EXHIBIT 10.1

                                PHOTOWORKS, INC.


              SUBORDINATED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

         THIS  SUBORDINATED   CONVERTIBLE   DEBENTURE  PURCHASE  AGREEMENT  (the
"Agreement") is made as of the 25th day of April, 2001 (the "Effective Date") by
and among PHOTOWORKS,  INC., a Washington  corporation (the "Company"),  and the
purchasers   listed  on   Schedule  1   attached   hereto   (collectively,   the
"Purchasers").

                                    RECITALS

         A. On the terms and subject to the  conditions  set forth  herein,  the
Purchasers  are each willing to purchase  from the  Company,  and the Company is
willing  to sell and issue to each  Purchaser  a  convertible  debenture  in the
principal amount set forth opposite each Purchaser's name on Schedule 1 attached
hereto and incorporated herein.

         B.  Capitalized  terms not  otherwise  defined  herein  shall  have the
meaning  set forth in the form of  Debenture  (as  defined  below)  attached  as
Exhibit A.

         NOW, THEREFORE, the parties hereby agree as follows:

1.       Amount and Terms of the Debenture

     1.1 The Debenture.  Subject to the terms of this Agreement,  each Purchaser
hereby agrees to purchase from the Company a subordinated  convertible debenture
issued to such Purchaser or the nominee set forth next to such  Purchaser's name
on Schedule 1 in the form attached hereto as Exhibit A (the  "Debenture") in the
principal  amount set forth on Schedule 1 opposite  such  Purchaser's  name (the
"Debenture  Amount")  against the  issuance  and delivery by the Company of such
Debenture.  As used  herein,  the term  "Debentures"  shall mean all  debentures
originally  delivered  to  the  Purchasers  pursuant  to  this  Agreement,   all
debentures  issued  in  payment  of any  interest  on such  debentures,  and all
debentures  delivered in  substitution  or exchange for any such debentures and,
where applicable, shall include the singular number as well as the plural.

     1.2  Restrictions.  Without the  approval  of the  holders of a  two-thirds
majority in interest of  Debentures  and Series B Preferred  Stock,  voting as a
class on an "as  converted"  basis,  the Company shall not  purchase,  redeem or
retire any shares of Company  capital  stock other than  repurchases  of capital
stock  granted  pursuant  to the  Company's  stock  option  plan  to  employees,
directors or consultants, upon termination of employment or consultancy pursuant
to agreements currently in place and listed in the Schedule of Exceptions nor



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shall the Company issue any capital  stock or other equity  securities of any of
its subsidiaries.

     1.3 Additional Debt. After the Closing, the Company may issue up to but not
more than an additional $7.5 million of subordinated  convertible  debentures or
capital  stock  of the  Company  (but  not  additional  Debentures  or  Series B
Preferred  Stock)  without the approval of the holders of Debentures or Series B
Preferred Stock,  provided,  that any such additional  subordinated  convertible
debentures  issued by the Company shall be pari passu with or subordinate to the
Debentures  in all  respects  and any  additional  capital  stock of the Company
issued by the Company  shall not have a liquidation  preference  superior to and
shall  otherwise be in all respects  pari passu or  subordinate  to the Series B
Preferred Stock.

2.       Definitions

         For  purposes  of this  Agreement  the  following  terms shall have the
following meanings:

     2.1 "Commission" shall mean the Securities and Exchange Commission.

     2.2  "Intellectual  Property"  shall  mean  patents,  patent  applications,
trademarks,  service marks, mask works, trade names, copyrights,  trade secrets,
information, proprietary rights and processes.

     2.3 "Incentive  Plans" shall mean  collectively  the Incentive Stock Option
Plan as amended and restated as of April 1, 1996, the 1987 Stock Option Plan, as
amended and restated as of April 1, 1996, the 1993 Employee Stock Purchase Plan,
as amended and restated as of May 31, 1995,  the 1999 Employee Stock Option Plan
dated October 20, 1999, the 1999 Stock Incentive  Compensation Plan, approved by
the Company's board of directors on November 23, 1999, the Company's  employment
letter with  Howard Lee dated  October  26,  2000 and the  Company's  employment
letter with Ben Calica dated October 31, 2000.

     2.4 "Material Adverse Event" shall mean any change, event or effect that is
materially  adverse  to  the  general  affairs,  business,  operations,  assets,
condition  (financial  or otherwise) or results of operations of the Company and
its Subsidiaries taken as a whole;  provided,  however, that the following shall
not be taken into account in  determining a "Material  Adverse  Event":  (a) any
adverse  change,  event or effect that is directly  attributable  to  conditions
affecting the United States economy  generally unless such conditions  adversely
affect such party in a materially  disproportionate  manner, and (b) any adverse


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change,  event or effect that is directly  attributable to conditions  affecting
the Company's industry generally,  unless such conditions  adversely affect such
party in a materially disproportionate manner.

     2.5 "Material  Contracts"  shall have the meaning  ascribed to such term in
Section 5.12.

     2.6 "Rights Agreement" shall mean the Investor Rights Agreement in the form
attached as Exhibit 2.6 hereto.

     2.7 "Schedule of  Exceptions"  shall mean the schedule of exceptions to the
representations  and  warranties  of the  Company in Section 5. The  Schedule of
Exceptions is attached as Exhibit 2.7 hereto.

     2.8 "Securities  Act" shall mean the Securities Act of 1933, as amended and
the rules and regulations of the Commission promulgated thereunder.

     2.9 "SEC Reports"  shall have the meaning  ascribed to such term in Section
5.21.

     2.10 "Subsidiary"  shall mean any corporation,  partnership or other entity
more than 50% of whose equity interests (measured by virtue of voting rights) in
the  aggregate  is owned by the Company or which is otherwise  controlled  by or
under common control with the Company.

     2.11  "Transactional  Agreements"  shall  mean this  Agreement,  the Rights
Agreement, and the Debentures.

3.       The Closing

     3.1 Closing  Date.  The closing of the purchase  and sale of the  Agreement
(the  "Closing")  shall be held on the Effective  Date, or at such other time as
the Company and the  Purchasers  shall agree (the "Closing  Date").  The Closing
shall take place at the principal  executive  offices of the Company  located at
1260 16th Avenue West, Seattle, WA 98119.

     3.2 Delivery. At the Closing (i) each Purchaser will deliver to the Company
a check or wire transfer funds in the amount of the principal  amount  indicated
next to such  Purchaser's  name on Schedule 1; and (ii) the Company  shall issue
and  deliver  to such  Purchaser  a  Debenture  in favor of the  nominee of such
Purchaser set forth on Schedule 1 payable in the  principal  amount paid by such
Purchaser.

     3.3 Use of Proceeds.  The Company  shall use the proceeds  from the sale of
Debentures for general corporate purposes.


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4.       Purchasers Closing Conditions

         Each  Purchaser's  obligations to purchase the Debenture at the Closing
are subject to the  fulfillment as of such Closing of the following  conditions,
any of which the Purchasers may waive in accordance with the terms hereof:

     4.1 Representations and Warranties True. The Company's  representations and
warranties  set forth  herein in Section 5 below shall be true and correct  when
made and shall be true and correct in all  material  respects as of such Closing
as if made on and as of such date; and

     4.2  Compliance  with  Covenants.  The  Company  shall have  performed  and
complied with all agreements and conditions contained in this Agreement required
to be  performed  or  complied  with by it prior to or at the  Closing and after
giving  effect to the issue and sale of the  Debentures,  no Event of Default as
defined in the Debentures shall have occurred and be continuing.

     4.3 Qualifications.  All  authorizations,  approvals or permits, if any, of
any  governmental  authority or  regulatory  body of the United States or of any
state that are required in connection  with the lawful  issuance and sale of the
Debenture, pursuant to this Agreement shall be duly obtained and effective as of
such Closing.

     4.4 Officers Certificate. At the Closing, the President and Chief Executive
Officer of the Company shall deliver to the Purchasers a certificate in form and
substance satisfactory to Purchasers certifying as to:

          (a)  resolutions of the Company's  Board of Directors  authorizing and
approving all matters in  connection  with this  Agreement and the  transactions
contemplated hereby;

          (b) the Company's by-laws in effect as of the Closing; and

          (c) the Company's Articles of Incorporation,  as amended in full force
and effect as of the Closing.

          (d) the  satisfaction of the conditions set forth in Sections 4.1, 4.2
and 4.3 above.

     4.5 Opinion of the Company's  Counsel.  The Purchasers  shall have received
from Heller  Ehrman White & McAuliffe  LLP,  legal  counsel for the Company,  an
opinion dated the Closing Date, in the form of Exhibit 4.5.

     4.6  Certificate of Existence.  The Company shall deliver to the Purchasers
at the Closing a long-form  Certificate of Existence  issued by the Secretary of
State,  as of a date in April,  2001 prior to the Closing,  along with copies of


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the Articles of  Incorporation,  including all amendments  thereto and all other
documents filed with the Secretary of State,  each certified by the Secretary of
State.

     4.7 Escrow.  Prior to the  Closing,  the  Company  shall  deliver  executed
Debentures to the Purchasers counsel to be held in escrow pending the Closing.

     4.8 Attorneys Fees. At the Closing,  the Company shall pay by wire transfer
the fees and  disbursements of counsel to Purchaser up to, but not in excess of,
$20,000.

5.       Representations and Warranties of the Company to purchaserS.

         Except as set forth in the Schedule of  Exceptions,  the Company hereby
represents and warrants to the Purchasers that:

     5.1 Corporate Organization and Authority. The Company:

          (a) is a corporation  duly  organized and validly  existing  under the
laws of the State of Washington;

          (b) has the corporate power and corporate authority to own and operate
its  properties  and to carry on its business as now  conducted and as currently
proposed to be conducted;

          (c) is  qualified as a foreign  corporation  in all  jurisdictions  in
which such  qualification is required,  other than those  jurisdictions in which
its failure to so qualify would not constitute a Material Adverse Event; and

          (d) by-laws and  Articles of  Incorporation,  as amended,  both in the
form delivered to the Purchasers, are in full force and effect as of the Closing
Date.

5.2      Capitalization.  The authorized capital of the Company consists of:

          (a) Preferred Stock.  2,000,000  shares of Preferred Stock,  $0.01 par
value,  of which 105,000 shares have been  designated  Series RP Preferred Stock
(none of which are outstanding),  15,000 shares have been designated as Series A
Preferred  Stock of which 15,000 are  outstanding,  and on the Closing Date will
also include 36,830 shares  designated  Series B Preferred  Stock (none of which
will be issued or outstanding prior to the Closing).

          (b) Common Stock. 101,250,000 shares of Common Stock, $0.01 par value,
of which  16,525,605  shares are duly and  validly  issued  (including,  without


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limitation,  issued in compliance with applicable  federal and state  securities
laws), fully paid, and nonassessable.

          (c) Other  Securities.  As of the Closing Date,  the Company will have
reserved  for  issuance:  (a)  36,830  shares  of Series B  Preferred  Stock for
issuance pursuant to the terms of this Agreement; (b) 3,683,000 shares of Common
Stock  for  issuance  upon  conversion  of the  Series B  Preferred  Stock;  (c)
3,157,895  shares of Common Stock for issuance  upon  conversion of the Series A
Preferred  Stock;  (d) 105,000 shares of Series RP Preferred  Stock, (e) 862,201
shares of Common Stock for issuance upon exercise of the warrants  listed in the
Schedule of  Exceptions;  and (f) 4,041,291  shares of Common Stock for issuance
under the Company's Incentive Plans. Except for (i) the conversion privileges of
the Series A Preferred  Stock,  (ii) the  conversion  privileges of the Series B
Preferred  Stock to be issued under this  Agreement,  (iii) the Investor  Rights
Agreement dated February 14, 2000 (the "Original  Investor  Rights  Agreement"),
(iv) the options and other rights  granted under the Company's  Incentive  Plans
listed in the  Schedule of  Exceptions,  and (v) the  preferred  share  purchase
rights issued as a dividend on the Company's Common Stock pursuant to the Rights
Agreement  between the  Company and  ChaseMellon  Shareholder  Services  LLC, as
Rights  Agent,  dated  December 16, 1999  attached as Exhibit 5.2,  there are no
outstanding rights of first refusal,  registration rights,  preemptive rights or
other   securities,    rights,   warrants,   options,   conversion   privileges,
subscriptions,   or  other   instruments  or  agreements,   either  directly  or
indirectly,  to purchase or otherwise  acquire or issue or  convertible  into or
exercisable for any equity  securities of the Company or with any holders of any
of the Company's securities.

     5.3  Subsidiaries.  The Company does not presently own, have any investment
in, or control,  directly or indirectly,  any  Subsidiaries  or other  entities,
other than the following Subsidiaries:  Seattle FilmWorks Manufacturing Company,
OptiColor, Inc. and FilmWorks Express Inc. Each of the Subsidiaries:

          (a) is duly  organized,  validly  existing and in good standing in the
state of its incorporation;

          (b) has the corporate power and corporate authority to own and operate
its  properties  and to carry on its business as now  conducted and as currently
proposed to be conducted; and

          (c) is  qualified as a foreign  corporation  in all  jurisdictions  in
which such  qualification is required,  other than those  jurisdictions in which
its failure to qualify would not constitute a Material Adverse Event.

     5.4  Corporate  Power.  The  Company  will  have on the  Closing  Date  all
requisite  legal and  corporate  power and  authority to execute and deliver the


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Transactional Agreements, to issue the Debentures,  the Series B Preferred Stock
issuable upon  conversion of the  Debentures  and the Common Stock issuable upon
conversion of the Series B Preferred  Stock (the  "Conversion  Shares"),  and to
carry out and  perform  its  obligations  under  the terms of the  Transactional
Agreements.

     5.5 Financial  Statements.  The audited financial statements of the Company
as of and for the period  ended  September  30, 2000 and the  unaudited  balance
sheet of the Company as of  December  30, 2000 and the  unaudited  statement  of
operations for the quarterly period then ended (the "Financial  Statements") are
complete and correct in all material respects,  have been prepared in accordance
with generally  accepted  accounting  principles  applied on a consistent  basis
throughout  the periods  indicated and fairly  present the  Company's  financial
position  as of those  dates and the  results of  operations  and changes in its
financial  position  for such  periods then ended;  provided  however,  that the
unaudited  financial   statements  are  subject  to  normal  recurring  year-end
adjustments  (which are not  expected  to be  material),  and do not contain all
footnotes required under generally accepted accounting principles. Except as set
forth in the unaudited balance sheet of the Company as of December 30, 2000, the
Company has no material  liabilities except for current liabilities  incurred in
the ordinary  course of business  subsequent to December 30, 2000 which are not,
either individually or in the aggregate,  materially adverse to the Company. The
Company has no material  contingent  obligations  which are not disclosed in the
SEC Reports.

     5.6  Authorization.  All corporate  action on the part of the Company,  its
officers  and  directors  and  shareholders  necessary  for  the  authorization,
execution,  delivery, and performance of all obligations under the Transactional
Agreements  has been taken and no other  action is required.  The  Transactional
Agreements  constitute  legally  binding  and valid  obligations  of the Company
enforceable in accordance with their respective terms, except to the extent that
such   enforcement  may  be  subject  to  applicable   bankruptcy,   insolvency,
reorganization,  arrangement,  moratorium,  fraudulent  conveyance or other laws
relating to or affecting the rights of creditors generally, and such enforcement
may be limited by equitable principles of general applicability.

     5.7 Valid  Issuance.  Each Debenture,  when issued,  sold, and delivered in
accordance with the terms and for the consideration expressed in this Agreement,
will be duly and  validly  issued  (including,  without  limitation,  issued  in
compliance  with  applicable  federal  and  state  securities  laws and  without
violation of applicable usury laws) fully-paid and non-assessable.  The Series B
Preferred  Stock and the Conversion  Shares have been duly and validly  reserved
and,  assuming the Series B Preferred Stock and Conversion  Shares are issued in


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accordance with the Debentures and the Articles of Amendment, respectively, will
be duly and validly issued (including,  without limitation, issued in compliance
with  all  applicable   federal  and  state   securities  laws)  fully-paid  and
non-assessable  and will be free of any  liens or  encumbrances  other  than any
liens or encumbrances  created by or imposed  thereon by the holders;  provided,
however,  that the Series B Preferred Stock and Conversion Shares may be subject
to  restrictions  on transfer  under state and/or federal  securities  laws. The
Series B  Preferred  Stock and the  Conversion  Shares  are not  subject  to any
preemptive rights or rights of first refusal.

     5.8  Changes  in  Condition.  Except  as  specifically  set  forth  in this
Agreement, in the SEC Reports or the Schedule of Exceptions,  since December 30,
2000, (a) the Company has not entered into any transaction  which was not in the
ordinary course of business,  (b) there has been no Material  Adverse Event, (c)
the Company has not incurred any material tax  liability,  (d) there has been no
resignation  or  termination  of  employment  of any  executive  officer  or key
employee  of the  Company  and  the  Company  does  not  know  of any  impending
resignation  or  termination  of employment of any such officer or key employee,
(e)  there  has  been no  labor  dispute  involving  the  Company  or any of its
respective  employees  and,  to the  Company's  knowledge,  none is  pending  or
threatened,  (f) there has been no waiver by the Company of a valuable  right or
of a debt  owing to the  Company,  (g)  there has not been any  satisfaction  or
discharge  of any  material  lien,  claim or  encumbrance  or any payment of any
material  obligation by the Company  except in the ordinary  course of business,
(h) there  has been no  direct or  indirect  loans  made by the  Company  to any
shareholder,  employee,  officer or director of the Company, other than advances
made in the ordinary  course of business,  (i) there has been no material change
in any  compensation  arrangement  or  agreement  with  any  executive  officer,
director, key employee or shareholder,  (j) the Company has not declared or paid
any dividend or other  distribution of assets of the Company,  (k) there has not
been any sale,  assignment  or transfer of any  Intellectual  Property,  (l) the
Company  has not  incurred,  assumed  or  guaranteed  any  debt,  obligation  or
liability except for immaterial amounts and for current liabilities  incurred in
the ordinary  course of business which are not, in the aggregate  material,  and
(m) there has not been any change in a Material Contract to which the Company is
a party or by which it is bound which would result in a Material  Adverse  Event
and to the  knowledge  of the Company no other fact or event is likely to occur,
with or without  the  passage of time,  which  could  reasonably  be expected to
result in a Material Adverse Event.

     5.9 Litigation. Except as set forth in the Schedule of Exceptions, there is
no action, proceeding, or, to the Company's knowledge,  investigation pending or
threatened,  or any basis  therefor known to the Company to which the Company or
any Subsidiary is a party or by which its or their assets are bound. There is no


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judgment,  decree,  or order of any court in effect  against the Company and the
Company  is  not in  default  with  respect  to any  order  of any  governmental
authority  to which the Company is a party or by which it is bound.  There is no
action, suit,  proceeding,  or investigation by the Company currently pending or
which the Company presently intends to initiate.

     5.10 Patents and Other Proprietary Rights.

          (a) To the Company's  knowledge,  the Company has sufficient title and
ownership of or sufficient right to use all Intellectual  Property necessary for
its  business as now  conducted,  and  believes it can obtain,  on  commercially
reasonable   terms,  any  additional   rights  necessary  for  its  business  as
contemplated at the Closing.

          (b) No claims have been  asserted  by any person  with  respect to the
validity of the Company's ownership or right to use the Intellectual Property.

          (c) The Company  does not have any  knowledge  of, and the Company has
not given or received any notice of, any pending  conflicts with or infringement
of the  rights of others  with  respect  to any  Intellectual  Property  or with
respect to any  license  of  Intellectual  Property  which are  material  to the
business of the Company.

          (d) No action, suit,  arbitration,  or legal,  administrative or other
proceeding,  or  investigation  is  pending,  or, to the best  knowledge  of the
Company, threatened, which involves any Intellectual Property and the Company is
not subject to any judgment,  order, writ,  injunction or decree of any court or
any Federal, state, local, foreign or other governmental department, commission,
board,  bureau,   agency  or  instrumentality,   domestic  or  foreign,  or  any
arbitrator,  and has not entered  into or is not a party to any  contract  which
restricts or impairs the use of any such Intellectual Property in a manner which
would result in Material Adverse Event.

          (e) The  Company has not entered  into any  consent,  indemnification,
forbearance to sue or settlement agreement with respect to Intellectual Property
other than in the  ordinary  course of business or which does not  restrict  its
business as presently proposed to be conducted.

          (f) The Company is not aware that any of its  employees  is  obligated
under any contract (including licenses,  covenants or commitments of any nature)
or other agreement, or subject to any judgment,  decree or order of any court or
administrative  agency,  that would  conflict  with the  Company's  business  as
proposed to be conducted.


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          (g) The Company has not received any communications  alleging that the
Company  or its  employees  has  violated  or  infringed  any  of  the  patents,
trademarks,  service marks, trade names,  copyrights,  or trade secrets,  or any
proprietary rights of any other person or entity.

          (h) The  Company  has taken  reasonable  measures to protect the value
(and,  to the  extent  applicable,  the  confidentiality  and  security)  of all
Intellectual Property used in its products,  services and business.  The Company
has taken  reasonable steps to ensure that employees and consultants who, either
alone or in concert  with  others,  developed,  invented,  discovered,  derived,
programmed or designed Intellectual Property, or who have knowledge of or access
to  information  about  Intellectual  Property,  have  entered  into an Employee
Confidentiality, Inventions, and Non-Competition Agreement, substantially in the
form of Exhibit 5.10 to this Agreement.

     5.11 Taxes.

          (a)  Except  as  disclosed  in the  Schedule  of  Exceptions,  (i) All
federal,  state,  local,  and foreign  tax  returns  required to be filed by the
Company have been timely  filed and are true in all  material  respects and (ii)
(A) all  taxes,  assessments,  fees,  and other  governmental  charges  upon the
Company,  or upon any of its properties,  income,  or franchises,  shown in such
returns  to be due and  payable,  (B) any  assessments,  penalties  or  interest
imposed, and (C) to the Company's knowledge,  all other taxes due and payable by
the  Company,  have  been  paid or will be paid  prior to the time  they  become
delinquent.

          (b) Except as disclosed in the Schedule of Exceptions, the Company has
not been advised (i) that any of its tax returns have been or are being  audited
as of the date hereof or (ii) of any  deficiency  in  assessment  related to its
federal, state or other taxes. The Company has not agreed to any extension of or
waived any statute of limitations  relating to any taxes or such other payments.
The Company has no knowledge of any liability for any tax to be imposed upon its
properties  or assets as of the date of this  Agreement  that is not  adequately
provided for.

     5.12 Company's Contracts.

          (a) Legality of Contracts.  Except as disclosed in the SEC Reports and
as  disclosed in the  Schedule of  Exceptions,  the Company is not a party to or
bound by any  contract,  commitment  or  understanding  which (i) is a  material
contract (as defined in Item  601(b)(10)  of Regulation  S-K of the  Commission)
which is to be  performed  after the date of this  Agreement,  (ii)  involves  a
license  or  grant  of  rights  to or from the  Company  involving  Intellectual
Property  applicable to the business of the Company,  (iii) contains  provisions


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restricting  the  development,  manufacture  or  distribution  of the  Company's
products or  services,  or (iv)  provides  indemnification  by the Company  with
respect  to  infringements  of  proprietary  rights to which the  Company or any
Subsidiary  is a party  (all of such  types  of  contracts,  communications  and
understandings,  collectively  "Material  Contracts").  All such  contracts  and
agreements  are  legally  binding,  valid,  and in full  force and effect in all
material respects.

          (b)  Dividends;  Indebtedness.  Except as disclosed in the SEC Reports
and as  disclosed  in the  Schedule  of  Exceptions,  the  Company  has  not (i)
incurred,  in the aggregate,  any  indebtedness  for money borrowed in excess of
$150,000,  (ii) made any loans or advances to any  person,  other than  ordinary
advances for travel expenses, (iii) sold, exchanged or otherwise disposed of any
of its  assets or rights or  entered  into any  agreement  or  arrangement  with
respect thereto,  other than the sale of its inventory in the ordinary course of
business, or (iv) declared or paid any dividends, or authorized any distribution
upon or with respect to any class or series of its capital stock.

     5.13 Compliance With Other  Agreements.  The Company is not in violation of
(i) any term or provision of its articles of incorporation or bylaws, each as in
effect as of the Closing,  (ii) any  material  term or provision of any Material
Contract (iii) to the Company's knowledge,  any decree,  order, statute, rule or
regulation  applicable to the Company,  in each case, or in the  aggregate,  the
violation of which would  constitute a Material  Adverse  Event.  The execution,
delivery and performance of the Transactional Agreements by the Company will not
result in any violation of, be in conflict  with, or constitute a default under,
with or without the passage of time or the giving of notice:

          (a) any  provision  of the  Company's  articles  of  incorporation  or
bylaws;

          (b) any  provision  of any  judgment,  decree  or order  to which  the
Company is a party or by which it is bound;

          (c) any contract,  agreement or commitment to which the Company or any
Subsidiary is a party or by which any of their respective assets are bound; or

          (d) to the  Company's  knowledge,  any statute,  rule or  governmental
regulation applicable to the Company.

     5.14 Employees.  The Company  believes its relations with its employees are
satisfactory.  The Company's  employees are not  represented by any labor unions
nor, to the Company's knowledge, is any union organization campaign in progress.


                                       11
<PAGE>

The Company is not aware that any of its  executive  officers  or key  employees
intends to terminate  employment nor does the Company have any present intention
to terminate the employment of any thereof.

     5.15 Transactions with Affiliates.  Except as disclosed in the SEC Reports,
no  employee,  officer,  or  director  of the  Company  or  member of his or her
immediate  family is indebted to the  Company,  nor is the Company  indebted (or
committed to make loans or extend or guarantee credit) to any of them other than
(i) for  payment  of  salary  and  services  rendered,  (ii)  reimbursement  for
reasonable  expenses  incurred  on  behalf of the  Company,  and (iii) for other
standard employee benefits made generally available to all employees  (including
stock option agreements outstanding under any Incentive Plans). To the Company's
knowledge, none of such persons has any direct or indirect ownership interest in
any firm or  corporation  with which the Company is affiliated or with which the
Company has a business  relationship,  or any firm or corporation  that competes
with the Company,  except that employees,  officers, or directors of the Company
and  members  of their  immediate  families  may own  stock in  publicly  traded
companies that may compete with the Company.  No member of the immediate  family
of any officer or director of the Company is directly or  indirectly  interested
in any Material  Contract with the Company.  Except for  agreements  between the
Company and its  employees  pertaining  to the terms of their  employment or the
purchase  of shares of Common  Stock  under the  Incentive  Plans,  there are no
agreements,  understandings or proposed transactions between the Company and any
of its officers, directors or affiliates.

     5.16 Governmental and Third Party Consents. Subject to the accuracy of each
Purchaser's  representations  in  Section  6  of  this  Agreement,  no  consent,
approval,   order,  or  authorization   of,  or   registration,   qualification,
designation,  declaration,  or  filing  with,  any  federal,  state,  local,  or
provincial  governmental  authority  on the part of the  Company is  required in
connection with the entering into of any of the Transactional  Agreements or the
issuance  and  sale of the  Debentures,  the  Series  B  Preferred  Stock or the
Conversion  Shares or the consummation of the transactions  contemplated by this
Agreement and the other Transactional  Agreements,  except for filings of Form D
required by federal and state securities laws.

     5.17 Compliance with Laws; Permits. To its knowledge, the Company is not in
violation of any  applicable  statute,  rule,  regulation or  restriction of any
government,  administrative  agency or instrumentality in respect of the conduct
of its business or the ownership of its properties. The Company has all material
franchises,  permits, licenses, and any similar governmental authority necessary
for the conduct of its  business as now being  conducted  by it and as currently


                                       12
<PAGE>

proposed  to be  conducted.  The  Company  is not in  default  under any of such
franchises, permits, license, or other similar authority.

     5.18 Registration Rights. Except as disclosed in the Schedule of Exceptions
and except as required  pursuant to the Original  Investor Rights  Agreement and
the Rights Agreement, the Company is not presently under any obligation, and has
not granted any rights to register any of the  Company's  presently  outstanding
securities or any securities that may hereinafter be issued under the Securities
Act.

     5.19 Offering.  Assuming the accuracy of the representations and warranties
of each Purchaser contained in Section 6 hereof, the offer, sale and issuance of
the Debenture,  the Series B Preferred  Stock and the Conversion  Shares will be
exempt from the  registration  requirements  of the Securities Act and will have
been registered or qualified or are exempt from  registration and  qualification
under the registration,  permit or qualification  requirements of all applicable
state securities laws. Neither the Company nor any agent on its behalf will take
any action that would cause the loss of any such exemption.

     5.20  Brokers and  Finders.  The Company has not  retained  any  investment
banker,  broker or finder in connection  with the  transactions  contemplated by
this Agreement.

     5.21 SEC Reports.  The Company has filed with the  Commission  all required
forms, reports, registration statements and documents required to be filed by it
with the Commission and made all  disclosures  required by the Securities Act or
the Exchange Act (collectively,  the "SEC Reports"), all of which complied as to
form when filed in all material  respects with the applicable  provisions of the
Securities  Act and  the  Securities  Exchange  Act of  1934,  as  amended  (the
"Exchange  Act"),  as the case  may be.  As of their  respective  dates  the SEC
Reports (including all exhibits and schedules thereto and documents incorporated
by reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the  statements  therein,  in light of the  circumstances  under which they were
made, not misleading.

     5.22  Environmental.  Except  as would  not,  singly  or in the  aggregate,
reasonably be expected to result in a Material  Adverse Event and to the best of
the  Company's  knowledge,  (A) the  Company is and in the past at all times has
been in compliance  with all applicable  Environmental  Laws (as defined below),
(B) the Company has all permits, authorizations and approvals required under any
applicable Environmental Laws and is in compliance with the requirements of such
permits  authorizations  and approvals,  and (C) there are no pending or, to the
best  knowledge  of the Company,  threatened  Environmental  Claims  against the


                                       13
<PAGE>

Company.  For purposes of this Section 5.22 references to the "Company"  include
its Subsidiaries and all of its and their respective predecessors.

For purposes of this  Agreement,  the  following  terms shall have the following
meanings:  "Environmental  Law"  means any United  States  (or other  applicable
jurisdiction's)   Federal,   state,  local  or  municipal  statute,  law,  rule,
regulation,  ordinance,  code,  policy or rule of common law and any judicial or
administrative  interpretation thereof, including any judicial or administrative
order, consent decree or judgement, relating to the environment,  health, safety
or any chemical, material or substance, use, disposition or exposure to which is
prohibited,  limited or  regulated  by any  governmental  authority,  including,
without limitation,  as to labeling,  storage,  use, generation,  disposition or
disposal. "Environmental Claims" means any and all administrative, regulatory or
judicial actions,  suits,  demands,  demand letters,  claims,  liens, notices of
noncompliance or violation, investigations or proceedings relating in any way to
any Environmental Law.

     5.23  Properties.  The Company does not own any real property.  The Company
has good title to all its personal  properties and other assets reflected on the
balance sheet included in the Financial  Statements which are, in the aggregate,
in  good  repair  (reasonable  wear  and  tear  excepted),  suitable  for  their
respective uses, and free from any liens,  charges or  encumbrances,  other than
those imposed in  connection  with the  Company's  credit  facilities or capital
leases  disclosed  in the SEC Reports or the  Schedule of  Exceptions.  Any real
properties  held  under  lease  by the  Company  are held by them  under  valid,
subsisting and  enforceable  leases with such exceptions as are not material and
do not  interfere  with the conduct of the  business of the Company and are free
from any liens, charges or encumbrances,  other than those imposed in connection
with the  Company's  credit  facility  or capital  leases  disclosed  in the SEC
Reports or the Schedule of Exceptions.

