known as the "Tenant Improvement Contractor. III. BUILDING STANDARD IMPROVEMENTS: As used herein, "Building Standard" shall mean the type, grade, brand, quality and/or quantity of materials Landlord designates from time to time to be the minimum quality and/or quantity to be used in Exhibit D, Page 1

the Building. Tenant shall use Building Standard lighting, window coverings, doors, relites, hardware, ceiling treatment and heating, ventilating and air conditioning distribution equipment and controls, except that Tenant may install a Liebert or similar dedicated cooling system in the technical rooms in the Premises. If such system will connect to the Building system, its compatibility must be approved by Landlord. IV. DESIGN OF TENANT IMPROVEMENTS: Tenant, at Tenant's initial cost and with the approval of Landlord, has retained Marvin Stein, Inc. ("Tenant's Office Planner") to prepare the necessary drawings for Basic Plans and supply the information necessary to complete the Working Drawings and Engineering Drawings referred to in Section IV(B) of this Exhibit D for construction of the tenant improvements in Tenant's area. All of Tenant's plans described below ("Tenant's Plans") shall be delivered to Landlord on the dates stated (the "Plan Delivery Dates"), and shall be subject to approval of Landlord, such approval not to be unreasonably withheld or delayed. Landlord agrees to respond in writing with approval or comments within five (5) business days after initial receipt of each component of Tenant's Plans or other initial requests for review or approval under this Exhibit D, and two (2) business days after receipt of any changes or additions to an initial submittal. Tenant's Office Planner shall ensure that the work shown on Tenant's Plans is compatible with the basic Building plans and that necessary basic Building modifications are included in Tenant's Plans. Such modifications shall be subject to Landlord approval. If such approved basic Building modifications are made subsequent to completion of the shell and core documents or Landlord's architect reasonably charges Landlord for such changes, then such modifications shall be subject to Landlord's approval and the cost of the changes to the documents as well as any increased shell and core construction costs shall be paid by Tenant. On or before the indicated dates, Tenant shall supply Landlord with one (1) reproducible copy and five (5) black line prints of the following Tenant's Plans with respect to the Tenant Improvements in the Premises: A. Basic Plans Delivery Date: October 20, 1999 The Basic Plans due on this date shall be signed by Tenant and include: Architectural Floor Plans: These shall be fully dimensioned floor plans showing partition layout and identifying each room with a number and each door with a number. The Basic Plans must clearly identify and locate equipment requiring plumbing or other special mechanical systems, area(s) subject to above-normal floor loads, special openings in the floor, and other major or special features. B. Working Drawings Delivery Date: November 5, 1999 On this date and at Tenant's expense, Tenant's Office Planner shall produce four (4) sets of Full Working Drawings for construction from the Basic Plans using the Pin Bar or CADD System, which system shall be approved by Landlord for compatibility with the other Building drawings. The four (4) sets of Working Drawings due on this date shall be signed by the Tenant and include all items in the Basic Plans referenced in Section IV(A) above plus the following additional information: Exhibit D, Page 2

(1) Electrical and Telephone Outlets: Locate all power and telephone requirements: Dimension the position from a corner and give height above concrete slab for all critically located outlets. Identify all dedicated circuits and identify all power outlets greater than 120 volts. For the equipment used in these outlets which require dedicated circuits and/or which require greater than 120 volts, identify the type of equipment, the manufacturer's name and the manufacturers model number, and submit a brochure for each piece of equipment. Also identify the manufacturer's name of the phone system to be used and the power requirements, size, and location of its processing equipment. (2) Reflected Ceiling Plan: Lighting layout showing location and type of all Building Standard and special lighting fixtures. (3) Furniture Layout: Layout showing furniture location so that Landlord's engineer can review the location of all light fixtures. The Allowance shall be applied to the cost of the engineers retained by Tenant's Office Planner. The Allowance shall also be applied to any necessary review of the Engineering Drawings by Landlord's shell and core engineers: electrical (Holmes Electric), mechanical (McDonald Miller) and structural plans (KPFF) (Engineering Drawings) for Tenant's Improvements based on the signed Working Drawings, unless Tenant engages those engineers directly to work on the Tenant Improvements. If Tenant does not engage one or more of those engineers, such review costs shall not exceed $.10 per usable square foot for review by each of the mechanical and electrical engineers. C. Permit Submittal Package: November 5, 1999 On this date, Tenant shall deliver to Landlord all materials necessary to submit a full building permit application to the appropriate municipality. D. Final Plans Review Date: November 23, 1999 On this date, Tenant's Office Planner shall deliver to Landlord and Tenant for review and approval four (4) complete sets of Final Plans, and shall deliver a set to the Tenant Improvement Contractor. The Final Plans will incorporate the Working Drawings referenced in Section IV(B) above, plus the following additional information: (1) Millwork Details: These drawings shall be in final form with Tenant's Office Planner's title block along the right border of the drawing, and shall include construction details of all cabinets, paneling, trim, bookcases, and door and jamb details for non-Building Standard doors and jambs. (2) Keying Schedules and Hardware Information: This information shall be in final form and include a preliminary keying schedule indicating which doors are locked, plus an "X" on the side of the door where the key will be inserted if a keyed door. Complete specifications for all non-Building Standard hardware will also be provided. The final keying schedule will be completed by October 25, 1999. Exhibit D, Page 3

(3) Room Finish and Color Schedule: This information shall be in final form and include locations and specifications for all wall finishes, floor covering and base for each room. (4) Construction Notes and Specifications: Complete specifications for every item included except those specified by the Landlord. E. Final Plans Delivery Date: November 30, 1999 The four (4) sets of Final Plans approved by Landlord and Tenant and due on this date shall include all the Final Plans referenced in Section IV(D) above. Final Plans are to be signed by Tenant and delivered to Landlord by the Final Plans Delivery Date. Landlord shall return one (1) signed set to Tenant for Tenant's records. Landlord will incorporate or submit Engineering Drawings with Tenant's Final Plans for transmittal to Landlord's Contractor. F. Anticipated Construction Commencement Date: December 6, 1999 On this date Landlord anticipates that construction of the Tenant Improvements shall commence. Tenant shall be responsible for delays and additional costs in completion of the Tenant Improvements incurred as a result of changes requested by Tenant or Tenant's Office Planner and made to any of Tenant's Plans after the specified Plan Delivery Date (assuming timely response by Landlord), delays caused by Tenant's failure to comply with the Plan Delivery Dates, Tenant's failure to provide adequate specifications or information for the completion of Tenant's Plans, or by delays caused by Tenant's specification of special materials; but only to the extent any of the foregoing delays or prevents critical path work or adversely affects completion. V. CONSTRUCTION OF TENANT IMPROVEMENTS A. Authorization to Proceed. Upon submission of Tenant's Final Plans to the Tenant Improvement Contractor on the Final Plans Review Date, the Tenant Improvement Contractor shall have five (5) days to provide to Tenant written notice of the price for such improvements. Within five (5) days of receipt of such price, Tenant shall give Landlord written authorization to complete the Premises in accordance with such Final Plans, or identify those pricing issues that do not meet Tenant's approval. Tenant may in such authorization delete any or all items of extra cost; however, if Landlord deems these changes to be extensive, at its option, Landlord may refuse to accept the authorization to proceed until all changes have been incorporated in the Final Plans signed by Tenant and written acceptance of the revised price has been received by Landlord from Tenant. In the absence of such written authorization to proceed, Landlord shall not be obligated to commence work on the Premises and Tenant shall be responsible for any costs due to any resulting delay in completion of the Premises and as provided in Section III.A of the Lease. B. Payments. Prior to commencement of tenant improvements and if the price for such improvements is greater than the Allowance, Tenant shall deposit with Landlord any additional cost above the Allowance (the "Additional Cost Deposit"). The Tenant Exhibit D, Page 4

Improvement Contractor shall complete Tenant's improvements in accordance with Tenant's approved Final Plans. Payments shall be made: first, by applying Tenant's Additional Cost Deposit, secondly, by applying the entire Allowance provided by Landlord against the monthly progress payments due, and then third, Tenant shall pay within ten (10) days after receipt of monthly progress statements from Landlord, the full amount of such progress billings in cash. The progress billings may include a retainage amount up to ten percent (10%) of the work ("Retainage"). Final billing shall be rendered and payable within ten (10) days after acceptance of the Premises by Tenant in accordance with the terms of the Lease. Retainage pursuant to the terms of this paragraph shall be payable with such final billing. In the event acceptance of the Premises is subject to punchlist items as provided in the Lease, a portion of the retainage equal to the cost to complete each outstanding punchlist item may be retained until such punchlist item is complete. If the cost of the Tenant Improvements is increased by change order approved by Tenant, Tenant shall deposit the corresponding increase in the Additional Cost Deposit. If the cost of the Tenant Improvements decreases due to a deductive change order approved by Tenant, a corresponding portion of the Additional Cost Deposit shall be released to Tenant. C. Final Plans and Modifications. If Tenant shall request any change after the Final Plans are submitted, Tenant shall request such change in writing to Landlord and such request shall be accompanied by all plans and specifications necessary to show and explain changes from the approved Final Plans. After receiving this information, Landlord shall give Tenant within five (5) business days a written price for the cost of engineering design services and an estimate of construction costs to incorporate the change in Tenant's Final Plans and any anticipated change to the completion schedule that the change would cause. If Tenant approves such price in writing within five (5) business days, Tenant shall within five (5) business days have such Final Plans changes made to engineering drawings and Tenant shall have changes made to other Final Plan design documents. Within three (3) business days after completion of such changes in the Final Plans, Landlord shall provide Tenant a written breakdown of the final costs, if any, which shall be chargeable or credited to Tenant for such change, addition or deletion and any impact such changes shall have on the schedule. Landlord shall not charge for its services in relation to any such modifications and Landlord shall not charge Tenant a construction management fee for Landlord's work on the Tenant Improvements. If Tenant wishes to proceed with such changes, Tenant shall within five (5) business days so notify Landlord in writing. In the absence of such notice, Landlord shall proceed in accordance with the previously approved Final Plans before such change, addition or deletion was requested. In accordance with Section 3.A of the Lease, Tenant shall be responsible for any resulting delay in completion of the Premises due to modification of Final Plans. Tenant shall also be responsible for any demolition work required as a result of the change. D. Improvements Constructed by Tenant. If any work is to be performed in connection with the Tenant Improvements on the Premises by Tenant or Tenant's contractor: (1) Such work shall proceed upon Landlord's written approval (not to be unreasonably withheld) of (i) Tenant's contractor, (ii) general liability and property damage insurance satisfactory to Landlord carried by Tenant's contractor, which insurance shall not be required to exceed levels carried by the contractor engaged by Landlord to complete Landlord's Work ("Landlord's Contractor"), and (iii) detailed plans and specifications for such work. Exhibit D, Page 5

(2) All work shall be done in conformity with a valid building permit when required, a copy of which shall be furnished for Landlord before such work is commenced, and in any case, all such work shall be performed in accordance with all applicable governmental regulations. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant's failure to meet all applicable regulations. (3) All work by Tenant or Tenant's contractor shall be done with union labor in accordance with all union labor agreements applicable to the trades being employed, unless otherwise agreed to in writing by Landlord. (4) All work by Tenant or Tenant's contractor shall be scheduled through Landlord or, with Landlord's approval, directly with Landlord's Contractor or Tenant Improvement Contractor. Landlord shall make best efforts to accommodate work by Tenant or Tenant's contractor during times requested. (5) Tenant or Tenant's contractor shall arrange for necessary utility, hoisting and elevator service with the Landlord's Contractor or the Tenant Improvement Contractor. Elevator service shall be provided without additional charge, but Tenant shall be responsible for any damage done by Tenant or its contractors or representatives to the elevator cabs. If Tenant requires hoisting beyond the capacity of the Building's freight elevator, such hoisting shall be provided at Tenant's expense. (6) Tenant shall promptly reimburse Landlord for costs incurred by Landlord due to faulty work done by Tenant or its contractors, or by reason of any delays caused by such work, or by reason of inadequate clean-up. Tenant shall receive notice from Landlord and a reasonable opportunity to cure damages prior to Landlord undertaking corrective action. (7) Prior to commencement of any work on the Premises by Tenant or Tenant's contractor, Tenant or Tenant's contractor shall enter into an indemnity agreement and a lien priority agreement satisfactory to Landlord indemnifying and holding harmless Landlord and Landlord's Contractor or the Tenant Improvement Contractor for any liability, losses or damages directly or indirectly from lien claims affecting the land, the Buildings or the Premises arising out of Tenant's or Tenant's contractor's work or that of subcontractor or suppliers, and subordinating any such liens to the liens of construction and permanent financing for the Buildings. (8) Landlord shall have the right to post a notice or notices in conspicuous places in or about the Premises announcing its non-responsibility for the work being performed therein. E. Tenant's Entry to Premises. Tenant's entry to the Premises for any purpose, including without limitation, inspection or performance of Tenant Construction by Tenant's agents, prior to the Commencement Date as specified in Section 3.A of the Lease shall be scheduled in advance with Landlord and shall be subject to all the terms and conditions of the Lease, except the payment of Rent and Additional Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, Tenant's Office Planner, licensees, agents, servants, employees, guests, invitees, or visitors. Landlord will make reasonable efforts to accommodate Tenant's Exhibit D, Page 6

request for access to the Premises at all times. Tenant will supply Landlord with a pre-approved list of a limited number of individuals who will be allowed to have access to the Premises during normal business hours prior to the Commencement Date, provided such access does not interfere with the work being performed in the Premises. F. Tenant's Telephone and Computer/Data Service. Tenant is responsible for Tenant's telephone service, computer and data service, obtaining any applicable permits, and related cabling. Tenant shall select and coordinate installation of such communication and information systems with the Landlord pursuant to item V(D)(4) of this Exhibit D. G. Meetings and Representatives. A representative of Landlord shall attend all of Tenant's design and construction meetings, provided Landlord is given adequate prior notice of such meetings. Michel Hebrant, Pat Daleo or Gary Nickell shall serve as Landlord's representatives with respect to the Tenant Improvements and shall be entitled to bind Landlord. Gwen Anderson and Bob Barton shall serve as Tenant's representatives with respect to the Tenant Improvements and shall be entitled to bind Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. LANDLORD: WRC SUNSET NORTH LLC, a Washington limited liability company By: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, its Manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its general partner By: ________________________________ Its:________________________________ Exhibit D, Page 7

EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By: ________________________________ Its:________________________________ TENANT: drugstore.com, inc., a Delaware corporation By: __________________________________________ Its:__________________________________________ Exhibit D, Page 8

EXHIBIT D-1 SUNSET NORTH Shell and Core and Landlord Provided Tenant Improvements Landlord shall provide bare shell and core floor ready for tenant improvements as follows: Building Standard restrooms completed. Building Standard drinking fountains installed. Drywall. Drywall installed around the core areas only and firetaped (excludes drywall at the perimeter of the building and columns). Main Lobby. The main lobby serving the building is completed. Elevator Lobby. All finishes are part of tenant improvements (except Building Standard elevator doors, frames, and buttons). Life Safety. Life safety includes fire sprinkler riser, code minimum tenant distribution, central life safety system with conduit, and wire to floor. Dropping of heads, detectors, strobe lights, and speakers are part of tenant improvements. Mechanical. Mechanical includes the main system with medium pressure duct (the main loop) serving the floor and return air systems. VAV boxes and low pressure ductwork from main loop is a part of tenant improvements. Electrical. Electrical includes panels in the electrical closets based on a design load of 4.5 watts per square foot. The main system includes expansion capabilities for additional panels installed during tenant improvements. The capacity for the electrical system is: 1.2 watts per square foot for lighting (this is the code maximum); 4.0 watts per square foot for HVAC loads, and 6.0 watts per square foot (un-diversified) for tenant equipment load. Perimeter Finishes. Perimeter finishes include the exterior of the building, support structure, and insulation. Ceiling Grid. Ceiling grid and panels are excluded and considered tenant improvements. Elevators and Stairwells. Elevators and stairwells (with Building Standard finishes) serving the floor are completed. Exhibit D-1, Page 1

