Supply and Services Agreement - Walsh Distribution Inc. and Drugstore.com Inc.


                         SUPPLY AND SERVICES AGREEMENT

     This Agreement is made and entered into this 29th day of January, 1999, by
and between Walsh Distribution, Inc., an Arkansas Corporation having a principal
place of business at 5005 State Line Avenue, Texarkana, Bowie County, Texas,
75501 (hereinafter referred to as "Walsh"), and DRUGSTORE.COM, INC., a Delaware
Corporation, having its principal place of business at 18650 NE 67th Court,
Redmond, Washington 98032 (hereinafter referred to as "Drugstore").

     WHEREAS, Walsh is a wholesale supplier and distributor of prescription
drugs, pharmaceuticals, health and beauty care products and other over the
counter products customarily sold in retail pharmacies; and

     WHEREAS, Drugstore is in the process of establishing an internet based on-
line shopping site for the retail sale of products customarily sold in retail
pharmacies; and

     WHEREAS, Drugstore desires to purchase from Walsh certain items, to furnish
other items from sources other than Walsh, and to provide for the packaging for
both such products by Walsh for shipment by Drugstore to its customers who order
said products from its internet based on-line shopping site; and

     WHEREAS, Walsh desires to sell specified products to Drugstore, to package
said products together with products provided by Drugstore and deliver the same
to Drugstore for sale by Drugstore to its customers through Drugstore's internet
based on-line shopping site;

     NOW, THEREFORE, in consideration of the mutual obligations and promises and
additional consideration set forth herein, Walsh and Drugstore agree as follows:

1.   Definitions.

     The following terms shall have the definitions as set forth below.

     (a)  Walsh Inventory - those items, products and goods owned by Walsh to be
          sold to Drugstore consisting initially of approximately [*] shelf
          keeping units (SKU), currently purchased as inventory by Walsh for its
          own account together with those additional line items which Walsh
          agrees to add to its inventory at the request of Drugstore.

     (b)  Drugstore Inventory - those items, products and goods owned by
          Drugstore and supplied to Walsh with the approval of Walsh (which
          shall not be unreasonably withheld) for packaging for shipment to
          Drugstore's on-line customers consisting initially of approximately
          [*] shelf keeping units (SKU) not currently purchased as inventory by
          Walsh but which Drugstore desires to make available to its customers.

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.


 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
     (c)  Line - means one or more items of the same shelf keeping unit (SKU) as
          that term is customarily used in the pharmaceutical and health and
          beauty care products wholesale industry.

     (d)  Deadnet Cost - means the manufacturer's wholesale list price reduced
          by applicable vendor allowances and cash discount, if any.

     (e)  Delivery Point - the staging area in the building located at 5101A
          Stateline Avenue, Texarkana, Bowie County, Texas, where packaged and
          sealed goods, labeled and ready for shipment, are delivered by Walsh
          to Drugstore. Walsh shall determine and designate the staging area.

2.   Walsh inventory.

     Walsh agrees to sell and Drugstore agrees to buy Walsh Inventory to supply
orders of goods made by customers of Drugstore on its internet based on-line
shopping site during the term of this agreement upon the following terms:

     (a)  The price to be paid by Drugstore for items of Walsh Inventory shall
          be the current Deadnet Cost plus [*] of Deadnet Cost for each item
          purchased by Drugstore.

     (b)  Walsh shall bill Drugstore daily for Walsh Inventory purchased by
          Drugstore.

     (c)  Drugstore shall pay Walsh within 15 days of invoice date by electronic
          funds transfer to the following account:

              [*]
              ABA #:  [*]
              Account Name:  Walsh Distribution, Inc.
              Account #:  [*]

     (d)  Drugstore shall deposit the sum of $50,000.00 with Walsh as security
          for payment of amounts owed to Walsh by Drugstore for purchases of
          Walsh inventory. If any invoice remains unpaid on the 18 day after the
          date of the invoice, Walsh may deduct from the deposit the amount
          necessary to pay said invoice. The deposit amount shall be replenished
          by Drugstore within 2 days of receipt by Drugstore of notice from
          Walsh. If at any time, and each time, that monies owed by Drugstore to
          Walsh for purchases of Walsh inventory exceed the deposit amount by
          10% of the deposit amount, Drugstore shall increase the deposit to a
          sum equal to 100% of the monies owed to Walsh; provided, the security
          deposit shall not be less than $50,000.00 during the period of time
          for which a deposit is required.