     5.24 ERISA Compliance. The Company and each Subsidiary have met the minimum
funding requirements of ERISA with respect to any employee benefit plans subject
to ERISA. No event has occurred resulting from the Company's or any Subsidiary's
failure to comply with ERISA that is reasonably  likely to result in the Company
incurring any liability that could result in a Material Adverse Event.

6.       Representations and Warranties of the Purchasers

         Each Purchaser  individually  as to itself,  represents and warrants to
the Company as follows:

     6.1 Purchase for Own Account. The Purchaser represents that it is acquiring
the  Debenture,   the  Series  B  Preferred  Stock  and  the  Conversion  Shares
(collectively,  the  "Securities")  solely for its own  account  and  beneficial
interest for investment and not for sale or with a view to  distribution  of the


                                       14
<PAGE>

Securities  or any  part  thereof,  has no  present  intention  of  selling  (in
connection with a distribution or otherwise),  granting any participation in, or
otherwise  distributing  the  same,  and  does  not  presently  have  reason  to
anticipate a change in such intention.

     6.2 Information and Sophistication.  The Purchaser acknowledges that it has
received all the information  requested from the Company and considers necessary
or appropriate  for deciding  whether to acquire the  Securities.  The Purchaser
represents  that it has had an opportunity to ask questions and receive  answers
from the  Company  regarding  the terms and  conditions  of the  offering of the
Securities  and to obtain any  additional  information  necessary  to verify the
accuracy  of  the  information  given  the  Purchaser.   The  Purchaser  further
represents  that it or its investment  adviser has such knowledge and experience
in financial and business  matters that it is capable of  evaluating  the merits
and risk of this investment.

     6.3  Ability  to  Bear  Economic  Risk.  The  Purchaser  acknowledges  that
investment in the Securities involves a high degree of risk, and represents that
it is able, without materially  impairing its financial  condition,  to hold the
Securities for an indefinite period of time and to suffer a complete loss of its
investment.

     6.4 Further  Limitations  on  Disposition.  Without in any way limiting the
representations  set forth above,  the Purchaser  further agrees not to make any
disposition of all or any portion of the Securities unless and until:

          (a)  There  is then in  effect  a  Registration  Statement  under  the
Securities Act covering such proposed  disposition and such  disposition is made
in accordance with such Registration Statement; or

          (b) The  Purchaser  shall have  notified  the Company of the  proposed
disposition  and shall have  furnished the Company with a detailed  statement of
the  circumstances  surrounding  the  proposed  disposition,  and if  reasonably
requested by the Company, the Purchaser shall have furnished the Company with an
opinion  of  counsel,   reasonably   satisfactory  to  the  Company,  that  such
disposition  will not  require  registration  under  the  Securities  Act or any
applicable state securities laws.

          (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no
such  registration  statement  or opinion of counsel  shall be  necessary  for a
transfer by the Purchaser to (i) a shareholder  or partner (or retired  partner)
of the  Purchaser,  or transfers by gift,  will or intestate  succession  to any
spouse or lineal  descendants or ancestors,  if all transferees agree in writing
to be subject to the terms hereof to the same extent as if they were a Purchaser
hereunder or (ii) any member or investment  advisory  client of Zesiger  Capital
Group LLC.


                                       15
<PAGE>

         6.5 Accredited Investor Status. The Purchaser is an "accredited
investor" as such term is defined in Rule 501 under the Securities Act.

7.       Miscellaneous

     7.1 Binding  Agreement.  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 third party any rights,  remedies,  obligations,  or
liabilities under or by reason of this Agreement,  except as expressly  provided
in this Agreement.

     7.2 Governing Law. This Agreement  shall be governed by and construed under
the laws of the State of Washington as applied to  agreements  among  Washington
residents, made and to be performed entirely within the State of Washington.

     7.3   Counterparts.   This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.  Delivery by facsimile to
the  Company  by the  Purchasers  and to the  Purchasers  by the  Company  of an
executed signature page to this Agreement by each Purchaser who shall previously
have been  furnished  the final form of this  Agreement  (other than  Schedule 1
hereto) and by the Company shall  constitute  the execution and delivery of this
Agreement by each Purchaser and by the Company.

     7.4 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.

     7.5 Notices. Any notice required or permitted under this Agreement shall be
given in writing and shall be deemed effectively given upon personal delivery or
three days after  deposit with the United States Post Office,  postage  prepaid,
addressed to the Company at 1260 16th Avenue West, Seattle, Washington 98119, or
to each  Purchaser at its address  shown on Schedule 1, or at such other address
as such party may designate by ten (10) days advance written notice to the other
party.

     7.6  Modification;  Waiver.  No  modification or waiver of any provision of
this Agreement or consent to departure  therefrom  shall be effective  unless in
writing and approved by the Company and each Purchaser to be bound thereby.

     7.7 Expenses.  The Company shall pay all costs and expenses incurred by the
Company and the Purchasers with respect to the negotiation,  execution, delivery
and performance of this Agreement and the Debenture; provided, however, that the


                                       16
<PAGE>

Company shall only reimburse the reasonable  fees and expenses of the Purchasers
and Purchasers  counsel up to Twenty Thousand Dollars  ($20,000),  including any
representation  related  to the  conversion  of the  Debenture).  If  action  is
instituted to collect the Debenture or to enforce  obligations  hereunder by the
Purchasers,  the  Company  promises  to pay all costs and  expenses,  including,
without limitation, reasonable attorneys' fees and costs, incurred in connection
with such action.  The Company  hereby waives notice of default,  presentment or
demand for payment,  protest or notice of  nonpayment  or dishonor and all other
notices or demands relative to this instrument.

     7.8 Validity.  If any provision of this Agreement is judicially  determined
to  be  invalid,   illegal  or   unenforceable,   the  validity,   legality  and
enforceability  of the remaining  provisions shall not in any way be affected or
impaired thereby.

     7.9 Survival of Warranties.  The representations,  warranties and covenants
of the  Company  and  the  Purchasers  contained  in or  made  pursuant  to this
Agreement  shall survive the  execution  and delivery of this  Agreement and the
Closing,  such  survival  to  continue  for two (2) years  commencing  as of the
Closing.  Such  representations,  warranties  and  covenants  shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Purchasers or the Company.

     7.10 Entire  Agreement.  This  Agreement,  the Exhibit and Schedule  hereto
including the Debenture,  and the Investor Rights Agreement  constitute the full
and entire  understanding  and agreement  between the parties with regard to the
subjects hereof and no party shall be liable or bound to any other in any manner
by  any  representations,   warranties,   covenants  and  agreements  except  as
specifically set forth herein.



                                       17
<PAGE>




         IN  WITNESS  WHEREOF,  the  parties  have  executed  this  SUBORDINATED
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT as of the date first written above.


                                                  COMPANY:

                                                  PHOTOWORKS, INC.


                                                  By:      /s/ Howard Lee
                                                     ---------------------------
                                                     Howard Lee, Chief Executive
                                                     Officer and President


                                                  THE   PURCHASERS,   LISTED  ON
                                                  SCHEDULE 1:



                                                  BY: ZESIGER CAPITAL GROUP LLC,
                                                  AGENT AND ATTORNEY IN FACT


                                                  By:      /s/ Albert Zesiger
                                                     ---------------------------
                                                  Name:   Albert Zesiger
                                                  Title:
                                                          ----------------------


                                       18
<PAGE>


                             SCHEDULES AND EXHIBITS


Schedule 1        Purchasers

Exhibit A:        Form of Convertible Subordinated Debenture

Exhibit 2.6:      Form of Investor Rights Agreement

Exhibit 2.7:      Schedule of Exceptions

Exhibit 4.5:      Opinion of Company Counsel

Exhibit 5.2:      Rights   Agreement   between  the   Company  and   ChaseMellon
Shareholder Services LLC, as Rights Agent, dated December 16, 1999

Exhibit 5.10:     Form   of   Employee    Confidentiality,    Inventions,    and
Non-Competition Agreement



<PAGE>



                                   Schedule 1

                             SCHEDULE OF PURCHASERS


<TABLE>
<CAPTION>
<S>     <C>                                        <C>                                            <C>
                Name of Purchaser*                             Nominee for Purchaser              Principal Amount of Debenture
                ------------------                             ---------------------              -----------------------------
                                                                                                             Purchased
1.       NFIB Serp Assets                           Huland & Co                                              $  39,750

2.       Public Employee Retirement                 Mellon Bank NA custodian                                 $ 639,750
         System of Idaho                            for PERSI-Zesiger Capital

3.       City of Stamford Firemen's Pension Fund    City of Stamford Firemen's Pension Fund                  $ 189,750

4.       The Jenifer Altman Foundation              Batrus & Co.                                             $  99,750

5.       Asphalt Green, Inc.                        Cudd & Co.                                               $  30,000

6.       Dean Witter Foundation                     Tice & Co.                                               $ 129,750

7.       Lazar Foundation                           Hare & Co.                                               $  45,000

8.       HBL Charitable Unitrust                    HBL Charitable Unitrust                                  $  45,000

9.       Helen Hunt                                 Cudd & Co.                                               $  65,250

10.      Peter Looram                               Peter Looram                                             $  35,250

11.      Mary C. Anderson                           Mary C. Anderson                                         $  65,250

12.      Murray Capital, LLC                        Murray Capital, LLC                                      $  50,250

13.      Meehan Foundation                          Meehan Foundation                                        $  35,250

14.      Domenic J. Mizio                           Domenic J. Mizio                                         $  90,000

15.      Morgan Trust Co. of the                    Morgan Trust Co. of the                                  $ 165,000
         Bahamas Ltd. as Trustee U/A/D              Bahamas Ltd. as Trustee U/A/D
         11/30/93                                   11/30/93

16.      Susan Uris Halpern                         Hare & Co.                                               $  99,750
<PAGE>

17.      Theeuwes Family Trust, Felix               Theeuwes Family Trust, Felix                             $  50,250
         Theeuwes Trustee                           Theeuwes Trustee

18.      Wells Family LLC                           Atwell & Co.                                             $ 300,000

19.      Albert L. Zesiger                          Albert L. Zesiger                                        $ 150,000

20.      Barrie Ramsay Zesiger                      Barrie Ramsay Zesiger                                    $  99,750

21.      Wolfson Investment Partners LP             Wolfson Investment Partners LP                           $  75,000

                      Total                                                                                 $2,499,750
                      -----                                                                                 ----------
</TABLE>


*Address for each Purchaser:
c/o Zesiger Capital Group LLC
320 Park Avenue, 30th Floor
New York, NY 10022
Attn:  Albert L. Zesiger




<PAGE>

                                   Exhibit A:

                   Form of Convertible Subordinated Debenture


                [TO BE ATTACHED - See Current Report Exhibit 4.1]




<PAGE>
                                   Exhibit 2.6

                        Form of Investor Rights Agreement


               [TO BE ATTACHED - See Current Report Exhibit 10.2]



<PAGE>
                                   Exhibit 2.7

                       SCHEDULE OF EXCEPTIONS/DISCLOSURES


The  following is a complete list of  exceptions,  amended as of the Closing (as
defined in the Agreement) of the  Subordinated  Convertible  Debenture  Purchase
Agreement  by and among the  Company  and the  Purchasers  listed  therein  (the
"Agreement"),  known  to the  Company,  to the  representations  and  warranties
contained in the Agreement.  Section  numbers  correspond to the section numbers
used in the Agreement.  Any matter set forth herein as an exception to a section
of the  Agreement  shall be deemed to be an  exception  to all other  applicable
sections to the  Agreement  if  reasonably  apparent it would be an exception to
such other sections.

Section 5.2(c)(e):
-----------------

         Imperial Bank:    72,727 common share warrants issued December 20, 2000
                                            $1.00 per share

         Series A Preferred Shareholders:   789,474 common shares warrants
                                       issued February 14, 2000, $6.00 per share


Section 5.2(c)(iv):
------------------

See Exhibit A: Grant Summary Report

Section 5.2:
-----------

See ATTACHMENT 6

Section 5.5:
-----------

Preliminary  quarterly financial statements for the quarter ended March 31, 2001
will be reviewed with Zesiger Capital Group and Howard Lee.

Section 5.8

         Historically the Company has annual merit increases which are effective
at the  beginning of each fiscal year. No annual merit  increases  were given at
the  beginning of fiscal year 2001.  The Company  reviews and adjusts  wages and
salaries and offers incentive plans as part of normal business  procedures.  The

<PAGE>

Compensation  Committee of the Board of Directors has overall responsibility for
compensation particularly as it relates to the CEO.

         As part of its workforce  reductions  the Company  eliminated  two Vice
President  positions as a reduction in force.  January 26, 2001 - Stephen Brown,
VP-Product Development/Business Development. March 16, 2001 - William Ledbetter,
VP-Information Technology Services.

         On February 2, 2001, the Company  entered into an agreement to purchase
selected  assets  related to the Web site of  ememories.com  for a cash purchase
price of $155,000 plus shipping and related transition expenses. The transaction
is expected to close in April 2001.

         On March 14, 2001, the Company purchased assets of Storycatcher.com. As
part of the transaction,  the Company paid $16,000 in cash at closing and signed
a one year note payable (due March 14, 2002) for $40,000 (includes principal and
interest).  In addition,  the Company issued 86,500 shares of PhotoWorks  common
stock which is held back for one year pending no material liabilities arise from
purchase of the Storycatcher.com assets.

Section 5.9:
-----------

The following actions are pending against the Company:

In the Matter of CERTAIN LENS-FITTED FILM PACKAGES,
United States International Trade Commission - Investigation No. 337-TA-406

         This  investigation  was  commenced  by the  U.S.  International  Trade
Commission  (ITC) in March,  1998,  based on a  Complaint  filed with the ITC on
February  13,  1998 by Fuji  Photo  Film Co.,  Ltd.  (Fuji)  against a number of
importers,  including the Company's OptiColor subsidiary.  The Complaint alleges
that the respondents were infringing a number of U.S. patents, owned by Fuji, on
single use cameras,  through the  importation and resale in the United States of
single  use  cameras,   primarily   previously  used  cameras  which  have  been
reconditioned  for use with new film. The Complaint  sought orders excluding the
alleged   infringing  cameras  from  importation  into  the  United  States  and
prohibiting  further  sales  of such  products  which  have  been  imported.  An
evidentiary  hearing before an ITC  Administrative Law Judge ("ALJ") was held in
November 1998. In February, 1999, the ALJ issued an initial decision in favor of
Fuji,  which the ITC  Commissioners  subsequently  decided to let stand. The ITC
Commissioners  issued a final order in June,  1999,  prohibiting the Company and
its subsidiaries, and the other respondents, from importing and selling imported
infringing single-use cameras, including recycled single-use cameras.


                                       2
<PAGE>

         The Company, and two of the other respondents who sell large volumes of
recycled single-use cameras,  have appealed the ITC Commissioner's  order to the
Federal Circuit Court of Appeals. A decision is expected shortly. In the appeal,
as in the ITC  proceedings,  the issues have been and are vigorously  contested,
and at this  time  their  resolution  cannot  be  predicted  with any  degree of
certainty. The Company's attorneys are therefore unable to express an opinion as
to whether an unfavorable outcome for OptiColor is probable or remote.

         There is risk that Fuji might bring a civil  action  against  OptiColor
and the  Company  for  damages  for  patent  infringement  by reason of sales of
cameras which have been found in the ITC proceeding to infringe Fuji patents. In
June,  1999,  Fuji brought  civil action for patent  infringement  against three
other  companies  and stated in a press release that it is reviewing its options
with respect to other  companies  involved in the sale of products that infringe
Fuji  patents.  If such an action  were  brought  against the  Company,  the ITC
decision  would not be binding  in the civil  proceeding  and would not  prevent
OptiColor and the Company from raising and litigating all available defenses. At
this time we are unable to express an opinion as to the likelihood  that such an
action would be brought by Fuji.  For reasons  expressed  above,  the  Company's
attorneys  cannot  express  an  opinion as to  whether,  if such an action  were
commenced, an unfavorable outcome for OptiColor or the Company would be probable
or remote.  Further,  the Company's attorneys lack sufficient  information to be
able to express any  estimate of what the  maximum  liability  in such an action
would be in the event of an unfavorable outcome.

OptiColor, Inc., a subsidiary of PhotoWorks,  Inc. has designed and manufactured
a preloaded  camera  (single-use)  that we believe  does not infringe any of the
Fuji patents. We have been importing the preloaded cameras and just recently had
one  shipment  held in customs.  The Company  and its counsel  (Derek  Fryberg -
Heller Ehrman) are researching the issue. We do not believe the cameras infringe
and will be released from customs.

Drinkard, et al vs. PhotoWorks, Inc.

                  A complaint  has been filed  against the Company,  since twice
         amended, by six individual plaintiffs who are suing on their own behalf
         and  purportedly  on  behalf  of a class of all  private  citizens  and
         non-governmental  entities who have received from the Company,  and had
         the  Company  process,  "C-41"  35mm color film from the Company or who
         have  received  replacement  rolls of film from the Company  after film
         processing.  This  complaint  alleges  that the  Company has engaged in
         unfair and deceptive practices by allegedly  misrepresenting  that film
         received  from the Company  must be  processed  only by the Company and
         that replacement film is "free". This complaint requests injunctive and
         declaratory relief and restitution and damages in unspecified  amounts,


                                       3
<PAGE>

         and also  requests  trebling  of damages  and  recovery  of  litigation
         expenses pursuant to the Washington  Consumer Protection Act. The court
         has  not yet  determined  whether  the  individual  plaintiffs  will be
         permitted to prosecute the suit as a class action.  The Company filed a
         motion  for  summary  judgment  dismissing  the  claims  of four of the
         plaintiffs  (two of the  plaintiffs  were  added  to the  action  by an
         amendment  to the  Complaint  a few days  before  filing of the summary
         judgment motion). This motion was denied.

                  Management  and  Plaintiff's  Counsel are  diligently  working
         towards an out of court settlement  regarding future business  conduct,
         distribution of film and discount coupons to the public, and disclosure
         of film  processing  information.  A summary of the terms of settlement
         will be published  in USA Today,  Popular  Photography  and Photo Trade
         News pursuant to standard class action procedures. The Company believes
         this  settlement  will be reached in early  April  2001.  The agreed to
         settlement  must then be approved by the court. ( ATTACHMENT 1 --------
         Notice to Class and Proposed Class Action Settlement).

Onkor, Ltd.

         By letter dated October 1, 1999,  Onkor, Ltd. informed the Company that
its  product,  PhotoWorks  Cards  appeared  to fall  within the scope of allowed
claims in two of their U.S.  Patents (Pat.  No.  5,552,994 and  5,748,484).  The
letter  requested the Company to respond and  indicated  that if the Company did
feel that its system  fell within the scope of one of Onkor's  claims,  that the
Company would be requested to enter into a licensing  agreement  with Onkor.  In
response to the Company's request, without admitting that the system fell within
the scope of Onkor's  patents,  Onkor has  forwarded the Company a copy of their
standard Patent License Agreement.

Pictra, Inc.
         On August 24,  2000,  an attorney  for Pictra,  Inc.  ("Pictra"),  sent
notice to the  Company  that the Company may be  infringing  on Pictra's  rights
granted  in 6 U.S.  patents  owned by  Pictra  relating  to photo  albums on the
internet.  The Company has requested copies of the patents to review and respond
to Pictra's letter.  The Company is currently  reviewing  Pictra's  patents.  No
suits have been filed.

Picture Vision
         A subsidiary of Kodak,  Picture Vision has been granted patents on core
processes of scanning  photographic  film and  presenting an online retail store
based  on  such  images.  It is  possible  that  some of the  Company's  current
processes  might  infringe such patents.  There has been no  communication  from
Kodak or Picture Vision on this issue.

Seattle FilmWorks, Inc. v. State of Washington Department of Revenue
Thurston County Cause No. 98-2-01473-1


                                       4
<PAGE>

         In this action, the Company is seeking a refund of taxes (and interest)
assessed by the  Department of Revenue for the period of January 1, 1990 through
March 31, 1994 in the amount of approximately  $75,000.  The taxes assessed were
use  taxes  alleged  by the  Department  of  Revenue  to be owed as a result  of
advertising materials (including order forms) mailed to out-of-state  customers.
The  Company  is also  seeking  resolution  of the  issues  involved  for future
periods.

         By virtue of a pre-trial  stipulation between the Department of Revenue
and the  Company,  it was agreed that the  Company  was  entitled to a refund of
$30,066 in taxes  (with  interest of $16,987  through  October  31,  1999).  The
remaining  claim of $45,031 in taxes (plus  interest)  was tried to the Thurston
County  Superior  Court on October 7, 1999.  The trial court  issued a partially
adverse  ruling  denying the  Company's  claim.  The Company has appealed to the
State Court of  Appeals,  but it is not  possible at this point to evaluate  the
likelihood  of a  favorable  or  unfavorable  outcome of such an appeal with any
reasonable degree of accuracy.

         The issue  underlying the foregoing  litigation in an ongoing issue for
the Company for tax  reporting  periods  after  March 31,  1994.  That is, it is
reasonable  that a future routine audit by the Department of Revenue will result
in a further use tax  assessment  unless the  litigation  has been resolved in a
manner favorable to the Company prior to such audit and assessment.  The Company
has accrued  approximately  $675,000 and believes it is  adequately  accrued for
such possible assessments.

Section 5.10

The Company is aware of several web sites using the name "PhotoWorks"  including
MyPhotoworks.com and Photoworks-digital.com.

The Company has objected to the use of the name "Pictures on Disk" and PhotoMail
by several  entities,  including  Fuji,  on the grounds  that it  infringes  the
Company's common law trademarks in these names.  The Company's  applications for
trademarks  on Pictures On Disk and PhotoMail  were rejected by the U.S.  Patent
and Trademark Office on the grounds that they were descriptive.

The  Company  has issued  several  cease and desist  orders for use of the names
PhotoWorks, Pictures on Disk, PhotoMail and Pictures Plus.

An employee  who worked for the Company  part-time  through  March 2001,  Sohrab
(Tony) Amirghodsi, also works for Adobe Systems on a full-time basis.

Section 5.11


                                       5
<PAGE>

A tax audit by the Washington Department of Revenue of the Company's Subsidiary,
OptiColor,  Inc.,  which commenced in December 1999, has been postponed  pending
the  resolution  of a dispute  regarding  order  forms  that is on appeal to the
Washington  State Court of Appeals.  In addition  the  Department  of Revenue is
expanding  the  audit  to  include   PhotoWorks,   Inc.  and  Seattle  FilmWorks
Manufacturing Company.

In December 2000, the City of Seattle  completed a routine audit.  No assessment
was made.  The City of Seattle is  requesting  to expand the audit for tax years
subsequent to 1996 but at this time the audit has not been scheduled.

The  Company  recently  concluded  negotiations  with the  State  of  Washington
relating to leasehold  excise taxes due for its Warehouse Lease with the federal
government.  The  assessment  was paid in April 2001. The Company had adequately
reserved for this  liability on its balance  sheet as of September  30, 2000 and
December 30, 2000.

Section 5.12(a)

         The Company has entered  into the  following  agreements  which are (i)
material contracts,  (ii) involve the license or grant of Intellectual Property,
(iii) restrict the  development,  manufacture or  distribution  of the Company's
products or services or (iv)  provide for  indemnification  by the Company  with
respect to proprietary rights:

         1.  Partnering  Agreement  dated May 19,  2000  between the Company and
Yahoo!  (as of the date  hereof,  the Company  owes  $500,000 of the  $1,500,000
contract price);  Term-Unless  earlier  terminated in accordance with the terms,
the agreement  shall be for twelve (12) months from launch date of September 21,
2000. The Company is currently  renegotiating with Yahoo! regarding the terms of
this agreement. The Company has not made the $250,000 payment due in March 2001;

         2.  Partnering  Agreement  between the Company and  American  Greetings
dated  September  11, 2000 and amended  April  2001.  The Company has  satisfied
payment terms to American Greetings based on the contract amendment; and

         3. Amended and Restated  Partnering  Agreement  between the Company and
The Message Group to provide free trial processing coupons/order forms, business
reply envelopes and stickers to be applied to the finished product (camera) from
The Message  Group.  The Company will also pay Message  Group  various  bounties
based on customer response. ATTACHMENT 3.

         In addition, the Company is a party to various Partnering Agreements or
arrangements  entered  into in the  ordinary  course  of  business  in which the
Company partners with an Internet partner to mutually promote their products and
services.  These  agreements  may  involve  the  grant of  certain  licenses  to
proprietary  rights and  related  indemnification.  The  Company  also  licenses


                                       6
<PAGE>

off-the-shelf  software pursuant to standard license  agreements in the ordinary
course of business. None of these agreements would constitute material contracts
(as defined in Item 601(b)(10) of Regulation S-K of the Commission)

Other Indebtedness

         (i) Agreement to Restructure  Debt dated November 1, 2000,  between the
Company  and FCB  Worldwide,  Inc.  d/b/a FCB  Seattle.  (Principal  Payments of
$410,482 due on March 2001, June 2001, October 2001,  December 2001, and a final
payment in the  amount of  $295,020  due in March  2002 for a total  outstanding
principal amount of $1,936,948.  Interest is 12% APR payable monthly.) The March
23, 2001  payment and April 1, 2001  interest  payment has not been made pending
negotiations  with FCB Worldwide to discount the amount of the principal balance
due.

         (ii) IBM lease for computer  equipment  pursuant to a Master Term Lease
dated December 28, 1997 and Supplements  dated December 29, 1999 (both operating
lease and a capital lease) in the amounts set forth on ATTACHMENT 2.

         (iii)  Xerox  lease for color  copier 36 month  operating  lease  dated
October 13, 2000, in the amounts set forth on ATTACHMENT 2.

         (iv) Supply  Agreement  dated November 1, 2000,  between  Eastman Kodak
Company and the Company (for supply of Kodak paper and chemicals);

         (v)  Agfa  Finance  Group  lease  for  Advanced  Photo  System  ("APS")
equipment  - 60  month  operating  lease  dated  March  28,  2001  set  forth on
ATTACHMENT 2.  PhotoWorks  Inc. is the  guarantor  for this lease.  The lease is
under  the  name  of  Seattle  FilmWorks  Manufacturing  Company  (wholly  owned
subsidiary of PhotoWorks).

         (vi) leases for main offices,  warehouse,  customer  service area,  and
retail locations (see ATTACHMENT 2, ("Lease Payments");

         (vii) Employment Contract dated August 16, 2000 between the Company and
Gary Christophersen  (term of June 30, 2000 to June 30, 2001, with a base salary
of $250,000 and a bonus of $150,000 (BONUS HAS BEEN PAID PURSUANT TO AGREEMENT);

         (viii)  Employment Offer dated October 26, 2000 between the Company and
Howard Lee. (Base salary of $250,000 plus a target bonus of 50% of annual salary
based  on  the  performance  of the  Company  as  determined  by  the  Board  of
Directors).  In addition,  a bonus of $125,000  upon  successful  completion  of
fourteen months of service with PhotoWorks);


                                       7
<PAGE>

         (ix)  Employment  Offer dated  October 31, 2000 between the Company and
Ben Calica. (Base salary of $145,000 plus a target bonus of 30% of annual salary
based  on  the  performance  of the  Company  as  determined  by  the  Board  of
Directors).  While this offer does not imply a contract for  employment  for any
duration,  should Mr.  Calica be terminated  for reasons  other than cause,  the
Company will continue salary for three months from the date of termination);

         (x) Employment  Offer dated April 1, 2001 between the Company and David
Barad.  (Base  salary of $150,000  plus a target  bonus of 40% of annual  salary
based  on  the  performance  of the  Company  as  determined  by  the  Board  of
Directors).  While this offer does not imply a contract for  employment  for any
duration,  should Mr.  Barad be  terminated  for reasons  other than cause,  the
Company will continue salary for three months from the date of termination);

         (xi) Note payable to Avenue A, Inc. in the  principal  sum of $209,057,
interest 10% APR.  Principal and interest  payments due weekly from December 22,
2000 through June 11, 2001, (note:  Payments have been made through March 2001).
Current principal balance due is $134,057.

Section 5.12(b):

         On December  20,  2000 the Company  closed a bridge line of credit with
Imperial  Bank for $2.5  million,  secured  by all  assets  of the  Company  and
perfected by UCC filings and related Security Agreements. Any draws on this line
bear  interest  at the prime rate plus 2%. As of April 4, 2001,  the Company has
drawn on this line in the amount of  $2,350,000.  Any  borrowed  amounts are due
upon the earlier of April 30, 2001,  or upon closing of the next round of equity
financing.  In connection with this note,  warrants were issued to Imperial Bank
to purchase 72,727 shares of Common Stock with an exercise price of $1.00.

         Imperial  Bank has  provided  to the Company a  preliminary  term sheet
which  would allow the company to convert the bridge line of credit to a 364 day
revolving line of credit based on closing $2.5 million in additional financing.

         The Company is in negotiations  with Rhino Advisors in New York.  Rhino
Advisors  has agreed to provide the Company  with a  $20,000,000  equity line of
credit designed to give the Company access to cash through the sale of it common
stock.  Attached  are the term sheets  from Rhino  Advisors  and Pacific  Crest.
ATTACHMENT 4 AND 5.



                                       8
<PAGE>

         In the 2nd  quarter  of  fiscal  2001,  March  31,  2001,  the  Company
increased its inventory  reserve by approximately  $360,000 for camera inventory
and other marketing  materials purchased for marketing programs that the company
is discontinuing.

         The Company  also wrote down  approximately  $230,000  of fixed  assets
related to  equipment  primarily  related to  scanning  equipment  that has been
replaced or upgraded and other  equipment that has been taken offline due to the
decline in roll volumes.

Section 5.14

         Employees The Company has recently  reduced its  workforce  through lay
offs.  November 28, 2000 - The Company reduced its workforce by approximately 50
positions,  or 7% of its  workforce.  March 8, 2001 - The  Company  reduced  its
workforce by approximately 113 positions, or 18% of its workforce.
         As part of its workforce  reductions  the Company  eliminated  two Vice
President  positions as a reduction in force.  January 26, 2001 - Stephen Brown,
VP-Product Development/Business Development. March 16, 2001 - William Ledbetter,
VP-Information Technology Services.

Section 5.18

         Under a Debenture  Subscription  Agreement  dated August 14, 1981,  the
Company granted certain registration rights to Sam Rubinstein. These rights were
subsequently amended and clarified by Amendment No. 3 to that agreement in June,
1996. The Debenture  Subscription  Agreement was further  clarified by Amendment
No. 4 to that agreement in February 2000.