EXHIBIT E ADDITIONAL PROVISIONS This Exhibit is attached to and made a part of the Lease dated November ___, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and DRUGSTORE.COM, INC., a Delaware corporation ("Tenant') for space in the Buildings located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. I. Parking. A. During the initial Lease Term, Landlord shall lease to Tenant, or cause the operator (the "Operator") of the garage serving the Buildings (the "Garage") to lease to Tenant, and Tenant shall lease from Landlord or such Operator, up to four (4) unreserved parking spaces in the Garage for each one thousand (1,000) usable square feet of area in the Premises (the "Spaces") for the use of Tenant and its employees. The Spaces shall be leased at the rate of $45.00 per Space, per month, plus applicable tax thereon, as such rate may be adjusted from time-to-time to reflect the then current rate for parking in the Garage. A designated executive parking area will be located directly below the Buildings on the top garage level and, to the extent available, a portion of the Spaces may be located in such executive parking area, but only if requested by Tenant, and not to exceed the number of spaces requested by Tenant. These executive Spaces shall be leased at the rate of $65.00 per Space, per month, plus applicable tax thereon, as such rate may be adjusted from time-to-time to reflect the then current rate for parking in the Garage. If requested by Landlord, Tenant shall execute and deliver to Landlord the standard parking agreement used by Landlord or the Operator (the "Parking Agreement") in the Garage for such Spaces. B. No deductions or allowances shall be made for days when Tenant or any of its employees does not utilize the parking facilities or for Tenant utilizing less than all of the Spaces. C. Except for particular spaces and areas designated by Landlord or the Operator for reserved parking, all parking in the Garage shall be on an unreserved, first-come, first-served basis. Tenant acknowledges that Landlord may implement a valet parking system in the Garage. D. Neither Landlord nor the Operator shall be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Garage or the surface parking areas regardless of whether such loss or theft occurs when the Garage or other areas therein are locked or otherwise secured. Except as caused by the negligence or willful misconduct of Landlord and without limiting the terms of the preceding sentence, Landlord shall not be liable for any loss, injury or damage to persons using the Garage or the surface parking areas or automobiles or other property therein, it being agreed that, to the fullest extent permitted by law, the use of the Spaces shall be at the sole risk of Tenant and its employees. Exhibit E, Page 1

E. Landlord or its Operator shall have the right from time to time to designate the location of the Spaces and (after written notice to Tenant) to promulgate reasonable rules and regulations regarding the Garage, the surface parking areas, if any, the Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations, all reasonable additions and amendments thereto, and the terms and provisions of the Parking Agreement. F. Tenant shall not store or permit its employees to store any automobiles in the Garage or on the surface parking areas without the prior written consent of Landlord. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the Garage or on the Property. G. Landlord or the Operator shall have the right to temporarily close the Garage or certain areas therein in order to perform necessary repairs, maintenance and improvements to the Garage or the surface parking areas, if any. H. Tenant shall not assign or sublease any of the Spaces without the consent of Landlord or in connection with an assignment or sublease of this Lease approved by Landlord in accordance with Section 11 of the Lease. Landlord shall have the right to terminate the agreement contained in this Section I or in the Parking Agreement with respect to any Spaces that Tenant desires to sublet or assign. I. Landlord may elect to provide parking cards or keys to control access to the Garage or surface parking areas, if any. In such event, Landlord shall provide Tenant with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord shall have the right to require Tenant or its employees to place a deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys. II. Renewal Option. A. Tenant shall have the right to extend the Lease Term (the "Renewal Option") with respect to the portion of the Premises located on the first floor of Building 4 only (consisting of approximately 26,663 square feet of rentable area), but not with respect to the remainder of the Premises, for the period running from the expiration of the initial three-year Term until July 30, 2005 (the "Renewal Term"), if: 1. Landlord receives notice of exercise of the Renewal Option ("Initial Renewal Notice") not less than twelve (12) full calendar months prior to the expiration of the initial Lease Term and not more than fifteen (15) full calendar months prior to the expiration of the initial Term; and 2. Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Notice; and Exhibit E, Page 2

3. Not more than twenty five percent (25%) of the area of the Premises is sublet at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Notice (except for a Permitted Transfer); and 4. The Lease has not been assigned prior to the date that Tenant delivers its Initial Renewal Notice or prior to the date Tenant delivers its Binding Notice (except for a Permitted Transfer); and 5. Tenant executes and returns the Renewal Amendment (hereinafter defined) within thirty (30) days after its submission to Tenant. B. The initial Base Rent rate per rentable square foot for the Premises during the Renewal Term shall equal the Prevailing Market Renewal Rate (hereinafter defined) per rentable square foot for the Premises. C. Tenant shall pay Additional Base Rent (i.e. Basic Costs) for the Premises during the Renewal Term in accordance with Article 4 of the Lease. D. Within sixty (60) days after receipt of Tenant's Initial Renewal Notice, Landlord shall advise Tenant of the applicable Base Rent rate for the Premises for the Renewal Term. Tenant, within thirty (30) days after the date on which Landlord advises Tenant of the applicable Base Rent rate for the Renewal Term, shall either (i) give Landlord final binding written notice ("Binding Notice") of Tenant's exercise of its option, or (ii) if Tenant disagrees with Landlord's determination, provide Landlord with written notice of rejection (the "Rejection Notice"). If Tenant fails to provide Landlord with either a Binding Notice or Rejection Notice within such thirty (30) day period, Tenant's Renewal Option shall be null and void and of no further force and effect. If Tenant provides Landlord with a Binding Notice, Landlord and Tenant shall enter into the Renewal Amendment upon the terms and conditions set forth herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall work together in good faith to agree upon the Prevailing Market Renewal Rent rate for the Premises during the Renewal Term. Upon agreement Tenant shall provide Landlord with Binding Notice and Landlord and Tenant shall enter into the Renewal Amendment in accordance with the terms and conditions hereof. If Landlord and Tenant fail to agree upon the Prevailing Market Renewal Rate within thirty (30) days after the date of the Rejection Notice, either party, by written notice (the "Arbitration Notice") to the other within ten (10) days after the expiration of such thirty (30) day period, shall have the right to have the Prevailing Market Renewal Rate determined by binding arbitration in accordance with the procedures set forth below. If Landlord and Tenant cannot agree upon the Prevailing Market Renewal Rate and neither party elects to invoke its right of arbitration, Tenant's Renewal Option shall be deemed to be null and void and of no further force and effect. If the right of arbitration is invoked, Landlord and Tenant, at their sole cost and expense, shall each employ an appraiser within fifteen (15) days after the date the Arbitration Notice is given. Each such appraiser shall be a member of the Master Appraisers Institute or similar reputable organization, with ten (10) years of experience appraising office buildings comparable to the location and type of that of the Buildings. If either party fails to appoint an appraiser then the appointed appraiser shall be the sole appraiser and his or her determination shall be binding. Each appraiser shall render an appraisal of the Prevailing Market Renewal Rate for the Premises within fifteen (15) calendar days. The two appraisers, within ten Exhibit E, Page 3

(10) days after the exchange of appraisals, shall mutually agree upon the Prevailing Market Renewal Rate and notify Landlord and Tenant in writing of their determination. Such determination shall be binding upon both Landlord and Tenant. If the appraisers cannot agree on a determination of the Prevailing Market Renewal Rate within ten (10) days of the exchange of appraisals, then Landlord and Tenant shall select an independent third appraiser acceptable to both with ten (10) days. If Landlord and Tenant are unable to select an independent third appraiser acceptable to both with ten (10) days, either party may request that the American Arbitration Association in the county in which the Buildings are located appoint an independent third appraiser that meets the qualifications described above. Within ten (10) days following appointment (whether by mutual agreement or arbitration), the third appraiser shall choose the appraisal of either Landlord's appraiser or Tenant's appraiser and the chosen appraisal shall be deemed to represent the Prevailing Market Renewal Rate for the Premises. Such determination shall be binding upon both Landlord and Tenant. The parties shall share equally in the cost of any such third appraiser. E. If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the "Renewal Amendment") to reflect changes in the Base Rent, Lease Term, Termination Date and other appropriate terms. The Renewal Amendment shall be: 1. sent to Tenant within a reasonable time after receipt of the Binding Notice; and 2. executed by Tenant and returned to Landlord in accordance with paragraph A.5. above. An otherwise valid exercise of the Renewal Option shall, at Landlord's option, be fully effective whether or not the Renewal Amendment is executed. F. For purpose of this Section II, "Prevailing Market Renewal Rate" shall mean the arms length fair market annual rental rate per rentable square foot under renewal leases and amendments entered into on or about the date on which the Prevailing Market Renewal Rate is being determined hereunder for space comparable to the Premises in the Buildings and office buildings comparable to the Buildings in Bellevue, Washington. The determination of Prevailing Market Renewal Rate shall take into account any material economic differences between the terms of this Lease and any comparison lease, such as rent abatements, construction costs and other concessions and the manner, if any, in which the Landlord under any such lease is reimbursed for operating expenses and taxes. The determination of Prevailing Market Renewal Rate shall also take into consideration any reasonably anticipated changes in the Prevailing Market Renewal Rate from the time such Prevailing Market Renewal Rate is being determined and the time such Prevailing Market Renewal Rate will become effective under this Lease. In no event shall the Prevailing Market rate be less than the rate payable under this Lease immediately prior to the commencement of the Renewal Term. Exhibit E, Page 4

III. Satellite Dish. 1. Tenant shall have the right to lease space on the roofs of the Buildings for the purpose of installing (in accordance with Section X.B of the Lease), operating and maintaining one or more dish, antenna or other communication device approved by the Landlord (collectively the "Dish/Antenna"). Tenant shall pay, in addition to all other amounts required to be paid under this Lease, Landlord's scheduled rates for all roof space so leased, provided such rates shall not exceed rates then being charged for leases of roofs of comparable buildings in the Bellevue, Washington area. The exact location of the space on the roof to be leased by Tenant shall be designated by Landlord (the "Roof Space"). Landlord reserves the right to relocate the Roof Space and the Dish/Antenna at Landlord's expense and at a time and to a location approved by Tenant as reasonably necessary during the Lease Term. Landlord's designation shall take into account Tenant's use of the Dish/Antenna. Notwithstanding the foregoing, Tenant's right to install the Dish/Antenna shall be subject to the approval rights of Landlord and Landlord's architect and/or engineer with respect to the plans and specifications of the Dish/Antenna, the manner in which the Dish/Antenna is attached to the roof of the Building and the manner in which any cables are run to and from the Dish/Antenna. The precise specifications and a general description of the Dish/Antenna along with all documents Landlord reasonably requires to review the installation of the Dish/Antenna (the "Plans and Specifications") shall be submitted to Landlord for Landlord's written approval no later than twenty (20) days before Tenant commences to install the Dish/Antenna. Tenant shall be solely responsible for obtaining all necessary governmental and regulatory approvals and for the cost of installing, operating, maintaining and removing the Dish/Antenna. Tenant shall notify Landlord upon completion of the installation of the Dish/Antenna. If Landlord determines that the Dish/Antenna equipment does not comply with the approved Plans and Specifications, that the Building has been damaged during installation of the Dish/Antenna or that the installation was defective, Landlord shall notify Tenant of any noncompliance or detected problems and Tenant immediately shall cure the defects. If the Tenant fails to immediately cure the defects, Tenant shall pay to Landlord upon demand the cost, as reasonably determined by Landlord, of correcting any defects and repairing any damage to the Building caused by such installation. If at any time Landlord, in its sole discretion, deems it necessary, Tenant shall provide and install, at Tenant's sole cost and expense, appropriate aesthetic screening, reasonably satisfactory to Landlord, for the Dish/Antenna (the "Aesthetic Screening"). 2. Landlord agrees that Tenant, upon reasonable prior written notice to Landlord, shall have access to the roof of the Building and the Roof Space for the purpose of installing, maintaining, repairing and removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, all of which shall be performed by Tenant or Tenant's authorized representative or contractors, which shall be approved by Landlord, at Tenant's sole cost and risk. It is agreed, however, that only authorized engineers, employees or properly authorized contractors of Tenant, FCC inspectors, or persons under their direct supervision will be permitted to have access to the roof of the Building and the Roof Space. Tenant further agrees to exercise firm control over the people requiring access to the roof of the Building and the Roof Space in order to keep to a minimum the number of people having access to the roof of the Building and the Roof Space and the frequency of their visits. Exhibit E, Page 5

3. It is further understood and agreed that the installation, maintenance, operation and removal of the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, will in no way damage the Building or the roof thereof, or interfere with the use of the Building and roof by Landlord. Tenant agrees to be responsible for any damage caused to the roof or any other part of the Building, which may be caused by Tenant or any of its agents or representatives. 4. Tenant agrees to install only equipment of types and frequencies which will not cause unreasonable interference to Landlord or existing tenants of the Building. In the event Tenant's equipment causes such interference, Tenant will change the frequency on which it transmits and/or receives and take any other steps necessary to eliminate the interference. If said interference cannot be eliminated within a reasonable period of time, in the judgment of Landlord, then Tenant agrees to remove the Dish/Antenna from the Roof Space. 5. Tenant shall, at its sole cost and expense, and at its sole risk, install, operate and maintain the Dish/Antenna in a good and workmanlike manner, and in compliance with all Building, electric, communication, and safety codes, ordinances, standards, regulations and requirements, now in effect or hereafter promulgated, of the Federal Government, including, without limitation, the Federal Communications Commission (the "FCC"), the Federal Aviation Administration ("FAA") or any successor agency of either the FCC or FAA having jurisdiction over radio or telecommunications, and of the state, city and county in which the Building is located. Under this Lease, the Landlord and its agents assume no responsibility for the licensing, operation and/or maintenance of Tenant's equipment. Tenant has the responsibility of carrying out the terms of its FCC license in all respects. The Dish/Antenna shall be connected to Landlord's power supply in strict compliance with all applicable Building, electrical, fire and safety codes. Neither Landlord nor its agents shall be liable to Tenant for any stoppages or shortages of electrical power furnished to the Dish/Antenna or the Roof Space because of any act, omission or requirement of the public utility serving the Building, or the act or omission of any other tenant, invitee or licensee or their respective agents, employees or contractors, or for any other cause beyond the reasonable control of Landlord, and Tenant shall not be entitled to any rental abatement for any such stoppage or shortage of electrical power. Neither Landlord nor its agents shall have any responsibility or liability for the conduct or safety of any of Tenant's representatives, repair, maintenance and engineering personnel while in or on any part of the Building or the Roof Space. 6. The Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, shall remain the personal property of Tenant, and shall be removed by Tenant at its own expense at the expiration or earlier termination of this Lease or Tenant's right to possession hereunder. Tenant shall repair any damage caused by such removal, including the patching of any holes to match, as closely as possible, the color surrounding the area where the equipment and appurtenances were attached. Tenant agrees to maintain all of the Tenant's Dish/Antenna equipment placed on or about the roof or in any other part of the Building in proper operating condition and maintain same in satisfactory condition as to appearance, in Landlord's sole discretion, and satisfactory condition as to safety, in Landlord's reasonable discretion. Such maintenance and operation shall be performed in a manner to avoid any interference with any other tenants or Landlord. Tenant agrees that at all times during the Lease Term, it will keep the Exhibit E, Page 6