     (e)  If Drugstore remains current in its payment of invoices owed to Walsh
          for Walsh inventory without any material invoices becoming past due
          during the first 6 months commencing with the date of the first
          purchase by Drugstore from Walsh,

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 2

 
          the requirement for a deposit shall be terminated and the deposit
          amount shall be applied by Walsh to the next occurring invoices until
          the deposit has been exhausted. However, should any invoice not be
          paid when due (thus, requiring payment made from the security
          deposit), during the first 6 months, the requirement for the security
          deposit shall continue until such time as 6 months have expired
          without any past due invoices.

     (f)  Upon termination of this agreement, either at the expiration of the
          term or the expiration of any extended or carry over term or for any
          other reason, after payment of all sums owed by Drugstore to Walsh
          under the terms of this Agreement, including but not limited to
          invoices for purchases of Walsh inventory and handling charges, the
          security deposit, or such portion thereof remaining, if any, shall be
          paid by Walsh to Drugstore. Upon termination of this Agreement, either
          at its original term or any extended or carry over term or for any
          other reason, the security deposit may be applied by Walsh upon any
          and all amounts owed by Drugstore to Walsh under the terms of this
          Agreement.

     (g)  Drugstore is not required to send any orders to Walsh for Walsh
          Inventory or Drugstore Inventory, or purchase any Walsh Inventory
          beyond the requirements set forth in Section 6(c).

3.   Drugstore Inventory.

     Drugstore shall order and have shipped to the premises of Walsh at 5101A
Stateline Avenue, Texarkana, Texas, the Drugstore Inventory in accordance with
the following terms:

     (a)    For so long as Drugstore uses Walsh services to fulfill orders of
          Drugstore inventory, Drugstore may use the inventory purchase and
          management system that is currently used by Walsh. In the event
          Drugstore elects not to use the Walsh inventory purchase and
          management system, Walsh shall create the interface to accept the
          completed purchase order data from Drugstore's system to Walsh's
          system.

     (b)  In the event Drugstore elects to use Walsh's inventory and management
          system, Drugstore shall coordinate the purchase of all Drugstore
          inventory through Walsh; however, all such purchasing shall be in the
          name of Drugstore, billed to Drugstore and paid by Drugstore directly
          to the manufacturers and/or distributors. At no time shall Walsh be
          responsible for the mis-ordering, mis-shipment or other errors
          relating to the ordering and receipt of Drugstore Inventory. Drugstore
          shall have Drugstore Inventory shipped to the premises of Walsh at
          5101A Stateline Avenue, Texarkana, Texas 75501.

     (c)  In the event Drugstore elects to use Walsh's inventory purchase and
          management system and Walsh incurs any fees or other charges for
          allowing such use by Drugstore, Drugstore will reimburse Walsh for any
          and all such charges or fees

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SUPPLY AGREEEMENT
PAGE 3

 
          within 15 days of the date of the invoice from Walsh to Drugstore for
          said charges or fees.

     (d)  In the event Drugstore elects to use Walsh's inventory purchase and
          management system, Drugstore shall be responsible for, and bear the
          expense of, maintaining the integrity of the Drugstore Inventory
          files.