                                       9
<PAGE>



                                  ATTACHMENT 1
I.       Notice of Class Action and Proposed Class Action Settlement


                  TO: All persons or entities in the United States who processed
         film with SEATTLE FILMWORKS or PHOTOWORKS, or received film distributed
         by SEATTLE  FILMWORKS or  PHOTOWORKS,  at any time after March 29, 1996
         ("the Class"):



                  This is to  notify  you that a Class  Action  lawsuit  ("Class
         Suit") has been  brought on your behalf in the  Superior  Court of King
         County, Washington, No. 00-2-09552-0SEA,  against PhotoWorks,  Inc., of
         Seattle Washington,  formerly known as Seattle FilmWorks.  In the Class
         Suit  the  plaintiffs  (who  are  6  individuals)  claim  that  Seattle
         FilmWorks (now PhotoWorks) has made false or misleading representations
         to  customers,  as well as to other  photoprocessers,  (1) that Seattle
         FilmWorks  brand film can be processed only by Seattle  FilmWorks or by
         only a few other labs, when in fact most of such film is of a C-41 type
         that  can be  processed  by most  other  photofinishers;  and (2)  that
         replacement film distributed by Seattle  FilmWorks to  photo-processing
         customers  is  "free,"  when  in fact  customers  are  charged  for the
         replacement  film. On behalf of the Class,  plaintiffs  seek injunctive
         and declaratory  relief,  as well as damages.  PhotoWorks  disputes and
         denies these  allegations and denies any wrongdoing or liability on the
         claims  asserted  in the  lawsuit.  In the Class Suit there has been no
         trial or other  determination  of the  merits of the  claims,  and this
         Notice  is not an  expression  of any  opinion  by the  Court as to the
         merits of the claims.



                  PROPOSED  SETTLEMENT:  For the sole  purpose  of  compromising
         disputed  claims and  avoiding  costs and risks of further  litigation,
         PhotoWorks  and the plaintiffs who represent the Class have agreed to a
         proposed settlement. Here is a summary of its terms.

                  Future conduct/disclosures.  Although PhotoWorks reaffirms its
         denials of any past  wrongdoing,  under the settlement  PhotoWorks will
         agree that in the future (a) it will not  represent to  customers  that
         its  film  can be  processed  only by  PhotoWorks  or by a few or small
         number of labs if such is not the fact;  (b) it will not represent that
         replacement  film is free  unless it is  provided at no charge over and
         above the  regular  price  PhotoWorks  charges for  processing  without
         replacement  film;  (c) so long as it generally  offers  customers  the
         option not to  purchase  replacement  film when  purchasing  processing
         services, it will conspicuously  disclose that option and the method of
         exercising it, on order forms and on signage in its retail stores;  (d)
         until March 31, 2006 it will maintain a "C-41" designation on the rolls
         of all standard C-41 film it distributes that is of a type that is able
         to be properly developed using the industry standard C-41 process.

                   Photoworks  also affirms  that most of the Seattle  FilmWorks
film it has distributed since 1996 is standard C-41 film.

         Other  benefits.  PhotoWorks  will also provide these benefits to Class
Members:

         (1) Within one year PhotoWorks will make the following distributions of
  free rolls of  24-exposure  standard  C-41  film.  (a) It will  distribute  an


                                       10
<PAGE>

  aggregate  of 900,000  rolls to persons who are active  PhotoWorks  customers,
  with the  identity  of  recipients  and  number  of rolls per  recipient  (not
  exceeding 3)  determined by  PhotoWorks  in a way that  reasonably  takes into
  account past and/or anticipated  quantity or frequency of their  transactions.
  (b) It will  also  distribute  one  roll to each of the  first  300,000  Class
  Members who do not receive any of the 900,000 rolls  mentioned  above and who,
  within 6 months after publication of this Notice,  request a free a roll in an
  e-mail sent to PhotoWorks  at  www.____________________,  a telephone  call to
  PhotoWorks  at 1-800-____  or a letter  mailed to  PhotoWorks,  P.O. Box ____,
  Seattle  WA _____.  Each  written  request  must  contain  the class  member's
  address,  signed or subscribed  name, and statement that he or she is a Member
  of  the  Class.   Materials   accompanying  these  distributions  will  inform
  recipients  that  the  C-41  process  identified  on the  film is an  industry
  standard chemical process that most photo-processing labs use to develop film.

         (2 Each  member of the Class who does not  receive  free film under (1)
  above may submit to Photoworks the Coupon  appended or attached to this Notice
  (prior  to  the  Coupon's  expiration)  to  receive  a $1  discount  on a film
  processing order.

            Other  provisions.   (a)  PhotoWorks  will  pay  (subject  to  Court
  approval)  $2500  to each of the  named  plaintiffs/class  representatives  as
  compensation for their time and involvement in the Class Suit, and $320,000 to
  the attorneys  for the Class for their  services and costs in the Class Suit..
  (b) The  settlement  will release and bar all claims of Class Members  against
  PhotoWorks  which arise out of any of the  allegations  and in the Class suit,
  except for certain  claims by Class Members who exercise the option to request
  exclusion, which is explained below.



         COURT PROCEDURES. The proposed settlement is subject to approval of the
  Court. The Court has made a preliminary  determination that the Class Suit may
  be  maintained  as a class  action for  purposes  of  settlement  and that the
  proposed  settlement appears to be fair and reasonable.  The Court will hold a
  Fairness  Hearing on  ___________2001  at _____ in the Courtroom of Hon. Bruce
  Hillyer, [room no.] King County Courthouse,  516 Third Ave., Seattle WA 98104,
  to determine whether the proposed settlement should be finally approved.

         Your Right to be Heard.  You may  object to,  support or comment on the
settlement if you do so by brief letter mailed first class,  postmarked no later
than  ____________________,  which indicates that it is in reference to Drinkard
et al. v.  PhotoWorks,  Inc,  No.  00-2-09552-0SEA  and is addressed to Superior
Court Clerk's Office, King County Courthouse, 516 Third Ave., Room E609, Seattle
WA,  98104,  with copies  addressed  and mailed by the same postmark date to (1)
Adam Berger, Schroeter,  Goldmark & Bender, 810 Third Ave. Ste. 500, Seattle, WA
98104 (Class Counsel) and (2) Peter A. Danelo, Heller, Ehrman, White & McAuliffe
LLP, 701 Fifth Ave. Ste. 6100,  Seattle,  WA 98104 (counsel for PhotoWorks).  If
you do this,  you may,  but are not required to, also appear and be heard orally
at the Fairness  Hearing,  either personally or through your own lawyer retained
at your expense.



         Exclusion.  You  may  exclude  yourself  from  the  settlement  and the
  settlement  Class by mailing  first  class a letter  addressed  to  PhotoWorks
  Settlement  Adminstrator  ,  _____________________  postmarked  no later  than
  _____________,  in which you state "I request  exclusion  from the  PhotoWorks
  settlement" followed by your name, signature and address. If you exercise this
  option,  you  will  not be  eligible  for the  free  film or  coupon  benefits
  described above under "Other  Benefits" and you will retain the right to bring
  a separate individual lawsuit against PhotoWorks on claims for damages covered


                                       11
<PAGE>

  by the Class Suit. If you do not request exclusion, the Settlement, if finally
  approved by the Court,  will release,  and prohibit you from filing a separate
  suit on,  any claim  you might  have  against  PhotoWorks  based on any of the
  allegations  in the Class Suit, as  summarized in the first  paragraph of this
  Notice and stated more  particularly  in the papers filed by plaintiffs in the
  Class Suit..

         Further  Information.  This  Notice  contains  only  a  summary  of the
  Settlement  Agreement and the  allegations  in the Class Suit. You may inspect
  complete  copies of the Settlement  Agreement and other documents in the Class
  Suit at the  Office of the Clerk of the  Superior  Court of King  County,  516
  Third  Avenue,  Room  E609,  Seattle,  WA  98104.  If you  wish a copy  of the
  Settlement  Agreement,  or want  further  information,  or  otherwise  wish to
  communicate  with  Class  Counsel,  you may call  toll-free  telephone  number
  _________________-   or  write  to  Class  Counsel,   PhotoWorks   Settlement,
  ______________________________________.





  DATED:  April ___, 2001.                                By Order of the Court
















                                       12
<PAGE>



                                  ATTACHMENT 2
                             MINIMUM LEASE PAYMENTS

<TABLE>
<CAPTION>
<S>                                            <C>         <C>          <C>          <C>          <C>          <C>
Location        Name                         FY01        FY02         FY03         FY04         FY05         FY06          Total
--------        ----                         ----        ----         ----         ----         ----         ----          -----
1               Main Building             387,000     387,000      387,000      387,000      387,000                   1,935,000
2               Fedworks                  208,544      52,992                                                            261,536
3               Buildings 2 & 3           420,000     420,000      420,000      470,400      470,400                   2,200,800
4               Thorndyke                 156,961     161,670      166,142      171,138      176,661                     832,572
4317            Bellevue                    8,942       9,210        9,541        4,040                                   31,733
4319            Mt. Vernon                  4,800       2,000                                                              6,800
4328            Stanwood                   17,750      18,250        9,250                                                45,250
4803            Tacoma                      8,400       2,100                                                             10,500
4806            Lakewood                   21,883      22,100        7,367                                                51,350
4814            Renton                     20,181      20,400       20,400       20,400        6,800                      88,181
4820            West Seattle               13,200      13,200        5,500                                                31,900
4826            U-District                 11,520      11,520        7,680                                                30,720
4828            Northgate                  26,760      27,924       27,924                                                82,608
4830            Federal Way                37,200      37,200       37,200                                               111,600
4832            Olympia                    24,483      26,867       28,210        9,555                                   89,115
4834            Gig Harbor                  8,050                                                                          8,050
4835            Mukilteo                   22,824      24,228       12,566                                                59,618
4838            Sunset Square              18,675                                                                         18,675
4840            Bonney Lake                25,006                                                                         25,006
4841            Langston Landing           19,148      19,239        1,603                                                39,991
4842            FIC                        26,180      26,180       13,090                                                65,450
4843            Tacoma Central             20,432                                                                         20,432
4844            Ballinger Village          24,552      14,322                                                             38,874
4845            Marysville                 16,723                                                                         16,723
4846            Woodinville                25,200       2,100                                                             27,300
4850            Maple Valley               23,100      23,100        1,925                                                48,125
4855            Totem Lake                 21,135       5,313                                                             26,448
4904            Sunset Plaza               25,600      26,800       18,400                                                70,800
4906            Portland                   19,800      19,800       14,850                                                54,450
4908            Cherry Park                 9,450                                                                          9,450
4910            Lloyd Center               19,056                                                                         19,056
4912            Clackamas                  22,272       1,856                                                             24,128
OPERATING       Xerox                      17,832      17,832       17,832                                                53,496
OPERATING       IBM                     1,078,812     443,583                                                          1,522,395
OPERATING       Agfa                       16,274      32,548       32,548       32,548       32,548       16,274        162,740
CAPITAL         IBM                       278,261     206,698       95,976                                               580,936

                                        3,106,007   2,076,032    1,335,005    1,095,081    1,073,409       16,274      8,701,807
</TABLE>



                                       13
<PAGE>



                                  ATTACHMENT 3
                             MESSAGE GROUP AGREEMENT

                    AMENDED AND RESTATED PARTNERING AGREEMENT

         THIS AMENDED AND RESTATED  PARTNERING  AGREEMENT (the  "Agreement")  is
entered into as of October 1, 2000 (the  "Effective  Date"),  by and between THE
MESSAGE GROUP, a Florida corporation ("M Group"), located at 3451 Executive Way,
Miramar   Florida  33025  and   PHOTOWORKS,   INC.,  a  Washington   corporation
("PhotoWorks"),  located at 1260 - 16th Avenue West,  Seattle,  Washington 98119
(collectively referred to herein as the "Parties").

                                    RECITALS

         I.  PhotoWorks  provides film and digital  processing,  and  archiving.
PhotoWorks  uses the  Internet  to help  people  organize,  view and share their
photos.  PhotoWorks delivers value-added  services--both  traditional prints and
digital output--directly to the customer.

         II.  M Group  is in the  business  of  manufacturing  and  distributing
pre-loaded  cameras  and  would  like  to add  value  for its  customers  by the
inclusion of a free processing trial offer.

         III. On or about May 22,  2000,  the Parties  entered into a Partnering
Agreement  and now wish to amend and restate  that  agreement in order to modify
and clarify such agreement to the mutual benefit of the Parties.  This Agreement
supersedes the original Partnering Agreement between the Parties.

                                    AGREEMENT

         Therefore, the Parties agree as follows:

1.       PHOTOWORKS OBLIGATIONS:

         PhotoWorks will, at its own expense:

1.1  Provide up to 800,000 free trial processing coupon/order forms ("Inserts"),
     business reply  envelopes  (BRE) and stickers to be applied to the finished
     product  referencing  the offer  enclosed  therein  to M Group for  general
     inclusion  with  their  Message  Camera   products.   PhotoWorks   will  be
     responsible  for  transporting  the order  forms,  BREs,  and stickers to M
     Group's manufacturing facility.

     1.1.1        The Parties  acknowledge  that  PhotoWorks  has already issued
                  300,000  Inserts  under  terms  of  the  original   Partnering
                  Agreement  (the  "Original  Inserts").  Customers  who  redeem
                  Original  Inserts  will not be  required to pay  shipping  and
                  handling charges relating to such redeemed Original Inserts.

     1.1.2        PhotoWorks  will  issue to M Group up to a maximum  of 500,000
                  additional Inserts subject to the terms and conditions of this
                  Agreement (the "New Inserts") beginning on the Effective Date.
                  M Group may submit an order for New Inserts only after M Group
                  has distributed its previously ordered Inserts to retailers.


                                       14
<PAGE>

     1.1.3        Customers  who redeem the New Inserts  will be required to pay
                  $1.95  in  shipping  and  handling  charges  for  each  coupon
                  redeemed.

     1.1.4        The New Inserts will expire 12 months after their print dates.
                  Print dates will  correspond  with the date of M Group's print
                  request(s).

     1.1.5        In order to address  PhotoWorks'  concerns  regarding  quality
                  control and to manage  customer  expectations,  PhotoWorks may
                  include a  statement  on the New  Inserts to the  effect  that
                  disposable   cameras  may  not  perform  as   effectively   as
                  traditional cameras.

1.2  Participate in a specific camera promotion for McDonald's  restaurants (the
     "McDonald's Program") with M Group as follows:

     1.2.1        In addition to the New Inserts to be issued under Section 1.1,
                  PhotoWorks  will  issue to M Group  for use in the  McDonald's
                  Program up to a maximum of one million  (1,000,000)  specially
                  coded Inserts  ("McDonald's  Inserts")  for  inclusion  with M
                  Group Camera products as part of a McDonald's promotion.

                  1.2.1.1           PhotoWorks  will issue to M Group an initial
                                    set of 265,000  McDonald's Inserts ("Initial
                                    McDonald's  Inserts").  Customers who redeem
                                    these Initial McDonald's Inserts will not be
                                    required  to  pay  $1.95  in  shipping   and
                                    handling charges for each Insert redeemed.

                  1.2.1.2           PhotoWorks  will  issue  to M Group up to an
                                    additional    735,000   McDonald's   Inserts
                                    ("Additional  McDonald's  Inserts") in order
                                    to  accommodate  expansion of the McDonald's
                                    Program.    Customers   who   redeem   these
                                    Additional   McDonald's   Inserts   will  be
                                    required  to  pay  $1.95  in  shipping   and
                                    handling charges for each Insert redeemed.

     1.2.2        All McDonald's Inserts will expire 12 months after their print
                  dates.  Print dates will correspond with the date of M Group's
                  print request(s). PhotoWorks may include in McDonald's Inserts
                  a  statement  similar to that  provided  for in Section  1.1.5
                  above.  1.2.3 The McDonald's  Program may be extended upon the
                  written mutual agreement of the Parties.  If PhotoWorks elects
                  not to provide additional  McDonald's Inserts, M Group may use
                  an  alternative  film  processor to continue  with an extended
                  McDonald's Program.

1.3 PhotoWorks will include a link to M Group's Web site on PhotoWorks' Partners
page on the PhotoWorks Web site.

2        M GROUP OBLIGATIONS:

         M Group will, at its own expense:

     2.1          Promote  PhotoWorks  as the  preferred  provider  of film  and
                  digital  processing  and archiving  services.  No  competitive
                  provider of photo  processing  and archiving  will be promoted
                  more  prominently  than  PhotoWorks.   M  Group  will  promote
                  PhotoWorks:


                                       15
<PAGE>

                  2.1.1             Using  banners,  buttons  and/or  text links
                                    provided  by  PhotoWorks  in any  listing of
                                    partners that appears on the M Group pages.

                  2.1.2             With the  inclusion  of a Original  Inserts,
                                    New Inserts and  McDonald's  Inserts  within
                                    the   package   of  M   Group   Cameras   as
                                    contemplated  by  this  Agreement.  M  Group
                                    retains  the  right to  decide  which of its
                                    customers'  cameras  shall  include the free
                                    processing offer.

                  2.1.3             Every camera containing an Insert shall bear
                                    a sticker supplied by PhotoWorks per Section
                                    1.1 in a previously  agreed-upon location on
                                    the  front  of  the  camera  outer   package
                                    indicating  a  free   processing   offer  is
                                    included therein.  Alternately,  M Group may
                                    redesign the outer  packaging  such that the
                                    Insert contained therein is printed directly
                                    and  prominently  displayed  on the camera's
                                    outer  package.   In  either  case,  artwork
                                    referencing  the  free  processing  offer or
                                    which includes any logo or other  PhotoWorks
                                    mark or trademark is subject to the approval
                                    of PhotoWorks prior to printing.

     2.2          M Group shall be  responsible  for ensuring  that all cameras,
                  which feature the free trial processing  coupons/order  forms,
                  are of a quality satisfactory for developing quality prints. M
                  Group's  products will be replaced if defective in manufacture
                  or packaging.  Any customer complaint to PhotoWorks related to
                  defects in manufacture or packaging must be  communicated to M
                  Group, in writing, within seven (7) days from receipt to the M
                  Group  Customer  Service  Department  for  customer  complaint
                  resolution. All costs incurred by PhotoWorks,  above usual and
                  customary costs for customer resolution and service time, as a
                  result of defective  manufacture  of  packaging,  shall be the
                  responsibility of M Group and may be deducted from sums due to
                  M Group under the terms of this agreement.


3        PAYMENTS:

     3.1          Within  fifteen (15) days  following  the end of each calendar
                  month, PhotoWorks shall make the following payments:

                  3.1.1             As to the Original Inserts only,  PhotoWorks
                                    will pay $17.50 for each New  Customer  that
                                    redeemed  an  Original   Insert  during  the
                                    preceding calendar month.

                  3.1.2             As to the New Inserts,  PhotoWorks  will pay
                                    $5.00 for each New Customer  that redeemed a
                                    New  Insert  during the  preceding  calendar
                                    month.  For each New  Customer who redeems a
                                    New   Insert,   PhotoWorks   will   pay   an
                                    additional  $5.00  (for  a  total  potential
                                    adjustment  of $10.00 per New  Customer)  if
                                    and  when  such  New  Customer   returns  to
                                    PhotoWorks,    purchases    and   pays   for
                                    PhotoWorks' film processing services without
                                    redeeming an Insert.

                  3.1.3             As  to  the  Initial   McDonald's   Inserts,
                                    PhotoWorks  will  pay  $5.00  for  each  New
                                    Customer that redeemed an Initial McDonald's
                                    Insert during the preceding  calendar month.
                                    No  additional  payments  shall be paid to M
                                    Group  relating to New  Customers who redeem
                                    the Initial McDonald's  Inserts,  whether or
                                    not such New Customers subsequently purchase
                                    PhotoWorks' film processing services without
                                    redeeming an Insert.


                                       16
<PAGE>

                  3.1.4             As to  the  Additional  McDonald's  Inserts,
                                    PhotoWorks  will  pay  $5.00  for  each  New
                                    Customer   that   redeemed   an   Additional
                                    McDonald's   Insert   during  the  preceding
                                    calendar  month.  For each New  Customer who
                                    redeems  an  Additional  McDonald's  Insert,
                                    PhotoWorks will pay an additional $5.00 (for
                                    a total potential  payment of $10.00 per New
                                    Customer)  if and  when  such  New  Customer
                                    returns to  PhotoWorks,  purchases  and pays
                                    for  PhotoWorks'  film  processing  services
                                    without redeeming an Insert.

                  3.1.5             Notwithstanding  the  foregoing,  the  total
                                    fees  to be paid  by  PhotoWorks  to M Group
                                    attributable to the McDonald's Program shall
                                    not exceed one million dollars ($1,000,000).

                  3.1.6             "New  Customer" for PhotoWorks is defined as
                                    a single  U.S.  postal  address  of a viable
                                    mail order  film  processing  customer  from
                                    which  PhotoWorks  has received no orders in
                                    the past one (1) year,  that sends in a roll
                                    (or more) of film or  pre-loaded  camera for
                                    processing  to  PhotoWorks,  using  an order
                                    form included within a Camera distributed by
                                    M Group.  As soon as  practicable  after the
                                    Reporting  Date,  M Group  agrees to provide
                                    PhotoWorks   with   its  test   list   which
                                    identifies  any  seed  customers.   M  Group
                                    acknowledges and agrees that no fees will be
                                    paid to M Group based on Inserts redeemed or
                                    purchases completed by such seed customers.

     3.2          On the  Effective  Date or as soon  thereafter  as  reasonably
                  practical  PhotoWorks shall pay M Group the sum of thirty-five
                  thousand  dollars  ($35,000).  Such funds  shall be an advance
                  against all fees under this Agreement  except funds related to
                  the MacDonald's  promotion..  In the event fees due under this
                  Agreement exceed $35,000,  in the aggregate,  PhotoWorks shall
                  pay the fees as  required in Section  3.1 and  accompany  such
                  payment with the accounting as required in Section 3.3.

     3.3          Within  fifteen (15) days  following  the end of each calendar
                  month  during  the term of this  Agreement,  PhotoWorks  shall
                  provide M Group with a report and  accounting  of monies  owed
                  based on activity  during the preceding  calendar  month.  The
                  reports  shall be  categorized  by insert code in alpha order.
                  Such report shall also include the names and mailing addresses
                  of  New  Customers   acquired  during  the  preceding   month;
                  provided,  however, M Group may use such customer  information
                  for no purpose other than for auditing PhotoWorks'  compliance
                  under this Agreement and such disclosures  shall be subject to
                  the  restrictions  contained in PhotoWorks'  privacy policy to
                  the extent  the  gathering  and  disclosure  of such  customer
                  information  is  controlled  by such  privacy  policy.  In any
                  event, such customer  information shall be deemed Confidential
                  Information  and the exclusive  property of  PhotoWorks  under
                  this Agreement.

4        TERM AND TERMINATION:

     4.1          The  term of this  Agreement  is to be one (1)  year  from the
                  Effective  Date.  The  term  may be  extended  for  additional
                  one-year periods upon the mutual agreement of the Parties.

     4.2          Either party may terminate  this  Agreement if the other party
                  materially breaches its obligations  hereunder and such breach
                  remains  uncured  for thirty (30) days  following  the written
                  notice to the breaching party of such breach.


                                       17
<PAGE>

     4.3          Upon the expiration or earlier  termination of this Agreement,
                  PhotoWorks'  obligation to issue Inserts shall cease; however,
                  PhotoWorks  will continue to honor all  unexpired  Inserts and
                  will  account  for  and  pay  the  fees  required  under  this
                  Agreement  with  respect to such  Inserts as they  become due.
                  Upon the expiration or earlier  termination of this Agreement,
                  M Group  will  promptly  return  any  unearned  portion of the
                  $35,000 advance remaining on the date of termination.

5        TRADEMARK LICENSE:

     5.1          Each party hereby grants to the other a non-exclusive, limited
                  license to use its  trademarks,  service  marks or trade names
                  only to fulfill any promotional  obligations specified herein.
                  The trademark  owner may  terminate  the  foregoing  trademark
                  license if, in its reasonable  discretion,  the licensee's use
                  of the marks is reasonably likely to tarnish,  dilute, blur or
                  otherwise  degrade the  reputation  value of the mark and such
                  use is not corrected  within five (5) days of notice  thereof;
                  alternatively,  in these  circumstances  the owner may specify
                  that  specified  uses may not contain the marks.  Title to and
                  ownership  of the owner's  marks shall  remain with the owner.
                  The licensee  shall use the marks exactly in the form provided
                  and in  conformance  with any trademark  usage  policies.  Any
                  benefits   accruing   from  use  of  such   trademarks   shall
                  automatically vest in the owner.

6        CONFIDENTIALITY:

     6.1          A  party's  "Confidential   Information"  is  defined  as  any
                  confidential  or  proprietary  information of a party which is
                  disclosed to the other party in writing,  marked  confidential
                  or if disclosed  orally,  is identified as confidential at the
                  time of  disclosure.  Each party shall hold the other  party's
                  Confidential  Information in confidence and shall not disclose
                  such to third parties nor use the other  party's  Confidential
                  Information  for any purpose other than as required to perform
                  under  this   Agreement.   Each  party   shall   destroy   all
                  Confidential Information of the other party upon expiration or
                  termination  of this  Agreement,  unless the  license  thereto
                  survives  termination  of this  Agreement.  Such  restrictions
                  shall  not  apply to  Confidential  Information  which  (a) is
                  already known by the recipient, (b) becomes, through no act or
                  fault of the  recipient,  publicly  known,  (c) is received by
                  recipient   from  a  third  party  without  a  restriction  on
                  disclosure  or  use,  or (d)  is  independently  developed  by
                  recipient without  reference to the Confidential  Information.
                  The restriction on disclosure  shall not apply to Confidential
                  Information  that is  required to be  disclosed  by a court or
                  government  agency. The terms and conditions of this Agreement
                  will be deemed to be Confidential  Information and will not be
                  disclosed  without  the  prior  written  consent  of the other
                  party.

7        INDEMNITY:

     7.1          Each party (the  "Indemnifying  Party")  shall  indemnify  the
                  other  party (the  "Indemnified  Party")  against  any and all
                  claims,  losses,  costs  and  expenses,  including  reasonable
                  attorneys'  fees,  which the Indemnified  Party may incur as a
                  result of claims in any form by third parties arising from any
                  breach of the  Indemnifying  Party's  obligations  under  this
                  Agreement.  In addition,  M Group shall  indemnify  PhotoWorks
                  against  any and  all  claims,  losses,  costs  and  expenses,
                  including  reasonable  attorneys'  fees,  which PhotoWorks may
                  incur  as a result  of  claims  in any  form by third  parties
                  arising from the M Group trademarks. The foregoing obligations
                  are  conditioned  on the  Indemnified  Party:  (i)  giving the
                  Indemnifying   Party  notice  of  the  relevant  claim,   (ii)
                  cooperating with the  Indemnifying  Party, at the Indemnifying
                  Party's  expense,  in the  defense  of such  claim,  and (iii)
                  giving the Indemnifying Party the right to control the defense
                  and settlement of any such claim, except that the Indemnifying
                  Party  shall not enter into any  settlement  that  affects the


                                       18
<PAGE>

                  Indemnified Party's rights or interest without the Indemnified
                  Party's prior written  approval.  The Indemnified  Party shall
                  have the right to participate in the defense at its expense.

8        LIMITATION OF LIABILITY:

     8.1          NEITHER  PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR SPECIAL,
                  INCIDENTAL OR  CONSEQUENTIAL  DAMAGES OR LOST PROFITS (HOWEVER
                  ARISING, INCLUDING NEGLIGENCE) ARISING OUT OF OR IN CONNECTION
                  WITH  THIS  AGREEMENT,  EVEN IF THE  PARTIES  ARE AWARE OF THE
                  POSSIBILITY  OF SUCH DAMAGES.  EXCEPT IN THE EVENT OF A BREACH
                  OF A PARTY'S  CONFIDENTIALITY  OBLIGATIONS,  IN NO EVENT SHALL
                  EITHER PARTY BE LIABLE TO THE OTHER PARTY IN AN AMOUNT GREATER
                  THAN THE AMOUNT OF FEES PAID TO M Group HEREUNDER.

9        DISCLAIMER OF WARRANTIES:

     9.1          EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, EACH
                  PARTY  PROVIDES ALL  MATERIALS AND SERVICES TO THE OTHER PARTY
                  "AS  IS."  EXCEPT  AS  OTHERWISE  EXPRESSLY  PROVIDED  IN THIS
                  AGREEMENT, EACH PARTY DISCLAIMS ALL WARRANTIES AND CONDITIONS,
                  EXPRESS,  IMPLIED OR STATUTORY,  INCLUDING WITHOUT  LIMITATION
                  THE   IMPLIED    WARRANTIES   OF   TITLE,    NON-INFRINGEMENT,
                  MERCHANTABILITY,  AND FITNESS FOR A PARTICULAR  PURPOSE.  Each
                  party acknowledges that it has not entered into this Agreement
                  in reliance upon any warranty or  representation  except those
                  specifically set forth herein.

10       DISPUTE RESOLUTION:

     10.1         In the event of any disputes  between the Parties arising from
                  or  concerning  in any  manner  the  subject  matter  of  this
                  Agreement   which  cannot  be  resolved   through  good  faith
                  negotiation   and  mediation,   the  Parties  will  refer  the
                  dispute(s)  to  the  American   Arbitration   Association  for
                  resolution through binding  arbitration by a single arbitrator
                  pursuant  to  the  American  Arbitration  Association's  rules
                  applicable to commercial disputes.

11       GENERAL PROVISIONS:

     11.1         This Agreement is the complete and exclusive agreement between
                  the  Parties  with  respect  to  the  subject  matter  hereof,
                  superseding  any prior  agreements  and  communications  (both
                  written  and  oral)  regarding  such  subject   matter.   This
                  Agreement may only be modified, or any rights under it waived,
                  by a written document executed by both Parties.

     11.2         Neither  party  may  assign  or  transfer  any of the  rights,
                  duties,  or  obligations  herein  to any party  (except  to an
                  affiliated company, or to a successor in interest in the event
                  of a  merger,  sale of assets of the  business  to which  this
                  Agreement  is  related,  or  consolidation)  without the prior
                  written consent of the other party, and any purported  attempt
                  to do so will be null and void.

     11.3         This  Agreement  shall be  construed  in  accordance  with and
                  governed by the laws of the State of Washington without regard
                  to the principles of conflicts of law.


                                       19
<PAGE>


     11.4         The  Parties  are  independent  contractors,  and  no  agency,
                  partnership,     joint    venture,     employee-employer    or
                  franchiser-franchisee  relationship  is intended or created by
                  this  Agreement.  Neither  party shall make any  warranties or
                  representations on behalf of the other party.

     11.5         If any provision  hereof shall be or become invalid,  illegal,
                  or  unenforceable in any respect,  the validity,  legality and
                  enforceability  of the remaining  provisions  contained herein
                  shall not be affected  thereby.  The Parties  agree to replace
                  any  invalid  provision  with a valid  provision,  which  most
                  closely  approximates  the intent and  economic  effect of the
                  invalid  provision.  Headings are for reference  purposes only
                  and in no way define, limit, construe or describe the scope or
                  extent of such section.

     11.6         If executed in  counterparts,  each will serve to evidence the
                  Parties' binding agreement.

         IN WITNESS WHEREOF,  the Parties have executed this Agreement effective
as of the day and year last written below.


M GROUP                                    PHOTOWORKS, INC.