roof of the Building and the Roof Space free of all trash or waste materials produced by Tenant or Tenant's agents, employees or contractors. 7. In light of the specialized nature of the Dish/Antenna, Tenant shall be permitted to utilize the services of its choice for installation, operation, removal and repair of the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, subject to the reasonable approval of Landlord. Notwithstanding the foregoing, Tenant must provide Landlord with prior written notice of any such installation, removal or repair and coordinate such work with Landlord in order to avoid voiding or otherwise adversely affecting any warranties granted to Landlord with respect to the roof. If necessary, Tenant, at its sole cost and expense, shall retain any contractor having a then existing warranty in effect on the roof to perform such work (to the extent that it involves the roof), or, at Tenant's option, to perform such work in conjunction with Tenant's contractor. In the event the Landlord contemplates roof repairs that could affect Tenant's Dish/Antenna, or which may result in an interruption of the Tenant's telecommunication service, Landlord shall formally notify Tenant at least thirty (30) days in advance (except in cases of an emergency) prior to the commencement of such contemplated work in order to allow Tenant to make other arrangements for such service. 8. Tenant shall not allow any provider of telecommunication, video, data or related services ("Communication Services") to locate any equipment on the roof of the Building or in the Roof Space for any purpose whatsoever, nor may Tenant use the Roof Space and/or Dish/Antenna to provide Communication Services to an unaffiliated tenant, occupant or licensee of another building, or to facilitate the provision of Communication Services on behalf of another Communication Services provider to an unaffiliated tenant, occupant or licensee of the Building or any other building. 9. Tenant acknowledges that Landlord may at some time establish a standard license agreement (the "License Agreement") with respect to the use of roof space by tenants of the Building. Tenant, upon request of Landlord, shall enter into such License Agreement with Landlord provided that such agreement is reasonably acceptable to Tenant and does not materially alter the rights of Tenant hereunder with respect to the Roof Space. 10. Tenant specifically acknowledges and agrees that the terms and conditions of Article 13 of the Lease (Indemnity and Waiver of Claims) shall apply with full force and effect to the Roof Space and any other portions of the roof accessed or utilized by Tenant, its representatives, agents, employees or contractors. 11. If Tenant defaults under any of the terms and conditions of this Section or the Lease, and Tenant fails to cure said default within the time allowed by Article 19 of the Lease, Landlord shall be permitted to exercise all remedies provided under the terms of the Lease, including removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and restoring the Building and the Roof Space to the condition that existed prior to the installation of the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any. If Landlord removes the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, as a result of an uncured default, Tenant shall be liable for all costs and expenses Landlord incurs in removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and repairing any damage to the Building, the roof of the Building and the Roof Space caused by the Exhibit E, Page 7

installation, operation or maintenance of the Dish/Antenna, the appurtenances, and the Aesthetic Screening, if any. 12. Tenant shall be allowed to install fiber optics and related equipment in the Building for Tenant's personal use, the design, location, and operating characteristics of which shall be subject to Landlord's reasonable approval. IV. Storage Space. A. Subject to availability and the rights of existing tenants of the Buildings, if any, and after written request from Tenant, Landlord shall lease to Tenant up to 300 square feet of storage space (the "Storage Space"). The Storage Space rental rate per square foot of the Storage Space ("Storage Space Rental") initially shall be Fourteen Dollars ($14.00) per usable square foot per month for the Lease Term, and shall thereafter be adjusted from time to time by Landlord to reflect market rates. Storage Space Rental shall be payable in advance on or before the first day of each month of the Storage Term. Any initial or final month shall be prorated. The Lease Term for the Storage Space shall be coterminous with the Term of the Premises. The Storage Space shall be used by Tenant for the storage of furniture, equipment, inventory or other non- perishable items normally used in Tenant's business (exclusive of any items or materials which may be deemed to be hazardous to the environment or hazardous to human life or safety), and for no other purpose whatsoever. Tenant agrees to keep the Storage Space in a neat and orderly fashion and to keep all stored items in cartons, file cabinets or other suitable containers. Landlord shall have the right to designate the location within the Storage Space of any items to be placed therein. All items stored in the Storage Space shall be elevated at least six inches above the floor on wooden pallets, and shall be at least eighteen inches below the bottom of all sprinklers located in the ceiling of the Storage Space, if any. Tenant shall not store anything in the Storage Space which is unsafe or which otherwise may create a hazardous condition, or which may increase Landlord's insurance rates, or cause a cancellation or modification of Landlord's insurance coverage. Without limitation, Tenant shall not store any flammable, combustible or explosive fluid, chemical or substance nor any perishable food or beverage products, except with Landlord's prior written approval. Landlord reserves the right to adopt and enforce reasonable rules and regulations governing the use of the Storage Space from time to time. B. All terms and provisions of this Lease shall be applicable to the Storage Space, including, without limitation, Article 13 (Indemnity and Waiver of Claims) and Article 14 (Tenant's Insurance), except that Landlord need not supply air-cooling, heat, water, janitorial service, cleaning, window washing or electricity to the Storage Space and Tenant shall not be entitled to any work allowances, rent credits, expansion rights or renewal rights with respect to the Storage Space unless such concessions or rights are specifically provided for in the Lease with respect to the Storage Space. C. Tenant agrees to accept the Storage Space in its condition and "as-built" configuration existing on the earlier of the date Tenant takes possession of the Storage Space or the Storage Commencement Date. Exhibit E, Page 8

D. At any time and from time to time, Landlord shall have the right to relocate the Storage Space to a new location which shall be no smaller than the square footage of the Storage Space. Landlord shall pay the direct, out-of- pocket, reasonable expenses of such relocation. E. Storage Space Rental is deemed Rent under the Lease. F. Notwithstanding anything set forth in Article 11 of the Lease, Tenant shall not, without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion, assign, sublease, transfer or encumber the Storage Space or grant any license, concession or other right of occupancy or permit the use of the Storage Space by any party other than Tenant. V. Hazardous Materials. Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials except those used for general office purposes in the ordinary course of Tenant's business and in compliance with all applicable laws, and except for samples of pharmaceuticals and other products stored and disposed of in compliance with all applicable laws and regulations. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances of materials, nor allow to be brought into the Project any such materials or substances except to use for general office purposes in the ordinary course of Tenant's business, and except for samples of pharmaceuticals and other products stored and disposed of in compliance with all applicable laws and regulations. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., any applicable state or local laws and the regulations adopted under these acts. If any governmental agency or lender (in its reasonable judgment) shall ever require testing to ascertain whether or not there has been any release of hazardous materials and such testing indicates that Tenant has violated any of the terms and conditions of this section, then, in addition to any other rights and remedies available hereunder or at law or in equity, the reasonable costs of such testing shall be reimbursed by Tenant to Landlord upon demand as additional charges. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the premises. In all events, except to the extent due to the negligence or willful misconduct of Landlord or its contractors or agents, Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous materials on the premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the Lease Term. Exhibit E, Page 9

IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. WITNESS/ATTEST: LANDLORD: WRC SUNSET NORTH LLC, a Washington limited liability company By: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, its Manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its general partner By:________________________________ Its:_______________________________ EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By:________________________________ Its:_______________________________ Exhibit E, Page 10

TENANT: drugstore.com, inc., a Delaware corporation By:________________________________ Its:_______________________________ Exhibit E, Page 11

EXHIBIT F SUBORDINATION AGREEMENT (TENANT) RETURN NAME AND ADDRESS: WELLS FARGO BANK, NATIONAL ASSOCIATION Real Estate Group, MAC 6101-121 1300 S.W. 5th Avenue, 12th Floor Portland, OR 97201 Attn: Mary Kathryn Long SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT
GRANTORS: GRANTEE: LEGAL DESCRIPTION: (1) WRC SUNSET NORTH LLC; (2) DRUGSTORE.COM, INC., a Delaware corporation WELLS FARGO BANK, NATIONAL ASSOCIATION LOTS 6 THROUGH 10 AND AN UNDIVIDED INTEREST IN LOT 11 AND TRACT C OF SUNSET RIDGE I-90 CORPORATE CAMPUS, VOLUME 154 OF PLATS, PAGES 77-80, KING COUNTY, WASHINGTON Additional legal description is on Exhibit A of this document. ASSESSOR'S PROPERTY TAX PARCEL ACCOUNT NUMBER(S): 813530-0060-02 813530-0070-00 813530-0080-08 813530-0090-06 813530-0100-04 813530-0110-02 502880-0050-09

Exhibit F

SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT (Lease To Deed of Trust)
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED BELOW). THIS SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT,

ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT ("Agreement") is made _______________, 19___, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord"), DRUGSTORE.COM, INC., a Delaware corporation ("Tenant") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender"). RECITALS A. Pursuant to the terms and provisions of a lease dated _______________, 19___ ("Lease"), Landlord, as "Landlord", granted to Tenant a leasehold estate in and to a portion of the property described on Exhibit A attached hereto and incorporated herein by this reference (which property, together with all improvements now or hereafter located on the property, is defined as the "Property"). B. Landlord has executed, or proposes to execute, a deed of trust with absolute assignment of leases and rents, security agreement and fixture filing ("Deed of Trust") securing, among other things, a promissory note ("Note") in the principal sum of SIXTY EIGHT MILLION DOLLARS ($68,000,000), dated September 1, 1998, in favor of Lender, which Note is payable with interest and upon the terms and conditions described therein ("Loan"). C. As a condition to making the Loan secured by the Deed of Trust, Lender requires that the Deed of Trust be unconditionally and at all times remain a lien on the Property, prior and superior to all the rights of Tenant under the Lease and that the Tenant specifically and unconditionally subordinate the Lease to the lien of the Deed of Trust. D. Landlord and Tenant have agreed to the subordination, attornment and other agreements herein in favor of Lender. NOW THEREFORE, for valuable consideration and to induce Lender to make the Loan, Landlord and Tenant hereby agree for the benefit of Lender as follows: 1. SUBORDINATION. Landlord and Tenant hereby agree that: Exhibit F, Page 1

1.1 Prior Lien. The Deed of Trust securing the Note in favor of Lender, and any modifications, renewals or extensions thereof, shall unconditionally be and at all times remain a lien on the Property prior and superior to the Lease; 1.2 Subordination. Lender would not make the Loan without this agreement to subordinate; and 1.3 Whole Agreement. This Agreement shall be the whole agreement and only agreement with regard to the subordination of the Lease to the lien of the Deed of Trust and shall supersede and cancel, but only insofar as would affect the priority between the Deed of Trust and the Lease, any prior agreements as to such subordination, including, without limitation, those provisions, if any, contained in the Lease which provide for the subordination of the Lease to a deed or deeds of trust or to a mortgage or mortgages, AND FURTHER, Tenant individually declares, agrees and acknowledges for the benefit of Lender, that: 1.4 Use of Proceeds. Lender, in making disbursements pursuant to the Note, the Deed of Trust or any loan agreements with respect to the Property, is under no obligation or duty to, nor has Lender represented that it will, see to the application of such proceeds by the person or persons to whom Lender disburses such proceeds, and any application or use of such proceeds for purposes other than those provided for in such agreement or agreements shall not defeat this agreement to subordinate in whole or in part; 1.5 Waiver, Relinquishment and Subordination. Tenant intentionally and unconditionally waives, relinquishes and subordinates all of Tenant's right, title and interest in and to the Property to the lien of the Deed of Trust and understands that in reliance upon, and in consideration of, this waiver, relinquishment and subordination, specific loans and advances are being and will be made by Lender and, as part and parcel thereof, specific monetary and other obligations are being and will be entered into which would not be made or entered into but for said reliance upon this waiver, relinquishment and subordination. 2. ASSIGNMENT. Tenant acknowledges and consents to the assignment of the Lease by Landlord in favor of Lender. 3. ESTOPPEL. Tenant acknowledges and represents that: 3.1 Lease Effective. The Lease has been duly executed and delivered by Tenant and, subject to the terms and conditions thereof, the Lease is in full force and effect, the obligations of Tenant thereunder are valid and binding and there have been no modifications or additions to the Lease, written or oral; 3.2 No Default. To the best of Tenant's knowledge, as of the date hereof: (i) there exists no breach, default, or event or condition which, with the giving of notice or the passage of time or both, would constitute a breach or default under the Lease; and (ii) there are no existing claims, defenses or offsets against rental due or to become due under the Lease; Exhibit F, Page 2

3.3 Entire Agreement. The Lease constitutes the entire agreement between Landlord and Tenant with respect to the Property and Tenant claims no rights with respect to the Property other than as set forth in the Lease; and 3.4 No Prepaid Rent. No deposits or prepayments of rent have been made in connection with the Lease, except as follows: (if none, state "None") _____________________. 4. ADDITIONAL AGREEMENTS. Tenant covenants and agrees that, during all such times as Lender is the Beneficiary under the Deed of Trust: 4.1 Modification, Termination and Cancellation. Tenant will not consent to any modification, amendment, termination or cancellation of the Lease (in whole or in part) without Lender's prior written consent and will not make any payment to Landlord in consideration of any modification, termination or cancellation of the Lease (in whole or in part) without Lender's prior written consent; 4.2 Notice of Default. Tenant will notify Lender in writing concurrently with any notice given to Landlord of any default by Landlord under the Lease, and Tenant agrees that Lender has the right (but not the obligation) to cure any breach or default specified in such notice within the time periods set forth below and Tenant will not declare a default of the Lease, as to Lender, if Lender cures such default within fifteen (15) days from and after the expiration of the time period provided in the Lease for the cure thereof by Landlord; provided, however, that if such default cannot with diligence be cured by Lender within such fifteen (15) day period, the commencement of action by Lender within such fifteen (15) day period to remedy the same shall be deemed sufficient so long as Lender pursues such cure with diligence; 4.3 No Advance Rents. Tenant will make no payments or prepayments of rent more than one (1) month in advance of the time when the same become due under the Lease; and 4.4 Assignment of Rents. Upon receipt by Tenant of written notice from Lender that Lender has elected to terminate the license granted to Landlord to collect rents, as provided in the Deed of Trust, and directing the payment of rents by Tenant to Lender, Tenant shall comply with such direction to pay and shall not be required to determine whether Landlord is in default under the Loan and/or the Deed of Trust. 5. ATTORNMENT. Tenant agrees for the benefit of Lender (including for this purpose any transferee of Lender or any transferee of Landlord's title in and to the Property by Lender's exercise of the remedy of sale by foreclosure under the Deed of Trust) as follows: 5.1 Payment of Rent. Tenant shall pay to Lender all rental payments required to be made by Tenant pursuant to the terms of the Lease for the duration of the term of the Lease; 5.2 Continuation of Performance. Tenant shall be bound to Lender in accordance with all of the provisions of the Lease for the balance of the term thereof, and Tenant hereby attorns to Lender as its landlord, such attornment to be effective and self-operative without the execution of any further instrument immediately upon Lender succeeding to Landlord's interest in the Lease and giving written notice thereof to Tenant; Exhibit F, Page 3

5.3 No Offset. Lender shall not be liable for, nor subject to, any offsets or defenses which Tenant may have by reason of any act or omission of Landlord under the Lease, nor for the return of any sums which Tenant may have paid to Landlord under the Lease as and for security deposits, advance rentals or otherwise, except to the extent that such sums are actually delivered by Landlord to Lender; and 5.4 Subsequent Transfer. If Lender, by succeeding to the interest of Landlord under the Lease, should become obligated to perform the covenants of Landlord thereunder, then, upon any further transfer of Landlord's interest by Lender, all of such obligations shall terminate as to Lender. 6. NON-DISTURBANCE. In the event of a foreclosure under the Deed of Trust, so long as there shall then exist no breach, default, or event of default on the part of Tenant under the Lease beyond any applicable notice and cure periods, Lender agrees for itself and its successors and assigns that the leasehold interest of Tenant under the Lease shall not be extinguished or terminated by reason of such foreclosure, but rather the Lease shall continue in full force and effect and Lender shall recognize and accept Tenant as tenant under the Lease subject to the terms and provisions of the Lease except as modified by this Agreement; provided, however, that Tenant and Lender agree that the following provisions of the Lease (if any) shall not be binding on Lender: any right of first refusal with respect to the Property; any provision regarding the use of insurance proceeds or condemnation proceeds with respect to the Property which is inconsistent with the terms of the Deed of Trust. 7. MISCELLANEOUS. 7.1 Heirs, Successors, Assigns and Transferees. The covenants herein shall be binding upon, and inure to the benefit of, the heirs, successors and assigns of the parties hereto; and 7.2 Notices. All notices or other communications required or permitted to be given pursuant to the provisions hereof shall be deemed served upon delivery or, if mailed, upon the first to occur of receipt or the expiration of three (3) days after deposit in United States Postal Service, certified mail, postage prepaid and addressed to the address of Landlord, Tenant or Lender appearing below: "LANDLORD" WRC SUNSET NORTH LLC c/o Wright Runstad & Company 1191 Second Avenue, Suite 2000 Seattle, Washington 98101 Attn: Jon F. Nordby Exhibit F, Page 4