4.   Product Orders.

     Orders by customers of Drugstore shall be forwarded by Drugstore to Walsh.
Upon Walsh's receipt of confirmation of the purchase from Drugstore, the order
shall be handled in the following procedure:

     (a)  Walsh shall pick those items of Walsh Inventory from its product
          inventory;

     (b)  Walsh shall pick those items of Drugstore Inventory from the Drugstore
          Inventory stored on the Walsh premises;

     (c)  Walsh shall validate order accuracy (using hardware and software
          supplied by Drugstore and in accordance with reasonable Drugstore
          approved procedures), pack the ordered items in boxes and/or other
          packaging materials provided by Drugstore, seal and label the package
          for shipment;

     (d)  Walsh shall deliver the package to the Drugstore employees at the
          Delivery Point;

     (e)  Drugstore shall accept the goods at the Delivery Point at which time
          title to the Walsh Inventory in the package passes to Drugstore, and
          the wholesale sale of the Walsh Inventory items is completed.

5.   Shipping of Products.

     (a)  All materials required for shipment of products, including but not
          limited to all boxes, packages, packing materials, tape, and labels
          shall be provided by Drugstore at its own expense.

     (b)  Drugstore shall be fully responsible for all packaged products once
          they have been delivered to Drugstore or its agents at the Delivery
          Point by Walsh. Drugstore shall provide and make arrangement for
          shipping of packaged products and shall pay all shipping charges from
          the Delivery Point except as hereinafter provided.

6.   Handling Fees and Bonus Payments.

     Drugstore shall pay to Walsh handling fees and bonus payments for the
handling, picking and packaging for shipment of both Walsh Inventory and
Drugstore Inventory in accordance with the following terms:

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SUPPLY AGREEMENT
PAGE 4

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
     (a)  Drugstore shall pay to Walsh a basic handling charge of [*] per order
          of goods which shall include up to [*] Lines of product regardless of
          the quantity of items of any one particular line of product. In
          addition, for each Line of product in excess of [*] for each order,
          Drugstore shall pay to Walsh an additional [*] per Line. In
          determining the number of Lines of product in an individual order,
          both Walsh Inventory and Drugstore Inventory shall be included. The
          picking and packing of samples, leaflets and other marketing materials
          shall not be considered a Line. However, if the picking and packing of
          such items materially increases the cost of fulfillment to Walsh,
          Walsh shall notify Drugstore. The parties will, within five days of
          such notice, discuss methods to reduce or eliminate the additional
          cost to Walsh, including reducing the picking and packing requirements
          for such materials or paying Walsh its cost for picking and packing
          such materials. In the event the parties fail to reach an agreement,
          to reduce or eliminate the additional costs to Walsh within ten days
          from the date of Walsh's notice to Drugstore, Walsh may discontinue
          the picking and packing of samples, leaflets and other marketing
          materials until such time the parties may so agree; and any such
          failure by Walsh to pick and pack any such samples, leaflets or other
          marketing materials shall not be considered a terminable event by
          either party under the terms of this Agreement.

     (b)  Walsh shall invoice Drugstore for handling charges daily. Invoices are
          due on the fifteenth (15th) day after the date of the invoice (net 15
          days) and must be paid by electronic funds transfer to the account
          specified in paragraph 2(c) above.

     (c)  Drugstore hereby guarantees a minimum of [*] customer orders for
          product to be handled by Walsh during the three-year term of this
          Agreement. If Drugstore (1) ceases business for any reason and/or this
          Agreement is terminated for any reason other than default or breach by
          Walsh, or (2) does not send [*] orders to Walsh during the
          initial three-year term, Drugstore shall pay to Walsh a sum calculated
          as follows:

          i.   where the actual number of orders processed by Walsh is less than
               [*] orders, Drugstore shall pay that sum of money which is equal
               to the number of actual orders processed subtracted from [*]
               multiplied by [*] PLUS the difference between the number of
               actual orders processed and [*] multiplied by [*]. For example,
               if the number of actual orders processed is equal to [*] orders,
               then Drugstore would pay to Walsh the sum of [*] which is the
               result of the following calculation: [*]

          ii.  where the actual number of orders processed by Walsh is equal to
               or greater then [*] orders, Drugstore shall pay that sum of money
               which is equal to the number of actual orders processed
               subtracted from [*] orders multiplied by [*]. For example, if the
               number of

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 5

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
               actual orders processed is equal to [*] orders, then Drugstore
               would pay to Walsh the sum of [*] which is the result of the
               following calculation: [*].