By:                                        By:
         -------------------------------           -----------------------------

Name:                                      Name:
         -------------------------------           -----------------------------

Title:                                     Title:
         -------------------------------           -----------------------------

Date:                                      Date:
         -------------------------------           -----------------------------



                                       20
<PAGE>



                                  ATTACHMENT 4
                             PACIFIC CREST AGREEMENT
                              EQUITY LINE OF CREDIT

January 17, 2001


Mr. Gary Christophersen
Chairman
PhotoWorks, Inc.
1260 16th Avenue West
Seattle, Wash.  98119


Dear Gary:

         In  accordance  with our  recent  discussions,  this  letter  agreement
("Agreement")  is provided  to confirm  our  understanding  that  Pacific  Crest
Securities  Inc.   ("PCS")  will  act  as  the  exclusive   investment   banking
representative  ("Representative")  to  PhotoWorks,  Inc.  ("PhotoWorks"  or the
"Company"), its board of directors and its shareholders to initiate, develop and
negotiate  proposals  with Rhino  Advisors,  Inc. for the  following  financing:
Underwritten   Equity  Access  Program  of  up  to  $20  Million  U.S.   Dollars
($20,000,000)  in  Common  Stock,  or an  alternative  structure  acceptable  to
PhotoWorks   (collectively,   the  "Investment")  subject  to  the  satisfactory
completion of our continuing due diligence.

Pacific Crest Securities' Role

PCS will act as the  Representative to advise PhotoWorks on the Investment.  PCS
activities  will include (i)  introduction  to Rhino  Advisors  (and  additional
investors if agreed) (ii)  development and evaluation of alternative  Investment
structures,  (iii) advice on tactics and strategy,  (iv) advice on pricing,  (v)
recommendations on potential alternatives and (vi) assistance in negotiating and
closing the Investment.

Access to Information and Confidentiality

In conjunction with the Investment,  the Company may provide PCS with historical
and  projected  financial  statements,   budgets,  marketing  plans,  and  other
information  relevant to the business,  properties  and prospects of the Company
(collectively  "Information").  The  Company  will  afford  PCS, on an as needed
basis, access to its directors,  officers,  Company employees and facilities, as
well as the Company's outside counsel,  independent accountants, and other third
parties  having a  relationship  with the Company to the extent  appropriate  to
permit PCS to complete its tasks and to render services  hereunder.  The Company


                                       21
<PAGE>

acknowledges that PCS will be relying upon Information  furnished by the Company
and  that  PCS  will  not  assume  any   responsibility  for  the  accuracy  and
completeness of the  Information  provided by the Company and will not undertake
to independently verify such Information.

         PCS shall not,  without the written  consent of the Company,  except as
required  by  law,  disclose  to  third  parties  or use  any of the  non-public
information  about the Company  that PCS obtains as a result of  performing  the
activities contemplated by this Agreement, except to employees and agents of PCS
directly  involved in the engagement and potential third parties approved by the
Company  that have  entered  into  agreements  with the  Company and PCS to keep
confidential any non-public  information about the Company. PCS agrees to comply
with  all  applicable  securities  laws in  maintaining  confidentiality  of all
non-public information PCS obtains hereunder.  The terms of this paragraph shall
survive the termination of this Agreement.


Engagement, Termination and Surviving Obligations

PCS will be engaged by PhotoWorks upon the signing of this  engagement  letter .
It is understood  that this Agreement may be terminated with or without cause by
the Company or PCS at any time and without  liability or  continuing  obligation
between the Company and PCS except for (1) any Financing  Fee or Commitment  Fee
(as defined below) earned,  (2) reimbursement of PCS's  out-of-pocket  expenses,
and (3) any other  obligation  hereunder,  which by its express terms,  survives
termination of this Agreement. All such obligations will be continuing after the
termination  of this  Agreement  and items  (1) and (2)  shall be deemed  earned
and/or  payable   according  to  the  terms  and  conditions  set  forth  below.
Termination  of this  Agreement must be in writing.  Any  modifications  to this
Agreement must be mutually agreed to in writing.

Fees

Upon the purchase of any  PhotoWorks  equity by an Investor  (as defined  below)
pursuant to the  underwritten  equity access program  (each, a "Purchase"),  the
Company  agrees to pay PCS a contingent fee  ("Financing  Fee") equal to 4.0% of
the total  Financing Value (as defined below) in cash and, upon execution of the
equity access program  documents,  warrants to purchase 120,000 shares of common
stock of PhotoWorks.  The warrants will be in form and substance comparable with
the terms of the warrant  granted to the Buyer,  and including any  registration
rights granted to the Buyer with respect to the warrants or any shares  issuable
upon  exercise of the warrants.  The exercise  price will be $1,00 per share for
20,000 warrants, $2,00 per share for 20,000 warrants, $3.00 per share for 20,000
warrants,  $4,00 for 20,000 warrants,  $5.00 for 20,000 warrants,  and $6.00 for
20,000  warrants.  Any  Financing  Fee will be  determined  as of each  Purchase
closing date,  or successive  Purchase  closing  dates,  and will become due and
payable upon each closing of a Purchase.

The term  "Financing  Value"  means  the  total  amount  equal to the sum of the
aggregate  face  value  of  any  securities   provided  to  the  Company,   cash
contributed,  advertising  credits,  other assets contributed and/or any similar
contributions,  payments  or  provisions  made to the  Company  by Rhino and its
affiliates.


                                       22
<PAGE>

In addition to any Financing Fee, Photo Works will pay an $80,000 commitment fee
to PCS as follows: $40,000 upon execution of the equity access program documents
("Closing")  $20,000 six months from Closing,  $20,000 nine months from Closing.
The second and third payments are contingent on a mutual  agreement  between PCS
and  PhotoWorks  (to be decided six months from Closing)  regarding a continuing
relationship between Pacific-Crest and PhotoWorks.

As a condition of PCS acting as  Representative  pertaining to Rhino Advisors or
other  companies as agreed upon in writing,  the Company agrees that if within 9
months after the  termination  of this  Agreement,  the Company and any Investor
effect any investment transaction or reach an agreement to effect any investment
transaction  which  actually  closes in the future,  PCS will be entitled to the
Financing  Fee that  would  have been paid had this  letter  agreement  not been
terminated.

Expenses

The  Company  agrees  to  reimburse  PCS for all of its  out-of-pocket  expenses
incurred in its role as Representative for the Company.  PCS agrees that it must
receive the Company's prior approval to incur aggregate  out-of-pocket  expenses
in excess of $20,000.  Such  reimbursements will be due at the end of each month
that the expenses are incurred.

Indemnification

The Company agrees that since PCS will be acting on its behalf,  PhotoWorks,  as
well as any successors, will defend, indemnify and hold harmless PCS and each of
its officers, directors,  employees, and each affiliated company of PCS (PCS and
each such other  person or entity being  herein  referred to as an  "Indemnified
Party") from and against any and all losses,  claims,  damages, and liabilities,
joint or several  (including all fees and disbursements of counsel and all other
expenses,  reasonably  incurred by any Indemnified  Party in connection with the
preparation  for or defense of any claim,  action or proceeding,  whether or not
resulting in any  liability,  as incurred) to which such  Indemnified  Party may
become subject under any applicable federal or state law or otherwise, which are
related  to or arise  out of (i)  actions  taken or  omitted  to be taken by the
Company or (ii)  actions  taken or omitted to be taken by an  Indemnified  Party
with the Company's  consent or in  conformity  with the  instructions  of, or in
conformity with actions taken or omitted to be taken by the Company or (iii) any
Investment accepted by the Company, provided, however, that the Company will not
be liable to PCS under  clause (ii) or (iii) hereof to the extent that any loss,
claim,  damage, or liability  resulted from the intentional  misconduct or gross
negligence of PCS or an Indemnified Party.

          If a suit or action is instituted in connection  with any  controversy
arising out of this Agreement, the aforementioned  confidentiality agreement, or
in the  enforcement  of any rights  hereunder,  the  prevailing  party  shall be
entitled  to  recover,  in  addition  to such  costs,  such sum as the court may
adjudge reasonable attorney fees, including fees on any appeal.



                                       23
<PAGE>

Assignment

Neither  party may assign its rights  hereunder to any other person  without the
consent of the other.

If the foregoing terms correctly set forth our agreement, please confirm this by
signing and returning to us the duplicate  copy of this letter.  We look forward
to working with you towards the successful conclusion of this assignment.

Very truly yours,

PACIFIC CREST SECURITIES INC.


By:_____________________________
Jody Miller
Senior Vice President


Acknowledged and Agreed:

 PhotoWorks, INC.

By:_____________________________

Its:_____________________________

Date:______________________________




                                       24
<PAGE>



                                  ATTACHMENT 5
                                 RHINO ADVISORS
                              EQUITY LINE OF CREDIT

                              RHINO ADVISORS, INC.

                         130 West 29th Street, 5th Floor
                               New York, NY 10001
                               Tel: (212) 594.6555
                               Fax: (212) 594.7181

                                                          January 18, 2001

PhotoWorks, Inc.
1260 16th Avenue West
Seattle, WA 98119

         Re:  Equity Line Commitment

Dear Mr. Howard Lee:

         Reference is made to that certain attached yet to be signed  Engagement
Agreement (the "Engagement  Agreement"),  by and between  PhotoWorks,  Inc. (the
"Company")  and Pacific Crest  Securities  (the  "Placement  Agent) and the term
sheet attached thereto (the "Term Sheet").  In consideration  for Rhino Advisors
(the "Investor's  Advisor")  agreeing to negotiate and prepare the documentation
necessary to close the proposed transaction (the "Transaction")  pursuant to the
Term Sheet,  the Company  shall in the event that the parties do not  consummate
the  Transaction  within sixty (60) calendar days from the date hereof,  pay the
non-accountable  fees,  expenses and disbursements of Investors'  counsel in the
amount of $20,000. Additionally, the Company makes the following representations
and warranties to the Investor:

         1.       The Company  will execute and deliver to the  Placement  Agent
                  the  Engagement   Agreement   immediately  upon  closing  this
                  Transaction.   This  letter   agreement  and  the   Engagement
                  Agreement  will  constitute a valid and binding  obligation of
                  the Company enforceable against the Company in accordance with
                  their respective terms;

         2.       The  execution  and  delivery of this letter  agreement by the
                  Company and  acceptance  of the attached  Term Sheet have been
                  duly  authorized by all necessary  corporate  action.  Further
                  authorization  of the  Company's  Board of  Directors  will be
                  required to close the Transaction; and

         3.       The execution, delivery and performance by the Company of this
                  letter  agreement,  the Engagement Letter and the consummation
                  by the Company of the transactions contemplated thereby do not


                                       25
<PAGE>

                  and will not,  conflict with, or constitute a material default
                  (or an event  that with  notice or lapse of time or both would
                  become a default) under, or give to others any rights of first
                  refusal, termination,  amendment, acceleration or cancellation
                  of,  any  material  agreement,  indenture,  instrument  or any
                  "lock-up" or similar  provision of any underwriting or similar
                  agreement to which the Company is a party.


         This letter  agreement shall be governed by and construed in accordance
with the laws of the State of New York  applicable to contracts made in New York
by persons  domiciled in New York City and without  regard to its  principles of
conflicts of laws.  Each of the Company and the Investor  agree to submit itself
to the in personam  jurisdiction of the state and federal courts situated within
the  Southern  District of the State of New York with regard to any  controversy
arising out of or relating to this letter agreement.

         This letter agreement may be executed in multiple counterparts, each of
which may be  executed by less than all of the parties and shall be deemed to be
an original  instrument which shall be enforceable  against the parties actually
executing such  counterparts  and all of which together shall constitute one and
the same instrument.  Except as otherwise stated herein, in lieu of the original
documents,  a facsimile  transmission or copy of the original documents shall be
as effective  and  enforceable  as the  original.  This letter  agreement may be
amended only by a writing executed by all parties.

         This letter agreement set forth the entire agreement and  understanding
of the parties  relating to the subject  matter hereof and  supersedes all prior
and  contemporaneous  agreements,  negotiations and  understandings  between the
parties, both oral and written relating to the subject matter hereof.

         In the event that any provision of this letter agreement  becomes or is
declared by a court of competent  jurisdiction to be illegal,  unenforceable  or
void, this letter agreement shall continue in full force and effect without said
provision.

         If the foregoing  correctly sets forth our understanding and agreement,
please so indicate by signing where indicated below.

                                         Very Truly Yours,

                                         Rhino Advisors


                                         By: ________________________________
                                                Name:
                                                Title:
ACCEPTED AND AGREED TO:
PhotoWorks, Inc.
By:  _____________________________
Name:                               Title: President and Chief Executive Officer


                                       26
<PAGE>

                                  ATTACHMENT #6

                    PHOTOWORKS, INC
                 CAPITALIZATION TABLE
                    (Fully Diluted)
                  As of April 5, 2001

Common stock issued and outstanding                       16,505,659
Common stock issued to StoryCatcher.com                       86,500
Employee stock purchase plan 3/30/01 purchase                 19,946

Series A Preferred shares:15,000 @ $1,000/sh
  Convertible to common stock - $4.75                      3,157,895
Series A Warrants $6.00                                      789,474

Warrants - Imperial Bank $1.00                                72,727

Stock Options issued and outstanding                       2,913,793
                                                       --------------

Total common stock - Fully Diluted                        23,543,994
                                                       ==============


After Series B:
2,500,000 convertible at.75                                3,333,333
                                                       --------------

Total                                                     26,877,327
                                                       ==============



                                       27

<PAGE>
                                   Exhibit 4.5

                       Form of Opinion of Company Counsel


April 25, 2001

                                                             Main (206) 447-0900
                                                              Fax (206) 447-0849



To Each of the Purchasers Listed on
Schedule 1 to the Subordinated Convertible
Debenture Purchase Agreement

Re:      PhotoWorks, Inc.

Ladies and Gentlemen:

         We have acted as counsel to PhotoWorks,  Inc., a Washington corporation
(the  "Company"),  in connection  with the  Subordinated  Convertible  Debenture
Purchase  Agreement,  dated as of April 25, 2001 between the Company and each of
the  Purchasers  listed on Schedule 1 to the Agreement (the  "Agreement").  This
opinion is rendered to you pursuant to Section 4.5 of the Agreement. Capitalized
terms used without definition in this opinion have the meanings given to them in
the Agreement.

                                       I.

         We  have  assumed  the  authenticity  of  all  records,  documents  and
instruments submitted to us as originals, the genuineness of all signatures, the
legal  capacity of natural  persons and the  conformity  to the originals of all
records,  documents  and  instruments  submitted  to us as copies.  We have also
assumed without making any inquiry into the  reasonableness  or validity thereof
that:  (A) each of the  parties to the  Agreement  other than the  Company  (the
"Other  Parties") has all necessary  power and authority to execute and deliver,
and perform its  obligations  under the Agreement,  (B) the Agreement is a valid
and binding  obligation  of each of the Other Parties  enforceable  against such
Other  Party  in  accordance  with  its  terms  and (C)  there  are no  facts or
circumstances  relating to any of the Other  Parties (for  example,  lack of due
organization,  regulatory prohibitions or the failure to qualify to do business)
that might  prevent such Other Party from  enforcing  any of its rights to which
our opinion relates.  We have based our opinion upon our review of the following
records,   documents,   instruments   and   certificates   and  such  additional
certificates  relating  to  factual  matters  as we  have  deemed  necessary  or
appropriate for our opinion:

         (a)      The Agreement;

         (b)      The  Articles  of  Amendment,  as filed  with  the  Washington
                  Secretary  of  State on  April  24,  2001  (the  "Articles  of
                  Amendment");

<TABLE>
<CAPTION>
<S>                                                                                                                     <C>
Heller Ehrman White & McAuliffe LLP   701 Fifth Avenue, Suite 6100   Seattle, WA  98104-7098   www.hewm.com
--------------------------------------------------------------------------------------------------------------------------
Seattle Portland Anchorage San Francisco Silicon Valley Los Angeles San Diego New York Washington D.C. Hong Kong Singapore
Affiliated Carnelutti Offices:   Milan   Rome   Paris   Padua   Naples

</TABLE>
<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 2



         (c)      The Subordinated  Convertible Debentures (the "Debentures") to
                  be issued to the Purchasers under the Agreement;

         (d)      The Investor Rights Agreement;

         (e)      The Articles of Incorporation of the Company  certified by the
                  Washington  Secretary  of  State  as of  April  9,  2001,  and
                  certified to us by an officer of the Company as being complete
                  and in full  force and  effect as of the date of this  opinion
                  prior to the  filing  of the  Articles  of  Amendment  and the
                  Articles of Correction;

         (f)      The Bylaws of the Company,  including all amendments  thereto,
                  certified to us by an officer of the Company as being complete
                  and in full force and effect as of the date of this opinion;

         (g)      Records  certified  to us by an  officer  of  the  Company  as
                  constituting  all  records of  proceedings  and actions of the
                  board of directors of the Company relating to (i) the issuance
                  of all outstanding  shares of capital stock of the Company and
                  (ii) the transactions contemplated by the Agreement;

         (h)      Information provided by the Company's transfer agent as to the
                  number of shares of Common Stock  outstanding  as of April 20,
                  2001;

         (i)      Stock ledger provided by the Company and certified to us by an
                  official  of the  Company  as being a  complete  record of the
                  issued and  outstanding  shares of Series A Preferred Stock as
                  of April 25, 2001;

         (j)      A  Certificate  of  Existence/Authorization  relating  to  the
                  Company  issued by the  Washington  Secretary  of State  dated
                  April 6, 2001;

         (k)      Each of the  agreements (i) filed as Exhibits to the Company's
                  Annual  Report on Form 10-K for the year ended  September  30,
                  2000,   (ii)  listed  in  Section  5.12  of  the  Schedule  of
                  Exceptions  to the Agreement and (iii) listed in a certificate
                  of the Chief Executive Officer and President of the Company as
                  to the material  agreements and material  instruments to which
                  the Company is a party or by which the Company's properties or
                  assets are bound (collectively, the "Material Contracts"); and


<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 3


         (l)      Articles of Correction, as filed with the Washington Secretary
                  of State on April 25, 2001 (the "Articles of Correction").

         The  documents  identified  in  paragraphs  (a),  (c) and (d) above are
referred to in this  opinion as the  "Transaction  Documents."  The Common Stock
issuable upon  conversion of the Series B Preferred Stock is referred to in this
opinion as the "Conversion Shares."

         Our  opinion  expressed  in  Paragraph  1 of Part  III as to the  valid
existence  of the  Company  under the laws of the State of  Washington  is based
solely upon the Certificate of Existence/Authorization enumerated above. We have
made  no  additional   investigation  after  the  date  of  the  Certificate  of
Existence/Authorization  in  rendering  our opinion  expressed in Paragraph 1 of
Part III.

         In connection with our opinion relating to Material Contracts,  we have
not  reviewed,  and express no opinion on, (i)  financial  covenants  or similar
provisions  requiring  financial  calculations  or  determinations  to ascertain
compliance,  (ii) provisions  relating to the occurrence of a "material  adverse
event"  or  words  of  similar  import  or  (iii)  parol  evidence   bearing  on
interpretation or construction. Moreover, to the extent that any of the Material
Contracts are governed by the laws of any  jurisdiction  other than the State of
Washington,  our opinion  relating to those  agreements and instruments is based
solely upon the plain meaning of their language without regard to interpretation
or construction  that might be indicated by the laws governing those  agreements
and instruments.

         Where our opinion relates to our  "knowledge,"  that knowledge is based
upon our examination of the records,  documents,  instruments  and  certificates
enumerated  or  described  above and the  actual  contemporaneous  knowledge  of
attorneys in this firm who are currently involved in legal representation of the
Company in connection  with the  Agreement.  We have not examined any records of
any court,  administrative  tribunal or other similar entity in connection  with
our opinion.

         In rendering our opinions in Paragraphs 5, 6 and 9 of Part IV below, we
have assumed without investigation that (i) the offer and sale of the Debentures
were not effected by any general solicitation or general  advertising,  (ii) all
of the representations  made by the Purchasers in Section 6 of the Agreement are
true and correct,  (iii) no offer, sale or issuance of any securities during the
six-month  period  preceding  the  start  of, or  during  the  six-month  period
following the  completion of the offer,  sale and issuance of Debentures  was or
will be "integrated" within the meaning of Rule 502(a) of Regulation D under the

<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 4


Securities Act of 1933, as amended (the  "Securities  Act") with the sale of the
Debentures so that,  when taken  together,  the sale of the  Debentures and such
other  issuance  will not meet all of the terms and  conditions  of Regulation D
under the Securities Act, and (iv) the filing of a notice of sale on Form D with
the Securities and Exchange  Commission  will be done within the respective time
periods prescribed by Regulation D of the Securities Act.

         Our opinion  expressed  in  Paragraph 7 of Part III below as to (a) the
number of outstanding  shares of Common Stock is based solely on the information
referred to in item (h) above provided by the Company's transfer agent as to the
number of  outstanding  shares of Common  Stock,  (b) the number of  outstanding
shares of Series A Preferred Stock is based solely on the  information  referred
to in item (i)  above  and (c) the  number  of  outstanding  shares of Series RP
Preferred  Stock  is  based  solely  on the  representations  set  forth  in the
Officer's  Certificate to the effect that no shares of Series RP Preferred Stock
are outstanding. Further, our opinion expressed in such paragraph as to the duly
authorized,  fully paid and  non-assessable  status of the outstanding shares of
capital stock of the Company is based on (a) records of proceedings  and actions
of the  board of  directors  of the  Company  relating  to the  issuance  of all
outstanding  shares of capital stock of the Company issued prior to May 8, 1986,
the  issuance  of Series A  Preferred  Stock and the  issuance  of Common  Stock
pursuant to the asset purchase of  Storycatcher.com  and (b) representations set
forth in the  Officer's  Certificate  to the effect that (i) except for the sale
and  issuance  of Series A  Preferred  Stock,  the  issuance  of warrants to the
holders of Series A  Preferred  Stock and to Imperial  Bank and the  issuance of
86,500 shares of Common Stock pursuant to the asset purchase of Storycatcher.com
on March 14, 2001, all shares of the Company's capital stock issued after May 8,
1986 were  issued  pursuant  to and within the number of shares  authorized  for
issuance  under the  Company's  Incentive  Plans and that  such  issuances  were
approved by the Company's  Board of Directors (or in the case of issuances  upon
the  exercise  of  options,  a  committee  or  officer  to whom it had  properly
delegated authority) and (ii) the Company received full payment of consideration
which was determined adequate by the Board of Directors in good faith for all of
its outstanding shares of capital stock.

                                       II.
         We express no opinion as to:

         A. If a court  other  than a court in the State of  Washington  were to
enforce the Agreement,  the  applicable  choice of law rules that may affect the
interpretation or enforcement of the Agreement.
<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 5


         B.  Any  securities,   tax,  anti-trust,   land  use,  export,  safety,
environmental  or hazardous  materials laws, rules or regulations or laws, rules
or regulations  applicable to Zesiger  Capital Group LLC by virtue of its status
as a registered  investment  advisor engaged in business of the type exemplified
by the Agreement.

         This  opinion is limited to the  federal  laws of the United  States of
America and the laws of the State of Washington,  and we disclaim any opinion as
to the laws of any other jurisdiction.

                                      III.

         Based upon the foregoing and our  examination  of such questions of law
as we have deemed  necessary or appropriate for the purpose of our opinion,  and
subject to the limitations and qualifications expressed below, it is our opinion
that:

         1.       The Company has been duly incorporated and is validly existing
                  under the laws of the State of Washington.

         2.       The Company has all  requisite  corporate  power and corporate
                  authority to execute and deliver the Transaction Documents, to
                  issue  the  Debentures,  and to issue the  Series B  Preferred
                  Stock  upon  conversion  of the  Debentures  and to issue  the
                  Conversion  Shares upon  conversion  of the Series B Preferred
                  Stock.

         3.       The execution and delivery of the Transaction  Documents,  the
                  issuance,  sale and delivery of the  Debentures  in accordance
                  with the  Agreement,  the  issuance  of the Series B Preferred
                  Stock in accordance with the  Debentures,  and the issuance of
                  the  Conversion  Shares in  accordance  with the  Articles  of
                  Amendment,   have  been  duly   authorized  by  all  necessary
                  corporate  action on the part of the  Company  and each of the
                  Transaction  Documents has been duly executed and delivered on
                  behalf of the Company.

         4.       Each  of the  Transaction  Documents  is a valid  and  binding
                  obligation of the Company,  enforceable against the Company in
                  accordance with its terms, subject, as to enforcement,  (i) to
                  bankruptcy,    insolvency,    reorganization,     arrangement,
                  moratorium and other laws of general applicability relating to
                  or affecting  creditors' rights and (ii) to general principles
                  of equity,  whether such  enforceability  is  considered  in a
                  proceeding in equity or at law.
<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 6


         5.       No   governmental   consents,    approvals,    authorizations,
                  registrations,  declarations  or filings are  required for the
                  execution and delivery of the Transaction  Documents on behalf
                  of the  Company and  consummation  by the Company of the valid
                  and lawful authorization,  issuance,  sale and delivery of the
                  Debentures, Series B Preferred Stock, and Conversion Shares as
                  provided  in the  Transaction  Documents  other  than  (i) the
                  filing  of the  Articles  of  Amendment  and the  Articles  of
                  Correction  in the  Office  of the  Secretary  of State of the
                  State of Washington,  which filings have been accomplished and
                  (ii) such  exemptive  filings as may be necessary to secure an
                  exemption from registration or qualification for the offer and
                  sale  of  the  Debentures,   Series  B  Preferred  Stock,  and
                  Conversion Shares under the federal securities laws.

         6.       Neither  the  execution   and  delivery  of  the   Transaction
                  Documents on behalf of the Company nor the consummation by the
                  Company of the issuance,  sale and delivery of the Debentures,
                  Series B Preferred Stock and Conversion  Shares as provided in
                  the Transaction  Documents (i) conflicts with any provision of
                  the Articles of Incorporation  or Bylaws of the Company,  (ii)
                  violates any law  applicable to the Company,  or (iii) results
                  in a breach or violation of, or  constitutes a default  under,
                  any term of any Material Contract.

         7.       The  authorized  capital  stock  of the  Company  consists  of
                  101,250,000  shares of Common Stock,  $.01 par value, of which
                  16,525,605  shares are  outstanding,  and 2,000,000  shares of
                  preferred  stock,  $.01 par  value.  Of the  preferred  stock,
                  105,000 shares are designated  Series RP Preferred Stock (none
                  of which are outstanding), 15,000 shares are designated Series
                  A Preferred  Stock, of which 15,000 shares are outstanding and
                  36,830 shares are  designated  Series B Preferred  Stock.  All
                  issued and outstanding  shares of the Company's  capital stock
                  have been duly  authorized  and  validly  issued and are fully
                  paid and nonassessable. To our knowledge, except for awards or
                  rights  granted under the  Incentive  Plans or as disclosed in
                  the  Schedule  of  Exceptions  to the  Agreement  or  the  SEC
                  Reports,  and except as set forth in the Articles of Amendment
                  or the Agreement, there are no options,  warrants,  conversion
                  privileges,  preemptive  rights,  or other rights  outstanding
                  granted by the Company to purchase  or  otherwise  acquire any
                  authorized  but  unissued  shares  of  capital  stock or other
                  securities of the Company.
<PAGE>

                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 7


         8.       When  issued,  delivered  and  paid  for  as  provided  in the
                  Agreement,   the   Debentures   will  be  validly  issued  and
                  outstanding  and fully paid. The Series B Preferred  Stock and
                  the Conversion  Shares have been validly reserved for issuance
                  and  when  the  Series  B  Preferred   Stock  is  issued  upon
                  conversion of the  Debentures  and the  Conversion  Shares are
                  issued  in  accordance  with  the  terms  of the  Articles  of
                  Amendment  and the  Articles  of  Correction,  such  Series  B
                  Preferred  Stock and Conversion  Shares will be validly issued
                  and outstanding, fully paid and non-assessable.

         9.       The  offer,  sale and  issuance  of the  Debentures,  Series B
                  Preferred  Stock and the Conversion  Shares in accordance with
                  the terms of the Transaction Documents constitute transactions
                  which are exempt  from the  registration  requirements  of the
                  Securities Act.

         10.      Except as  disclosed  in the  Schedule  of  Exceptions  to the
                  Agreement or the SEC Reports,  we do not have knowledge of any
                  action,  suit or proceeding against the Company that is either
                  pending or has been threatened in writing.

         11.      The Articles of Amendment and the Articles of Correction  have
                  been duly authorized by all necessary  corporate action,  have
                  been duly  filed with the  Secretary  of State of the State of
                  Washington  and are in  full  force  and  effect  on the  date
                  hereof.

                                       IV.

We further advise you that:

         A.       As noted, the  enforceability of the Transaction  Documents is
                  subject to the effect of general  principles of equity.  These
                  principles include, without limitation, concepts of commercial
                  reasonableness,  materiality  and good faith and fair dealing.
                  As applied to the Transaction Documents, these principles will
                  require you to act  reasonably,  in good faith and in a manner
                  that is not arbitrary or capricious in the  administration and
                  enforcement of the Transaction Documents and will preclude you
                  from  invoking  penalties for defaults that bear no reasonable
                  relation to the damage suffered or that would otherwise work a
                  forfeiture.
<PAGE>
                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 8


         B.       The enforceability of the Transaction  Documents is subject to
                  the effects of (i) Revised Code of Washington  ("RCW") Section
                  62A.1-102,  which  provides  that  obligations  of good faith,
                  diligence,   reasonableness   and  care   prescribed   by  the
                  Washington  Uniform Commercial Code (RCW Title 62A) may not be
                  disclaimed by agreement, although the parties may by agreement
                  determine  the  standards  by which  the  performance  of such
                  obligations  is to be  measured  if  those  standards  are not
                  manifestly unreasonable,  (ii) RCW 62A.1-203, which imposes an
                  obligation of good faith in the  performance or enforcement of
                  a contract and (iii) legal  principles under which a court may
                  refuse to enforce, or may limit the enforcement of, a contract
                  or any clause of a contract  that a court finds as a matter of
                  law to have been unconscionable at the time it was made.

         C.       The  effectiveness  of  indemnities,  rights of  contribution,
                  exculpatory   provisions   and  waivers  of  the  benefits  of
                  statutory provisions may be limited on public policy grounds.

         D.       Pursuant  to  RCW  4.84.330,  any  provision  in an  agreement
                  requiring a party to pay another  party's  attorneys' fees and
                  costs in actions to enforce the  provisions of such  agreement
                  will be  construed  to  entitle  the  prevailing  party in any
                  action,  whether or not that party is the specified  party, to
                  be awarded its reasonable attorneys' fees, costs and necessary
                  disbursements.

         E.       Provisions of the Agreement  requiring that waivers must be in
                  writing may not be binding or enforceable  if a  non-executory
                  oral  agreement has been created  modifying any such provision
                  or an implied agreement by trade practice or course of conduct
                  has given rise to a waiver.




<PAGE>

                                             To Each of the Purchasers Listed on
                                      Schedule 1 to the Subordinated Convertible
                                                    Debenture Purchase Agreement
                                                                  April 25, 2001
                                                                          Page 9






                                       V.

         This  opinion is rendered  to you in  connection  with the  Transaction
Documents and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose, or relied upon by any other person, firm, corporation
or other entity for any purpose,  without our prior written consent. We disclaim
any  obligation to advise you of any change of law that occurs,  or any facts of
which we become aware, after the date of this opinion.

                                            Very truly yours,



                                            HELLER EHRMAN WHITE & MCAULIFFE LLP

<PAGE>
                                   Exhibit 5.2

 Rights Agreement between the Company and ChaseMellon Shareholder Services LLC,
                    as Rights Agent, dated December 16, 1999












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

                             SEATTLE FILMWORKS, INC.