With a copy to: EQUITY OFFICE PROPERTIES TRUST Two North Riverside Plaza, Suite 2200 Chicago, Illinois 60606 Attention: Regional Counsel -- Western Region "LENDER" WELLS FARGO BANK, NATIONAL ASSOCIATION Real Estate Group, MAC 6101-121 1300 S.W. 5th Avenue, 12th Floor Portland, OR 97201 Attn: Mary Kathryn Long Loan No: 2554 "TENANT" ADDRESS provided, however, any party shall have the right to change its address for notice hereunder by the giving of written notice thereof to the other party in the manner set forth in this Agreement; 7.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute and be construed as one and the same instrument; 7.4 Remedies Cumulative. All rights of Lender herein to collect rents on behalf of Landlord under the Lease are cumulative and shall be in addition to any and all other rights and remedies provided by law and by other agreements between Lender and Landlord or others; 7.5 Paragraph Headings. Paragraph headings in this Agreement are for convenience only and are not to be construed as part of this Agreement or in any way limiting or applying the provisions hereof; and 7.6 INCORPORATION. Exhibit A is attached hereto and incorporated herein by this reference. Exhibit F, Page 5

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE LANDLORD TO OBTAIN A LOAN, THE PROCEEDS OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN THE IMPROVEMENT OF THE PROPERTY. IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT HERETO. "LANDLORD" WRC SUNSET NORTH LLC, a Washington limited liability company By: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a Washington limited partnership, its Manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its general partner By:________________________ Its:_______________________ Exhibit F, Page 6

By: EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By:____________________________ Its:___________________________ "LENDER" WELLS FARGO BANK, NATIONAL ASSOCIATION By:______________________________________ Its:_____________________________________ "TENANT" DRUGSTORE.COM, INC., a Delaware corporation By:______________________________________ Its:_____________________________________ Exhibit F, Page 7

LANDLORD ACKNOWLEDGMENTS
STATE OF ___________ COUNTY OF __________ ) ) ) ss.

On this the ______ day of _______________, 19___, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of Wright Runstad & Company, the general partner of Wright Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public:______________________________ Printed Name:_______________________________ Residing at:________________________________ My Commission expires:______________________ Exhibit F, Page 8

STATE OF _______________ COUNTY OF ______________

) ) )

ss.

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of Equity Office Properties Trust, the general partner of EOP Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public:______________________________ Printed Name:_______________________________ Residing at:________________________________ My Commission expires:______________________ Exhibit F, Page 9

LENDER ACKNOWLEDGMENT
STATE OF _______________ COUNTY OF ______________ ) ) ) ss.

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of WELLS FARGO BANK, NATIONAL ASSOCIATION, the Lender in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public:______________________________ Printed Name:_______________________________ Residing at:________________________________ My Commission expires:______________________ Exhibit F, Page 10

TENANT ACKNOWLEDGMENT
STATE OF ___________ COUNTY OF __________ ) ) ) ss:

On this the ______ day of _______________, 1999, before me a Notary Public duly authorized in and for said County in the State aforesaid to take acknowledgments personally appeared _________________________ known to me to be _______________ of DRUGSTORE.COM, INC., a Delaware corporation, the Tenant in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public:______________________________ Printed Name:_______________________________ Residing at:________________________________ My Commission expires:______________________ Exhibit F, Page 11

EXHIBIT A Loan No. 2554 DESCRIPTION OF PROPERTY EXHIBIT A to Subordination Agreement; Acknowledgment of Lease Assignment, Estoppel, Attornment and Non-Disturbance Agreement dated as of _______________, 19___, executed by WRC SUNSET NORTH LLC, a Washington limited liability company as "Landlord", DRUGSTORE.COM, INC., a Delaware corporation, as "Tenant", and WELLS FARGO BANK, NATIONAL ASSOCIATION, as "Lender". All that certain real property located in the County of King, State of Washington, described as follows: LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING COUNTY; EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER RECORDING NO. 9101280422; TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9601091040; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9107260572; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9309292404; SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON. Exhibit A, Page 1

EXHIBIT G TENANT ESTOPPEL CERTIFICATE Loan No. 2554 _______________, 19___ WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender") Real Estate Group, MAC 6101-121 1300 S.W. 5th Avenue, 12th Floor Portland, OR 97201 Attn: Mary Kathryn Long RE: Lease dated _______________, 1999, and amended on _______________, 1999 (the "Lease") by and between WRC SUNSET NORTH LLC, as Landlord ("Landlord") and DRUGSTORE.COM, as Tenant ("Tenant") with respect to certain premises (the "Leased Premises") located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington (the "Property"). The Leased Premises are comprised of ____________ square feet. Gentlemen: The undersigned hereby acknowledges that Landlord intends to encumber the Property with a deed of trust in favor of Lender. The undersigned further acknowledges the right of Landlord, Lender and any and all of Landlord's present and future lenders to rely upon the statements and representations of the undersigned contained in this Certificate and further acknowledges that any loan secured by any such deed of trust or further deeds of trust will be made and entered into in material reliance on this Certificate. Given the foregoing, the undersigned Tenant hereby certifies and represents unto Lender, its successors and assigns, with respect to the above described Lease, a true and correct copy of which is attached as Exhibit A hereto, as follows: All space and improvements covered by the Lease have been completed and furnished to the satisfaction of Tenant, all conditions required under the Lease have been met, and Tenant has accepted and taken possession of and presently occupies the Leased Premises, consisting of approximately ____________ square feet. Exhibit G, Page 1

The Lease is for a total term of ________ years, ________ months commencing _______________, 19___, and ending _______________, 19___, and has not been modified, altered or amended in any respect and contains the entire agreement between Landlord and Tenant, except as follows: ______________________________________________________ (list amendments and modifications other than those, if any, attached to and forming a part of the Lease as well as any verbal agreements, or write "None"). As of the date hereof, the annual minimum rent under the Lease is $_______________, subject to any escalation and/or percentage rent and/or common area maintenance charges, in accordance with the terms and provisions of the Lease. No rent has been paid by Tenant in advance under the Lease except for $_______________, which amount represents rent for the period beginning _______________, 19___, and ending _______________, 19___, and Tenant has no current charge or claim of offset under said Lease or otherwise, against rents or other amounts due or to become due thereunder. No "discounts", "free rent" or "discounted rent" have been agreed to or are in effect except for ___________________________________________________________________________. A Security Deposit of $_______________ has been made and is currently being held by Landlord. Tenant has no claim against Landlord for any deposit or prepaid rent except as provided in Paragraphs 4 and 5 above. The Landlord has satisfied all commitments, arrangements or understandings made to induce Tenant to enter into the Lease, and to Tenant's knowledge, after due inquiry, the Landlord is not in any respect in default in the performance of the terms and provisions of the Lease, nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default. Tenant is not in any respect in default under the terms and provisions of the Lease (nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default) and has not assigned, transferred or hypothecated its interest under the Lease, except as follows: __________________________________________________________________. Except as expressly provided in the Lease or in any amendment or supplement to the Lease, Tenant (i) does not have any right to renew or extend the term of the Lease; (ii) does not have any option or preferential right to purchase all or any part of the Leased Premises or all or any part of the building or premises of which the Leased Premises are a part; and (iii) does not have right, title, or interest with respect to the Leased Premises other than as Tenant under the Lease. There are no understandings, contracts, agreements, subleases, assignments, or commitments of any kind whatsoever with respect to the Lease or the Leased Premises except as expressly provided in the Lease or in any amendment or supplement to the Lease set forth in Paragraph 2 above, copies of which are attached hereto. Exhibit G, Page 2

To Tenant's knowledge, after due inquiry, the Lease is in full force and effect and Tenant has no defenses, setoffs, or counterclaims against Landlord arising out of the Lease or in any way relating thereto or arising out of any other transactions between Tenant and Landlord. The current address to which all notices to Tenant as required under the Lease should be sent is: _____________________________________________________________________________. Dated: _______________, 19___.

"TENANT" Exhibit G, Page 3

EXHIBIT 10.35 AGREEMENT This Agreement, dated as of January 24, 2000 is made and entered into by and between Amazon.com Commerce Services, Inc., ("ACI"), an indirect wholly owned subsidiary of Amazon.com, Inc. ("Amazon.com"), and drugstore.com, inc. ("drugstore.com"). ACI and drugstore.com sometimes are referred to collectively as the "Parties" and individually as a "Party." ACI and drugstore.com agree as follows: Section 1. Definitions Whenever used in this Agreement with initial letters capitalized, the following terms shall have the following specified meaning: "Amazon.com Health and Beauty Section" means an Amazon.com Product Section, to be created pursuant to this Agreement, featuring Drugstore Products and Beauty Products, to be labeled either "Drugstore," "Health and Beauty" or such other title as mutually agreed by the Parties. "Amazon.com Product Section" means any discrete group of products and services available at any time during the Term on the Amazon.com Site that is identified by a tab or other top-level product category identifier on the Amazon.com Site Home Page (such as "Books," "Music," "DVD and Video," "Toys," etc.), but excluding (a) the Amazon.com Site Home Page itself, and (b) any mechanisms, areas or services on or through which independent third parties may sell products or services through the Amazon.com Site (including, without limitation, the existing "Auctions", "zShops", "Sothebys.amazon.com" and "Amazon.com Advantage" areas and services of the Amazon.com Site, and any successors or replacements thereto). "Amazon.com Site" means that Web Site, the primary Home Page for which is identified by the URL www.amazon.com (and any successor or replacement Web Site). For the avoidance of doubt, the "Amazon.com Site" does not include any other Web Sites maintained by or for Amazon.com, ACI or its Affiliates (including, without limitation, those Web Sites with the primary Home Pages identified by the URL's www.amazon.co.uk and www.amazon.de). "Amazon.com Site Functionality" means, collectively: (a) tab, search and browse functionality available to users of the Amazon.com Site for navigating through Amazon.com Product Sections; (b) payment and transaction functionality available to users of the Amazon.com Site for purchasing products (including, without limitation, "shopping cart" and "Payment with 1-Click" functionality), (c) any other functionality available on the Amazon.com Site that ACI may make available to drugstore.com from time to time, and (d) any future equivalents, improvements and enhancements of any of the foregoing. "Affiliate" means, with respect to either Party, any individual or entity that directly or indirectly controls, is controlled by or is under common control with that Party, or which such Party beneficially owns at least fifty percent (50%) of the equity interests therein; -1-

excluding any entity for which a drugstore.com or Amazon.com does not directly or indirectly control the operation and management thereof. "Beauty Products" means cosmetics and other makeup products, fragrance products, bathing products, skin care products and hair care products. "Change of Control" means, with respect to drugstore.com, a transaction or series of related transactions that results in (a) a sale of all or substantially of the assets of drugstore.com, (b) the transfer of fifty percent (50%) or more of the outstanding voting power of drugstore.com (other than to a subsidiary corporation wholly-owned by drugstore.com), (c) the acquisition by a person or entity, by reason of any contractual arrangement with one or more persons or entities, of the right or power to appoint or cause to be appointed a majority of the directors or officers of drugstore.com. "Closing" means the consummation of the purchase of common stock of drugstore.com by Amazon.com pursuant to the Stock Purchase Letter Agreement between Amazon.com and drugstore.com (the "Purchase Agreement"). "Confidential Information" means all nonpublic information relating to a Party or its Affiliates that is designated as confidential or that, given the nature of the information or the circumstances surrounding its disclosure, reasonably should be considered as confidential, including without limitation any information disclosing that a specific end-user traveled from the Amazon.com Site to the drugstore.com Site (however obtained). Confidential Information includes, without limitation, (a) all nonpublic information relating to a Party's or its Affiliates' technology, customers, business plans, promotional and marketing activities, finances and other business affairs and (b) all third party information that a Party or its Affiliates is obligated to keep confidential. Confidential Information may be contained in tangible materials, such as drawings, data, specifications, reports and computer programs, or may be in the nature of unwritten knowledge. Confidential Information does not include any information that (i) has become publicly available without breach of this Agreement, (ii) can be shown by documentation to have been known to the Receiving Party at the time of its receipt from the Disclosing Party or its Affiliates, (iii) is received from a third party who did not acquire or disclose such information by a wrongful or tortious act or (iv) can be shown by documentation to have been independently developed by the Receiving Party without reference to any Confidential Information. "Disclosing Party" means a Party that discloses Confidential Information to the other Party in connection with this Agreement. "Drugstore Products" means health, beauty, wellness, personal care and prescription drug products, including over-the-counter drugs, first aid, contraceptives, vitamins and fitness supplements, natural health remedies (such as nutritional supplements, herbs and homeopathy), medical devices for home health care and other durable medical goods, and other products relating to hair, body, skin and eye care (e.g. contact lenses and contact lens solutions). -2-

"drugstore.com Site Functionality" means, collectively: (a) functionality available on the drugstore.com Site that drugstore.com may make available to ACI or Amazon.com from time to time, and (b) any future equivalents, improvements and enhancements of any of the foregoing. "drugstore.com Site" means, collectively: (a) that Web Site, the primary Home Page for which is identified by the URL www.drugstore.com (and any successor or replacement Web Site); (b) that Web Site, the primary Home Page for which is identified by the URL www.beauty.com (and any successor or replacement Web Site); and (c) any other Web Sites operated by or for drugstore.com or its Affiliates from time to time through which Drugstore Products or Beauty Products are sold or offered for sale. "Home Page" means, with respect to a Web Site, the Web page designated by the operator of the Web Site as the initial and primary end user interface for the Web Site. "Intellectual Property Right" means any patent, copyright, trademark, service mark, trade dress, trade name or trade secret right and any other intellectual property or proprietary right. "Launch Date" means the date on which the Amazon.com Health and Beauty Section is made generally available to all Amazon.com customers, which date shall be mutually agreed by the Parties, but which date shall occur no later than 90 days after the Closing. "Receiving Party" means a Party that receives Confidential Information from the other Party in connection with this Agreement. "Site" means the Amazon.com Site or the drugstore.com Site, as required by the context. "Technology" means any design, specification, content (which includes product files, catalogs, images, and editorial content), data, URL, domain name, software, code, user interface, "look and feel," technique, algorithm, method, process, device, procedure, functionality or other technology or item. "Term" means the term of this Agreement as defined in Section 10. "Trademark" means any trademark, service mark, trade name, trade dress, proprietary logo or insignia or other source or business identifier. "Transition Page" means a page of the Amazon.com Health and Beauty Section that is part of the Amazon.com Site and contains representations of the drugstore.com site and contains live links to pages on the drugstore.com Site, as further described in Section 2.1. "Web Site" means any point of presence maintained on the Internet or on any other public data network. With respect to any Web Site maintained on the World Wide Web or any successor public data network, such Web Site includes all HTML pages (or similar unit -3-

of information presented in any relevant data protocol) that either (a) are identified by the same second-level domain (such as http://www.amazon.com) or by the same equivalent level identifier in any relevant address scheme, or (b) contain branding, graphics, navigation or other characteristics such that a user reasonably would conclude that the pages are part of an integrated information or service offering. "Year" means any period of twelve (12) consecutive months commencing on the Closing, or on any anniversary of the Launch. Section 2. Amazon.com Health and Beauty Section The overall goal of the Parties is to maximize drugstore.com customers and revenues through the Amazon.com Health and Beauty Section and create a superior customer experience on the Amazon.com Health and Beauty Section. 2.1 Phase One -- Transition Page(s). ACI will create and, following the Launch Date, maintain on the Amazon.com Site during the Term the Amazon.com Health and Beauty Section, which shall include the Transition Page(s) ("Phase One"). The Amazon.com Health and Beauty Section in Phase One and Phase Two will be given generally the same treatment including visibility and persistence on the Amazon.com Site as the top five most prominent Amazon.com Product Sections, excluding any seasonal-based or one-time promotions involving one or more Amazon.com Product Sections or as a result of Amazon.com Site changes for a particular individual due to personalization of the Amazon.com Site by such individual. The format and functionality of the Transition Page(s) will be generally consistent with other pages of the Amazon.com Site, except that the coloring, graphics, fonts, logos and similar "look and feel" aspects of the Transition Page(s) will be generally consistent with similar characteristics of the drugstore.com Site. All links, including a tab as used on the Amazon.com Site as of the date hereof, and other navigation functions for the Amazon.com Health and Beauty Section on the Amazon.com Home Page will link directly to a Transition Page. The Transition Page(s) will contain hypertext links that will allow users to navigate directly to pages on the drugstore.com Site. The Parties will work together to determine the specific editorial and creative content, personalization, placement, promotions, messaging, and category names of the Transition Pages, ensuring consistency with the drugstore.com Site, including editorial and creative content, personalization, placement, promotions, messaging, and category names, pursuant to the implementation procedures set forth in Section 4. Subject to the foregoing, other than with respect to the Transition Pages, ACI will determine the content, appearance, functionality and all other aspects of the Amazon.com Site (including the Amazon.com Site Home Page) in its sole discretion. 2.2 Phase Two - Catalog Integration and Single Checkout. On or before June 30, 2000, ACI in consultation with drugstore.com will determine the design and development schedule for implementation of certain of the Amazon.com Site Functionalities in order to enable Amazon.com customers to shop and pay for non- prescription products available on the drugstore.com Site (along with shopping and paying for all other products available on the Amazon.com Site) while shopping on the Amazon.com Site. The Parties intend that with respect to this Amazon.com Site Functionality, the shopping experience within the -4-