          Said sums shall be due and payable within 15 days after (1) cessation
          of business by Drugstore (2) termination of this Agreement for any
          reason other than default or breach by Walsh, or (3) the end of the
          initial three year term, whichever first occurs.

     (d)  [*]

     (e)  In the event either Drugstore or Drugstore's customer request
          additional special handling of an order such as gift wrap, extra
          packaging or extra wrapping, Walsh may impose a special handling
          charge upon each such order as the parties may so agree. All
          specialized wrapping, packaging and shipping supplies shall be
          furnished by Drugstore at Drugstore's cost.

     (f)  In the event that Walsh fails to pick the required inventory, package
          it for shipment and deliver it to the Delivery Point at or before [*]
          Central Standard Time (or Central Daylight Savings Time when Daylight
          Savings Time is being observed) on the date of receipt of the order,
          Walsh shall reimburse Drugstore for the shipping charges paid by
          Drugstore upon that Order. This penalty shall not apply to any order
          which cannot be filled due to circumstances beyond the control of
          Walsh, including but not limited to acts of God, strikes at facilities
          other than Walsh facilities, transportation interruptions affecting
          the supply of Walsh Inventory, manufacturer or distributor back orders
          and insufficient Drugstore inventory or packaging supplies.

     (g)  Drugstore shall pay to Walsh bonus compensation in accordance with the
          following terms:

          (i)  at the end of each calendar quarter during the term of this
               Agreement, commencing on March 31, 1999, a review of the goods
               and services provided by Walsh in accordance with the terms of
               this Agreement shall be made. Walsh shall be entitled to bonus
               compensation of [*] per processed order for each calendar
               quarter, if, and only if, the following bonus criteria are met:

               (A)  Orders received before [*] each day are delivered to the
                    Delivery Point not later than [*] of the same day at a rate
                    equal to or greater than [*] of the time.

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 6

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
               (B)  Walsh has maintained Walsh Inventory available to fill
                    customer orders in stock and available for picking at least
                    [*] of the time; provided, however, adjustments shall be
                    made to account for manufacturer and distributor backorders
                    of product, unavailable product, recall product, or any
                    other circumstances outside of Walsh's control which affect
                    the timely receipt of product by Walsh.

               (C)  Walsh's accuracy in filling and packaging for shipment in
                    accordance with Drugstore customer orders is at or exceeds
                    [*].

               (D)  Orders which are not filled and packaged ready for shipping
                    due to events beyond the control of Walsh including but not
                    limited to acts of God, strikes at facilities other than the
                    Walsh facilities, transportation interruptions affecting the
                    supply of Walsh inventory, unavailability of Walsh or
                    Drugstore Inventory from the manufacturer or distributor,
                    and unavailability of adequate and proper packaging and
                    shipping materials to be supplied by Drugstore, shall not be
                    considered in determining whether or not Walsh has met the
                    bonus criteria specified in (A) through (C) above.

         (ii)  Bonus compensation as provided in this paragraph shall be paid
               within 15 days of the invoice date by electronic funds transfer
               to the address and account provided in paragraph 2 (c) above.

         (iii) Customer Returns of Goods shall be directed to the attention of
               Walsh at 5005 North Stateline Avenue, Texarkana, Texas. Receipt
               of all returned goods shall be by Walsh personnel. Returned goods
               shall be handled as follows:

               (A)  Determination of Saleable and Unsaleable Product.

                    Walsh shall determine whether a returned item is Saleable or
                    Unsaleable at its sole and final discretion. For those items
                    determined by Walsh to be Saleable, Walsh shall restock the
                    product at its cost and shall credit to Drugstore the full
                    amount of the product's cost paid by Drugstore. For those
                    items determined by Walsh to be Unsaleable, Walsh shall
                    destroy, or make other arrangements for the disposal of,
                    such product at Walsh's cost.

               (B)  Handling Fees.