                                       and

            CHASEMELLON SHAREHOLDER SERVICES L.L.C., AS RIGHTS AGENT


                                RIGHTS AGREEMENT

                          DATED AS OF DECEMBER 16, 1999



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



<PAGE>

                                RIGHTS AGREEMENT


         This RIGHTS AGREEMENT (this "Agreement") is made as of this 16th day of
December, 1999 by and between Seattle FilmWorks,  Inc., a Washington corporation
(the "Corporation"),  and ChaseMellon Shareholder Services, L.L.C., a New Jersey
limited  liability  company (the "Rights Agent"),  with respect to the following
facts and circumstances.

         A.  The  Board of  Directors  of the  Corporation  has  authorized  and
declared a dividend of one preferred  share  purchase right (a "Right") for each
share of Common Stock (as hereinafter defined) of the Corporation outstanding at
the Close of Business (as hereinafter defined) on December 27, 1999 (the "Record
Date"),  each  Right  representing  the  right to  purchase  one  one-thousandth
(1/1000th)  of a share of Preferred  Stock (as  hereinafter  defined),  upon the
terms and subject to the conditions herein set forth.

         B. The Board of Directors of the Corporation has further authorized and
directed  the  issuance of one Right with  respect to each share of Common Stock
that shall  become  outstanding  between the Record Date and the earliest of the
Distribution  Date, the Redemption  Date or the Final  Expiration  Date (as such
terms are hereinafter  defined);  provided,  however,  that Rights may be issued
with respect to shares of Common Stock that shall become  outstanding  after the
Distribution  Date and prior to the earlier of the Redemption Date and the Final
Expiration  Date  in  accordance  with  the  provisions  of  Section  22 of this
Agreement.

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  mutual
agreements herein set forth, the parties hereby agree as follows:

     1. Certain Definitions.

         For purposes of this  Agreement,  the following terms have the meanings
indicated:

         1.1.  "Acquiring  Person" means any Person who or which,  together with
all Affiliates and Associates of such Person,  without the prior approval of the
Corporation's  Board of  Directors,  shall  be the  Beneficial  Owner of  shares
representing  15% or more of the  Voting  Power  (other  than as a  result  of a
Permitted  Offer)  or was such a  Beneficial  Owner at any time  after  the date
hereof,  whether or not such  person  continues  to be the  Beneficial  Owner of
shares  representing  15% or  more  of the  Voting  Power.  Notwithstanding  the
foregoing:   (A)  the  term  "Acquiring   Person"  shall  not  include  (i)  the
Corporation, (ii) any Subsidiary of the Corporation,  (iii) any employee benefit
plan of the Corporation or of any Subsidiary of the Corporation, (iv) any Person
or  entity  organized,  appointed  or  established  by  the  Corporation  or any
Subsidiary of the  Corporation for or pursuant to the terms of any such plan, or
(v) any Person who or which, together with all Affiliates and Associates of such
Person,  becomes the Beneficial Owner of shares  representing 15% or more of the
Voting Power as a result of the  acquisition  of shares of Common Stock directly
from the Corporation; and (B) no Person shall be deemed to be an "Acquiring


                                       1
<PAGE>

Person"  either  (i) as a  result  of the  acquisition  of  Common  Stock by the
Corporation which, by reducing the number of shares of Common Stock outstanding,
increases the proportional  number of shares  beneficially  owned by such Person
together with all Affiliates and Associates of such Person;  provided,  however,
that if (X) a Person would become an Acquiring  Person (but for the operation of
this subclause  (B)(i)) as a result of the acquisition of shares of Common Stock
by the  Corporation,  and (Y) after such share  acquisition by the  Corporation,
such Person, or an Affiliate or Associate of such Person, becomes the Beneficial
Owner of any additional shares of Common Stock, then such Person shall be deemed
an  Acquiring  Person,  or (ii) if (X) within  eight (8) days after such  Person
would  otherwise have become an Acquiring  Person (but for the operation of this
subclause  (B)(ii)),  such  Person  notifies  the  Board  of  Directors  of  the
Corporation  that  such  Person  did so  inadvertently  and (Y)  within  two (2)
Business Days (as defined in Section 1.8 hereof) after such  notification,  such
Person  is the  Beneficial  Owner of  shares  representing  less than 15% of the
Voting Power.

         1.2. "Act" means the Securities Act of 1933, as amended.

         1.3. "Adjusted Number of Shares" and "Adjusted Purchase Price" have the
respective meanings set forth in Section 11.1.3 hereof.

         1.4.  "Adjustment  Shares" has the meaning set forth in Section  11.1.2
hereof.

         1.5.  "Affiliate"  and "Associate"  shall have the respective  meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations  under
the Exchange Act.

         1.6. The term  "current per share market  price" shall have the meaning
set forth in Section  11.4.1  hereof when used with respect to a "Security"  (as
defined in said Section  11.4.1) and shall have the meaning set forth in Section
11.4.2 when used with respect to the Preferred Stock.

         1.7. A Person is the "Beneficial Owner" of and "beneficially  owns" any
securities which:

                  1.7.1.  such  Person  or any of such  Person's  Affiliates  or
Associates beneficially owns, directly or indirectly;

                  1.7.2.  such  Person  or any of such  Person's  Affiliates  or
Associates  has (A) the right to  acquire  (whether  such  right is  exercisable
immediately  or only  after the  passage  of time)  pursuant  to any  agreement,
arrangement  or  understanding,  or upon  the  exercise  of  conversion  rights,
exchange  rights,  rights  (other than the  Rights),  warrants  or  options,  or
otherwise;  provided,  however, that a Person shall not be deemed the Beneficial


                                       2
<PAGE>

Owner of, or to beneficially  own,  securities  tendered pursuant to a tender or
exchange  offer  made by or on  behalf of such  Person  or any of such  Person's
Affiliates  or  Associates  until such  tendered  securities  are  accepted  for
purchase  or  exchange;  or (B) the  right to vote  pursuant  to any  agreement,
arrangement  or  understanding;  provided,  however,  that a Person shall not be
deemed the  Beneficial  Owner of, or to  beneficially  own,  any security if the
agreement,  arrangement or understanding to vote such security (1) arises solely
from a revocable  proxy or consent  given to such Person in response to a public
proxy or consent  solicitation  made  pursuant to, and in accordance  with,  the
applicable rules and regulations  promulgated  under the Exchange Act and (2) is
not also  then  reportable  on  Schedule  13D  under  the  Exchange  Act (or any
comparable or successor report); or

                  1.7.3. are beneficially owned, directly or indirectly,  by any
other Person (or any Affiliate or Associate  thereof) with which such Person (or
any of such Person's Affiliates or Associates) has any agreement, arrangement or
understanding relating to the acquisition, holding, voting (except to the extent
contemplated by the proviso to subclause (B) of Section 1.7.2),  or disposing of
any securities of the Corporation.

                  Notwithstanding  anything in this Section 1.7 to the contrary,
the phrase "then outstanding," when used with reference to a Person's Beneficial
Ownership  of  securities  of the  Corporation,  shall  mean the  number of such
securities  then  issued  and  outstanding  together  with  the  number  of such
securities not then actually issued and  outstanding  which such Person would be
deemed to own beneficially hereunder.

                  Notwithstanding  anything in this Section 1.7 to the contrary,
no Person shall be deemed to beneficially own any securities solely by reason of
such Person being a party to a customary agreement pursuant to which such Person
acts or agrees  to act as an  underwriter  with  respect  to a bona fide  public
offering of securities.

                  No  decision  reached,  or  action  taken,  by  the  Board  of
Directors of the Corporation or any committee thereof shall cause any Person (or
any  Affiliate  or  Associate  of such  Person)  who is a member of the Board of
Directors of the Corporation or such committee to be deemed, for the purposes of
this Agreement, to be a Beneficial Owner of any securities beneficially owned by
any other Person (or any  Affiliate or Associate of such Person) who is a member
of the Board of Directors of the Corporation or any committee  thereof solely by
reason of such membership of the Board of Directors or any committee  thereof or
participation  in the decisions or actions thereof on the part of either or both
of such Persons.

         1.8.  "Business Day" means any day other than a Saturday,  a Sunday,  a
day on which  banking  institutions  in the State of  Washington  or the city in
which  the  office  of the  Rights  Agent is  located  are  obligated  by law or
executive order to close, or a United States federal holiday.


                                       3
<PAGE>

         1.9.  "Capital Stock  Equivalents" has the meaning set forth in Section
11.1.3 hereof.

         1.10. "Close of Business" on any given date means 5:00 P.M., Washington
time, on such date; provided,  however,  that if such date is not a Business Day
it means 5:00 P.M., Washington time, on the next succeeding Business Day.

         1.11.  "Common Stock" when used with reference to the Corporation means
the  Common  Stock  of the  Corporation  or,  in  the  event  of a  subdivision,
combination or  consolidation  with respect to such shares of Common Stock,  the
shares  of  Common  Stock  resulting  from  such  subdivision,   combination  or
consolidation.  "Common Stock" when used with reference to any Person other than
the Corporation  means the capital stock (or equity  interest) with the greatest
voting power of such other  Person or, if such other  Person is a Subsidiary  of
another   Person,   the  Person  or  Persons  which   ultimately   control  such
first-mentioned Person.

         1.12.  "Corporation"  means  Seattle  FilmWorks,   Inc.,  a  Washington
corporation,  and also means a Principal Party to the extent provided in Section
13.1 hereof.

         1.13.  "Distribution  Date" has the  meaning  set forth in Section  3.1
hereof.

         1.14. "Equivalent Preferred Stock" has the meaning set forth in Section
11.2 hereof.

         1.15.  "Exchange  Act" means the  Securities  Exchange Act of 1934,  as
amended.


         1.16.  "Exchange  Ratio"  has the  meaning  set forth in  Section  26.1
hereof.

         1.17.  "Final Expiration Date" has the meaning set forth in Section 7.1
hereof.

         1.18.  "Interested  Shareholder"  means  any  Acquiring  Person  or any
Affiliate or  Associate of an Acquiring  Person or any other Person in which any
such  Acquiring  Person,  Affiliate or Associate  has an interest,  or any other
Person  acting  directly or  indirectly on behalf of or in concert with any such
Acquiring Person, Affiliate or Associate.

         1.19. "NASDAQ" has the meaning set forth in Section 11.4.1 hereof.

         1.20.  "Permitted  Offer" means a tender or exchange offer which is for
all  outstanding  shares of Common  Stock of the  Corporation  at a price and on
terms determined,  prior to the purchase of shares under such tender or exchange


                                       4
<PAGE>

offer,  by at least a majority of the members of the Board of Directors  who are
not officers of the Corporation and who are not Acquiring Persons or Affiliates,
Associates,  nominees or  representatives of an Acquiring Person, to be adequate
(taking into account all factors that such directors  deem pertinent  including,
without limitation,  prices that could reasonably be achieved if the Corporation
or its assets were sold on an orderly basis  designed to realize  maximum value)
and otherwise in the best interests of the Corporation,  its shareholders (other
than the Person or any  Affiliate or Associate  thereof on whose basis the offer
is being  made) and other  relevant  constituencies,  taking  into  account  all
factors that such directors may deem pertinent.

         1.21. "Person" means any individual,  firm,  partnership,  corporation,
limited liability company,  limited liability partnership,  trust,  association,
joint  venture  or other  entity,  and  includes  any  successor  (by  merger or
otherwise) of such entity.

         1.22.  "Preferred  Stock" means shares of the  Corporation's  Series RP
Preferred  Stock,  par value  $0.01  per  share,  having  the  relative  rights,
preferences and limitations set forth in the Form of Certificate of Designation,
Preferences  and Rights of Series RP Preferred  Stock attached to this Agreement
as Exhibit A.

         1.23.  "Principal  Party" has the  meaning  set forth in  Section  13.2
hereof.

         1.24.  "Proration  Factor" has the meaning set forth in Section  11.1.3
hereof.

         1.25. "Purchase Price" has the meaning set forth in Section 4.1 hereof.


         1.26. "Record Date" has the meaning set forth in Recital A hereof.


         1.27.  "Redemption  Date"  has the  meaning  set forth in  Section  7.1
hereof.

         1.28.  "Redemption  Price" has the meaning set forth in Section  23.1.1
hereof.

         1.29.  "Right  Certificate"  has the  meaning  set forth in Section 3.1
hereof.


         1.30. "Rights" has the meaning set forth in Recital A hereof.

         1.31. "Rights Agent" means ChaseMellon Shareholder Services,  L.L.C., a
New Jersey limited liability company,  as Rights Agent hereunder,  and, from the
time of its succession,  any successor  Rights Agent under Section 19 or Section
21 hereof.



                                       5
<PAGE>

         1.32.  "Section  11.1.2  Event"  has the  meaning  set forth in Section
11.1.2 hereof.

         1.33.  "Section 13 Event" means any event  described in clause (x), (y)
or (z) of Section 13.1 hereof.

         1.34.  "Shares  Acquisition  Date"  means  the  first  date  of  public
announcement  (which,  for purposes of this definition,  shall include,  without
limitation,  a report filed pursuant to the Exchange Act) by the  Corporation or
an Acquiring Person that an Acquiring Person has become such or that facts exist
as a result of which there exists an Acquiring Person;  provided,  that, if such
Person is  determined by the Board of Directors of the  Corporation  not to have
become an Acquiring Person pursuant to subclause  (B)(ii) of Section 1.1 hereof,
then no Shares Acquisition Date shall be deemed to have occurred.

         1.35.  "Subsidiary" of any Person means any corporation or other Person
of which a majority  of the  voting  power of the voting  equity  securities  or
equity interest is owned, directly or indirectly, by such Person.

         1.36.  "Summary  of Rights"  has the  meaning  set forth in Section 3.2
hereof.

         1.37. "Trading Day" has the meaning set forth in Section 11.4.1 hereof.


         1.38.  "Triggering Event" means any Section 11.1.2 Event or any Section
13 Event.

         1.39.  "Voting  Power"  means the  combined  voting power of the voting
securities of the Corporation,  outstanding on any relevant  determination date,
to vote generally in the election of directors of the Corporation.

         1.40. The term "voting securities" has the meaning set forth in Section
13.1 hereof.


     2. Appointment of Rights Agent.

         2.1. The  Corporation  hereby appoints the Rights Agent to act as agent
for the Corporation in accordance with the terms and conditions  hereof, and the
Rights Agent hereby accepts such  appointment.  The Corporation may from time to
time appoint such co-Rights  Agents as it may deem  necessary or desirable.  The
Rights  Agent shall have no duty to  supervise,  and in no event shall be liable
for, the acts or omissions of any such co-Rights Agent.


                                       6
<PAGE>

     3. Issuance of Right Certificates.

         3.1. Until the earlier of (i) the Shares  Acquisition  Date or (ii) the
Close  of  Business  on the  tenth  (10th)  day (or  such  later  date as may be
determined by action of the Corporation's  Board of Directors) after the date of
the  commencement by any Person (other than the  Corporation,  any Subsidiary of
the  Corporation,  any  employee  benefit  plan  of  the  Corporation  or of any
Subsidiary of the  Corporation or any Person or entity  organized,  appointed or
established  by the  Corporation  or any  Subsidiary of the  Corporation  for or
pursuant  to the  terms of any such  plan)  of,  or after  the date of the first
public  announcement of the intention of any Person (other than the Corporation,
any Subsidiary of the Corporation,  any employee benefit plan of the Corporation
or of any  Subsidiary  of the  Corporation  or any  Person or entity  organized,
appointed or established by the Corporation or any Subsidiary of the Corporation
for or pursuant to the terms of any such plan) to commence  (which  intention to
commence remains in effect for five (5) Business Days after such  announcement),
a tender or exchange offer the  consummation of which would result in any Person
becoming an Acquiring Person  (including,  in the case of both (i) and (ii), any
such date which is after the date of this Agreement and prior to the issuance of
the Rights) (the "Distribution Date"), (x) the Rights will be evidenced (subject
to the  provisions  of Section  3.2  hereof) by the  certificates  for shares of
Common Stock registered in the names of the holders thereof (which  certificates
shall  also be  deemed  to be  Right  Certificates)  and not by  separate  Right
Certificates,   and  (y)  the  right  to  receive  Right  Certificates  will  be
transferable  only in connection  with the transfer of the underlying  shares of
Common Stock (including a transfer to the Corporation);  provided, however, that
if a tender  or  exchange  offer is  terminated  prior  to the  occurrence  of a
Distribution  Date,  then no  Distribution  Date shall occur as a result of such
tender or exchange offer. As soon as practicable  after the  Distribution  Date,
the Corporation will prepare and execute, the Rights Agent will countersign, and
the Corporation  will send or cause to be sent by  first-class,  postage-prepaid
mail,  to each  record  holder  of  shares  of  Common  Stock as of the Close of
Business on the  Distribution  Date,  at the address of such holder shown on the
records of the Corporation,  a Right  Certificate,  substantially in the form of
Exhibit B hereto (a "Right Certificate"), evidencing one Right for each share of
Common Stock so held. As of and after the Distribution  Date, the Rights will be
evidenced solely by such Right Certificates.

         3.2.  As  promptly  as  practicable  following  the  Record  Date,  the
Corporation will send a copy of a Summary of Rights to Purchase Preferred Stock,
in  substantially  the form of Exhibit C hereto (the  "Summary of  Rights"),  by
first-class,  postage-prepaid  mail,  to each record  holder of shares of Common
Stock as of the Close of  Business  on the Record  Date,  at the address of such
holder shown on the records of the Corporation. With respect to certificates for
shares of Common Stock outstanding as of the Record Date, until the Distribution
Date the Rights will be evidenced by such  certificates  registered in the names
of the holders  thereof  together with a copy of the Summary of Rights  attached
thereto.  Until the Distribution  Date (or the earlier of the Redemption Date or
the Final  Expiration  Date),  the surrender for transfer of any certificate for
shares of Common Stock outstanding on the Record Date, with or without a copy of
the Summary of Rights  attached  thereto,  shall also constitute the transfer of
the Rights associated with such shares of Common Stock.


                                       7
<PAGE>

3.3. Certificates for shares of Common Stock that become outstanding (including,
without  limitation,  reacquired  shares of Common Stock referred to in the last
sentence of this Section 3.3) after the Record Date but prior to the earliest of
the  Distribution  Date, the Redemption Date or the Final Expiration Date, shall
be deemed  also to be  certificates  for  Rights,  and shall bear the  following
legend:

                  This certificate also evidences and entitles the holder hereof
                  to certain rights as set forth in a Rights  Agreement  between
                  Seattle FilmWorks,  Inc. and ChaseMellon Shareholder Services,
                  L.L.C.,  a New Jersey  limited  liability  company,  as Rights
                  Agent, dated as of December __, 1999 (the "Rights Agreement"),
                  the terms of which are hereby incorporated herein by reference
                  and a copy of  which  is on file  at the  principal  executive
                  offices   of   Seattle    FilmWorks,    Inc.   Under   certain
                  circumstances,  as set  forth in the  Rights  Agreement,  such
                  Rights will be evidenced by separate  certificates and will no
                  longer be evidenced by this  certificate.  Seattle  FilmWorks,
                  Inc. will mail to the holder of this certificate a copy of the
                  Rights  Agreement  without  charge after  receipt of a written
                  request therefor. Under certain circumstances set forth in the
                  Rights Agreement, Rights issued to, or held by, any Person who
                  is, was or  becomes an  Acquiring  Person or an  Affiliate  or
                  Associate  thereof  (as defined in the Rights  Agreement)  and
                  certain  related  persons,  whether  currently  held  by or on
                  behalf of such Person or by any subsequent  holder, may become
                  null and void.

With respect to such  certificates  containing the foregoing  legend,  until the
Distribution  Date  the  Rights  associated  with the  shares  of  Common  Stock
represented by such certificates shall be evidenced by such certificates  alone,
and the surrender for transfer of any such certificate shall also constitute the
transfer of the Rights  associated  with the shares of Common Stock  represented
thereby.  In the event that the Corporation  purchases or acquires any shares of
Common  Stock after the Record Date but prior to the  Distribution  Date (or the
earlier  of the  Redemption  Date or the  Final  Expiration  Date),  any  Rights
associated with such shares of Common Stock shall be deemed canceled and retired
so that the Corporation  shall not be entitled to exercise any Rights associated
with the Common Stock that are no longer outstanding.

     4. Form of Right Certificate.


         4.1. The Right  Certificates (and the forms of election to purchase and
of assignment to be printed on the reverse  thereof) shall be  substantially  in
the form set forth in Exhibit B hereto and may have such marks of identification
or designation and such legends,  summaries or  endorsements  printed thereon as
the  Corporation  may deem  appropriate  (which  may not  affect  the duties and
responsibilities  of the  Rights  Agent)  and as are not  inconsistent  with the
provisions  of  this  Agreement,  or as may  be  required  to  comply  with  any
applicable law or with any rule or regulation made pursuant  thereto or with any
rule or  regulation  of any stock  exchange on which the Rights may from time to
time be listed, or to conform to usage.  Subject to the provisions of Section 11


                                       8
<PAGE>

and Section 22 hereof,  the Right Certificates shall entitle the holders thereof
to  purchase  such  number  of one  one-thousandths  (1/1000ths)  of a share  of
Preferred   Stock  as  shall  be  set  forth   therein  at  the  price  per  one
one-thousandth  (1/1000th)  of a share of Preferred  Stock set forth  therein in
accordance  with Section 7.2 hereof (the "Purchase  Price"),  but the amount and
type of securities  purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.

         4.2. Any Right Certificate issued pursuant to Section 3.1 or Section 22
hereof that represents  Rights that are null and void pursuant to Section 7.6 of
this Agreement and any Right Certificate issued pursuant to Section 6 or Section
11 hereof upon transfer, exchange,  replacement or adjustment of any other Right
Certificate referred to in this sentence,  shall contain (to the extent feasible
and upon notice by the Corporation to the Rights Agent that this Section 4.2 has
become applicable) the following legend:

                  The Rights  represented by this Right  Certificate are or were
                  beneficially  owned by a Person who was or became an Acquiring
                  Person or an Affiliate or Associate of an Acquiring Person (as
                  such terms are defined in the Rights Agreement).  Accordingly,
                  this Right Certificate and the Rights  represented  hereby are
                  null and void.

The  provisions of Section 7.6 of this Agreement  shall be operative  whether or
not the foregoing legend is contained on any such Right Certificate.

     5. Countersignature and Registration.

         5.1.  The  Right  Certificates  shall  be  executed  on  behalf  of the
Corporation  by its  President  or any Vice  President  and the  Secretary or an
Assistant  Secretary,  either  manually or by  facsimile  signature,  shall have
affixed  thereto the  Corporation's  seal or a facsimile  thereof,  and shall be
attested by the Secretary or an Assistant  Secretary of the Corporation,  either
manually  or  by  facsimile   signature.   The  Right   Certificates   shall  be
countersigned,  either manually or by facsimile  signature,  by the Rights Agent
and shall  not be valid for any  purpose  unless so  countersigned.  In case any
officer of the Corporation  who shall have signed any of the Right  Certificates
shall cease to be such officer of the Corporation before countersignature by the
Rights  Agent  and  issuance  and  delivery  by  the  Corporation,   such  Right
Certificates  may  nevertheless be  countersigned by the Rights Agent and issued
and  delivered by the  Corporation  with the same force and effect as though the
person who signed such Right  Certificates  had not ceased to be such officer of
the  Corporation;  and any  Right  Certificate  may be  signed  on behalf of the
Corporation by any Person who, at the actual date of the execution of such Right
Certificate,  shall be a proper  officer of the  Corporation  to sign such Right
Certificate,  although at the date of the execution of this Rights Agreement any
such Person was not such an officer.


                                       9
<PAGE>

         5.2.  Following the Distribution  Date, and receipt by the Rights Agent
of a list of record holders of Rights, the Rights Agent will keep or cause to be
kept, at its office designated  pursuant to Section 25 hereof as the appropriate
place  for  surrender  or  transfer  of  the  Right   Certificates,   books  for
registration and transfer of the Right Certificates issued hereunder. Such books
shall  show the names  and  addresses  of the  respective  holders  of the Right
Certificates,  the number of Rights  evidenced  on the face of each of the Right
Certificates  and  the  certificate  number  and the  date of each of the  Right
Certificates.

     6.  Transfer,  Split-Up,  Combination  and Exchange of Right  Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates.

         6.1.  Subject to the provisions of Section 4.2, Section 7.6 and Section
14 hereof, at any time after the Close of Business on the Distribution Date, and
at or prior to the Close of Business on the  earlier of the  Redemption  Date or
the Final  Expiration Date, any Right  Certificate or Right  Certificates may be
transferred,  split up,  combined or exchanged for another Right  Certificate or
Right Certificates, entitling the registered holder to purchase a like number of
one  one-thousandths  (1/1000ths) of a share of Preferred Stock (or, following a
Triggering Event, other securities, as the case may be) as the Right Certificate
or Right Certificates surrendered then entitled such holder (or former holder in
the case of a transfer) to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Right Certificate or Right  Certificates shall
make such request in writing  delivered to the Rights Agent, and shall surrender
the  Right  Certificate  or Right  Certificates  to be  transferred,  split  up,
combined or  exchanged  at the office of the Rights  Agent  designated  for such
purpose. Neither the Rights Agent nor the Corporation shall be obligated to take
any action whatsoever with respect to the transfer of any such surrendered Right
Certificate  until the  registered  holder shall have  completed  and signed the
certificate  contained  in the form of  assignment  on the reverse  side of such
Right  Certificate  and shall have  provided  such  additional  evidence  of the
identity of the Beneficial Owner (or former  Beneficial  Owner) or Affiliates or
Associates  thereof as the  Corporation  or the Rights  Agent  shall  reasonably
request.  Thereupon the Rights Agent shall,  subject to Section 4.2, Section 7.6
and Section 14 hereof,  countersign and deliver to the Person entitled thereto a
Right  Certificate or Right  Certificates,  as the case may be, as so requested.
The  Corporation  may require  payment of a sum  sufficient  to cover any tax or
charge  that  may  be  imposed  in  connection  with  any  transfer,  split  up,
combination or exchange of Right Certificates.  The Rights Agent may in its sole
discretion  require  the  Corporation  or the  Person  entitled  to  such  Right
Certificate  to provide  evidence that such tax or charge has been paid prior to
countersigning  and  delivering any Right  Certificate  pursuant to this Section
6.1.

         6.2. Upon receipt by the  Corporation  and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security  reasonably  satisfactory to them, and, at the  Corporation's  request,
reimbursement to the Corporation and the Rights Agent of all reasonable expenses
incidental  thereto,  and upon surrender to the Rights Agent and cancellation of


                                       10
<PAGE>

the Right Certificate if mutilated,  the Corporation will make and deliver a new
Right  Certificate  of like tenor to the Rights Agent for  countersignature  and
delivery  to the  registered  holder in lieu of the Right  Certificate  so lost,
stolen, destroyed or mutilated.

     7. Exercise of Rights; Purchase Price; Expiration Date of Rights.

         7.1. Subject to Section 7.6 hereof,  the registered holder of any Right
Certificate  may  exercise  the Rights  evidenced  thereby  (except as otherwise
provided  herein)  in whole or in part at any time after the  Distribution  Date
upon surrender of the Right  Certificate,  with the form of election to purchase
and the certificate on the reverse side thereof duly and properly  executed,  to
the Rights Agent at the office of the Rights Agent  designated for such purpose,
together  with payment of the aggregate  Purchase  Price for the total number of
one  one-thousandths  (1/1000ths)  of a  share  of  Preferred  Stock  (or  other
securities,  as the  case  may  be) as to  which  such  surrendered  Rights  are
exercised,  at or prior to the  earlier of (i) the Close of Business on December
27, 2009 (the "Final Expiration Date"), or (ii) the time at which the Rights are
redeemed as provided in Section 23 hereof (the "Redemption Date").

         7.2. The Purchase  Price for each one  one-thousandth  (1/1000th)  of a
share of Preferred  Stock pursuant to the exercise of a Right shall initially be
$22.00, shall be subject to adjustment from time to time as provided in the next
sentence  and in Sections 11 and 13.1 hereof and shall be payable in  accordance
with   paragraph  7.3  below.   Anything  in  this  Agreement  to  the  contrary
notwithstanding,  in the event that at any time after the date of this Agreement
and prior to the Distribution Date, the Corporation shall (i) declare or pay any
dividend  on the  Common  Stock  payable  in  Common  Stock  or  (ii)  effect  a
subdivision,   combination   or   consolidation   of  the   Common   Stock   (by
reclassification  or otherwise  than by payment of dividends in shares of Common
Stock) into a greater or lesser number of shares of Common  Stock,  then, in any
such case, each share of Common Stock  outstanding  following such  subdivision,
combination or consolidation shall continue to have a Right associated therewith
and the  Purchase  Price  following  any such  event  shall  be  proportionately
adjusted  to equal  the  result  obtained  by  multiplying  the  Purchase  Price
immediately  prior to such event by a fraction  the  numerator of which shall be
the total number of shares of Common Stock outstanding  immediately prior to the
occurrence of the event and the  denominator  of which shall be the total number
of shares of Common Stock  outstanding  immediately  following the occurrence of
such event. The adjustment  provided for in the preceding sentence shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.

         7.3.  Upon  receipt  of a Right  Certificate  representing  exercisable
Rights, with the form of election to purchase and the certificate on the reverse
side thereof duly and properly executed,  accompanied by payment of the Purchase
Price for the Preferred  Stock (or other  securities,  as the case may be) to be
purchased  and an amount equal to any  applicable  tax or charge  required to be
paid by the holder of such Right Certificate in accordance with Section 6 hereof
by certified  check,  cashier's check or money order payable to the order of the


                                       11
<PAGE>

Corporation,  the Rights Agent shall thereupon promptly (i) (A) requisition from
any transfer agent of the Preferred Stock  certificates for the number of shares
of Preferred  Stock to be  purchased,  and the  Corporation  hereby  irrevocably
authorizes its transfer  agent to comply with all such  requests,  or (B) if the
Corporation, in its sole discretion, shall have elected to deposit the Preferred
Stock  issuable  upon  exercise  of the  Rights  hereunder  into  a  depositary,
requisition  from the depositary  agent depositary  receipts  representing  such
number of one  one-thousandths  (1/1000ths) of a share of Preferred Stock as are
to be purchased (in which case  certificates for the Preferred Stock represented
by such receipts  shall be deposited by the transfer  agent with the  depositary
agent) and the Corporation  will direct the depositary agent to comply with such
requests, (ii) when appropriate,  requisition from the Corporation the amount of
cash to be paid in lieu of  issuance of  fractional  shares in  accordance  with
Section 14  hereof,  (iii)  after  receipt of such  certificates  or  depositary
receipts,  cause the same to be delivered to or upon the order of the registered
holder of such  Right  Certificate,  registered  in such name or names as may be
designated by such holder,  and (iv) when  appropriate,  after receipt  thereof,
deliver  such cash to or upon the order of the  registered  holder of such Right
Certificate.  In the event that the  Corporation  is  obligated  to issue  other
securities  (including  shares of Common Stock) of the  Corporation  pursuant to
Section 11.1 hereof,  the Corporation  will make all  arrangements  necessary so
that such other  securities are available for  distribution by the Rights Agent,
if and when necessary to comply with this Agreement.

         7.4. In addition,  in the case of an exercise of the Rights by a holder
pursuant to Section 11.1.2, the Rights Agent shall return such Right Certificate
to the  registered  holder  thereof  after  imprinting,  stamping  or  otherwise
indicating  thereon that the Rights  represented  by such Right  Certificate  no
longer include the rights provided by Section 11.1.2 of the Rights Agreement and
if less  than all the  Rights  represented  by such  Right  Certificate  were so
exercised,  the Rights Agent shall indicate on the Right  Certificate the number
of Rights  represented  thereby that continue to include the rights  provided by
Section 11.1.2.