Amazon.com Health and Beauty Section will be consistent with the functionality of the other Amazon.com Product Sections with respect to search and checkout, while the general shopping experience within the Amazon.com Health and Beauty Section will be generally the same as the shopping experience on the drugstore.com Site and the coloring, graphics, logos, editorial, merchandising, features and services and other "look and feel" aspects of the Amazon.com Health and Beauty Section will remain generally the same as on the drugstore.com Site (except with respect to checkout and search) or as otherwise agreed to by drugstore.com, given the technical and production issues associated with the search and checkout features ("Phase Two"). Customers who purchase products through the Amazon.com Health and Beauty Section are customers of ACI, Amazon.com and drugstore.com. drugstore.com will be solely responsible for all order fulfillment and customer service for orders of products purchased from drugstore.com through the Amazon.com Health and Beauty Section. ACI or its Affiliates will provide drugstore.com with all order-related and customer- related data necessary for drugstore.com to fulfill its order fulfillment and customer service responsibilities as well as to recognize and transact with an Amazon.com Heath and Beauty Section customer as a repeat customer on the drugstore.com Site. Such information may include products ordered, name, address, email address and credit card information of the purchaser and other necessary information. drugstore.com shall be free to use such data and communicate with such customers as it uses such data for, and as it communicates with, its other customers. All revenues from sales of products or services in the Amazon.com Health and Beauty Section, other than cross-promoted products from other Amazon.com Product Sections, shall be drugstore.com revenues and Amazon.com and ACI shall have no right to any revenue share or other fees, except as set forth in Section 5.3. On or before December 31, 2000 and to the extent commercially reasonable and technically feasible, ACI and drugstore.com shall implement Phase Two in a manner that does not subject ACI, Amazon.com and their Affiliates to federal, state or local regulations involving pharmacists, over the counter drugs or homeopathic drugs and does not subject drugstore.com to any additional regulation of such kind, and further does not create any jurisdiction or authority for any governmental authority to impose material additional obligations to collect sales tax, use tax or similar tax in connection with any sales of products by ACI, Amazon.com, drugstore.com or their Affiliates. The parties will agree to pursue in good faith ways to permit customers to order prescription products through the Amazon.com Health and Beauty Section in Phase Two, and cross-promote products from other Amazon.com Product Sections. 2.3 Redesign of Amazon.com Site. Without limiting the generality of the foregoing, nothing in this Agreement shall limit the ability of Amazon.com, ACI or their Affiliates to re-design or modify the appearance and functionality of the Amazon.com Site Home Page or Amazon.com Site from time to time, in their sole discretion; provided, however, that in the event of such a redesign or revision, the presentation of the Amazon.com Health and Beauty Section on the Amazon.com Site Home Page and throughout the Amazon.com Site will continue to receive generally the same treatment including visibility and persistence as the top five most prominent Amazon.com Product Sections as set forth in Section 2.1. -5-

2.4 Certain drugstore.com Obligations. During the Term, drugstore.com will (a) ensure that every page of the drugstore.com Site displayed to any user who links to the drugstore.com Site from the Amazon.com Site displays prominent, above-the-fold, graphical hypertext links to be designed by ACI in consultation with drugstore.com, which, when clicked, return the user to the Amazon.com Site, (b) ensure that substantially all products available through the drugstore.com Site are available through the Amazon.com Health and Beauty Section, (c) ensure that prices of products offered through the Amazon.com Health and Beauty Section are equal to or lower than the prices for the same products on the drugstore.com Site, and (d) ensure that promotions related to products offered through the Amazon.com Health and Beauty Section (including, without limitation, discounts, free products with a purchase and "points"), are equal or superior to any such promotions generally offered by drugstore.com on the drugstore.com Site to the extent technically and commercially feasible. Notwithstanding the functionality necessary for a single checkout and catalog integration, drugstore.com will be solely responsible for all order fulfillment and customer service for orders of products from drugstore.com through the Amazon.com Health and Beauty Section. 2.5 No Framing. Neither Party will use or authorize or assist any third party to use in connection with any links on its Site any framing techniques, interstitial advertisements, pop-up windows, new consoles or other items or techniques that would alter the appearance or presentation of the other party's Site from that seen by users hand-entering the applicable URL into their browser. Without limiting the generality of the foregoing, each Party specifically acknowledges that it will not cause or permit any new browser window to open upon any user's clicking on any link on its Site to the other Party's Site. 2.6 Technical Standards; Customer Service. The Parties will at all times comply with the technical, site and customer service requirements as mutually agreed upon by the parties within 45 days of the Closing and to be added as Exhibit A, and comply with the privacy policies as set forth in Exhibit B. Without limiting the generality of the foregoing, drugstore.com will at all times conduct its dealings with customers who link to the drugstore.com Site from the Amazon.com Site in a professional and courteous manner which reflects favorably upon ACI and its Affiliates and the Amazon.com Site and will in any event ensure that (a) the drugstore.com Site is at all times at least generally comparable in quality, ease of use and performance to the Amazon.com Site; and (b) the customer service provided to users of the drugstore.com Site is of no lesser quality, timeliness and responsiveness than that provided to users of the Amazon.com Site, so long as ACI or Amazon.com has delivered all relevant customer and order information in a timely and reliable manner. 2.7 Referral Information. drugstore.com will not disclose any personally identifying information regarding users of the Amazon.com Site to any third party, or use or permit any third party to use such information to target communications specifically to users of the Amazon.com Site without ACI's prior written consent, provided, however, that nothing in the foregoing shall prohibit drugstore.com from contacting its own customers generally, so long as such contacts are not specifically and intentionally directed at customers who have linked to the drugstore.com Site from the Amazon.com Site. -6-

Section 3. Promotional Activities 3.1 Press Releases. Both Parties will issue mutually agreeable press releases describing the nature of their relationship upon or shortly after (a) the execution of this Agreement, disclosing that drugstore.com shall be the exclusive provider of Drugstore Products and Beauty Products on the Amazon.com Site, the Term, the Annual Fees and the purchase of drugstore.com common stock by Amazon.com pursuant to the Purchase Agreement, and (b) the Launch Date. Neither Party will issue any other press releases, make any other disclosures regarding this Agreement or its terms or the relationship between the parties except that either Party may speak in public regarding disclosures set forth in (a) above, or use the other party's Trademarks (except as permitted by Section 6), without the other party's prior written consent, except that a Party may, without the other Party's prior consent, distribute or issue public relations materials or press releases that contain a description of the relationship of the Parties, provided that such description has been approved in advance by the Parties. Disclosure of this Agreement of the transactions contemplated herein required by applicable law or the transactions contemplated herein shall be governed solely by Section 11.2. 3.2 Advertising. 3.2.1 Amazon Customer Base. During the Term, ACI will exert reasonable commercial efforts to introduce the Amazon.com Health and Beauty Section to the Amazon.com customer base. For each Year of the Term, ACI will deliver advertising materials for the Amazon.com Health and Beauty Section to the Amazon.com customer base via electronic mail and product shipments to Amazon.com customers as the Parties shall mutually agree. ACI shall make commercially reasonable efforts to deliver these electronic mail and product shipments ratably over each year, unless otherwise agreed to by drugstore.com. Each such advertisement shall include a promotional offer, the specific nature of which shall be agreed upon by the Parties, but the final determination of which shall rest with drugstore.com so long as the promotion shall be deemed reasonably attractive to an Amazon.com customer. During Phase One, such electronic mail and product shipments shall contain no promotions other than for drugstore.com unless otherwise directed by drugstore.com. During Phase Two, such electronic mail shall contain no promotions other than for the Amazon.com Health and Beauty Section; provided that the drugstore.com brand shall be at least as prominent as any Amazon.com brand included in all such promotions. During Phase Two, if the parties determine that the conversion rates for product shipment promotions containing Amazon.com Health and Beauty Section promotions are materially lower than conversion rates for product shipment promotions containing drugstore.com promotions, the parties agree to mutually determine whether all remaining product shipment promotions contain no promotions other than for drugstore.com. drugstore.com shall design, produce, and pay for all materials to be included in such emails and product shipments, provided such design is subject to the reasonable prior approval of ACI. If drugstore.com and ACI agree that ACI shall handle design or production, drugstore.com shall reimburse ACI for its reasonable costs; provided that Amazon.com shall not charge drugstore.com for any internal costs associated with -7-

segregating and delivering such emails or product shipments. ACI will invoice drugstore.com on a monthly basis for the costs incurred by ACI, and drugstore.com will pay ACI the invoiced sums within thirty (30) days after receipt of the applicable invoice. 3.2.2 Other Continuing Marketing Efforts. ACI will make commercially reasonable efforts to include the Amazon.com Health and Beauty Section in placements on the Amazon.com Site consistent including in terms of visibility of and persistence, with placements of the other top five most prominent Amazon.com Product Sections to the extent technically feasible, including cross-sell prompts, reminders on order confirmation and checkout pages, daily specials on the Amazon.com Home Page and other pages on the Amazon.com Site, placements on search results pages and other programmatic techniques used by Amazon.com to promote Amazon.com Product Stores. In addition, if and when ACI produces catalogs for multiple Amazon.com Product Sections, ACI will advertise the Amazon.com Health and Beauty Section through such catalogs in a manner generally consistent with the promotion of other Amazon.com Product Sections through such catalogs. 3.2.3 Advertising Budget. For each Year during the Term, ACI will commit to an incremental funds budget of one million dollars ($1,000,000) that is incremental to Amazon.com's other marketing efforts for general advertising through traditional media outlets specifically promoting the Amazon.com Health and Beauty Section. Such funds will be used to cover actual payments to third parties for the advertising placements and production costs. ACI will determine the nature, timing and content of which shall be determined by ACI in its sole discretion, subject to the reasonable prior review and approval of drugstore.com, which will not be unreasonably withheld. 3.2.4 Competitive Advertising. Neither Amazon.com nor ACI shall post or serve, or permit to be posted or served, on any page of the Amazon.com Site (excluding any mechanisms, areas or services on or through which independent third parties may sell products or services through the Amazon.com Site (including, without limitation, the existing "Auctions", "zShops", "Sothebys.amazon.com" and "Amazon.com Advantage" areas and services of the Amazon.com Site, and any successors or replacements thereto), any advertising banner, promotional button, promotion link or other advertising or promotional placement or materials related to any competitor of drugstore.com. drugstore.com will not post, or permit to be posted or served, on any page of the drugstore.com Site displayed to any user who links to the drugstore.com Site from the Amazon.com Health and Beauty Section, any advertising banner, promotional button, promotion link or other advertising or promotional placement or materials related to any competitor of Amazon.com, ACI or their Affiliates. 3.2.5 Other Advertising. Neither ACI nor Amazon.com shall place any third party advertising on the Transition Pages or within the Amazon.com Health and Beauty Section without drugstore.com's prior consent. -8-

Section 4. Implementation 4.1 Account Managers. Each Party will assign an account manager (which manager shall be subject to change from time to time by the assigning Party upon written notice to the other Party) to oversee the performance of such Party's obligations under this Agreement and to facilitate coordination of the Parties' performance of their respective obligations (including, without limitation, the creation and maintenance of the Transition Pages, the integration of the Amazon.com Site Functionality with the drugstore.com Site, and the advertising activities contemplated in Section 3). The account managers will meet at least once every three (3) months during the Term to review the implementation of this Agreement and to explore methods for improving performance. 4.2 Cooperation. During the Term, the Parties will cooperate in good faith and use commercially reasonable efforts to (a) provide a positive customer experience between the Amazon.com Health and Beauty Section and the drugstore.com Site, (b) maximize conversion rates and sales from or through the Amazon.com Health and Beauty Section, and (c) review opportunities for cross- marketing each Party's products. 4.3 Dedicated Personnel. Each Party will dedicate during the Term the appropriate resources and personnel to produce and promote the Amazon.com Health and Beauty Section. Each Party's designated employees will be subject to change from time to time by such Party in its sole discretion upon notice to the other Party. 4.4 Traffic Data. Throughout the Term as is reasonably available, on a monthly basis, each Party will provide the other Party all relevant data requested from time to time by the such Party concerning behavior on the drugstore.com Site and the Amazon.com Health and Beauty Section, as the case may be. The Parties will hold such data in confidence and will not use it except in connection with their marketing efforts, or otherwise in accordance with such reasonable guidelines as the Parties may agree upon. Notwithstanding anything contained in this Section 4.4, neither Party will be required to deliver to the other Party any user data in violation of its then-existing, generally applicable policies regarding the protection of user information with respect to the drugstore.com Site or the Amazon.com Site or in contravention of any applicable law or regulation. 4.5 Dispute Resolution. In all discussions and activities relating to this Agreement, ACI and drugstore.com will cooperate in good faith to accomplish the objectives specified in this Agreement. If any dispute arises relating to either Parties' rights or obligations under this Agreement, and the Parties are unable to resolve the dispute in the ordinary course of business, ACI and drugstore.com will use good-faith efforts to resolve the matter in accordance with this Section 4.5. Within three (3) days following the written request of either Party (which will describe the nature of the dispute and other relevant information), the Parties' account managers pursuant to Section 4.1 will meet to resolve the dispute at a mutually convenient time and place. If the account managers are unable to resolve the dispute within two (2) days following their initial meeting, they will refer the matter to the Parties' divisional executives who are responsible for the administration of this Agreement, along with a written statement (or statements) describing the nature of the -9-