                    For each and every returned order, including the return of
                    partial orders, Walsh shall be paid a processing fee of
                    [*] per order. Walsh shall invoice Drugstore for
                    processing fees daily. Invoices

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 7

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
                    are due on the fifteenth (15th) day after the date of the
                    invoice (net 15 days) and must be paid by electronic funds
                    transfer to the account specified in paragraph 2(c) above.

     7.   Reimbursement of Walsh Cost.

          Drugstore shall reimburse Walsh for certain startup and ongoing costs
of operations in fulfillment of its obligations under this contract in
accordance with the following terms:

          (a)  Drugstore shall reimburse Walsh as the start up expenses are
               incurred as follows:

              (i)   The sum of [*] for upgrade and modifications to Walsh's
                    AS400 Computer System to the standards necessary to perform
                    under this Agreement;

              (ii)  A sum not to exceed [*] for the expense of computer
                    programming and support (including but not limited to the
                    costs of payroll, benefits, travel, lodging, meals, etc.) to
                    implement the necessary software changes to Walsh's computer
                    system in order to perform its obligations under this
                    Agreement; and

              (iii) A sum not to exceed [*] for expenses of Walsh in initially
                    stocking Drugstore inventory, programming for exchange of
                    order and receiving information between Walsh and Drugstore,
                    and computer programming and training for inventory
                    tracking.

              (iv)  Drugstore shall reimburse Walsh for the actual out-of-pocket
                    costs related to any additional programming not described in
                    (i) - (iii) above such as the interface programming with
                    Drugstore's new "scan data" hardware/software system.

              (v)   Sums to be reimbursed under this paragraph (a) shall be
                    invoiced by Walsh to Drugstore as incurred, and shall be
                    paid by Drugstore within [*] days by electronic funds
                    transfer to the address and account provided for in
                    paragraph 2(c) above.

          (b)  Drugstore shall additionally reimburse Walsh on an ongoing basis
               during the term of this Agreement and any extension thereof for
               the actual out-of-pocket cost of Walsh for a full time AS400
               Computer Programmer including salary not to exceed [*] per
               calendar year plus all health and fringe benefits customarily
               provided by Walsh plus the employer's share of all payroll, FICA
               and unemployment compensation taxes relating to the salaried
               position. This obligation for reimbursement shall cover all
               reasonable expenses incurred by Walsh commencing with its hiring
               of the individual on December 14, 1998. Drugstore shall be
               obligated to reimburse Walsh for its actual cost of employment of
               up to two data entry clerks (to perform item file maintenance,
               interface and

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 8

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
          data input related to receipt of product) at a base salary not to
          exceed [*] per year plus health and fringe benefits, payroll taxes,
          FICA and unemployment taxes.

     (c)  Drugstore shall reimburse Walsh for all costs incurred by Walsh to
          service and maintain any and all network servers, computer hardware,
          and other peripheral equipment provided by Drugstore and installed
          (with the prior written consent of Walsh) upon the premises of Walsh.
          In the event any of the work which is to be performed by Walsh
          pursuant to this section is anticipated to exceed [*], Walsh shall i)
          provide to Drugstore an estimate of the costs which will be incurred
          by Walsh in performing such work; and ii) obtain written approval from
          Drugstore prior to beginning such work.

     (d)  Walsh shall bill Drugstore for its reimbursable costs, set forth in
          this paragraph 8 (b) and (c), on the 15th and last day of each month
          during the term. Drugstore shall pay said invoices within [*] days by
          electronic funds transfer to the address and account provided for in
          paragraph 2(c) above.

8.   Contract Term.

     This Agreement shall be for a period of three years from the date hereof
and shall terminate at such time unless extended in writing by the parties.

     This Agreement may not be terminated for any reason other than for default
by one of the parties in performing its obligations under this Agreement. In the
event of default, the Agreement shall terminate only after the defaulting party
has received notice of the default from the non defaulting party and has failed
to cure the default within 30 days after the date of said notice; provided,
however, default in payment of any material amounts owed under this Agreement
shall not be entitled to either notice or an opportunity to cure.