         7.5.  In case the  registered  holder  of any Right  Certificate  shall
exercise less than all the Rights  evidenced  thereby,  a new Right  Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized  assigns,  subject to the provisions of Section 6 and Section 14
hereof,  or the Rights  Agent shall place an  appropriate  notation on the Right
Certificate with respect to those Rights exercised.

         7.6.  Notwithstanding  anything in this Agreement to the contrary, from
and  after  the  first   occurrence  of  a  Section  11.1.2  Event,  any  Rights
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of an
Acquiring Person,  (ii) a transferee of an Acquiring Person (or of any Affiliate
or  Associate  thereof)  who becomes a  transferee  after the  Acquiring  Person
becomes such, or (iii) a transferee of an Acquiring  Person (or of any Affiliate
or Associate thereof) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for  consideration)  from the Acquiring Person (or from
any  Affiliate  or  Associate  thereof) to holders of equity  interests  in such


                                       12
<PAGE>

Acquiring  Person  or to  any  Person  with  whom  the  Acquiring  Person  has a
continuing  agreement,  arrangement or  understanding  regarding the transferred
Rights or (B) a transfer  that the Board of  Directors  of the  Corporation  has
determined is part of a plan, arrangement or understanding that has as a primary
purpose or effect the avoidance of this Section 7.6,  shall become null and void
without  any further  action and no holder of such Rights  shall have any rights
whatsoever  with respect to such  Rights,  whether  under any  provision of this
Agreement or otherwise.  The Corporation shall notify the Rights Agent when this
Section  7.6  applies  and shall use all  reasonable  efforts to insure that the
provisions  of this  Section 7.6 and Section 4.2 hereof are complied  with,  but
neither the  Corporation  nor the Rights  Agent shall have any  liability to any
holder of Right  Certificates  or other Person as a result of the  Corporation's
failure to make any  determinations  with respect to an Acquiring  Person or its
Affiliates, Associates or transferees hereunder.

         7.7.  Notwithstanding  anything  in  this  Agreement  to the  contrary,
neither the Rights Agent nor the Corporation shall be obligated to undertake any
action with respect to a registered  holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i)  properly  completed  and signed the  certificate  contained  in the form of
election to  purchase  set forth on the  reverse  side of the Right  Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former  Beneficial  Owner) or Affiliates or
Associates  thereof as the  Corporation  or the Rights  Agent  shall  reasonably
request.

     8. Cancellation and Destruction of Right Certificates.

         8.1. All Right  Certificates  surrendered  for the purpose of exercise,
transfer,  split up,  combination  or  exchange  shall,  if  surrendered  to the
Corporation  or to any of its  agents,  be  delivered  to the  Rights  Agent for
cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall
be  cancelled by it, and no Right  Certificates  shall be issued in lieu thereof
except as expressly  permitted by the provisions of this Rights  Agreement.  The
Corporation  shall deliver to the Rights Agent for  cancellation and retirement,
and the Rights  Agent  shall so cancel and retire,  any other Right  Certificate
purchased  or  acquired  by the  Corporation  otherwise  than upon the  exercise
thereof.  The Rights Agent shall deliver all cancelled Right Certificates to the
Corporation,  or shall, at the written request of the Corporation,  destroy such
cancelled  Right  Certificates,  and in such case shall deliver a certificate of
destruction thereof to the Corporation.

     9. Reservation and Availability of Preferred Stock.


         9.1. The  Corporation  covenants and agrees that, at all times prior to
the occurrence of a Section 11.1.2 Event,  it will cause to be reserved and kept
available out of its authorized and unissued  Preferred Stock, or any authorized
and  issued  Preferred  Stock  held in its  treasury,  the  number  of shares of
Preferred  Stock that will be  sufficient  to permit the exercise in full of all
outstanding  Rights and, after the occurrence of a Section 11.1.2 Event,  shall,


                                       13
<PAGE>

to the extent reasonably practicable, so reserve and keep available a sufficient
number of shares of Common Stock (and/or other  securities) that may be required
to permit the exercise in full of the Rights pursuant to this Agreement.

         9.2.  So  long  as the  shares  of  Preferred  Stock  (and,  after  the
occurrence  of a Section  11.1.2  Event,  shares  of  Common  Stock or any other
securities)  issuable upon the exercise of the Rights may be listed on any stock
exchange,  the Corporation  shall use its best efforts to cause,  from and after
such time as the  Rights  become  exercisable,  all  shares or other  securities
reserved for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.

         9.3. The  Corporation  covenants  and agrees that it will take all such
action as may be  necessary  to ensure  that all shares of  Preferred  Stock (or
shares of Common Stock and/or other  securities,  as the case may be)  delivered
upon exercise of Rights shall, at the time of delivery of the  certificates  for
such shares or other securities  (subject to payment of the Purchase Price),  be
duly and validly authorized and issued and fully paid and non-assessable  shares
or securities.

         9.4. The Corporation covenants and agrees that it will pay when due and
payable  any and all taxes and  charges  that may be  payable  in respect of the
issuance  or delivery of the Right  Certificates  or of any shares of  Preferred
Stock (or shares of Common Stock and/or  other  securities,  as the case may be)
upon the exercise of Rights. The Corporation shall not, however,  be required to
pay any tax or charge that may be payable in respect of any transfer or delivery
of Right  Certificates  to a person  other than,  or the issuance or delivery of
certificates or depositary receipts for the shares of Preferred Stock (or shares
of Common  Stock and/or  other  securities,  as the case may be) in a name other
than that of, the registered holder of the Right  Certificate  evidencing Rights
surrendered  for  exercise,  or to  issue  or to  deliver  any  certificates  or
depositary  receipts  for shares of  Preferred  Stock (or shares of Common Stock
and/or  other  securities,  as the case may be) upon the exercise of any Rights,
until any such tax or charge  shall have been paid (any such tax or charge being
payable by the holder of such Right  Certificate  at the time of  surrender)  or
until it has been established to the Corporation's  reasonable satisfaction that
no such tax or charge is due.

         9.5. The Corporation shall use its best efforts to (i) file, as soon as
practicable  following the Shares  Acquisition  Date, a  registration  statement
under the Act, with respect to the securities  purchasable  upon exercise of the
Rights on an appropriate form, (ii) cause such registration  statement to become
effective  as soon as  practicable  after  such  filing,  and (iii)  cause  such
registration  statement  to remain  effective  (with a  prospectus  at all times
meeting the  requirements of the Act and the rules and  regulations  thereunder)
until the date of the  expiration  of the  period  for  exercise  of the  Rights
provided by Section 11.1.2. The Corporation will also take such action as may be
appropriate under the blue sky laws of the various states.


                                       14
<PAGE>


     10. Preferred Stock Record Date.

         10.1. Each Person in whose name any certificate for shares of Preferred
Stock (or shares of Common Stock and/or other securities, as the case may be) is
issued  upon the  exercise  of Rights  shall for all  purposes be deemed to have
become  the  holder of record of the  shares of  Preferred  Stock (or  shares of
Common Stock and/or other  securities,  as the case may be) represented  thereby
on,  and such  certificate  shall  be  dated,  the date  upon  which  the  Right
Certificate  evidencing  such  Rights was duly  surrendered  and  payment of the
Purchase  Price  (and any  applicable  taxes and  charges)  was made;  provided,
however,  that,  if the date of such  surrender and payment is a date upon which
the  shares  of  Preferred  Stock  (or  shares  of  Common  Stock  and/or  other
securities,  as the case may be) transfer books of the  Corporation  are closed,
such person shall be deemed to have become the record  holder of such shares on,
and such certificate  shall be dated, the next succeeding  Business Day on which
the  shares  of  Preferred  Stock  (or  shares  of  Common  Stock  and/or  other
securities, as the case may be) transfer books of the Corporation are open.

     11.  Adjustment of Purchase  Price,  Number and Kind of Shares or Number of
Rights.

         The Purchase Price, the number and kind of shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.

         11.1. Adjustment Events.

               11.1.1.  In the event the Corporation shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred  Stock payable in
Preferred Stock, (B) subdivide the outstanding  Preferred Stock, (C) combine the
outstanding  Preferred  Stock into a smaller  number of  Preferred  Stock or (D)
issue any shares of its capital  stock in a  reclassification  of the  Preferred
Stock (including any such reclassification in connection with a consolidation or
merger in which the  Corporation  is the  continuing or surviving  corporation),
except as otherwise  provided in this  Section 11.1 and Section 7.6 hereof,  the
Purchase  Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number  and kind of shares of capital  stock  issuable  on such  date,  shall be
proportionately  adjusted so that the holder of any Right  exercised  after such
time shall be  entitled to receive  the  aggregate  number and kind of shares of
capital stock that, if such Right had been exercised  immediately  prior to such
date and at a time when the Preferred  Stock transfer  books of the  Corporation
were open,  such holder would have owned upon such exercise and been entitled to
receive   by   virtue   of   such   dividend,   subdivision,    combination   or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value,  if
any, of the shares of capital stock of the Corporation issuable upon exercise of
one Right.  If an event  occurs  that would  require  an  adjustment  under both
Section 11.1.1 and Section 11.1.2,  the adjustment  provided for in this Section
11.1.1  shall be in  addition  to, and shall be made  prior to,  any  adjustment
required pursuant to Section 11.1.2.



                                       15
<PAGE>

               11.1.2.  In the event (a "Section 11.1.2 Event") that any Person,
alone or together with its Affiliates and Associates,  shall become an Acquiring
Person,  then  proper  provision  shall be made so that  each  holder of a Right
(except as  provided  below and in Section 7.6  hereof)  shall,  for a period of
sixty (60) days (or such longer period as the  Corporation's  Board of Directors
may  determine  at any time prior to or during  such  period of sixty (60) days)
after the later of the  occurrence of any such event or the effective date of an
appropriate registration statement under the Act pursuant to Section 9.5 hereof,
have a right to  receive,  upon  exercise  thereof at a price  equal to the then
current  Purchase Price,  in accordance  with the terms of this Agreement,  such
number of shares of Common  Stock (or, in the  discretion  of the  Corporation's
Board of  Directors,  one  one-thousandths  (1/1000ths)  of a share of Preferred
Stock) as shall equal the result  obtained by (x)  multiplying  the then current
Purchase Price by the then number of one one-thousandths  (1/1000ths) of a share
of Preferred  Stock for which a Right was exercisable  immediately  prior to the
first occurrence of a Section 11.1.2 Event, and (y) dividing that product by 50%
of the then  current  per share  market  price of the Common  Stock  (determined
pursuant  to Section  11.4  hereof) on the date of such first  occurrence  (such
number  of shares  being  referred  to as the  "Adjustment  Shares");  provided,
however, that if the transaction that would otherwise give rise to the foregoing
adjustment is also subject to the provisions of Section 13 hereof, then only the
provisions  of Section 13 hereof  shall  apply and no  adjustment  shall be made
pursuant to this Section 11.1.2.

         11.1.3.  In the event that there  shall not be  sufficient  treasury or
authorized but unissued (and unreserved)  Common Stock to permit the exercise in
full of the Rights in  accordance  with Section  11.1.2 and the Rights become so
exercisable (and the Board of Directors of the Corporation has not determined to
make the  Rights  exercisable  solely  into  fractions  of a share of  Preferred
Stock),  notwithstanding  any other provision of this  Agreement,  to the extent
necessary and permitted by applicable  law, each Right except as provided  below
and in Section 7.6 hereof shall thereafter represent the right to receive,  upon
exercise thereof at the then current Purchase Price in accordance with the terms
of this  Agreement,  (x) a number of (or  fractions  of) shares of Common  Stock
calculated  by dividing  the maximum  number of shares of Common  Stock that may
permissibly  be issued by the number of  outstanding  Rights and (y) a number of
one one-thousandths  (1/1000ths) of shares of Preferred Stock or a number of, or
fractions of, other equity  securities of the Corporation (or, in the discretion
of the Board of Directors of the Corporation,  debt) that the Board of Directors
of the  Corporation  has  determined to have an aggregate  current  market value
(determined  pursuant to Section 11.1.1 and Section 11.1.2 hereof, to the extent
applicable)  equal to the  difference  between (1) the aggregate  current market
value of the  Adjustment  Shares  (assuming such shares of Common Stock could be
issued  pursuant to Section 11.1.2 hereof) and (2) the aggregate  current market
value of the shares of Common Stock issued in respect of such Right  pursuant to
the  preceding  clause (x) (such number of, or fractions of, shares of Preferred
Stock, debt or other equity securities or debt of the Corporation being referred
to as a "Capital Stock Equivalent");  provided, however, if sufficient shares of
Common  Stock  and/or  Capital  Stock  Equivalents  are  unavailable,  then  the
Corporation  shall,  to the extent  permitted by  applicable  law, take all such
action as may be  necessary to  authorize  additional  shares of Common Stock or
Capital Stock  Equivalents  for issuance upon exercise of the Rights,  including
the calling of a meeting of  shareholders;  and provided,  further,  that if the
Corporation is unable to cause sufficient  shares of Common Stock and/or Capital
Stock  Equivalents  to be available  for issuance  upon  exercise in full of the



                                       16
<PAGE>

Rights,  then each Right  shall  thereafter  represent  the right to receive the
Adjusted Number of Shares upon exercise at the Adjusted  Purchase Price (as such
terms are hereinafter  defined).  As used herein,  the term "Adjusted  Number of
Shares"  shall be equal to that  number of (or  fractions  of)  shares of Common
Stock (and/or Capital Stock  Equivalents) equal to the product of (x) the number
of Adjustment Shares and (y) a fraction, the numerator of which is the number of
shares of Common Stock (and/or Capital Stock Equivalents) available for issuance
upon exercise of the Rights and the denominator of which is the aggregate number
of  Adjustment  Shares  otherwise  issuable  upon exercise in full of all Rights
(assuming  there were a sufficient  number of shares of Common Stock  available)
(such  fraction  being  referred to as the  "Proration  Factor").  The "Adjusted
Purchase  Price" shall mean the product of the Purchase  Price and the Proration
Factor. The Board of Directors of the Corporation may, but shall not be required
to, establish procedures to allocate the right to receive shares of Common Stock
and Capital  Stock  Equivalents  upon  exercise of the Rights  among  holders of
Rights.

         11.2. In case the Corporation  shall fix a record date for the issuance
of rights  (other  than the  Rights),  options  or  warrants  to all  holders of
Preferred  Stock  entitling them (for a period  expiring within 60 calendar days
after such record date) to subscribe for or purchase  shares of Preferred  Stock
(or shares having the same rights,  privileges and  preferences as the Preferred
Stock ("Equivalent  Preferred Stock")) or securities  convertible into Preferred
Stock or Equivalent  Preferred  Stock at a price per share of Preferred Stock or
Equivalent  Preferred  Stock  (or  having a  conversion  price per  share,  if a
security  convertible  into shares of Preferred  Stock or  Equivalent  Preferred
Stock) less than the then current per share market price of the Preferred  Stock
(as  determined  pursuant  to Section  11.4  hereof) on such  record  date,  the
Purchase  Price to be in effect  after such record date shall be  determined  by
multiplying the Purchase Price in effect  immediately  prior to such record date
by a fraction, the numerator of which shall be the number of shares of Preferred
Stock  outstanding  on such record  date plus the number of shares of  Preferred
Stock  that the  aggregate  offering  price of the  total  number  of  shares of
Preferred Stock and/or  Equivalent  Preferred Stock so to be offered (and/or the
aggregate  initial  conversion  price  of the  convertible  securities  so to be
offered)  would  purchase  at such  current  per  share  market  price,  and the
denominator  of  which  shall  be  the  number  of  shares  of  Preferred  Stock
outstanding  on such  record  date  plus the  number  of  additional  shares  of
Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription
or  purchase  (or into which the  convertible  securities  so to be offered  are
initially  convertible);   provided,   however,  that  in  no  event  shall  the
consideration  to be paid  upon  the  exercise  of one  Right  be less  than the
aggregate par value,  if any, of the shares of capital stock of the  Corporation
issuable upon exercise of one Right. In case such subscription price may be paid
in a consideration  part or all of which shall be in a form other than cash, the
value of such  consideration  shall be  determined in good faith by the Board of
Directors  of the  Corporation,  whose  determination  shall be  described  in a
statement  filed with the Rights  Agent and shall be binding on the Rights Agent
and the holders of the Rights.  Preferred Stock owned by or held for the account
of the Corporation  shall not be deemed  outstanding for the purpose of any such
computation.  Such adjustment shall be made successively  whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price that would
then be in effect if such record date had not been fixed.


                                       17
<PAGE>

         11.3. In case the Corporation shall fix a record date for the making of
a  distribution  to all  holders  of the  Preferred  Stock  (including  any such
distribution  made in  connection  with a  consolidation  or merger in which the
Corporation  is  the  continuing  or  surviving  corporation)  of  evidences  of
indebtedness  or assets  (other  than a regular  quarterly  cash  dividend  or a
dividend  payable  in  Preferred  Stock)  or  subscription  rights  or  warrants
(excluding  those referred to in Section 11.2 hereof),  the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price  in  effect  immediately  prior to such  record  date by a  fraction,  the
numerator  of  which  shall be the then  current  per  share  market  price  (as
determined  pursuant  to Section  11.4  hereof) of the  Preferred  Stock on such
record  date,  less the fair market  value (as  determined  in good faith by the
Board of Directors of the Corporation, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the Rights Agent
and the  holders of the  Rights) of the  portion of the assets or  evidences  of
indebtedness  so to be  distributed or of such  subscription  rights or warrants
applicable to one share of Preferred  Stock,  and the denominator of which shall
be such  current  per  share  market  price of the  Preferred  Stock;  provided,
however,  that in no event shall the  consideration to be paid upon the exercise
of one Right be less than the  aggregate  par  value,  if any,  of the shares of
capital stock of the  Corporation to be issued upon exercise of one Right.  Such
adjustments shall be made successively whenever such a record date is fixed; and
in the event that such  distribution  is not so made,  the Purchase  Price shall
again be adjusted to be the Purchase  Price that would then be in effect if such
record date had not been fixed.

         11.4. Computation of "Current Per Share Market Price."

               11.4.1.  For  the  purpose  of  any  computation  hereunder,  the
"current per share market price" of any security (a  "Security"  for the purpose
of this  Section  11.4.1) on any date  shall be deemed to be the  average of the
daily closing prices per share of such Security for the thirty (30)  consecutive
Trading  Days  immediately  prior  to and not  including  such  date;  provided,
however,  that in the  event  that the  current  per share  market  price of the
Security is determined  during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution  on such Security  payable in
shares of such Security or securities  convertible into such shares,  or (B) any
subdivision,  combination or  reclassification of such Security and prior to the
expiration of thirty (30) Trading Days after (but not including) the ex-dividend
date for such dividend or distribution, or the record date for such subdivision,
combination  or  reclassification,  then, and in each such case, the current per
share market price shall be appropriately adjusted to reflect the current market
price per share  equivalent  of such  Security.  The closing  price for each day
shall be the last sale price,  regular way, or, in case no such sale takes place
on such day,  the average of the closing bid and asked  prices,  regular way, in
either case as  reported in the  principal  consolidated  transaction  reporting
system with respect to securities  listed or admitted to trading on the New York
Stock  Exchange  or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal  consolidated  transaction
reporting  system with respect to securities  listed on the  principal  national
securities  exchange on which the  Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national  securities
exchange,  the last quoted  price or, if not so quoted,  the average of the high
bid and low asked  prices in the  over-the-counter  market,  as  reported by the
National  Association of Securities  Dealers,  Inc. Automated  Quotations System


                                       18
<PAGE>

("NASDAQ")  or such  other  system  then in use,  or,  if on any  such  date the
Security is not quoted by any such organization,  the average of the closing bid
and asked prices as furnished by a professional  market maker making a market in
the Security  selected by the Board of Directors of the  Corporation.  If on any
such date no such  market  maker is making a market  in the  Security,  the fair
value of the Security on such date as  determined  in good faith by the Board of
Directors of the Corporation  shall be used. The term "Trading Day" shall mean a
day on which the principal national securities exchange on which the Security is
listed or admitted to trading is open for the transaction of business or, if the
Security  is not  listed or  admitted  to  trading  on any  national  securities
exchange, a Business Day.

               11.4.2.  For  the  purpose  of  any  computation  hereunder,  the
"current per share market price" of the  Preferred  Stock shall be determined in
accordance  with the  method  set  forth in  Section  11.4.1.  If the  shares of
Preferred Stock are not publicly traded, the "current per share market price" of
the  Preferred  Stock shall be  conclusively  deemed to be the current per share
market  price of the Common  Stock as  determined  pursuant  to  Section  11.4.1
(appropriately  adjusted to reflect any stock split,  stock  dividend or similar
transaction  occurring  after the date hereof),  multiplied by 1,000. If neither
the  Common  Stock nor the  Preferred  Stock are  publicly  held or so listed or
traded,  "current  per share  market  price"  shall  mean,  with  respect to the
Preferred  Stock,  the fair value per share as  determined  in good faith by the
Board of Directors of the Corporation, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights.

         11.5. Anything herein to the contrary notwithstanding, no adjustment in
the Purchase  Price shall be required  unless such  adjustment  would require an
increase or decrease of at least 1% in the Purchase  Price;  provided,  however,
that any adjustments  that by reason of this Section 11.5 are not required to be
made  shall  be  carried  forward  and  taken  into  account  in any  subsequent
adjustment.  All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one  one-thousandth  (1/1000th)  of a share of  Preferred
Stock or of any other share or security as the case may be.  Notwithstanding the
first sentence of this Section 11.5, any adjustment  required by this Section 11
shall be made no later than the  earlier of (i) three (3) years from the date of
the transaction that mandates such adjustment or (ii) the Final Expiration Date.

         11.6. If as a result of an adjustment  made pursuant to Section  11.1.2
or Section  13.1  hereof,  the holder of any Right  thereafter  exercised  shall
become entitled to receive any shares of capital stock of the Corporation  other
than Preferred  Stock,  thereafter the number of other shares so receivable upon
exercise  of any Right  shall be  subject to  adjustment  from time to time in a
manner and on terms as nearly  equivalent as practicable to the provisions  with
respect  to  the  Preferred  Stock  contained  in  Section  11.1  through  11.3,
inclusive,  and the  provisions  of Sections 7, 9, 10, 13 and 14 with respect to
the Preferred Stock shall apply on like terms to any such other shares.



                                       19
<PAGE>

         11.7. All Rights originally issued by the Corporation subsequent to any
adjustment  made to the Purchase  Price  hereunder  shall  evidence the right to
purchase,  at the adjusted  Purchase  Price,  the number of one  one-thousandths
(1/1000ths)  of a  share  of  Preferred  Stock  purchasable  from  time  to time
hereunder  upon  exercise of the Rights,  all subject to further  adjustment  as
provided herein.

         11.8. The  Corporation may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights,  in lieu of any adjustment
in the number of one  one-thousandths  (1/1000ths) of a share of Preferred Stock
purchasable upon the exercise of a Right.  Each of the Rights  outstanding after
such  adjustment of the number of Rights shall be exercisable  for the number of
one one-thousandths  (1/1000ths) of a share of Preferred Stock for which a Right
was exercisable immediately prior to such adjustment.  Each Right held of record
prior to such  adjustment  of the number of Rights  shall  become that number of
Rights (calculated to the nearest one  ten-thousandth)  obtained by dividing the
Purchase Price in effect  immediately  prior to adjustment of the Purchase Price
by the Purchase  Price in effect  immediately  after  adjustment of the Purchase
Price.  The  Corporation  shall make a public  announcement  of its  election to
adjust the number of Rights, indicating the record date for the adjustment, and,
if known at the time, the amount of the adjustment to be made, and shall deliver
a copy of such public  announcement to the Rights Agent. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter,  but, if
the Right  Certificates have been issued,  shall be at least ten (10) days later
than the  date of the  public  announcement.  If Right  Certificates  have  been
issued,  upon each  adjustment of the number of Rights  pursuant to this Section
11.8, the Corporation shall, as promptly as practicable, cause to be distributed
to  holders  of  record  of  Right   Certificates  on  such  record  date  Right
Certificates evidencing,  subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment,  or, at the
option of the  Corporation,  shall cause to be  distributed  to such  holders of
record in substitution and replacement for the Right  Certificates  held by such
holders prior to the date of adjustment, and upon surrender thereof, if required
by the Corporation,  new Right  Certificates  evidencing all the Rights to which
such holders shall be entitled after such adjustment.  Right  Certificates so to
be  distributed  shall be  issued,  executed  and  countersigned  in the  manner
provided  for  herein  and shall be  registered  in the names of the  holders of
record  of  Right  Certificates  on the  record  date  specified  in the  public
announcement.

         11.9. Irrespective of any adjustment or change in the Purchase Price or
the number of one  one-thousandths  (1/1000ths)  of a share of  Preferred  Stock
issuable upon the exercise of the Rights, the Right Certificates theretofore and
thereafter  issued may continue to express the Purchase  Price and the number of
one  one-thousandths  (1/1000ths)  of a  share  of  Preferred  Stock  that  were
expressed in the initial Right Certificates issued hereunder.

         11.10. Before taking any action that would cause an adjustment reducing
the  Purchase  Price  below the then par  value,  if any,  of the  number of one
one-thousandths (1/1000ths) of a share of Preferred Stock, share of Common Stock
or other securities  issuable upon exercise of the Rights, the Corporation shall
take any corporate action that may, in the opinion of its counsel,  be necessary


                                       20
<PAGE>

in order that the Corporation may validly and legally issue such number of fully
paid and non-assessable one one-thousandths  (1/1000ths) of a share of Preferred
Stock,  share of Common  Stock or other  securities  at such  adjusted  Purchase
Price.

         11.11.  In any case in which  this  Section  11 shall  require  that an
adjustment  in the  Purchase  Price be made  effective as of a record date for a
specified event, the Corporation may elect to defer until the occurrence of such
event the issuance to the holder of any Right  exercised  after such record date
of the  Preferred  Stock,  shares of  Common  Stock or other  securities  of the
Corporation,  if any,  issuable  upon such exercise over and above the Preferred
Stock,  shares of Common Stock or other securities of the  Corporation,  if any,
issuable upon such  exercise on the basis of the Purchase  Price in effect prior
to such adjustment;  provided,  however,  that the Corporation  shall deliver to
such holder a due bill or other appropriate  instrument evidencing such holder's
right to  receive  such  additional  shares  upon the  occurrence  of the  event
requiring  such  adjustment  and  shall  deliver  to the  Rights  Agent a notice
describing the terms of such due bill or other appropriate instrument.

         11.12. Anything in this Section 11 to the contrary notwithstanding, the
Corporation  shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments  expressly  required by this Section 11, as and to
the extent that the  Corporation in its sole  discretion  shall  determine to be
advisable in order that any (i)  consolidation  or  subdivision of the Preferred
Stock, (ii) issuance wholly for cash of Preferred Stock at less than the current
market price,  (iii) issuance  wholly for cash of Preferred  Stock or securities
that by their terms are convertible  into or exchangeable  for Preferred  Stock,
(iv) stock dividends or (v) issuance of rights,  options or warrants referred to
in  this  Section  11,  hereafter  made by the  Corporation  to  holders  of its
Preferred Stock shall not be taxable to such holders.

         11.13.  The Corporation  covenants and agrees that it shall not, at any
time after the  Distribution  Date, (i) consolidate with any other Person (other
than a Subsidiary  of the  Corporation  in a  transaction  that does not violate
Section  11.14  hereof),  (ii) merge with or into any other Person (other than a
Subsidiary of the  Corporation  in a transaction  that does not violate  Section
11.14  hereof),  or (iii) sell or transfer (or permit any  Subsidiary to sell or
transfer),  in one transaction,  or a series of related transactions,  assets or
earning  power  aggregating  more than 50% of the assets or earning power of the
Corporation  and its  Subsidiaries  (taken as a whole)  to any  other  Person or
Persons (other than the  Corporation  and/or any of its  Subsidiaries  in one or
more transactions  each of which does not violate Section 11.14 hereof),  if (x)
at the  time  of or  immediately  after  such  consolidation,  merger,  sale  or
transfer,  there are any charter or bylaw provisions or any rights,  warrants or
other  instruments  or securities  outstanding  or agreements in effect or other
actions taken that would materially diminish or otherwise eliminate the benefits
intended to be afforded  by the Rights or (y) prior to,  simultaneously  with or
immediately after such consolidation, merger, sale or transfer, the shareholders
of the Person who constitutes,  or would  constitute,  the "Principal Party" for
purposes of Section 13.1 hereof  shall have  received a  distribution  of Rights
previously  owned by such Person or any of its  Affiliates and  Associates.  The
Corporation  shall  not  consummate  any  such  consolidation,  merger,  sale or
transfer  unless prior thereto the  Corporation and such other Person shall have


                                       21
<PAGE>

executed and delivered to the Rights Agent a supplemental  agreement  evidencing
compliance with this Section 11.13.

         11.14.   The   Corporation   covenants  and  agrees  that,   after  the
Distribution  Date,  it will not,  except as  permitted by Section 23 or Section
25.2 hereof,  take (or permit any  Subsidiary to take) any action the purpose of
which is to, or if at the time such action is taken it is reasonably foreseeable
that the effect of such action is to, materially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights.

         11.15. The exercise of Rights under Section 11.1.2 shall only result in
the loss of rights under Section 11.1.2 to the extent so exercised and shall not
otherwise  affect the rights  represented  by the Rights  under this  Agreement,
including the rights represented by Section 13.

     12. Certificate of Adjusted Purchase Price or Number of Shares.

         12.1.  Whenever  an  adjustment  is made as  provided  in Section 11 or
Section 13 hereof,  the  Corporation  shall  promptly (a) prepare a  certificate
setting forth such adjustment and a brief,  reasonably detailed statement of the
facts,  computations and methodology  accounting for such  adjustment,  (b) file
with the Rights Agent and with each transfer  agent for the Common Stock and the
Preferred  Stock a copy of such  certificate  and (c) if such adjustment is made
after the  Distribution  Date,  mail a brief summary thereof to each holder of a
Right Certificate in accordance with Section 25.1 hereof. The Rights Agent shall
be fully  protected  in relying on any such  certificate  and on any  adjustment
therein  contained  and shall  have no duty with  respect  to,  and shall not be
deemed to have  knowledge  of,  such  adjustment  unless and until it shall have
received such certificate.


                                       22
<PAGE>

     13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.