dispute and other relevant information. Within three (3) days following the referral of the matter to the Parties' divisional executives, the divisional executives will meet to resolve the dispute at a mutually convenient time and place. Additional representatives of the parties (but not their accounting managers) may be present at the meeting. If the divisional executives are unable to resolve the dispute within two (2) days following their initial meeting, they will refer the matter to the Parties' General Counsels, along with a written statement (or statements) describing the nature of the dispute and other relevant information. Within three (3) days following the referral of the matter to the Parties' General Counsels, the General Counsels will meet to resolve the dispute at a mutually convenient time and place. Additional representatives of the parties (but not their account managers or divisional executives) may be present at the meeting. If the General Counsels are unable to resolve the dispute, either Party shall be free to pursue any remedy it shall have at law or in equity. Any resolution reached under this Section 4.5 will be reduced to writing and signed by the Parties. During any dispute resolution procedure conducted under this Section 4.5, the Parties will diligently perform all obligations hereunder that are not directly related to the dispute. Section 5. Compensation 5.1 General. Except as expressly provided for elsewhere in this Agreement, each Party will be responsible for all costs and expenses incurred by such Party in performing its obligations under this Agreement. 5.2 Setup Fee. Upon the Closing, drugstore.com shall pay to ACI a non- refundable set-up fee in the amount of three million dollars ($3,000,000), representing compensation for engineering work performed. 5.3 Annual Fees. During the Term, drugstore.com will pay ACI annual fees in the amounts set forth below ("Annual Fees"): Year 1: $27,000,000.00 Year 2: $35,000,000.00 Year 3: $40,000,000.00 Subject to Section 10.5.2, drugstore.com will pay each of the Annual Fees set forth above in four (4) equal installments due at the end of each consecutive three month period of the Term following the Launch Date ("Quarterly Payments"). 5.4 Prepayment. At the Closing, drugstore.com will pay to ACI $27,000,000.00 via wire transfer, which payment will represent prepayment of the first four Quarterly Payments due under Section 5.3, such that after such prepayment drugstore.com shall have no obligation to make Quarterly Payments until the fifth Quarterly Payment becomes due at the end of the fifth quarter of the Term following the Launch Date. 5.5 Year 3 Equity Option. The parties acknowledge that, at the sole discretion of ACI, but with drugstore.com's approval, drugstore.com shall issue at the second anniversary of the Launch to Amazon.com shares of common stock of drugstore.com with a -10-

then-current fair market value equal to the Annual Fee owed for Year 3 in lieu of such Annual Fee. 5.6 Overdue Payments. Payments called for by this Section 5 that are not received within fifteen (15) days of receipt of an invoice after the end of the period for which payment is due will bear interest at a rate equal to the lesser of one and one-half percent (1-1/2%) per month or the maximum legal rate permitted under the controlling law. Payment of such interest shall not cure or excuse any breach of any underlying payment obligation. 5.7 Allocation of Payments. The parties acknowledge and agree that the Annual Fees shall be allocated as consideration for advertising services and intangible rights granted by ACI to drugstore.com hereunder, including the proprietary rights granted to drugstore.com under Section 6, as set forth on Exhibit C. Section 6. Proprietary Rights 6.1 Ownership. 6.1.1 ACI. As between the Parties, ACI reserves all right, title and interest in and to the "ACI-Furnished Items," as defined below, the "ACI-Owned Developments," as defined below and the Amazon.com Site, along with all Intellectual Property Rights associated with any of the foregoing and no title to or ownership of any of the foregoing is transferred or, except as expressly set forth in Section 6.2, licensed to drugstore.com or any other person or entity. drugstore.com hereby assigns to ACI all right, title and interest that it may have or acquire in and to such items and all associated Intellectual Property Rights, and drugstore.com shall take, at ACI's expense, any actions (including, without limitation, execution and delivery of affidavits and other documents) reasonably requested by ACI to effect, perfect or confirm ACI's or its designee's right, title and interest therein. As used herein, ACI-Furnished Item" means any Technology or Trademark of ACI, Amazon.com or their Affiliates, as the case may be, that (a) is owned or controlled (e.g., by license or otherwise) by ACI, Amazon.com or their Affiliates, as the case may be, (b) is furnished by ACI for use in connection with the activities contemplated by this Agreement, and (c) was developed or in existence prior to the date of this Agreement or is at any time developed by or for ACI, Amazon.com or their Affiliates independent of the activities contemplated by this Agreement. The ACI-Furnished Items include, without limitation, the Amazon.com Site Functionality. As used herein, "ACI-Owned Development" means any Technology (including, without limitation, any adaptation, modification, improvement or derivative work of any ACI-Furnished Item or any drugstore.com-Furnished Item) that is developed (as permitted by this Agreement) by either Party or jointly by the Parties specifically for use solely on the Amazon.com Site or in the Amazon.com Heath and Beauty Section in connection with the activities contemplated by this Agreement; provided, however, that the ACI-Owned Developments do not include, without limitation, any drugstore.com-Furnished Items, as defined below. The ACI-Owned Developments will also include, without limitation, all adaptations, modifications, improvements or derivative works of the Amazon.com Site Functionality that are developed (as permitted by this Agreement) by either Party or jointly by the Parties unless such item is so developed specifically to link or -11-

communicate between the Amazon.com Site and the drugstore.com Site. At the termination of the Agreement, drugstore.com will return all ACI-Furnished Items to ACI and drugstore.com shall have no further rights thereto. 6.1.2 drugstore.com. As between the Parties, drugstore.com reserves all right, title and interest in and to the "drugstore.com-Furnished Items," as defined below, the "drugstore.com-Owned Developments," as defined below, and the drugstore.com Site., along with all Intellectual Property Rights associated with any of the foregoing and no title to or ownership of any of the foregoing is transferred or, except as expressly set forth in Section 6.3, licensed to ACI or any other person or entity. ACI hereby assigns and agrees to assign to drugstore.com all right, title and interest to such items and all associated Intellectual Property Rights, and ACI shall take, at drugstore.com's expense, any actions (including, without limitation, execution and delivery of affidavits and other documents) reasonably requested by drugstore.com to effect, perfect or confirm drugstore.com's or its designee's right, title and interest therein. As used herein, "drugstore.com-Furnished Item" means any Technology or Trademark of drugstore.com that (a) is owned or controlled (e.g., by license or otherwise) by drugstore.com or its Affiliates, as the case may be, (b) is furnished by drugstore.com for use in connection with the activities contemplated by this Agreement, and (c) was developed or in existence prior to the date of this Agreement or is at any time developed by or for drugstore.com independent of the activities contemplated by this Agreement. "drugstore.com-Owned Development" means any Technology (including, without limitation, any adaptation, modification, improvement or derivative work of any ACI-Furnished Item or any drugstore.com-Furnished Item) that is developed (as permitted by this Agreement) by either Party or jointly by the Parties specifically for use solely on the drugstore.com Site in connection with the activities contemplated by this Agreement; provided, however, that the drugstore.com-Owned Developments will not include, without limitation, any ACI-Furnished Item or any adaptation, modification, improvement or derivative work of the Amazon.com Site Functionality that is developed by either Party or jointly by the Parties. At the termination of the Agreement, ACI shall return all drugstore.com-Furnished Items to drugstore.com and ACI shall have no further rights thereto. 6.1.3 Joint. ACI and drugstore.com shall each have an equal and undivided ownership interest in and to the Joint Developments, as defined below, and all associated Intellectual Property Rights, with no duty on the part of either Party to account to the other Party with respect to its use and exploitation of the same. Without limiting the generality of the foregoing, either Party may: (a) make, manufacture, assemble, produce, market, sell, distribute, transfer, use, license and otherwise commercially and non- commercially exploit and deal with the Joint Developments; provided, that neither party shall seek or obtain any registration of any Intellectual Property Rights associated with the Joint Developments without the other Party's prior written consent, (b) make, manufacture, assemble, produce, market, sell, distribute, transfer, use, license, seek and obtain registrations of Intellectual Property Rights (subject to paragraph (a) above) and otherwise commercially and non-commercially exploit and deal with any derivative works of the Joint Developments independently created by or for such Party, whether or not competitive with any items created by or for the other party; and (c) authorize any third party to take any action described in (a) or (b) above. Each Party shall take, at the other Party's expense, any actions (including, -12-

without limitation, execution and delivery of affidavits and other documents) reasonably requested by the other Party to effect, perfect or confirm the other Party's or its designee's right, title and interest any Joint Developments. As used herein, "Joint Development" means any Technology that is developed (as permitted by this Agreement) by either Party or jointly by the Parties specifically (a) to link or communicate between the Amazon.com Site and the drugstore.com Site or (b) for use on both the Amazon.com Site and the drugstore.com Site in connection with the activities contemplated by this Agreement; provided, however, that the Joint Developments will not include, without limitation, any ACI-Furnished Items, any drugstore.com Furnished Items or any adaptation, modification, improvement or derivative work of the Amazon.com Site Functionality or of the drugstore.com Site Functionality that is developed (as permitted by this Agreement) by either Party or jointly by the Parties unless such item is so developed specifically to link or communicate between the Amazon.com Site and the drugstore.com Site. 6.2 ACI License. ACI hereby grants to drugstore.com, during the Term, a non-exclusive, non-transferable license to use the ACI-Furnished Items and ACI- Owned Developments supplied by ACI as is reasonably necessary to perform its obligations under this Agreement; provided, however, that drugstore.com shall not use Trademarks of ACI, Amazon.com or their Affiliates, including in any advertising, without ACI's prior written consent, unless such use conforms to a written Trademark use policy previously furnished by ACI to drugstore.com. All goodwill arising out of any use of any of ACI's, Amazon.com's or their Affiliate's Trademarks by, through or under drugstore.com will inure solely to the benefit of ACI, Amazon.com or such Affiliate, as the case may be. 6.3 drugstore.com License. drugstore.com hereby grants to ACI, during the Term, a non-exclusive, non-transferable license to use the drugstore.com- Furnished Items and drugstore.com Owned-Developments as is reasonably necessary to perform its obligations under this Agreement; provided, however, that ACI shall not use drugstore.com's Trademarks, including in any advertising, without the drugstore.com's prior written consent, unless such use conforms to a written trademark use policy previously furnished by drugstore.com to ACI. All goodwill arising out of any use of any of drugstore.com's marks by, through or under ACI will inure solely to the benefit of drugstore.com. 6.4 Non-Disparagement. Neither drugstore.com nor ACI or Amazon.com will use the other Party's Trademarks in a manner that disparages the other Party or its products or services, or portrays the other Party or its products or services in a false, competitively adverse or poor light. Each of drugstore.com and ACI and Amazon.com will comply with the other Party's requests as to the use of the other Party's Trademarks and will avoid knowingly taking any action that diminishes the value of such marks. Section 7. Representations; Indemnification 7.1 Representations. Each party represents and warrants to the other that: (a) it has the full corporate right, power and authority to enter into this Agreement and perform its obligations hereunder; (b) its performance of this Agreement, and the other party's exercise of such other party's rights under this Agreement, will not conflict with or result in a breach -13-

or violation of any of the terms or provisions or constitute a default under any agreement by which it is bound; (c) when executed and delivered, this Agreement will constitute its legal, valid and binding obligation enforceable against it in accordance with its terms; and (d) it will comply with all applicable laws, regulations and orders of any governmental authority of competent jurisdiction in its performance of this Agreement. 7.2 Indemnity. ACI and drugstore.com (as applicable, the "Indemnifying Party") will each defend, indemnify and hold harmless the other Party (the "Indemnified Party") and its Affiliates (and their respective employees, directors and representatives) from and against any and all claims, costs, losses, damages, judgments and expenses (including reasonable attorneys' fees) arising out of any third party claim or action, to the extent it is based on (a) the operation or content of the Indemnifying Party's Site (other than any items or materials supplied by the Indemnified Party), (b) any actual or alleged breach of the Indemnifying Party's representations or warranties set forth in Section 7.1 above, or (c) any actual or alleged infringement of any Intellectual Property Rights by any materials provided by the Indemnifying Party to the Indemnified Party for its use under this Agreement. Subject to Section 7.3, the Indemnifying Party will pay any award against the Indemnified Party and its Affiliates (and their respective employees, directors or representatives) and any costs and attorneys' fees reasonably incurred by them resulting from any such claim or action. drugstore.com will defend, indemnify and hold harmless the ACI and its Affiliates (and their respective employees, directors and representatives) from and against any and all claims, costs, losses, damages, judgments and expenses (including reasonable attorneys' fees) arising out of any third party claim or action based on the offer, marketing (unless directed by ACI or Amazon.com and drugstore.com has notified ACI that drugstore.com objects to such marketing) or sale of any products or services on the Amazon.com Health and Beauty Site. ACI will defend, indemnify and hold harmless drugstore.com and its Affiliates (and their respective employees, directors and representatives) from and against any and all claims, costs, losses, damages, judgments and expenses (including reasonable attorneys' fees) arising out of any third party claim or action based on the offer, marketing or sale of any products or services on the Amazon.com Product Sections other than the Amazon.com Health and Beauty Section. 7.3 Procedure. In connection with any claim or action described in this Section 7, the Indemnified Party will (a) give the Indemnifying Party prompt written notice of the claim, (b) cooperate with the Indemnifying Party (at the Indemnifying Party's expense) in connection with the defense and settlement of the claim, and (c) permit the Indemnifying Party to control the defense and settlement of the claim, provided that the Indemnifying Party may not settle the claim without the Indemnified Party's prior written consent (which will not be unreasonably withheld). Further, the Indemnified Party (at its cost) may participate in the defense and settlement of the claim with counsel of its own choosing. If the Indemnifying Party chooses not to defend the claim, the Indemnifying Party may control the defense and settlement of the claim. -14-

Section 8. Disclaimers, Limitations and Reservations 8.1 DISCLAIMER OF WARRANTIES. EXCEPT AS PROVIDED IN SECTION 7.1 ABOVE, NEITHER PARTY MAKES, AND EACH PARTY HEREBY WAIVES AND DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES REGARDING THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING (WITHOUT LIMITATION) ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OR IMPLIED WARRANTIES ARISING OUT OF COURSE OF DEALING, COURSE OF PERFORMANCE OR USAGE OF TRADE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH PARTY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (A) THE AMOUNT OF SALES REVENUES THAT MAY OCCUR DURING THE TERM, AND (B) ANY ECONOMIC OR OTHER BENEFIT THAT THE MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT (OTHER THAN THE SPECIFIC SUMS TO BE PAID PURSUANT TO THIS AGREEMENT). 8.2 No Consequential Damages. EXCEPT TO THE EXTENT AWARDED TO A THIRD PARTY IN A JUDGMENT AGAINST WHICH A PARTY IS ENTITLED TO INDEMNIFICATION PURSUANT TO SECTION 7, OR TO THE EXTENT ARISING OUT OF ANY BREACH OF SECTION 11.2, NEITHER PARTY WILL BE LIABLE (WHETHER IN CONTRACT, WARRANTY, TORT (INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE), PRODUCT LIABILITY OR OTHER THEORY), TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY FOR COST OF COVER OR FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF PROFIT, BUSINESS OR DATA) ARISING OUT OF THIS AGREEMENT. 8.3 Responsibility for Web Sites. Subject to the express terms of this Agreement, each Party will remain solely responsible for, and retains sole control over, the programming, content and conduct of transactions on its Site. In the event that either Party receives from a third party a bona fide claim of infringement with a reasonable basis concerning any advertising materials or other content supplied by the other Party, such Party may remove such materials or content supplied by the other party from its Web Site at its sole discretion, pending receipt of a non-infringing replacement materials or content or satisfactory resolution of such claim, and any such removal shall not constitute a breach of this Agreement, provided that such Party first notified the other Party of such claim, made commercial reasonable efforts to discuss such claim with the other Party, and the Parties did not resolve whether materials or content should be removed within five days of such notice. Section 9. Exclusivity. 9.1 Amazon.com Site. 9.1.1 ACI and Amazon.com New Product Sections. During the Term, neither ACI nor Amazon.com will create or maintain a new Amazon.com Product Section -15-

that offers, markets and sells Drugstore Products or Beauty Products, provided, however that ACI or Amazon.com may offer Drugstore Products and Beauty Products, excluding with respect to any party other than Amazon.com, prescription products, in existing or new ACI Product Sections as long as the annual gross revenue derived from such products does not exceed 15% of the combined annual gross revenue derived from sales of all products and services offered by the ACI Product Sections offering such products (excluding the Amazon.com Health and Beauty Section). 9.2 Amazon.com Health and Beauty Section. 9.2.1 Non-Drugstore Products and Non-Beauty Products. drugstore.com will not offer for sale from or through the Amazon.com Health and Beauty Section any products or services that do not constitute a Drugstore Product or a Beauty Product; provided, however, that drugstore.com may sell such products and services from or through the Amazon.com Health and Beauty Section so long as the annual gross revenue derived from the sales of such products and services do not exceed fifteen percent (15%) of the annual gross revenue derived from the sale of all products and services offered from or through the Amazon.com Health and Beauty Section. 9.2.2 Permitted Sales. The Parties may agree from time to time in writing to offer products or services through the Amazon.com Health and Beauty Section that do not constitute a Drugstore Product or a Beauty Product, including cross-promotions of products sold in other Amazon.com Product Sections, in which case sales of such mutually agreeable products and services will not be subject to the limitations of Section 9.2.1. 9.3 drugstore.com Site. drugstore.com may not offer for sale from or through the drugstore.com Site any product or service that does not constitute a Drugstore Product or a Beauty Product; provided, however, that drugstore.com may offer such products or services so long as annual gross revenues from sale of such products and services does not exceed fifteen percent (15%) of the annual gross revenues derived from sales of all products and services offered from or through the drugstore.com Site. 9.4 Records; Audit. Each Party will, during the Term and for a period of one (1) year thereafter, maintain complete and accurate books and records sufficient to verify its compliance or non-compliance with the provisions of this Section 9. Each Party (the "Audited Party") will, upon at least thirty (30) days' prior written request by the other Party (the "Auditing Party"), allow an independent certified public accounting firm selected by the Auditing Party and reasonably acceptable to the Audited Party to audit such books and records at the Audited Party's premises to the extent necessary to verify the Audited Party's compliance or non-compliance with the provisions of this Section 9; provided, that: (a) any such audit is conducted during normal business hours and in a manner designed to not unreasonably interfere with the Audited Party's ordinary business operations; (b) audits may not occur more frequently than once every twelve (12) months; and (c) each such audit may only cover the period commencing after the period covered by the last audit conducted pursuant to this Section, if any. The Auditing Party agrees that any information learned or disclosed by its auditor in connection with such audit is Confidential Information of the -16-