     Upon termination of this Agreement by Drugstore for default by Walsh, all
of Drugstore's obligations terminate, including the minimum order guarantees set
forth in Section 6(c); provided, that Drugstore shall pay any proper invoices
outstanding as of the date of termination.

9.   Examination of Records.

     Upon not less than 48 hours notice, each party shall be entitled to examine
the records of the other party regarding the performance of the parties under
this Agreement on regular business days (Monday through Friday) and during
regular business hours (8:00 A.M. - 5:00 P.M. central standard time).

10.  Use of Facilities.

     In performing the terms of this Agreement, Walsh shall provide warehouse
space for Drugstore Inventory in accordance with the following terms:

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
PAGE 9

 
                                                CONFIDENTIAL TREATMENT REQUESTED
 
     (a)  Walsh shall provide at no cost to Drugstore up to but not more than
          20,000 square feet of office and storage space for Drugstore Inventory
          at Walsh premises located at 5101A Stateline Avenue, Texarkana, Texas.

     (b)  All premises and facilities provided by Walsh shall comply with all
          applicable laws and regulations, including the requirements of the
          Prescription Drug Marketing Act, OSHA and regulations adopted pursuant
          thereto.

     (c)  Drugstore shall assign an adequate number of its employees or agents
          to take delivery of the packaged product at the delivery point and to
          handle all matters relating to the shipment of the product packages
          after receipt by Drugstore of said product packages at the Delivery
          Point.

11.  [*]

12.  Notices.

     Notice by either party will be made only in writing by certified mail,
return receipt requested or facsimile addressed to the other party and will be
considered given as of the time it is deposited with the United States Postal
Service or acknowledged as received by the other parties facsimile machine.
Addresses for notices are as follows:

     Walsh Distribution, Inc.
     Attn: Bob Bancroft
     P.O. Box 1928
     Texarkana, Texas 75504
     Facsimile: 903-735-4047

     DRUGSTORE.COM
     Attn:
          ------------------------- 

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

     ------------------------------
     Facsimile:
               --------------------

     Changes to the notice addresses may be accomplished by notice in accordance
with this paragraph.

[*] Represents a confidential provision for which confidential treatment has 
    been requested from the Securities and Exchange Commission.

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SUPPLY AGREEMENT
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13.  Risk of Loss and Insurance.

     With regard to risk of loss and insurance requirements the parties agree as
follows:

     (a)  The risk of loss of Drugstore Inventory shall at all times be born by
          Drugstore.

     (b)  The risk of loss of Walsh inventory shall be born by Walsh up to and
          until said inventory is delivered to Drugstore at the Delivery Point.
          At the time of delivery of the packaged product to the Delivery Point,
          title to Walsh Inventory shall pass to Drugstore and Drugstore shall
          bear the risk of loss as owner of the packaged products.

     (c)  Each party shall be responsible for maintaining insurance upon its own
          inventory, equipment, furniture, fixtures, supplies and other property
          located upon the premises of Walsh. Each party shall provide worker's
          compensation insurance upon its own employees in accordance with Texas
          law.

     (d)  Each party shall carry General Liability Insurance in the amount of
          not less than $1,000,000 per occurrence/$2,000,000 aggregate during
          the term of this agreement.

     (e)  Each party shall furnish evidence to the other party of its compliance
          with this paragraph

14.  Confidential Information.

     The parties hereto consider this Agreement and all of its terms and
conditions to be confidential. Except as may have been, or shall be, authorized
in writing, or as hereinafter mentioned, each of the parties hereto shall keep
confidential and shall not use otherwise than in the performance of this
Agreement and shall take all reasonable steps to insure that its employees keep
confidential and not use, all information supplied to them or which they have
learned during the negotiations leading to this Agreement or learned hereafter
concerning the business of the other. This obligation shall survive the
termination of this Agreement and for 5 years after any termination of this
Agreement. Nothing herein shall preclude disclosure of information to the extent
that the disclosure is required to be made under statutory laws or regulations
in force and applicable to the party, or pursuant to a subpoena; provided,
however, the party required to disclose any such confidential information shall
immediately, upon receipt of a subpoena, notice, demand or order to produce the
information, and prior to complying with the subpoena, notice, demand, or order,
notify the other party of said subpoena, notice, demand or order and at the
request of the other party, contest or join with the other party in contesting
the propriety and/or authority of disclosing the information. Each party shall
bear its own costs of complying with the provisions of this paragraph.