         13.1. In the event that, on or following the Shares  Acquisition  Date,
directly or indirectly,  (x) the Corporation  shall  consolidate  with, or merge
with and into, any Interested Shareholder or, if in such merger or consolidation
all holders of shares of Common Stock are not treated  alike,  any other Person,
(y) the  Corporation  shall  consolidate  with,  or merge with,  any  Interested
Shareholder  or, if in such  merger or  consolidation  all  holders of shares of
Common Stock are not treated alike, any other Person,  and the Corporation shall
be the  continuing  or surviving  corporation  of such  consolidation  or merger
(other than, in a case of any  transaction  described in (x) or (y), a merger or
consolation  that would result in all of the  securities  generally  entitled to
vote in the  election of  directors  of the  Corporation  ("voting  securities")
outstanding  immediately  prior  thereto  continuing  to  represent  (either  by
remaining  outstanding or by being  converted  into  securities of the surviving
entity) all of the voting securities of the Corporation or such voting surviving
entity  outstanding  immediately  after  such  merger or  consolidation  and the
holders  of such  securities  not having  changed as a result of such  merger or
consolidation),  or (z) the Corporation shall sell or otherwise transfer (or one
or  more  of  its  Subsidiaries  shall  sell  or  otherwise  transfer),  in  one
transaction  or a series  of  related  transactions,  assets  or  earning  power
aggregating  more than 50% of the assets or earning power of the Corporation and
its  Subsidiaries   (taken  as  a  whole)  to  any  Interested   Shareholder  or
Shareholders  or, if in such  transaction  all  holders of Common  Stock are not
treated alike, any other Person (other than the Corporation or any Subsidiary of
the  Corporation  in one or more  transactions  each of which  does not  violate
Section  11.14  hereof),  then,  and in each such case  (except as  provided  in
Section 13.4 hereof),  proper provision shall be made so that (i) each holder of
a Right,  except as provided in Section 7.6 hereof,  shall  thereafter  have the
right to receive, upon the exercise thereof at a price equal to the then current
Purchase  Price,  in accordance  with the terms of this Agreement and in lieu of
Preferred  Stock,  such number of freely  tradable shares of Common Stock of the
Principal Party, not subject to any liens, encumbrances, rights of first refusal
or other adverse  claims,  as shall equal the result obtained by (A) multiplying
the then current Purchase Price by the number of one one-thousandths (1/1000ths)
of a share of  Preferred  Stock for which a Right is then  exercisable  (without
taking into account any adjustment  previously  made pursuant to Section 11.1.2)
and dividing  that product by (B) 50% of the then current per share market price
of the Common Stock of such Principal Party (determined pursuant to Section 11.4
hereof)  on the  date of  consummation  of such  Section  13  Event;  (ii)  such
Principal Party shall  thereafter be liable for, and shall assume,  by virtue of
such  Section  13 Event,  all the  obligations  and  duties  of the  Corporation
pursuant to this Agreement;  (iii) the term  "Corporation"  shall  thereafter be
deemed to refer to such Principal Party, it being specifically intended that the
provisions  of  Section  11 hereof  shall  apply  only to such  Principal  Party
following the first  occurrence of a Section 13 Event;  and (iv) such  Principal
Party shall take such steps (including, but not limited to, the reservation of a
sufficient  number  of its  shares  of  Common  Stock)  in  connection  with the
consummation  of any such  transaction  as may be  necessary  to assure that the
provisions  hereof shall  thereafter be applicable,  as nearly as reasonably may
be, in relation to the shares of Common Stock  thereafter  deliverable  upon the
exercise of the Rights.



                                       23
<PAGE>

         13.2. "Principal Party" shall mean:

               13.2.1. in the case of any transaction described in clause (x) or
(y) of the first  sentence of Section 13.1, the Person that is the issuer of any
securities into which shares of Common Stock of the Corporation are converted in
such merger or  consolidation,  and if no securities  are so issued,  the Person
that  is the  other  party  to  such  merger  or  consolidation  (including,  if
applicable, the Corporation if it is the surviving corporation); and

               13.2.2. in the case of any transaction described in clause (z) of
the first sentence of Section 13.1,  the Person that is the party  receiving the
greatest  portion of the assets or earning  power  transferred  pursuant to such
transaction or transactions;


provided,  however,  that in any of the foregoing cases, (1) if the Common Stock
of such  Person  is not at such  time  and has not  been  continuously  over the
preceding  twelve (12) month period  registered under Section 12 of the Exchange
Act, and such Person is a direct or indirect  Subsidiary  of another  Person the
shares of Common  Stock of which  are and have  been so  registered,  "Principal
Party"  shall  refer  to  such  other  Person;  (2) in  case  such  Person  is a
Subsidiary,  directly  or  indirectly,  of more than one  Person,  the shares of
Common Stock of two or more of which are and have been so registered, "Principal
Party"  shall  refer to  whichever  of such  Persons is the issuer of the Common
Stock having the greatest aggregate market value; and (3) in case such Person is
owned, directly or indirectly,  by a joint venture formed by two or more Persons
that are not owned,  directly or indirectly,  by the same Person,  the rules set
forth in (1) and (2) above shall apply to each of the chains of ownership having
an interest in such joint venture as if such party were a  "Subsidiary"  of both
or all of such  joint  venturers  and the  Principal  Parties in each such chain
shall  bear the  obligations  set forth in this  Section 13 in the same ratio as
their  direct or  indirect  interests  in such  Person bear to the total of such
interests.

         13.3. The  Corporation  shall not  consummate  any such  consolidation,
merger,  sale or transfer  unless the  Principal  Party shall have a  sufficient
number of its  authorized  shares of Common  Stock that have not been  issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Corporation and such Principal
Party shall have  executed  and  delivered  to the Rights  Agent a  supplemental
agreement  providing  for the  terms  set  forth in  Sections  13.1 and 13.2 and
further   providing  that,  as  soon  as  practicable  after  the  date  of  any
consolidation, merger, sale or transfer mentioned in Section 13.1, the Principal
Party at its own expense shall:

               13.3.1.  prepare and file a registration  statement under the Act
with respect to the Rights and the securities  purchasable  upon exercise of the
Rights on an  appropriate  form,  and will use its best  efforts  to cause  such
registration statement to (A) become effective as soon as practicable after such
filing and (B) remain  effective  (with a  prospectus  at all times  meeting the
requirements of the Act) until the Final Expiration Date;


                                       24
<PAGE>

               13.3.2.  use its best  efforts to qualify or register  the Rights
and the  securities  purchasable  upon exercise of the Rights under the blue sky
laws of such jurisdictions as may be necessary or appropriate; and

               13.3.3.  deliver to holders  of the Rights  historical  financial
statements  for the  Principal  Party  that  comply  in all  respects  with  the
requirements for registration on Form 10 under the Exchange Act.

               The  provisions  of this  Section  13  shall  similarly  apply to
successive  mergers or  consolidations  or sales or other transfers.  The rights
under this Section 13 shall be in addition to the rights to exercise  Rights and
adjustments under Section 11.1.2 and shall survive any exercise  thereof.  13.4.
Notwithstanding  anything  in this  Agreement  to the  contrary,  the  foregoing
provisions of this Section 13 shall not be applicable to a transaction described
in clauses (x) and (y) of Section 13.1 if: (i) such  transaction  is consummated
with a Person or Persons  who  acquired  shares of Common  Stock  pursuant  to a
Permitted  Offer (or a wholly owned  Subsidiary  of any such Person or Persons);
(ii) the price per share of Common Stock offered in such transaction is not less
than the price per share of Common Stock paid to all holders of shares of Common
Stock whose shares were purchased  pursuant to such Permitted  Offer;  and (iii)
the form of consideration offered in such transaction is the same as the form of
consideration  paid pursuant to such Permitted Offer.  Upon  consummation of any
such  transaction  contemplated by this Section 13.4, all Rights hereunder shall
expire.

     14. Fractional Rights and Fractional Shares.

         14.1.  The  Corporation  shall not be  required to issue  fractions  of
Rights or to distribute Right  Certificates that evidence  fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the  Right  Certificates  with  regard to which  such  fractional  Rights  would
otherwise  be  issuable  an amount  in cash  equal to the same  fraction  of the
current  market value of a whole Right.  For the purposes of this Section  14.1,
the current  market  value of a whole  Right  shall be the closing  price of the
Rights  for  the  Trading  Day  immediately  prior  to the  date on  which  such
fractional Rights would have been otherwise issuable.  The closing price for any
day shall be the last sale price,  regular  way,  or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal  consolidated  transaction reporting
system with respect to securities  listed or admitted to trading on the New York
Stock  Exchange  or, if the Rights are not listed or  admitted to trading on the
New York Stock Exchange, as reported in the principal  consolidated  transaction
reporting  system with respect to securities  listed on the  principal  national
securities exchange on which the Rights are listed or admitted to trading or, if
the Rights  are not listed or  admitted  to trading on any  national  securities
exchange,  the last quoted  price or, if not so quoted,  the average of the high
bid and low asked prices in the  over-the-counter  market, as reported by NASDAQ
or such  other  system  then in use or, if on any such date the  Rights  are not


                                       25
<PAGE>

quoted by any such organization, the average of the closing bid and asked prices
as  furnished  by a  professional  market  maker  making a market in the  Rights
selected by the Board of  Directors of the  Corporation.  If on any such date no
such market maker is making a market in the Rights, the fair value of the Rights
on such  date as  determined  in good  faith by the  Board of  Directors  of the
Corporation shall be used.

         14.2.  The  Corporation  shall not be  required to issue  fractions  of
shares of Preferred  Stock  (other than  fractions  that are one  one-thousandth
(1/1000th) or integral multiples of one one-thousandth  (1/1000th) of a share of
Preferred  Stock,  or such other  fraction  determined  pursuant  to  adjustment
provisions  of Section 11 hereof) upon  exercise of the Rights or to  distribute
certificates  that  evidence  fractional  shares of Preferred  Stock (other than
fractions that are one one-thousandth  (1/1000th),  or integral multiples of one
one-thousandth  (1/1000th) of a share of Preferred  Stock or such other fraction
determined pursuant to adjustment provisions of Section 11 hereof). Fractions of
shares of Preferred Stock in integral multiples of one one-thousandth (1/1000th)
of a share of  Preferred  Stock may,  at the  election  of the  Corporation,  be
evidenced by depositary receipts,  pursuant to an appropriate  agreement between
the  Corporation  and a depositary  selected by it; provided that such agreement
shall  provide  that the  holders  of such  depositary  receipts  shall have the
rights,  privileges  and  preferences  to which they are entitled as  beneficial
owners of the Preferred Stock represented by such depositary  receipts.  In lieu
of  fractional  shares  of  Preferred  Stock  that  are not  one  one-thousandth
(1/1000th) or integral multiples of one one-thousandth  (1/1000th) of a share of
Preferred  Stock, the Corporation  shall pay to the registered  holders of Right
Certificates  at the time such Rights are exercised as herein provided an amount
in cash equal to the same  fraction of the current  market value of one share of
Preferred Stock. For the purposes of this Section 14.2, the current market value
of a share of Preferred Stock shall be the closing price of a share of Preferred
Stock (as  determined  pursuant  to Section  11.4.2  hereof) for the Trading Day
immediately prior to the date of such exercise.

         14.3.  Following the  occurrence of one of the  transactions  or events
specified  in  Section 11 giving  rise to the right to receive  shares of Common
Stock,   Capital  Stock  Equivalents  (other  than  Preferred  Stock)  or  other
securities upon the exercise of a Right,  the Corporation  shall not be required
to issue  fractions of shares or units of such shares of Common  Stock,  Capital
Stock  Equivalents  or  other  securities  upon  exercise  of the  Rights  or to
distribute  certificates that evidence fractions of such shares of Common Stock,
Capital Stock Equivalents or other  securities.  In lieu of fractional shares or
units of such  shares  of  Common  Stock,  Capital  Stock  Equivalents  or other
securities,  the  Corporation  may  pay  to  the  registered  holders  of  Right
Certificates  at the time such Rights are exercised as herein provided an amount
in cash equal to the same  fraction  of the current  market  value of a share or
unit of such  shares  of  Common  Stock,  Capital  Stock  Equivalents  or  other
securities. For purposes of this Section 14.3, the current market value shall be
determined  in the manner set forth in Section  11.4  hereof for the Trading Day
immediately  prior to the  date of such  exercise  and,  if such  Capital  Stock
Equivalent  is not traded,  each such Capital  Stock  Equivalent  shall have the
value of one one-thousandth (1/1000th) of a share of Preferred Stock.


                                       26
<PAGE>


         14.4.  The holder of a Right by the  acceptance of the Right  expressly
waives such holder's  right to receive any  fractional  Rights or any fractional
share upon  exercise of a Right  (except as provided  above).  The Rights  Agent
shall not be deemed to have  knowledge of, and shall have no duty in respect of,
the issuance of fractional Rights or fractional shares unless and until it shall
have received instructions from the Corporation  concerning the issuance of such
fractional Rights or fractional shares.

15.      Rights of Action.

         15.1. All rights of action in respect of this Agreement,  excepting the
rights of action  given to the Rights Agent under this  Agreement  are vested in
the respective  registered  holders of the Right Certificates (and, prior to the
Distribution  Date, the registered  holders of shares of the Common Stock);  and
any registered  holder of any Right  Certificate  (or, prior to the Distribution
Date, of shares of the Common Stock), without the consent of the Rights Agent or
of the holder of any other  Right  Certificate  (or,  prior to the  Distribution
Date,  of shares of the Common  Stock),  may, in such  registered  holder's  own
behalf and for such registered holder's own benefit,  enforce, and may institute
and maintain any suit, action or proceeding  against the Corporation to enforce,
or otherwise act in respect of, such  registered  holder's right to exercise the
Rights evidenced by such Right  Certificate in the manner provided in such Right
Certificate  and in  this  Agreement.  Without  limiting  the  foregoing  or any
remedies  available to the holders of Rights,  it is  specifically  acknowledged
that the  holders  of Rights  would not have an  adequate  remedy at law for any
breach of this  Agreement  and will be entitled to specific  performance  of the
obligations under, and injunctive relief against actual or threatened violations
of the  obligations  of any Person subject to, this  Agreement.  Nothing in this
Section  15 is  intended  to  modify  or limit  the  authority  of the  Board of
Directors under Section 25.3.

     16. Agreement of Right Holders.

     Every holder of a Right,  by accepting  the same,  consents and agrees with
the  Corporation  and the Rights  Agent and with every  other  holder of a Right
that:

         16.1. prior to the  Distribution  Date, the Rights will be transferable
only in connection with the transfer of the associated shares of Common Stock;

         16.2.  after  the  Distribution   Date,  the  Right   Certificates  are
transferable  only on the registry  books of the Rights Agent if  surrendered at
the office of the Rights Agent  designated  for such  purpose,  duly endorsed or
accompanied  by a proper  instrument of transfer and with the  appropriate  form
fully executed;

         16.3.  the  Corporation  and the  Rights  Agent  may deem and treat the
Person in whose name the Right Certificate (or, prior to the Distribution  Date,
the  associated  Common Stock  certificate)  is registered as the absolute owner
thereof and of the Rights evidenced  thereby  (notwithstanding  any notations of


                                       27
<PAGE>

ownership or writing on the Right  Certificate  or the  associated  Common Stock
certificate  made by anyone other than the  Corporation or the Rights Agent) for
all purposes whatsoever, and neither the Corporation nor the Rights Agent, shall
be required to be affected by any notice to the contrary; and

         16.4.  Notwithstanding  anything  in this  Agreement  to the  contrary,
neither the  Corporation  nor the Rights  Agent shall have any  liability to any
holder  of a Right or a  beneficial  interest  in a Right or other  Person  as a
result of its inability to perform any of its  obligations  under this Agreement
by reason of any  preliminary  or permanent  injunction or other order,  decree,
judgment  or  ruling  (whether  interlocutory  or  final)  issued  by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission,  or any statute,  rule, regulation or executive order promulgated
or enacted by any governmental  authority,  prohibiting or otherwise restraining
performance of such obligation; provided, however, that the Corporation must use
its best efforts to have any such order,  decree,  judgment or ruling  lifted or
otherwise overturned as soon as practicable.

     17. Right Certificate Holder Not Deemed a Shareholder.

     No holder,  as such,  of any Right  Certificate  shall be entitled to vote,
receive  dividends  or be deemed  for any  purpose  the  holder of shares of the
Preferred Stock or any other  securities of the Corporation that may at any time
be  issuable  on the  exercise  of the  Rights  represented  thereby,  nor shall
anything  contained  herein or in any Right  Certificate  be construed to confer
upon the  holder  of any  Right  Certificate,  as such,  any of the  rights of a
shareholder  of the  Corporation  or any  right  to  vote  for the  election  of
directors or upon any matter  submitted to shareholders at any meeting  thereof,
or to give or withhold consent to any corporate  action, or to receive notice of
meetings or other actions affecting  shareholders (except as provided in Section
24 hereof),  or to receive  dividends or other  distributions or to exercise any
preemptive  or  subscription  rights,  or  otherwise,  until the Right or Rights
evidenced by such Right Certificate shall have been exercised in accordance with
the provisions hereof.

     18. Concerning the Rights Agent.

         18.1.  The  Corporation  agrees to pay to the Rights  Agent  reasonable
compensation  for all services  rendered by it hereunder and, from time to time,
on demand of the Rights  Agent,  its  reasonable  expenses  and counsel fees and
other  disbursements  incurred  in the  administration,  preparation,  delivery,
amendment and execution of this  Agreement and the exercise and  performance  of
its duties hereunder.  The Corporation also agrees to indemnify the Rights Agent
for, and to hold it harmless against,  any loss,  liability,  damage,  judgment,
fine, penalty, claim, demand, settlement, cost or expense incurred without gross
negligence,  bad faith or willful  misconduct  on the part of the  Rights  Agent
(which gross negligence, bad faith or willful misconduct must be determined by a
final,  non-appealable order, judgment, decree or ruling of a court of competent
jurisdiction),  for any action taken, suffered or omitted by the Rights Agent in
connection with the acceptance and  administration of this Agreement,  including


                                       28
<PAGE>

without  limitation  the costs and  expenses of  defending  against any claim of
liability  in respect of any such  action.  The costs and  expenses of enforcing
this  right  of  indemnification  shall  also be paid  by the  Corporation.  The
indemnity provided for herein shall survive the expiration of the Rights and the
termination of this Agreement.

         18.2.  The  Rights  Agent  may  conclusively  rely  upon  and  shall be
authorized and protected and shall incur no liability for, or in respect of, any
action taken,  suffered or omitted by it in connection  with the  acceptance and
administration  of this  Agreement  in reliance  upon any Right  Certificate  or
certificate  for  shares  of  Common  Stock  or  for  other  securities  of  the
Corporation,   instrument  of   assignment  or  transfer,   power  of  attorney,
endorsement,   affidavit,  letter,  notice,  direction,   consent,  certificate,
statement  or other  paper or  document  believed  by it to be genuine and to be
signed, executed and, where necessary,  verified or acknowledged,  by the proper
Person or  Persons  or  otherwise  upon the  advice of  counsel  as set forth in
Section 20 hereof.  The Rights Agent shall not be deemed to have  knowledge  of,
and  shall  have no  duty in  respect  of,  any  fact  contained  in such  Right
Certificate or certificate for shares of Common Stock or for other securities of
the  Corporation,  instrument  of  assignment  or  transfer,  power of attorney,
endorsement,   affidavit,  letter,  notice,  direction,   consent,  certificate,
statement or other paper or document unless and until it shall have received the
same.

         18.3. Anything in this Agreement to the contrary notwithstanding, in no
event  shall  the  Rights  Agent  be  liable  for  special,  indirect,  punitive
incidental or consequential loss or damage of any kind whatsoever (including but
not limited to lost  profits),  even if the Rights Agent has been advised of the
likelihood of such loss or damage and regardless of the form of the action.  Any
liability of the Rights Agent under this Rights Agreement will be limited to the
amount of fees paid by the Corporation to the Rights Agent.

     19. Merger or Consolidation or Change of Name of Rights Agent.

         19.1.  Any Person into which the Rights Agent or any  successor  Rights
Agent  may be  merged  or  with  which  it may be  consolidated,  or any  Person
resulting  from any merger or  consolidation  to which the  Rights  Agent or any
successor  Rights  Agent  shall  be a party,  or any  Person  succeeding  to the
shareholder services business of the Rights Agent or any successor Rights Agent,
shall be the  successor  to the Rights  Agent under this  Agreement  without the
execution  or filing of any paper or any  further  act on the part of any of the
parties hereto, provided that such Person would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof.

         19.2. In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered,  the Rights Agent may adopt the countersignature  under its prior
name and deliver Right  Certificates so countersigned;  and in case at that time
any of the Right  Certificates  shall not have been  countersigned,  the  Rights
Agent may countersign such Right Certificates either in its prior name or in its


                                       29
<PAGE>

changed name; and in all such cases such Right  Certificates shall have the full
force provided in the Right Certificates and in this Agreement.

     20. Duties of Rights Agent.

         20.1. The Rights Agent  undertakes  those duties and  obligations,  and
only the duties and  obligations,  expressly  imposed by this  Agreement (and no
implied duties or obligations)  upon the following terms and conditions,  and no
implied  duties or  obligations  shall be read into this  Agreement  against the
Rights  Agent,  by all of  which  the  Corporation  and  the  holders  of  Right
Certificates, by their acceptance thereof, shall be bound.

         20.2. Before the Rights Agent acts or refrains from acting,  the Rights
Agent  may  consult  with  legal  counsel  (who  may be  legal  counsel  for the
Corporation),  and the  advice  or  opinion  of such  counsel  shall be full and
complete  authorization and protection to the Rights Agent, and the Rights Agent
shall  incur no  liability  for or in respect of any action  taken,  suffered or
omitted by it in good faith and in accordance with such advice or opinion.

         20.3.  Whenever in the  performance  of its duties under this Agreement
the Rights Agent shall deem it  necessary  or desirable  that any fact or matter
(including,  without  limitation,  the identity of an  Acquiring  Person and the
determination  of the  current  market  price  of any  security)  be  proved  or
established by the Corporation prior to taking, suffering or omitting any action
hereunder,  such fact or matter  (unless  other  evidence in respect  thereof be
herein  specifically  prescribed)  may be deemed to be  conclusively  proved and
established by a certificate  signed by any one of the Chairman or Vice Chairman
of the Board, the Chief Executive  Officer,  the President,  any Vice President,
the  Treasurer or the Secretary of the  Corporation  and delivered to the Rights
Agent; and such certificate  shall be full  authorization  and protection to the
Rights Agent and the Rights Agent shall incur no liability  for or in respect of
any action taken,  suffered or omitted in good faith by it under the  provisions
of this Agreement in reliance upon such certificate.

         20.4. The Rights Agent shall be liable hereunder only for its own gross
negligence,  bad faith or willful misconduct (which gross negligence,  bad faith
or willful  misconduct  must be  determined  by a final,  non-appealable  order,
judgment, decree or ruling of a court of competent jurisdiction).

         20.5. The Rights Agent shall not be liable for, or by reason of, any of
the  statements of fact or recitals  contained in this Agreement or in the Right
Certificates  (except its  countersignature  on such Right  Certificates)  or be
required to verify the same, but all such  statements and recitals are and shall
be deemed to have been made by the Corporation only.


                                       30
<PAGE>

         20.6.   The  Rights   Agent  shall  not  be  under  any   liability  or
responsibility in respect of the validity of this Agreement or the execution and
delivery  hereof  (except the due  execution  hereof by the Rights  Agent) or in
respect of the  validity  or  execution  of any Right  Certificate  (except  its
countersignature  thereof); nor shall it be liable or responsible for any breach
by the  Corporation of any covenant or condition  contained in this Agreement or
in any Rights Certificate;  nor shall it be liable or responsible for any change
in the exercisability of the Rights (including the Rights becoming null and void
pursuant to Section 7.6 hereof) or any adjustment  required under the provisions
of Section 11,  Section 13 or Section 26 hereof or  responsible  for the manner,
method or amount of any such adjustment or the  ascertaining of the existence of
facts  that  would  require  any such  adjustment  (except  with  respect to the
exercise  of  Rights  evidenced  by  Right  Certificates  after  receipt  of the
certificate  described in Section 12 hereof);  nor shall it by any act hereunder
be deemed to make any  representation  or  warranty as to the  authorization  or
reservation  of any shares of  Preferred  Stock or shares of Common  Stock to be
issued pursuant to this Agreement or any Right  Certificate or as to whether any
Preferred  Stock or  shares  of Common  Stock  will,  when  issued,  be  validly
authorized and issued, fully paid and non-assessable.

         20.7. The Corporation agrees that it will perform, execute, acknowledge
and deliver or cause to be performed,  executed,  acknowledged and delivered all
such further and other acts,  instruments  and  assurances as may  reasonably be
required by the Rights Agent for the carrying  out or  performing  by the Rights
Agent of the provisions of this Agreement.

         20.8.  The Rights  Agent is hereby  authorized  and  directed to accept
instructions  with respect to the  performance of its duties  hereunder from any
one of the Chairman of the Board,  the Chief Executive  Officer,  the President,
any Vice President,  the Treasurer or the Secretary of the  Corporation,  and to
apply to such officers for advice or instructions in connection with its duties,
and such instructions  shall be full  authorization and protection of the Rights
Agent and the Rights  Agent  shall incur no  liability  for or in respect of any
action  taken,  suffered  or  omitted  by it in good  faith or lack of action in
accordance  with  instructions  of any such  officer  or for any delay in acting
while waiting for those instructions.  The Rights Agent shall incur no liability
for or in respect of its reliance upon the most recent instructions  received by
any such officer.  Any application by the Rights Agent for written  instructions
from the  Corporation  may,  at the  option of the  Rights  Agent,  set forth in
writing  any action  proposed  to be taken or omitted by the Rights  Agent under
this  Agreement  and the date on or after  which such  action  shall be taken or
suffered such omission shall be effective.  The Rights Agent shall not be liable
for any action  taken or  suffered  by, or  omission  of,  the  Rights  Agent in
accordance with a proposal included in any such application on or after the date
specified  in such  application  (which  date  shall  not be less  than five (5)
Business Days after the date any officer of the  Corporation  actually  receives
such application,  unless any such officer shall have consented in writing to an
earlier date) unless,  prior to taking any such action (or the effective date in
the  case  of an  omission),  the  Rights  Agent  shall  have  received  written
instruction in response to such  application  specifying the action to be taken,
suffered or omitted.



                                       31
<PAGE>

         20.9.  The  Rights  Agent  and any  shareholder,  Affiliate,  director,
officer  or  employee  of the Rights  Agent may buy,  sell or deal in any of the
Rights or other securities of the Corporation or become  pecuniarily  interested
in any transaction in which the Corporation may be interested,  or contract with
or lend money to the  Corporation or otherwise act as fully and freely as though
it were not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other  capacity for the  Corporation  or for any
other Person or legal entity.

         20.10.  The Rights  Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder  either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, negligence or misconduct of any such attorneys
or agents or for any loss to the Corporation or any other Person  resulting from
any such act, default,  negligence or misconduct,  absent gross negligence,  bad
faith or willful misconduct as determined by a court of competent  jurisdiction,
in the selection and continued employment thereof.

         20.11. No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise  incur any financial  liability in the
performance  of any of its duties  hereunder or in the exercise of its rights if
it believes  that  repayment of such funds or adequate  indemnification  against
such risk or liability is not reasonably assured to it.

         20.12.  If, with respect to any Rights  Certificate  surrendered to the
Rights Agent for exercise or transfer,  the certificate  attached to the form of
assignment  or form of  election to  purchase,  as the case may be, has not been
completed,  the Rights  Agent shall not take any further  action with respect to
such  requested   exercise  or  transfer   without  first  consulting  with  the
Corporation.

     21. Change of Rights Agent.

     The Rights Agent or any successor Rights Agent may resign and be discharged
from its duties  under this  Agreement  upon thirty (30) days' notice in writing
mailed to the  Corporation  and to each  transfer  agent of the Common  Stock or
Preferred Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. The Corporation may remove the Rights Agent or
any successor  Rights Agent upon thirty (30) days' notice in writing,  mailed to
the Rights  Agent or  successor  Rights  Agent,  as the case may be, and to each
transfer agent of the Common Stock or Preferred Stock by registered or certified
mail,  and to holders of the Right  Certificates  by  first-class  mail.  If the
Rights Agent shall resign or be removed or shall otherwise  become  incapable of
acting,  the  Corporation  shall appoint a successor to the Rights Agent. If the
Corporation  shall fail to make such appointment  within a period of thirty (30)
days  after  giving  notice of such  removal  or after it has been  notified  in
writing of such  resignation  or incapacity  by the  resigning or  incapacitated
Rights  Agent or by the  holder of a Right  Certificate  (who  shall,  with such
notice,  submit his Right Certificate for inspection by the  Corporation),  then
the  registered  holder  of any  Right  Certificate  may  apply to any  court of
competent  jurisdiction for the appointment of a new Rights Agent. Any successor


                                       34
<PAGE>

Rights Agent,  whether appointed by the Corporation or by such a court, shall be
(i) a Person organized and doing business under the laws of the United States or
of any of the  States of New York,  New  Jersey or  California  (or of any other
state of the United States so long as such Person is authorized to do business),
in good  standing,  having an office in any of such States,  which is subject to
supervision  or  examination  by  federal or state  authority  and which (or the
parent  corporation of which) has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of a
Person described in clause (i) above.  After  appointment,  the successor Rights
Agent shall be vested with the same powers,  rights, duties and responsibilities
as if it had been originally  named as Rights Agent without further act or deed;
but the  predecessor  Rights Agent shall  deliver and transfer to the  successor
Rights  Agent any  property  at the time held by it  hereunder,  and execute and
deliver  any  further  assurance,  conveyance,  act or  deed  necessary  for the
purpose.  In case at the time such  successor  Rights Agent shall succeed to the
agency created by this Agreement,  any of the Right Certificates shall have been
countersigned  but not delivered,  any such successor Rights Agent may adopt the
countersignature   of  a  predecessor   Rights  Agent  and  deliver  such  Right
Certificates  so  countersigned;  and in  case  at that  time  any of the  Right
Certificates shall not have been  countersigned,  any successor Rights Agent may
countersign such Right Certificates  either in the name of the predecessor or in
the name of the  successor  Rights  Agent;  and in all  such  cases  such  Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.  Not later than the effective date of any such appointment,  the
Corporation  shall file notice  thereof in writing with the  predecessor  Rights
Agent and each transfer agent of the Common Stock or Preferred Stock, and mail a
notice thereof in writing to the registered  holders of the Right  Certificates.
Failure to give any notice  provided  for in this  Section 21,  however,  or any
defect therein,  shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the   case    may   be.

     22. Issuance of New Right Certificates.


         22.1. Notwithstanding any of the provisions of this Agreement or of the
Rights to the  contrary,  the  Corporation  may, at its option,  issue new Right
Certificates  evidencing  Rights in such form as may be approved by its Board of
Directors  to reflect any  adjustment  or change in the  Purchase  Price and the
number or kind or class of shares or other  securities  or property  purchasable
under the Right  Certificates  made in  accordance  with the  provisions of this
Agreement.

         22.2. In connection with the issuance or sale of Common Stock following
the  Distribution  Date and prior to the earlier of the Redemption  Date and the
Final  Expiration  Date,  the  Corporation  (a) shall with  respect to shares of
Common  Stock so issued or sold  pursuant to the  exercise  of stock  options or
under any employee  plan or  arrangement,  or upon the  exercise,  conversion or
exchange of securities,  notes or debentures issued by the Corporation,  and (b)
may in any  other  case,  if deemed  necessary  or  appropriate  by the Board of
Directors  of  the  Corporation,   issue  Right  Certificates  representing  the
appropriate number of Rights in connection with such issuance or sale; provided,
however,  that no Right  Certificate shall be issued if, and to the extent that,

                                       33
<PAGE>

the Corporation  shall be advised by counsel that  appropriate  adjustment shall
otherwise have been made in lieu of the issuance thereof.