Audited Party. If any such audit reveals any material non-compliance with the provisions of this Section 9 by the Audited Party, the Audited Party shall, within ten (10) days of its receipt of an invoice therefor, reimburse the Auditing Party for all reasonable out-of-pocket fees and expenses incurred by the Auditing Party in connection with the applicable audit. Section 10. Term and Termination 10.1 Term. The Term of this Agreement will commence on the date of the Closing, and unless earlier terminated as provided elsewhere in this Agreement, will end automatically upon the three (3) year anniversary of the Launch Date. 10.2 Termination for Breach. Without limiting any other rights or remedies (including, without limitation, any right to seek damages and other monetary relief and ACI's rights under Section 10.3) that either Party may have in law or otherwise, either Party may terminate this Agreement if the other Party materially breaches its obligations hereunder, provided that (a) the non- breaching Party sends written notice to the breaching Party describing the breach, and (b) the breaching Party does not cure the breach within thirty (30) days following its receipt of such notice. 10.3 ACI Termination. In the event that: (a) drugstore.com at any time engages in any criminal conduct, fraud or other behavior that ACI reasonably determines is harming or is likely to materially harm the goodwill or reputation of ACI, Amazon.com or the Amazon.com Site; (b) drugstore.com has consistently failed to abide by ACI's reasonable requests with respect to the establishment of technical and customer service requirements or with respect to the implementation of Phase Two in accordance with the terms of this Agreement and ACI reasonably determines such failure is causing material harm to Amazon.com and its customers; or (d) drugstore.com becomes insolvent, admits in writing its inability to pay debts as they mature, institutes or has instituted against it any bankruptcy, reorganization, debt arrangement, assignment for the benefit of creditors, or other proceeding under any bankruptcy or insolvency law or dissolution, receivership, or liquidation proceeding (and, if such proceeding is instituted against it, such proceeding is not dismissed within sixty (60) days), the same shall be deemed a material breach of this Agreement pursuant to Section 10.2, but which is not susceptible to cure, and ACI shall be entitled to terminate this Agreement upon written notice to drugstore.com. 10.4 drugstore.com Termination. In the event that: (a) ACI or Amazon.com at any time engages in any criminal conduct, fraud or other behavior that drugstore.com reasonably determines is harming or is likely to materially harm the goodwill or reputation of drugstore.com or the drugstore.com Site; (b) Amazon.com or ACI has consistently failed to abide by drugstore's reasonable requests with respect to the establishment of the same technical and customer service requirements Amazon.com requires of drugstore.com or with respect to the implementation of Phase Two in accordance with the terms of this Agreement and drugstore.com reasonable determines that such failure is causing material harm to drugstore.com and its customers, or (c) Amazon.com becomes insolvent, admits in writing its inability to pay debts as they mature, institutes or has instituted against it any bankruptcy, reorganization, debt arrangement, assignment for the benefit of creditors, or other proceeding -17-

under any bankruptcy or insolvency law or dissolution, receivership, or liquidation proceeding (and, if such proceeding is instituted against it, such proceeding is not dismissed within sixty (60) days), the same shall be deemed a material breach of this Agreement pursuant to Section 10.2, but which is not susceptible to cure, and drugstore.com shall be entitled to terminate this Agreement upon written notice to ACI. 10.5 Effect of Termination. 10.5.1 General. Upon termination of this Agreement, each Party in receipt, possession or control of the other Party's intellectual or proprietary property, information and materials (including any Confidential Information) pursuant to this Agreement must return to the other Party (or at the other Party's written request, destroy) such property, information and materials. Except as provided in Section 10.5.2, drugstore.com will promptly upon any termination of this Agreement pay to ACI a prorated portion of the Quarterly Payment due for the quarter in which termination is effective. Sections 5 through 8, 10 and 11 (together with all other provisions that reasonably may be interpreted as surviving termination or expiration of this Agreement) will survive the termination or expiration of this Agreement. 10.5.2 Liquidated Damages for Breach. Upon termination by ACI for drugstore.com's breach pursuant to Section 10.2, drugstore.com will immediately pay ACI, as liquidated damages, and not as a penalty, such amount as mutually agreed by the Parties. Upon termination by drugstore.com for ACI's breach pursuant to Section 10.2, ACI will immediately pay, as liquidated damages, and not as a penalty, such amount as mutually agreed by the Parties. THE PARTIES ACKNOWLEDGE THAT ACTUAL DAMAGES IN THE EVENT OF ANY MATERIAL BREACH OF THIS AGREEMENT BY A PARTY WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE; THEREFORE, THE PARTIES ACKNOWLEDGE THAT THE LIQUIDATED DAMAGES SPECIFIED IN THIS SECTION 10.5.2 HAVE BEEN AGREED UPON, AFTER NEGOTIATION, AS (A) THE PARTIES' REASONABLE ESTIMATE OF JUST COMPENSATION FOR THE DAMAGES THE NON-BREACHING PARTY WOULD SUFFER AND INCUR BY REASON OF ANY SUCH BREACHES AND (B) TOGETHER WITH TERMINATION OF THIS AGREEMENT, A PARTY'S EXCLUSIVE REMEDY AGAINST THE PARTY BREACHING THIS AGREEMENT. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHTS OR BENEFITS OF ANY LAW, RULE OR REGULATION, NOW OR HEREAFTER EXISTING, THAT WOULD, IN THE EVENT OF SUCH PARTY'S MATERIAL BREACH OF THIS AGREEMENT (1) ALLOW SUCH PARTY TO CLAIM THAT THE LIQUIDATED DAMAGES SPECIFIED IN THIS SECTION 10.5.2 ARE UNREASONABLE IN AMOUNT OR CONSTITUTE A PENALTY OR (2) REQUIRE ACI TO PROVE ACTUAL LOSS IN ORDER TO COLLECT THE FULL AMOUNT OF LIQUIDATED DAMAGES. 10.5.3 Construction by Court. To the extent that any court of competent jurisdiction determines that any provision of this Section 10.5.2 is for any reason unlawful, invalid, in violation of public policy or otherwise enforceable in whole or in part, such provision shall be narrowed in scope to the extent necessary to make the same lawful, valid -18-

and enforceable while as nearly as possible reflecting the intent of the parties as expressed in this Agreement. Section 11. Miscellaneous 11.1 Independent Contractors. The Parties are entering this Agreement as independent contractors, and this Agreement will not be construed to create a partnership, joint venture or employment relationship between them. Neither Party will represent itself to be an employee or agent of the other or enter into any agreement or legally binding commitment or statement on the other's behalf of or in the other's name. 11.2 Nondisclosure. Each Party will protect the Confidential Information of the other Party from misappropriation and unauthorized use or disclosure, and at a minimum, will take precautions at least as great as those taken to protect its own confidential information of a similar nature. Without limiting the foregoing, the Receiving Party will: (a) use such Confidential Information solely for the purposes for which it has been disclosed; and (b) disclose such Confidential Information only to those of its employees, agents, consultants, and others who have a need to know the same for the purpose of performing this Agreement and who are informed of and agree to a duty of nondisclosure. The Receiving Party may also disclose Confidential Information of the Disclosing Party to the extent necessary to comply with applicable law or legal process, provided that the Receiving Party uses reasonable efforts to give the Disclosing Party prompt advance notice thereof. Upon request of the other Party, or in any event upon any termination or expiration of the Term, each Party shall return to the other all materials, in any medium, which contain, embody, reflect or reference all or any part of any Confidential Information of the other Party. Neither Party shall issue any press release or other public announcement regarding, or otherwise disclose, this Agreement or the transactions contemplated herein, or make any filing of this Agreement or other agreements relating to the transactions contemplated herein, without the consent of the other; provided, however, that if a party is required by applicable law to provide public disclosure of this Agreement or the transactions contemplated herein, such party shall use all reasonable efforts to coordinate the disclosure with the other party before issuance, including, but not limited to the submission to the Securities and Commission (and any other applicable regulatory or judicial authority) of an application for confidential treatment of certain terms (which terms shall be agreed upon by the Parties) of this Agreement. Each party shall provide to the other for review a copy of any proposed disclosure of this Agreement or its terms and any application for confidential treatment prior to any such disclosure or application is made and the parties shall work together to mutually approve such disclosure or application. 11.3 Compliance with Laws. In its performance of this Agreement, each Party will comply with all applicable laws, regulations, orders and other requirements, now or hereafter in effect, of governmental authorities having jurisdiction. Except as expressly provided herein, each Party will be responsible for all costs and expenses incurred by it in connection with the negotiation, execution and performance of this Agreement. -19-

11.4 Tax Treatment. 11.4.1 The Parties acknowledge and agree that this Agreement and the transactions contemplated hereby are not intended to create any jurisdiction or authority for any governmental authority to impose any obligation to collect any sales tax, use tax or similar tax in connection with any sales of products by either Party or Amazon.com. Accordingly, both Parties, and Amazon.com, agree to take such action as the other Party may reasonably request (including, without limitation, execution of affidavits and other documents) to avoid or curtail the imposition, by reason of this Agreement or the transactions contemplated hereby, of any such obligation on a Party or Amazon.com, or the establishment of a nexus for tax purposes sufficient to grant any jurisdiction the authority to levy any sales tax, use tax or similar tax on sales of products by a Party or Amazon.com. 11.4.2 Each Party will pay, collect, remit and otherwise be responsible for such taxes as may be imposed upon such Party with respect to any product sales, compensation, royalties or transactions under this Agreement. 11.5 Insurance. drugstore.com and Amazon.com will at their expense obtain and maintain such policy or policies of insurance as is commercially reasonable for the transactions and business contemplated by this Agreement. Upon request from a Party, the other Party will furnish to certificates of insurance and such other documentation relating to such policies reasonably requested. 11.6 Notices. Any notice or other communication under this Agreement given by either Party to the other Party will be in writing and must be sent to the intended recipient by registered letter, receipted commercial courier, or electronically receipted facsimile transmission (acknowledged in like manner by the intended recipient) at its address specified below its signature at the end of this Agreement, and in the case of ACI, with a copy to ACI, c/o Amazon.com, Inc., 1200 12th Avenue South, Suite 1200, Seattle, WA 98144, USA, Facsimile: 206.266.7010, Attn: General Counsel; provided, that no notice of termination of this Agreement shall be deemed properly given unless sent by registered mail to such address(es) and to the attention of such officer(s). Either Party may from time to time change such address or individual by giving the other Party notice of such change in accordance with this Section 11.4. 11.7 Assignment. drugstore.com may not assign or delegate this Agreement or any of its rights or obligations hereunder, whether voluntarily, involuntarily, by operation of law or otherwise, without ACI's prior written consent not to be unreasonably withheld, except to a wholly-owned subsidiary that agrees in writing to be bound by all the terms and conditions of this Agreement or to a corporation resulting from a Change in Control of drugstore.com that in ACI's reasonable judgment is not a competitor, provided, however, that if, after consummation of such Change in Control, ACI determines in its reasonable judgment that such corporation has become a competitor, ACI may terminate the Agreement. ACI may assign this Agreement to (a) any corporation resulting from any merger, consolidation, or other reorganization involving ACI, (b) any of its Affiliates, or (c) any person or entity to which it transfers all or substantially all of its assets; provided that the assignee agrees in -20-

writing to be bound by all the terms and conditions of this Agreement. Subject to the foregoing, this Agreement will be binding on and enforceable by the Parties and their respective successors and permitted assigns. 11.8 Nonwaiver. To be effective, any waiver by a Party of any of its rights or the other Party's obligations under this Agreement must be made in a writing signed by the Party to be charged with the waiver. No failure or forbearance by either Party to insist upon or enforce performance by the other Party of any of the provisions of this Agreement or to exercise any rights or remedies under this Agreement or otherwise at law or in equity shall be construed as a waiver or relinquishment to any extent of such Party's right to assert or rely upon any such provision, right, or remedy in that or any other instance; rather the same shall be and remain in full force and effect. 11.9 Counterparts; Transmitted Copies. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which taken together will constitute but one and the same instrument. To expedite the process of entering into this Agreement, the parties acknowledge that Transmitted Copies of the Agreement shall be equivalent to original documents until such time (if any) as original documents are completely executed and delivered. "Transmitted Copies" shall mean copies which are reproduced or transmitted via facsimile, or another process of complete and accurate reproduction and transmission. 11.10 Headings. The headings of sections and subsections of this Agreement are for convenience of reference only and are not intended to restrict, affect or otherwise influence the interpretation or construction of any provision of this Agreement. 11.11 Choice of Law. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Washington, without reference to its choice of law rules. 11.12 Venue. Each Party hereby irrevocably consents to exclusive personal jurisdiction and venue in the state and federal courts located in King County, Washington, with respect to any claim arising out of or related to this Agreement and each Party agrees not to commence or prosecute any such Claim other than in the aforementioned courts. 11.13 Conflict with Existing Agreements. To extent a direct conflict exists during the Term between this Agreement and the Amended and Restated Technology License and Advertising Agreement, dated August 10, 1998, between drugstore.com, Amazon.com and Amazon.com D, Inc. (the "Technology License Agreement"), this Agreement shall supercede the Technology License Agreement; provided, however, that no license granted by either party to the other in the Technology License Agreement is superceded. To the extent a conflict exists during the Term between this Agreement and the Marketing Agreement, between drugstore.com and Amazon.com (the "Marketing Agreement"), this Agreement shall supercede the Marketing Agreement. The parties hereby agree that the reference to "a substantial and sustained marketing efforts" in the Marketing Agreement shall be deemed met by Section 3 with respect to both Parties. -21-

11.14 Entire Agreement. This Agreement (a) represents the entire agreement between the Parties with respect to the subject matter hereof and supersedes any previous or contemporaneous oral or written agreements regarding such subject matter and (b) may be amended or modified only by a written instrument signed by a duly authorized agent of each Party. No breach of this Agreement by either Party shall affect the rights or obligations of either Party under any other Agreement between the Parties; rather, the same will remain in full force and effect. -22-