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SUPPLY AGREEMENT 
PAGE 11


 
15.  Independent Contract; Taxes; Indemnification.

     The parties each agree and acknowledge that this Agreement does not
constitute a joint venture or partnership. This Agreement has been reached at
arms length negotiations and is an independent supply and services contract in
which Walsh acts as a wholesale distributor of the Walsh Inventory. The parties
agree and acknowledge that all sales made by Walsh to Drugstore are made at
wholesale and that Walsh is not, and shall not be, responsible for collection or
payment of any sales taxes to the State of Texas, any other state, or any other
governmental entity. Drugstore agrees and acknowledges that it is the retailer
of the products sold to its customers through the internet based on line
shopping service known as "DRUGSTORE.COM." Drugstore hereby agrees to indemnify
and hold harmless Walsh from any and all claims, actions, suits, enforcement
actions or other proceedings, including the reasonable attorney's fees,
investigation costs and other costs incurred by Walsh in defending any such
types of proceedings relating to the imposition of sales taxes upon the
transactions described in this Agreement.

16.  Assignability.

     This Agreement and the rights and obligations hereunder may not be assigned
by either party without the prior written consent of the other party.

17.  Force Majeure.

     Except for the payment of money due hereunder, Walsh and Drugstore shall be
excused for failure to perform under this Agreement where such failure results
from circumstances beyond the affected party's control including, without
limitation, such circumstances as fire, storm, flood, earthquake, strikes, work
stoppages or slow downs, delay or failure of transportation or supplies, acts of
the public enemy, acts of God or acts, regulations, priorities or actions of the
United States, a state or any local government or agents or instrumentalities
thereof.

18.  Warranties.

     Drugstore acknowledges that Walsh is a wholesaler of products manufactured
and packaged by other entities. WALSH MAKES NO REPRESENTATION OR WARRANTY OF ANY
KIND, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING WITHOUT LIMITATION THE
WARRANTY OF MERCHANTABILITY OR THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE
OF ANY GOODS OR SERVICES SOLD OR SUPPLIED UNDER THIS AGREEMENT INDEPENDENT OF,
OR BEYOND THE WARRANTY AND RETURN POLICIES PROVIDED BY THE MANUFACTURER OR
VENDOR, IF ANY.

19.  Year 2000 Readiness Disclosure.

     The parties to this agreement recognize the potential for information
system problems associated with the new millennium. To avoid the possible issues
that could result from incorrectly processing date-related information, Walsh
and Drugstore shall institute a Year 2000

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SUPPLY AGREEMENT
PAGE 12

 
Compliance Plan for their respective companies to ensure that the operations of
both parties, including data exchange with suppliers and customers, can continue
without interruption up through and beyond January 1, 2000. The Year 2000
Compliance Plan shall outline a comprehensive approach for addressing all at-
risk components of Walsh operations- hardware, networks, in-house software
applications, third-party vendor applications, interfacing software, data
exchange with trading partners, automation systems and equipment. Walsh and
Drugstore represent that the defined objectives for Year 2000 Compliance are
that the processes, systems and equipment of each company shall be able to
function properly up through and beyond January 1, 2000. This includes the
ability to:

          .  Process (i.e. receive, perform calculations and comparisons) any
             and all date-related information up through and beyond January 1,
             2000.
          .  Accommodate dates with either a 2-digit or 4-digit year.
          .  Correctly process information with a date of 9/9/99.
          .  Correctly process information with a year date of "99" or "00"
          .  Correctly process information with a date of February 29 during
             leap years.

20.  Governing Law.

     This Agreement shall be interpreted, and the rights, obligations and
liabilities of the parties determined in accordance with the laws of the State
of Texas (without regard to the conflicts of laws provisions thereof). The
parties agree that any litigation arising out of this Agreement or performance
of it by either party shall be litigated in either the District Court of Bowie
County, Texas, or the United States District Court for the Eastern District of
Texas, Texarkana, Division.

21.  Amendments.

     No alteration, modification or change of this Agreement shall be valid
except by an agreement in writing executed by both parties hereto.

22.  Dispute Resolution.

     Walsh and Drugstore will attempt to settle any claim or controversy arising
out of this Agreement through consultation and negotiation in good faith and a
spirit of mutual cooperation. If those attempts fail, then the dispute will be
mediated by a mutually acceptable mediator to be chosen by Walsh and Drugstore
within 45 days after written notice by either to the other demanding mediation.
Neither party may unreasonably withhold consent to the selection of a mediator,
and Walsh and Drugstore will share the cost of the mediation equally. By mutual
agreement, Walsh and Drugstore may postpone mediation until some specified but
limited discovery about the dispute has been completed. The parties may also
agree to replace mediation with some other form of alternative dispute
resolution. Any dispute which cannot be resolved between the parties through
negotiation, mediation or other form of agreed alternative dispute resolution
within 120 days of the date of the initial demand for it by one of the parties
may then be submitted to the courts for resolution. Nothing in this section will
prevent either party from

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SUPPLY AGREEMENT
PAGE 13

 
resorting to judicial proceedings if (A) good faith efforts to resolve the
dispute under these procedures have been unsuccessful, (B) interim relief from a
court is necessary to prevent serious and irreparable injury to one party or to
others, or (C) litigation is required to be filed prior to the running of the
applicable statute of limitations. The use of any alternative dispute resolution
procedure will not be construed under the doctrines of laches, waiver or
estoppel to affect adversely the rights of either party.

23.  Limitation of Liability.

     Neither party shall be liable to the other for any incidental, indirect,
special or consequential damages whatsoever arising out of, caused by, or
related in any way to this agreement. The parties expressly agree that the
limitations on incidental, consequential, special or indirect damages set forth
herein are agreed allocations of risk constituting in part the consideration for
this Agreement, and that such limitations shall survive the determination of any
court of competent jurisdiction that any remedy provided herein or available at
law fails of its essential purpose.

24.  Severability.

     In the event that any provision or any portion of any provision of this
agreement is held illegal, unenforceable, or invalid by any Court, such
provision or portion thereof shall be deemed to be deleted from this agreement
and the validity of the remainder of this agreement shall remain unaffected
thereby.

25.  Entire Agreement.

     This Agreement together with the exhibits referred to herein, constitutes
the entire Agreement and understanding of the parties with regard to the matters
covered and herein have merged all prior and collateral representations,
promises or conditions, whether oral or written.

     In witness whereof, each of the parties hereto have caused this Agreement
to be signed by its respective duly authorized representative.

                                        WALSH DISTRIBUTION, INC.

                                        By:  /s/ Ronald G. Nelson
                                            -----------------------------
                                            Ronald G.  Nelson, President

                                        DRUGSTORE.COM, INC.

                                        By:  /s/ Tracy R. Nolan
                                            ------------------------------
                                            Tracy Nolan,
                                            Vice President of Operations

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SUPPLY AGREEMENT
PAGE 14



s agree that any litigation arising out of this Agreement or performance
of it by either party shall be litigated in either the District Court of Bowie
County, Texas, or the United States District Court for the Eastern District of
Texas, Texarkana, Division.

21.  Amendments.

     No alteration, modification or change of this Agreement shall be valid
except by an agreement in writing executed by both parties hereto.

22.  Dispute Resolution.

     Walsh and Drugstore will attempt to settle any claim or controversy arising
out of this Agreement through consultation and negotiation in good faith and a
spirit of mutual cooperation. If those attempts fail, then the dispute will be
mediated by a mutually acceptab