ACI --Amazon.com Commerce Services, Inc. By:_________________________________ Title:______________________________ Date:_______________________________

drugstore.com: ------------drugstore.com, inc. By:_________________________________ Title:______________________________ Date:_______________________________

Notice Address: ACI c/o Amazon.com, Inc. 1200 12th Avenue South, Suite 1200 Seattle, WA 98144 Facsimile: 206.266.7010

Notice Address: drugstore.com, inc. 13920 S.E. Eastgate Way, Suite 300 Bellevue, WA 98005 Facsimile: 425.372.3808

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Exhibit A SITE, TECHNICAL AND CUSTOMER SERVICE STANDARDS [To Come] -24-

EXHIBIT B PRIVACY POLICY -25-

EXHIBIT C ALLOCATION OF PAYMENTS
-------------------------------------------------------------------------------Year Advertising Services Intangible Assets -------------------------------------------------------------------------------1 $ 900,000 $29,100,000 -------------------------------------------------------------------------------2 $1,050,000 $33,950,000 -------------------------------------------------------------------------------3 $1,200,000 $38,800,000 --------------------------------------------------------------------------------

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PERFORMANCE GUARANTEE OF AMAZON.COM, INC. Amazon.com, Inc. ("Amazon.com") hereby guarantees the full performance of all obligations of Amazon.com Commerce Services, Inc. ("ACI") pursuant to the Agreement, dated January 24, 2000, between ACI and drugstore.com (the "Agreement"), and any obligations of any majority owned (directly or indirectly) subsidiary of Amazon.com pursuant to the Agreement, and hereby agrees that all restrictions imposed on ACI under the Agreement will apply to Amazon.com and each majority owned (directly or indirectly) subsidiary of Amazon.com, subject to and in accordance with the following: (a) Amazon.com will only be a guarantor of such obligations and not a party thereto or to the Agreement; (b) Upon any alleged breach or default of any such obligation, Amazon.com will be entitled to assert on its own behalf such defenses as may be asserted by ACI or its Affiliates with respect thereto; and (c) drugstore.com acknowledges and agrees that Amazon.com may in its discretion satisfy its obligations under this guarantee by causing one or more of its Affiliates to perform its obligations hereunder. Dated: January 24, 2000 Amazon.com, Inc. By: Mark Britto Its: Vice President, Strategic Alliances

EXHIBIT 10.37 STOCK PURCHASE LETTER AGREEMENT This Stock Purchase Letter Agreement, dated as of January 24, 2000, sets forth the entire agreement between drugstore.com, inc., a Delaware corporation ("drugstore.com"), and Amazon.com, Inc., a Delaware corporation ("Amazon.com"), regarding the issuance and sale by drugstore.com of 1,066,667 shares (the "Amazon.com Shares") of the common stock, par value $0.0001, of drugstore.com (the "Common Stock") in a private placement transaction. Unless otherwise defined herein, all capitalized terms shall have the meanings ascribed to them in the Fourth Amended and Restated Investors' Rights Agreement, dated May 19, 1999, as amended (the "IRA"). A. drugstore.com hereby agrees to issue and sell to Amazon.com, and Amazon.com, on the basis of the representations and warranties herein contained and subject to the terms and conditions hereof, hereby agrees to purchase from drugstore.com, the Amazon.com Shares, at a purchase price of $28.125 per share (representing the average closing prices of the Common Stock for the five trading days immediately preceding the date hereof). Payment for the Amazon.com Shares shall be made by Amazon.com to an account designated by drugstore.com by wire transfer of immediately available funds in the amount of $30,000,009.37. Such payment will be made at 9:00 a.m. Seattle time, on January 24, 2000 (the "Closing Time"). A certificate or certificates representing the Amazon.com Shares shall be delivered by drugstore.com to Amazon.com at the Closing Time or as soon as practicable thereafter. As a condition to the closing of the transaction contemplated by this Stock Purchase Letter Agreement, at the Closing Time, drugstore.com shall deliver to Amazon.com a legal opinion of its counsel regarding such transaction in form and substance reasonably satisfactory to Amazon.com. B. drugstore.com hereby certifies that the representations and warranties of drugstore.com attached hereto as Exhibit A are true and correct as of the date hereof and as of the Closing Time. C. (i) drugstore.com will use its reasonable best efforts to amend the IRA to include the Amazon.com Shares in the definition of "Registrable Securities" contained in Section 1.1(b) of the IRA for all purposes and subject to all conditions of the IRA. (ii) drugstore.com shall use its reasonable best efforts to list the Amazon.com Shares on the Nasdaq National Market as soon as practicable after the date hereof. D. (i) Amazon.com hereby confirms that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act of 1933, as amended (the "Act"); that it has read the Private Placement Memorandum dated as of January 23, 2000 (the "Disclosure Document") attached hereto as Exhibit B and has had an opportunity to ask questions and obtain answers concerning the information provided in the Disclosure Document; that the Amazon.com Shares

are being acquired for investment purposes only for its own account; and that it has no present intention of selling or otherwise distributing the shares. Amazon.com further acknowledges that the Amazon.com Shares are "restricted securities" under applicable federal and state securities laws and that, pursuant to these laws, Amazon.com must hold the shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. (ii) Amazon.com agrees that the certificate or certificates representing the Amazon.com Shares, and any certificate or certificates delivered in substitution or exchange therefor, shall bear a legend substantially in the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT OR (B) UPON RECEIPT BY DRUGSTORE.COM, INC. OF AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE SATISFACTORY TO DRUGSTORE.COM, INC., STATING THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." drugstore.com shall cause such legend to be removed with respect to any Amazon.com Shares that are transferred pursuant to an effective registration statement under the Act or pursuant to Rule 144 under the Act. E. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts laws. 2

IN WITNESS WHEREOF, the parties have executed and delivered this Stock Purchase Letter Agreement as of the date first written above. DRUGSTORE.COM, INC. By Title AMAZON.COM, INC. By Title 3

Exhibit A Representations and Warranties of the drugstore.com drugstore.com (the "Company") represents and warrants to Amazon.com that, as of the date hereof: (a) The Disclosure Document, as of its date, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that (i) the Disclosure Document contains no disclosure of any kind regarding the transactions contemplated by this Stock Purchase Agreement or related agreements and (ii) the Disclosure Document contains disclosure regarding a proposed public offering (the "Offering") by the Company and certain selling stockholders of shares of Common Stock, and there can be no assurance that the Offering will occur as contemplated in the Disclosure Document or at all. (b) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Disclosure Document and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (c) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Disclosure Document and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. No subsidiary is a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the Securities Act of 1933, as amended (the "Securities Act"). (d) This Stock Purchase Agreement Letter has been duly authorized, executed and delivered by the Company. (e) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Disclosure Document. (f) The shares of Common Stock outstanding prior to the issuance of the Amazon.com Shares have been duly authorized and are validly issued, fully paid and non-assessable. 1

(g) The Amazon.com Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Stock Purchase Letter Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such shares will not be subject to any preemptive or similar rights. (h) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Stock Purchase Letter Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, except where such contravention would not singly or in the aggregate, have a material adverse effect on the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Stock Purchase Letter Agreement, except such as may be required by securities or Blue Sky laws. (i) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Disclosure Document. (j) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Disclosure Document and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Disclosure Document that are not described as required. (k) The Company is not and, after giving effect to the offering and sale of the Amazon.com Shares and the application of the proceeds thereof, will not be required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (l) The Company and its subsidiaries (i) are in compliance with any and all applicable, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (m) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, 2

closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (n) Except as described in the Disclosure Document, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company. (o) Subsequent to the respective dates as of which information is given in the Disclosure Document, (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in the Disclosure Document and except for the transactions contemplated by this Stock Purchase Letter Agreement or related agreements. (p) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Disclosure Document or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Disclosure Document. (q) Except as described in the Disclosure Document, the Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), Internet domain names, trademarks, service marks and trade names ("Intellectual Property") currently employed by them in connection with the business now operated by them; neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse affect on the Company and its subsidiaries, taken as a whole. (r) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Disclosure Document, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent 3

labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company and its subsidiaries, taken as a whole. (s) The Company and its subsidiaries are insured by the insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Disclosure Document. (t) The Company and its subsidiaries are in material compliance with all applicable, federal, state and local laws and regulations relating to the Company's pharmacy operations as described in the Disclosure Document; the Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state, or local regulatory authorities necessary to conduct their respective business, including being licensed and in good standing as a pharmacy in the State of Washington and as a non-resident pharmacy in each state where a license is required by the Company's current pharmacy operations; to the best knowledge of the Company, RxAmerica, L.L.C. and Rite Aid Corporation possess all certificates, authorizations and permits issued by the appropriate federal or state regulatory authorities necessary to fulfill its obligations to the Company under the Pharmacy Service Agreement (the "Pharmacy Service Agreement") dated February 8, 1999 and the Pharmacy Supply and Services Agreement (the "Rite Aid Agreement") dated June 17, 1999, respectively, including being a licensed resident pharmacy in each state where a license is required; and neither the Company, any of its subsidiaries, or to the best knowledge of the Company, RxAmerica, L.L.C. or Rite Aid Corporation, has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Disclosure Document. (u) The Company and its subsidiaries have not received written notice of termination of (i) the Pharmacy Service Agreement, (ii) the Rite Aid Agreement, or (iii) the Service and Supply Agreement dated January 29, 1999 between the Company and Walsh Distribution, Inc. (v) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 4

(w) The Company has reviewed its operations and that of its subsidiaries to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be or has been affected by the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company and its subsidiaries will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); as a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have or has had a material adverse effect on the condition, financial or otherwise, or on the earnings, business or operations of the Company and its subsidiaries, taken as a whole, or result in any material loss or interference with the business or operations of the Company and its subsidiaries, taken as a whole. 5

EXHIBIT 10.38 THIRD ADDENDUM TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT THIS THIRD ADDENDUM (this "Addendum") dated as of January 24, 2000, to the Fourth Amended and Restated Investors' Rights Agreement dated as of May 18, 1999 as amended (the "Rights Agreement"), by and among drugstore.com, inc., a Delaware corporation (the "Company") and the parties listed on Exhibit A hereto hereby adds certain securities to the definition of "registrable securities" under the Rights Agreement. Two prior addenda to the Rights Agreement dated as of June 17, 1999 and July 26, 1999 remain in full force and effect. RECITALS A. The Company and Amazon.com, Inc. ("Amazon.com") have entered into a letter agreement (the "Stock Purchase Letter Agreement"), a copy of which is attached as Exhibit B hereto, pursuant to which the Company will sell to Amazon.com and Amazon.com will purchase from the Company 1,066,667 of shares of the Company's Common Stock in a private placement transaction (the "Amazon Private Placement"). The Company and the Investors party to the Rights Agreement are willing to grant Amazon.com registration rights with regard to such shares. B. Pursuant to Section 5.2 of the Rights Agreement, this Addendum is being executed by the Company and the holders of at least two-thirds (2/3) of the Registrable Securities presently outstanding, thereby permitting the Rights Agreement be amended hereby. C. Capitalized terms used herein and not defined shall have the meanings given to them in the Rights Agreement. AGREEMENT 1. The parties agree that for purposes of Section 1 of the Rights Agreement, shares of Common Stock of the Company issued to Amazon.com pursuant to the Amazon Private Placement shall be deemed to be "Registrable Securities" for all purposes and subject to all conditions of the Rights Agreement. 2. This Addendum shall become effective immediately upon the receipt of the required two-thirds (2/3) consent. Upon such effectiveness: (a) all references in any document to the Rights Agreement shall be deemed to be references to the Rights Agreement as modified by this Addendum; and (b) except as specifically modified hereby, the Rights Agreement shall continue in full force and effect in accordance with the provisions thereof.

2 3. This Addendum, which shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws, may be executed in counterparts. [Signature Page Follows]

3 The parties have executed this Third Addendum to the Fourth Amended and Restated Investors' Rights Agreement as of the date first above written.
COMPANY: DRUGSTORE.COM, INC., INVESTORS: RITE AID CORPORATION,

By: ------------------------------Peter M. Neupert President Address: 13920 SE Eastgate Way Suite 300 Bellevue, WA 98005

By: -----------------------------Name: Title: Address: 30 Hunter Lane Camp Hill, PA 17011

GENERAL NUTRITION COMPANIES, INC. By: Name:

Title: Address: 300 6th Avenue Pittsburgh, PA 17011 VULCAN VENTURES INCORPORATED, By: Name:

Title: Address: 110 110th Avenue NE, Suite 550 Bellevue, WA 98004

4 KLEINER PERKINS CAUFIELD & BYERS VIII, L.P., By: KPCB VIII Associates, L.P., its General Partner By: a General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII FOUNDERS FUND, L.P., By: KPCB VIII Associates, L.P., its General Partner By: a General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025 KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P. By: KPCB VII Associates, L.P., its General Partner By: a General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025

5 AMAZON.COM, INC. By: Name:

Title: Address: 1516 2nd Avenue Seattle, WA 98101 PETER M. NEUPERT

Peter M. Neupert Address: 13920 SE Eastgate Way, Suite 300 Bellevue, WA 98005 DRUGSTORE.COM FOUNDATION By: Name:

Title: Address: 13920 SE Eastgate Way, Suite 300 Bellevue, WA 98005 MAVERON EQUITY PARTNERS, L.P. By: Name:

Title: Address: 800 Fifth Ave., Suite 4100 Seattle, WA 98104

6 LIBERTY DS, INC. By: Name:

Title: Address: 9197 South Peoria Street Englewood, CO 80112 DAVID WHORTON

David Whorton Address: c/o Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025

7 EXHIBIT A INVESTORS Name and Address Rite Aid Corporation 30 Hunter Lane Camp Hill, PA 17011 General Nutrition Companies, Inc. 300 6th Avenue Pittsburgh, PA 15222 Vulcan Ventures Incorporated 110th Avenue Northeast, Suite 550 Bellevue, WA 98004 Kleiner Perkins Caufield & Byers VIII 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII Founders Fund, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 KPCB Life Sciences Zaibatsu Fund II, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 David Whorton c/o Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Amazon.com, Inc. 1516 2nd Avenue Seattle, WA 98101 Attn: General Counsel Peter M. Neupert 13920 SE Eastgate Way, Suite 300 Bellevue, WA 98005 Maveron Equity Partners, L.P. 800 Fifth Avenue, Suite 4100 Seattle, WA 98104

8 Liberty DS, Inc. 9197 South Peoria Street Englewood, CO 80112 drugstore.com Foundation Attn: Alesia L. Pinney 13920 SE Eastgate Way, Ste. 300 Bellevue, WA 98005

Exhibit 21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT DS Pharmacy, Inc., a Delaware corporation DS Distribution, Inc., a Delaware corporation DS Non-Pharmaceutical Sales, Inc., a Delaware corporation DSGC Idaho, Inc., a Idaho corporation

Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated January 21, 2000, except as to Note 10, as to which the date is February 2, 2000, in the Registration Statement (Form S-1) and related Prospectus of drugstore.com, inc. for the registration of 6,020,000 shares of its common stock.
/s/ Ernst & Young LLP Seattle, Washington February 7, 2000

ARTICLE 5 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED

YEAR JAN 02 2000 JAN 01 1999 JAN 02 2000 26,526 106,228 4,524 251 2,862 149,232 28,387 3,179 395,708 42,272 2,687 0 0 485,377 (134,628) 395,708 34,848 34,848 38,440 38,440 117,151 0 124 (115,831) 0 (115,831) 0 0 0 (115,831) (6.13) (6.13)

Exhibit 99.1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE We have audited the financial statements of drugstore.com, inc. as of January 2, 2000 and December 31, 1998 and for the year ended January 2, 2000 and the period from April 2, 1998 (inception) to December 31, 1998, and have issued our report thereon dated January 21, 2000, except as to Note 10, as to which the date is February 2, 2000 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP Seattle, Washington February 7, 2000