     23. Redemption and Termination.

         23.1. Redemption

               23.1.1.  The Board of  Directors of the  Corporation  may, at its
option,  redeem  all but not less than all of the then  outstanding  Rights at a
redemption  price  of $.001  per  Right,  as such  amount  may be  appropriately
adjusted  to reflect any stock  split,  stock  dividend  or similar  transaction
occurring  after  the date  hereof  (such  redemption  price  being  hereinafter
referred to as the "Redemption  Price"), at any time prior to the earlier of the
occurrence  of a  Section  11.1.2  Event  or  the  Final  Expiration  Date.  The
Corporation  may, at its option,  pay the  Redemption  Price either in shares of
Common Stock (based on the current per share market price of the Common Stock at
the time of redemption) or cash;  provided that if the Corporation elects to pay
the Redemption  Price in shares of Common Stock,  the  Corporation  shall not be
required to issue any fractional shares of Common Stock and the number of shares
of Common  Stock  issuable to each holder of Rights shall be rounded down to the
next whole share.

               23.1.2.  In addition,  the Board of Directors of the  Corporation
may, at its option,  at any time  following the  occurrence of a Section  11.1.2
Event and the  expiration  of any period  during  which the holder of Rights may
exercise  the Rights  under  Section  11.1.2  but prior to any  Section 13 Event
redeem  all  but  not  less  than  all of the  then  outstanding  Rights  at the
Redemption  Price (x) in connection  with any merger,  consolidation  or sale or
other transfer (in one  transaction or in a series of related  transactions)  of
assets or earning  power  aggregating  50% or more of the  earning  power of the
Corporation  and its  Subsidiaries  (taken as a whole) in which all  holders  of
shares of Common  Stock are  treated  alike and not  involving  (other than as a
holder of shares of Common Stock being  treated like all other such  holders) an
Interested  Shareholder or (y) (i) if and for so long as the Acquiring Person is
not thereafter the Beneficial  Owner of securities  representing  15% or more of
the  Voting  Power,  and (ii) at the time of  redemption  no other  Persons  are
Acquiring Persons.

         23.2.  In the case of a  redemption  permitted  under  Section  23.1.1,
immediately  upon the date for  redemption  set forth in (or  determined  in the
manner  specified in) a resolution of the Board of Directors of the  Corporation
ordering  the  redemption  of the Rights,  and  without  any further  action and
without any notice, the right to exercise the Rights will terminate and the only
right  thereafter  of the holders of Rights  shall be to receive the  Redemption
Price for each Right so held. In the case of a redemption  permitted  only under
Section  23.1.2,  the right to exercise the Rights will  terminate and represent
only the  right to  receive  the  Redemption  Price  upon the  later of ten (10)
Business  Days  following  the giving of such  notice or the  expiration  of any
period  during  which the Rights may be  exercised  under  Section  11.1.2.  The


                                       34
<PAGE>

Corporation  shall  promptly  give public  notice of any such  redemption;  with
prompt notice thereof to the Rights Agent provided, however, that the failure to
give,  or any defect in, any such notice  shall not affect the  validity of such
redemption.  Within ten (10) days after such date for  redemption set forth in a
resolution of the Board of Directors of the Corporation  ordering the redemption
of the Rights,  the Corporation  shall mail a notice of redemption to the Rights
Agent  and all the  holders  of the then  outstanding  Rights at (in the case of
notice to holders) their addresses as they appear upon the registry books of the
Rights Agent or, prior to the  Distribution  Date, on the registry  books of the
transfer  agent for the Common  Stock.  Any notice which is mailed in the manner
herein  provided shall be deemed given,  whether or not the holder  receives the
notice.  Each  such  notice of  redemption  will  state the  method by which the
payment of the Redemption Price will be made. Neither the Corporation nor any of
its  Affiliates  or  Associates  may redeem,  acquire or purchase  for value any
Rights at any time in any manner  other than as  specifically  set forth in this
Section 23 and other than in  connection  with the  purchase of shares of Common
Stock prior to the Distribution Date.

         23.3.  The  Corporation  may,  at  its  option,  discharge  all  of its
obligations with respect to the Rights by (i) issuing a press release announcing
the manner of  redemption of the Rights in  accordance  with this  Agreement and
(ii) mailing  payment of the Redemption  Price to the registered  holders of the
Rights at their  addresses  as they appear on the  registry  books of the Rights
Agent or, prior to the Distribution  Date, on the registry books of the Transfer
Agent of the Common  Stock,  and upon such action,  all  outstanding  Rights and
Right  Certificates  shall be null and void  without any  further  action by the
Corporation.

     24. Notice of Certain Events.

         24.1. In case the Corporation shall propose after the Distribution Date
(i) to pay any  dividend  payable  in stock of any class to the  holders  of its
Preferred  Stock  or to  make  any  other  distribution  to the  holders  of its
Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to
the holders of its  Preferred  Stock rights or warrants to  subscribe  for or to
purchase any additional  Preferred  Stock or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Stock (other than a reclassification involving only the subdivision of
outstanding Preferred Stock), (iv) to effect any consolidation or merger into or
with  any  other  Person  (other  than  a  Subsidiary  of the  Corporation  in a
transaction which does not violate Section 11.14 hereof),  or to effect any sale
or other  transfer (or to permit one or more of its  Subsidiaries  to effect any
sale  or  other  transfer)  in one or more  transactions,  of 50% or more of the
assets or earning  power of the  Corporation  and its  Subsidiaries  (taken as a
whole) to any other Person or Persons (other than the Corporation  and/or any of
its  Subsidiaries  in one or more  transactions  each of which does not  violate
Section 11.14 hereof), or (v) to effect the liquidation,  dissolution or winding
up of the Corporation,  then, in each such case, the Corporation  shall give the
Rights  Agent and to each  holder of a Right  Certificate,  in  accordance  with
Section 25 hereof,  a notice of such  proposed  action  which shall  specify the
record date for the purposes of such stock dividend or distribution of rights or
warrants,  or the date on which such  reclassification,  consolidation,  merger,
sale, transfer, liquidation,  dissolution or winding up is to take place and the
date of participation therein by the holders of the Preferred Stock, if any such


                                       35
<PAGE>

date is to be fixed, and such notice shall be so given in the case of any action
covered  by clause  (i) or (ii)  above at least  twenty  (20) days  prior to the
record date for determining  holders of the Preferred Stock for purposes of such
action,  and in the case of any such other  action,  at least  twenty  (20) days
prior  to the  date  of the  taking  of  such  proposed  action  or the  date of
participation therein by the holders of the Preferred Stock,  whichever shall be
the earlier.

         24.2. In case of a Section 11.1.2 Event, then (i) the Corporation shall
as soon as practicable thereafter give to each holder of a Right Certificate, in
accordance with Section 25.1.3 hereof, a notice of the occurrence of such event,
which notice shall  describe  such event and the  consequences  of such event to
holders of Rights under Section  11.1.2  hereof,  and (ii) all references in the
preceding  Section 24.1 to Preferred  Stock shall be deemed  thereafter to refer
also to shares of Common Stock and/or,  if appropriate,  other securities of the
Corporation.

     25. Miscellaneous.

         25.1. Notices.

               25.1.1.  Notices or demands  authorized  by this  Agreement to be
given or made by the Rights Agent or by the holder of any Right  Certificate  to
or on the Corporation shall be sufficiently  given or made if sent by registered
or  certified  mail and shall be deemed  given upon  receipt,  addressed  (until
another address is filed in writing with the Rights Agent) as follows:

                  Seattle FilmWorks, Inc.
                  1260 16th Avenue West
                  Seattle, Washington 98119
                  Attention:  Corporate Secretary

               25.1.2.  Subject to the  provisions  of  Section  21 hereof,  any
notice  or  demand  authorized  by this  Agreement  to be  given  or made by the
Corporation or by the holder of any Right  Certificate to or on the Rights Agent
shall be sufficiently  given or made if sent by registered or certified mail and
shall be deemed given upon receipt,  postage  prepaid,  addressed (until another
address is filed in writing with the Corporation) as follows:


                  ChaseMellon Shareholder Services, L.L.C.
                  520 Pike Street, Suite 1220
                  Seattle, WA  98101
                  Attention:  Joseph Campbell


                                       36
<PAGE>

               25.1.3.  Notices or demands  authorized  by this  Agreement to be
given or made by the  Corporation or the Rights Agent to the holder of any Right
Certificate or, if prior to the Distribution Date, to the holder of certificates
representing  shares of Common Stock shall be sufficiently given or made if sent
by first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Corporation.

         25.2. Supplements and Amendments. The Corporation may from time to time
supplement or amend any provision of this Agreement  without the approval of any
holders of Rights in order to cure any  ambiguity,  to  correct,  supplement  or
amend any provision  herein,  or to make any other provision with respect to the
Rights  which  the  Corporation  may  deem  necessary  or  desirable,  any  such
supplement or amendment to be evidenced by a writing  signed by the  Corporation
and the  Rights  Agent;  provided,  however,  that  from and  after  any  Shares
Acquisition  Date this  Agreement  shall not be amended in any manner which will
adversely affect the interests of the holders of Rights.  Upon the delivery of a
certificate from an appropriate officer of the Corporation which states that the
proposed supplement or amendment is in compliance with the terms of this Section
25.2, and, if requested by the Rights Agent,  an opinion of counsel,  the Rights
Agent shall  execute such  supplement or  amendment.  Prior to the  Distribution
Date, the interests of the holders of Rights shall be deemed coincident with the
interests of the holders of shares of Common Stock.  This Agreement shall not be
amended,  without the prior written  consent of the Rights Agent,  in any manner
that changes or increases the duties,  liabilities  or obligations of the Rights
Agent.

         25.3.  Determination  and Actions by the Board of  Directors,  etc. The
Board of  Directors  of the  Corporation  shall  have the  exclusive  power  and
authority to  administer  this  Agreement  and to exercise all rights and powers
specifically granted to the Board, or the Corporation, or as may be necessary or
advisable in the administration of this Agreement, including without limitation,
the right and power to (i) interpret the provisions of this Agreement,  and (ii)
make all determinations  deemed necessary or advisable for the administration of
this Agreement (including,  without limitation, a determination to redeem or not
redeem the Rights or to amend the Agreement  and whether any proposed  amendment
adversely affects the interests of the holders of Right  Certificates).  For all
purposes of this  Agreement,  any  calculation of the number of shares of Common
Stock or other  securities  outstanding  at any particular  time,  including for
purposes of determining the particular  percentage of such outstanding shares of
Common  Stock or any  other  securities  of which any  Person is the  Beneficial
Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i)
of the General Rules and Regulations  under the Exchange Act as in effect on the
date of this  Agreement.  All such actions,  calculations,  interpretations  and
determinations  (including, for purposes of clause (y) below, all omissions with
respect  to the  foregoing)  which are done or made by the Board in good  faith,
shall (x) be final, conclusive and binding on the Corporation, the Rights Agent,
the holders of the Right Certificates and all other Persons, and (y) not subject
the Board to any liability to the holders of the Right Certificates.  The Rights
Agent shall be fully protected and shall incur no liability for or in respect of
its  reliance on the good faith of the  Corporation's  Board of  Directors  with
respect to actions done or made in connection with such calculation.  Nothing in
Section 15 hereof is intended to modify or limit this Section 25.3.


                                       37
<PAGE>

         25.4. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the  Corporation  or the Rights Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.

         25.5.  Benefits of this  Agreement.  Nothing in this Agreement shall be
construed to give to any Person or corporation  other than the Corporation,  the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the shares of Common Stock) any legal or equitable right,
remedy or claim under this  Agreement.  This Agreement shall be for the sole and
exclusive  benefit  of the  Corporation,  the  Rights  Agent and the  registered
holders of the Right  Certificates  (and,  prior to the  Distribution  Date, the
shares of Common Stock).

         25.6. Severability.  If any term, provision, covenant or restriction of
this Agreement is held by a court of competent  jurisdiction  or other authority
to be invalid,  void or unenforceable,  the remainder of the terms,  provisions,
covenants  and  restrictions  of this  Agreement  shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.

         25.7.  Governing  Law.  This  Agreement,  each  Right  and  each  Right
Certificate  issued  hereunder  shall be deemed to be a contract  made under the
laws of the State of  Washington  and for all purposes  shall be governed by and
construed in accordance  with the laws of such State  applicable to contracts to
be made and performed  entirely  within such State;  except that all  provisions
regarding  the  rights,  duties and  obligations  of the Rights  Agent  shall be
governed  and  construed  in  accordance  with the laws of the State of New York
applicable to contracts made and to be performed entirely within such State.

         25.8.  Counterparts.  This  Agreement  may be executed in any number of
counterparts and each of such  counterparts  shall for all purposes be deemed to
be an original,  and all such counterparts shall together constitute but one and
the same instrument.

         25.9.  Descriptive  Headings.   Descriptive  headings  of  the  several
sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.

     26. Exchange.

         26.1.   Notwithstanding  any  other  provision  hereof,  the  Board  of
Directors of the  Corporation  may, at its option,  at any time after any Person
becomes an Acquiring  Person,  exchange all or part of the then  outstanding and
exercisable  Rights  (which  shall not include  Rights that have become null and
void  pursuant  to the  provisions  of Section  7.6 hereof) for shares of Common


                                       38
<PAGE>

Stock of the  Corporation  at an  exchange  ratio  determined  by  dividing  the
then-applicable exercise price of the Rights determined under Section 7.2 by the
"current per share  market  price" as defined in Section  11.4.1 (such  exchange
ratio being hereinafter  referred to as the "Exchange  Ratio").  Notwithstanding
the foregoing,  the  Corporation's  Board of Directors shall not be empowered to
effect such exchange at any time after any Person  (other than the  Corporation,
any Subsidiary of the Corporation,  any employee benefit plan of the Corporation
or any such Subsidiary, or any Person organized, appointed or established by the
Corporation  for or  pursuant  to the  terms  of any such  plan or any  trustee,
administrator  or fiduciary of such a plan),  together with all  Affiliates  and
Associates of such Person,  becomes the Beneficial Owner of shares  representing
50% or more of the Voting Power.

         26.2.  Immediately  upon the  action of the Board of  Directors  of the
Corporation  ordering  the  exchange of any Rights  pursuant to Section 26.1 and
without any further  action and without any notice,  the right to exercise  such
rights  shall  terminate  and the only  right  thereafter  of the holder of such
Rights (other than a holder of Rights that have become null and void pursuant to
the  provisions of Section 7.6 hereof) shall be to receive that number of shares
of  Common  Stock  equal  to the  number  of such  Rights  held  by such  holder
multiplied by the Exchange  Ratio.  The  Corporation  shall promptly give public
notice,  and  shall  promptly  give  notice  to the  Rights  Agent,  of any such
exchange;  provided,  however,  that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange.  The Corporation promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein  provided shall be deemed given,
whether or not the holder  receives  the  notice.  Each such  notice of exchange
shall state the method by which the exchange of the Common Stock for Rights will
be  effected  and, in the event of any  partial  exchange,  the number of Rights
which will be exchanged.  Any partial  exchange shall be effected pro rata based
on the number of Rights  (other than Rights  which have become void  pursuant to
the provisions of Section 7.6) held by each holder of Rights.

         26.3. In the event that there shall not be sufficient  shares of Common
Stock  issued but not  outstanding  or  authorized  but  unissued  to permit any
exchange  of Rights as  contemplated  in  accordance  with this  Section 26, the
Corporation  shall take all such action as may be necessary to issue  additional
shares of Common Stock, Preferred Stock and/or Capital Stock Equivalents with an
aggregate  current  market value (as determined by the Board of Directors of the
Corporation)  equal to the aggregate  current market value of a number of shares
of Common Stock equal to the Exchange Ratio.


                     [REST OF PAGE INTENTIONALLY LEFT BLANK]



                                       39
<PAGE>




                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Agreement to be duly  executed and  attested,  all as of the date and year first
above written.


                                        SEATTLE FILMWORKS, INC.

Attest:



                                        By:/s/ Gary R. Christophersen
                                           --------------------------
                                           Gary R. Christophersen, President and
                                           Chief Executive Officer


                                        CHASEMELLON SHAREHOLDER SERVICES,
                                           L.L.C., as Rights Agent

                                        By:/s/ Joseph Campbell
                                           -------------------
                                           Joseph Campbell
                                           Assistant Vice President




<PAGE>

                                    Exhibit A

                                     Form of
                   Certificate of Designation, Preferences and
                       Rights of Series RP Preferred Stock

                                       of

                             Seattle FilmWorks, Inc.

      (Pursuant toss.23B.06.020 of the Washington Business Corporation Act)


         I,  Mich  Kele  Earl,   Secretary  of  Seattle  FilmWorks,   Inc.  (the
"Corporation"),  a  corporation  organized  and  existing  under the  Washington
Business   Corporation  Act,  in  accordance  with  the  provisions  of  Section
23B.01.200 thereof, DO HEREBY CERTIFY:


         That pursuant to the authority conferred upon the Board of Directors of
the  Corporation by the Amended and Restated  Articles of  Incorporation  of the
Corporation,  the said Board of Directors has adopted the following  resolutions
creating a series of 105,000 shares of Preferred  Stock  designated as Series RP
Preferred Stock.


         RESOLVED,  that pursuant to the authority  granted to and vested in the
Board of Directors of the  Corporation in accordance  with the provisions of the
Articles of  Incorporation  of the  Corporation,  the Board of Directors  hereby
creates  a series of Series  RP  Preferred  Stock,  with a par value of $.01 per
share,  of the  Corporation  and  hereby  states the  designation  and number of
shares,  and fixes the relative rights,  preferences and limitations  thereof as
follows (the following  provisions  being intended to operate in addition to any
other provisions of said Articles of  Incorporation  applicable to any series of
Preferred Stock):


                            Series RP Preferred Stock


         Section 1. Designation, Par Value and Amount. The shares of such series
shall be designated as "Series RP Preferred Stock"  (hereinafter  referred to as
"Series RP Preferred Stock"),  the shares of such series shall be with par value
of $.01 per share,  and the number of shares  constituting  such series shall be
105,000;  provided,  however,  that,  if more than a total of 105,000  shares of
Series RP  Preferred  Stock shall be issuable  upon the  exercise of Rights (the
"Rights")  issued  pursuant to the Rights  Agreement,  dated as of December  16,
1999,  between the Corporation and ChaseMellon  Shareholder  Services L.L.C., as
Rights Agent (as amended from time to time, the "Rights  Agreement"),  the Board
of Directors of the Corporation shall direct by resolution or resolutions that a
certificate be properly executed, acknowledged and filed providing for the total
number of shares of Series  RP  Preferred  Stock  authorized  to be issued to be
increased (to the extent that the Articles of Incorporation then permits) to the
largest number of whole shares (rounded up to the nearest whole number) issuable
upon exercise of the Rights.

<PAGE>

         Section 2.        Dividends and Distributions.

                  2.1 Subject to the prior and superior rights of the holders of
any shares of any series of Preferred  Stock  ranking  prior and superior to the
shares of Series RP Preferred  Stock with respect to  dividends,  the holders of
shares of Series RP Preferred  Stock shall be entitled to receive,  when, as and
if declared by the Board of Directors  out of assets  legally  available for the
purpose, quarterly dividends payable in cash on the first business day of March,
June,  September  and  December  in each year (each such date being  referred to
herein  as a  "Quarterly  Dividend  Payment  Date"),  commencing  on  the  first
Quarterly  Dividend Payment Date after the first issuance of a share or fraction
of a share of Series RP Preferred  Stock, in an amount per share (rounded to the
nearest  cent) equal to the greater of (a) $1.00 or (b) subject to the provision
for  adjustment  set forth in Section 6.1,  1,000 times the  aggregate per share
amount of all cash  dividends,  and 1,000 times the  aggregate  per share amount
(payable in kind) of all non-cash dividends or other  distributions other than a
dividend  payable in shares of Common  Stock,  par value $.01 per share,  of the
Corporation  (the "Common Stock") or a subdivision of the outstanding  shares of
Common Stock (by  reclassification  or otherwise),  declared on the Common Stock
since the  immediately  preceding  Quarterly  Dividend  Payment  Date,  or, with
respect to the first Quarterly  Dividend  Payment Date, since the first issuance
of any share or fraction of a share of Series RP Preferred Stock.


                  2.2 The  Corporation  shall declare a dividend or distribution
on the Series RP  Preferred  Stock as provided in Section 2.1 above  immediately
after it declares a dividend or  distribution  on the Common Stock (other than a
dividend  payable in shares of Common  Stock);  provided  that,  in the event no
dividend or distribution shall have been declared on the Common Stock during the
period  between any  Quarterly  Dividend  Payment  Date and the next  subsequent
Quarterly  Dividend Payment Date, a dividend of $1.00 per share on the Series RP
Preferred  Stock  shall  nevertheless  be payable on such  subsequent  Quarterly
Dividend Payment Date.


                  2.3  Dividends  shall  begin to accrue  and be  cumulative  on
outstanding  shares of Series RP  Preferred  Stock from the  Quarterly  Dividend
Payment  Date  next  preceding  the date of issue of such  shares  of  Series RP
Preferred Stock,  unless the date of issue of such shares is prior to the record
date for the first Quarterly  Dividend  Payment Date, in which case dividends on
such  shares  shall begin to accrue  from the date of issue of such  shares,  or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the  record  date for the  determination  of  holders  of  shares  of  Series RP
Preferred  Stock  entitled  to receive a  quarterly  dividend  and  before  such
Quarterly  Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative  from such  Quarterly  Dividend  Payment Date.
Accrued but unpaid  dividends  shall not bear  interest.  Dividends  paid on the
shares of Series RP  Preferred  Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be allocated
pro  rata  on  a  share-by-share  basis  among  all  such  shares  at  the  time
outstanding.  The Board of Directors may fix a record date for the determination
of holders of shares of Series RP Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 30 days prior to the date fixed for the payment thereof.

                                       2
<PAGE>

         Section 3. Voting Rights.  The holders of shares of Series RP Preferred
Stock shall have the following voting rights:


                  3.1  Except as  provided  in  Section  3.3 and  subject to the
provision  for  adjustment  hereinafter  set  forth,  each  share of  Series  RP
Preferred  Stock shall entitle the holder  thereof to 1,000 votes on all matters
submitted to a vote of the shareholders of the Corporation.


                  3.2 Except as otherwise provided herein or by law, the holders
of shares of Series RP Preferred Stock and the holders of shares of Common Stock
shall  vote  together  as  one  class  on all  matters  submitted  to a vote  of
shareholders of the Corporation.


                  3.3 The  following  additional  provisions  shall  apply  with
respect to the voting of shares of Series RP Preferred Stock:


                           3.3.1 If, on the date used to determine  shareholders
of record for any  meeting of  shareholders  for the  election of  directors,  a
default in  preference  dividends  (as  defined in Section  3.3.5  below) on the
Series RP Preferred  Stock shall  exist,  the holders of the Series RP Preferred
Stock  shall have the right,  voting as a class as  described  in Section  3.3.2
below,  to elect two directors (in addition to the directors  elected by holders
of Common  Stock of the  Corporation).  Such right may be  exercised  (a) at any
meeting of shareholders for the election of directors or (b) at a meeting of the
holders of shares of Voting Preferred Stock (as hereinafter defined), called for
the purpose in  accordance  with the Bylaws of the  Corporation,  until all such
cumulative  dividends  (referred to above) shall have been paid in full or until
non-cumulative dividends have been paid regularly for at least one year.


                           3.3.2 The right of the holders of Series RP Preferred
Stock to elect two directors,  as described above, shall be exercised as a class
concurrently  with the rights of holders of any other series of Preferred  Stock
upon which voting  rights to elect such  directors  have been  conferred and are
then  exercisable.  The Series RP Preferred  Stock and any additional  series of
Preferred  Stock that the  Corporation  may issue and that may  provide  for the
right to vote with the  foregoing  series of  Preferred  Stock are  collectively
referred to herein as "Voting Preferred Stock."


                           3.3.3 Each director  elected by the holders of shares
of Voting Preferred Stock shall be referred to herein as a "Preferred Director."
A  Preferred  Director  shall  continue to serve as such for a term of one year,
except that upon any termination of the right of all holders of Voting Preferred
Stock  to vote  as a class  for  Preferred  Directors,  the  term of  office  of
Preferred Directors then serving shall terminate.  Any Preferred Director may be
removed  by,  and shall not be removed  except  by,  the vote of the  holders of
record of a majority of the  outstanding  shares of Voting  Preferred Stock then
entitled to vote for the election of directors,  present (in person or by proxy)
and voting together as a single class (a) at a meeting of the  shareholders,  or
(b) at a meeting of the holders of shares of such Voting Preferred Stock, called
for the purpose in accordance with the Bylaws of the Corporation.


                           3.3.4  So  long  as  a  default  in  any   preference
dividends  of the Series RP  Preferred  Stock  shall exist or the holders of any
other  series of Voting  Preferred  Stock shall be  entitled to elect  Preferred


                                       3
<PAGE>

Directors,  (a) any vacancy in the office of a Preferred  Director may be filled
(except as provided in the  following  clause (b)) by an  instrument  in writing
signed by the remaining  Preferred  Director and filed with the  Corporation and
(b) in the case of the  removal of any  Preferred  Director,  the vacancy may be
filled by the vote or  written  consent  of the  holders  of a  majority  of the
outstanding  shares of Voting  Preferred  Stock  then  entitled  to vote for the
election of directors,  present (in person or by proxy) and voting together as a
single  class,  at such time as the removal  shall be  effected.  Each  director
appointed as aforesaid by the remaining  Preferred Director shall be deemed, for
all  purposes  hereof,  to be a Preferred  Director.  Whenever (x) no default in
preference  dividends on the Series RP  Preferred  Stock shall exist and (y) the
holders of other series of Voting Preferred Stock shall no longer be entitled to
elect such Preferred  Directors,  then the number of directors  constituting the
Board of Directors of the Corporation shall be reduced by two.


                           3.3.5 For purposes  hereof,  a "default in preference
dividends"  on the Series RP  Preferred  Stock shall be deemed to have  occurred
whenever  the  amount  of  cumulative  and  unpaid  dividends  on the  Series RP
Preferred  Stock shall be  equivalent  to six full  quarterly  dividends or more
(whether or not  consecutive),  and,  having so occurred,  such default shall be
deemed to exist thereafter  until,  but only until, all cumulative  dividends on
all shares of the Series RP  Preferred  Stock then  outstanding  shall have been
paid through the last Quarterly  Dividend Payment Date or until, but only until,
non-cumulative dividends have been paid regularly for at least one year.


                  3.4 Except as set forth  herein (or as  otherwise  required by
applicable  law),  holders of Series RP Preferred Stock shall have no general or
special  voting  rights and their  consent  shall not be required for taking any
corporate action.


         Section 4.  Certain Restrictions.

                  4.1  Whenever  quarterly   dividends  or  other  dividends  or
distributions  payable on the Series RP Preferred Stock as provided in Section 2
are in  arrears,  thereafter  and until all  accrued  and unpaid  dividends  and
distributions,  whether or not declared,  on shares of Series RP Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:


                           4.1.1  declare  or pay  dividends,  or make any other
distributions,  on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series RP Preferred Stock;


                           4.1.2  declare  or pay  dividends,  or make any other
distributions,  on any  shares  of  stock  ranking  on a  parity  (either  as to
dividends  or upon  liquidation,  dissolution  or winding up) with the Series RP
Preferred Stock,  except dividends paid ratably on the Series RP Preferred Stock
and all such  parity  stock on which  dividends  are  payable  or in  arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;


                           4.1.3  redeem or  purchase or  otherwise  acquire for
consideration  (except as provided in Section  4.1.4 below)  shares of any stock
ranking  junior  (either as to dividends  or upon  liquidation,  dissolution  or
winding up) to the Series RP Preferred Stock,  provided that the Corporation may


                                       4
<PAGE>

at any time  redeem,  purchase or  otherwise  acquire  shares of any such junior
stock in  exchange  for shares of any stock of the  Corporation  ranking  junior
(either as to dividends or upon  dissolution,  liquidation or winding up) to the
Series RP Preferred Stock;

                           4.1.4  redeem or  purchase or  otherwise  acquire for
consideration  any shares of Series RP Preferred  Stock,  or any shares of stock
ranking on a parity (either as to dividends or upon liquidation,  dissolution or
winding up) with the Series RP  Preferred  Stock,  except in  accordance  with a
purchase offer made in writing or by publication  (as determined by the Board of
Directors)  to all  holders  of such  shares  upon  such  terms as the  Board of
Directors, after consideration of the respective annual dividend rates and other
relative  rights and  preferences  of the respective  series and classes,  shall
determine in good faith will result in fair and  equitable  treatment  among the
respective series or classes.


                  4.2 The  Corporation  shall not permit any  subsidiary  of the
Corporation  to purchase or otherwise  acquire for  consideration  any shares of
stock of the  Corporation  unless the  Corporation  could,  under  Section  4.1,
purchase or otherwise acquire such shares at such time and in such manner.


         Section 5. Reacquired  Shares.  Any shares of Series RP Preferred Stock
purchased  or otherwise  acquired by the  Corporation  in any manner  whatsoever
shall be retired and canceled promptly after the acquisition  thereof.  All such
shares shall upon their  cancellation  become  authorized but unissued shares of
Preferred  Stock and may be reissued as part of a new series of Preferred  Stock
subject to the conditions and restrictions on issuance set forth herein,  in the
Certificate of Incorporation,  in any other Certificate of Amendment  creating a
series of Preferred Stock or as otherwise required by law.


         Section 6.  Liquidation, Dissolution or Winding Up.

                  6.1 Subject to the prior and superior rights of holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of  Series  RP  Preferred  Stock  with  respect  to  rights  upon   liquidation,
dissolution or winding up (voluntary or  otherwise),  no  distribution  shall be
made to the holders of shares of stock ranking junior (either as to dividends or
upon  liquidation,  dissolution or winding up) to the Series RP Preferred  Stock
unless,  prior thereto, the holders of shares of Series RP Preferred Stock shall
have  received per share an amount equal to the greater of 1,000 times $22.00 or
1,000 times the payment made per share of Common Stock,  plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment (the "Series RP Liquidation Preference").  Following
the  payment of the full  amount of the  Series RP  Liquidation  Preference,  no
additional  distributions  shall be made to the  holders  of shares of Series RP
Preferred  Stock unless,  prior  thereto,  the holders of shares of Common Stock
shall have received an amount per share (the "Capital  Adjustment") equal to the
quotient  obtained by dividing (i) the Series RP Liquidation  Preference by (ii)
1,000 (as  appropriately  adjusted as set forth in Section  6.3 to reflect  such
events as stock splits,  stock dividends and  recapitalizations  with respect to
the Common Stock) (such number in clause (ii) being hereafter referred to as the
"Adjustment Number").  Following the payment of the full amount of the Series RP
Liquidation  Preference and the Capital Adjustment in respect of all outstanding
shares of Series RP Preferred Stock and Common Stock,  respectively,  holders of


                                       5
<PAGE>

Series RP  Preferred  Stock and  holders of Common  Stock  shall  receive  their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the  Adjustment  Number to 1 with respect to such  Preferred  Stock and
Common Stock, on a per share basis, respectively.


                  6.2 In the  event,  however,  that  there  are not  sufficient
assets  available  to  permit  payment  in full  of the  Series  RP  Liquidation
Preference  and the  liquidation  preferences  of all other  series of preferred
stock, if any, which rank on a parity with the Series RP Preferred  Stock,  then
such remaining  assets shall be distributed  ratably to the holders of Series RP
Preferred  Stock and the holders of such parity  shares in  proportion  to their
respective  liquidation  preferences.  In the event, however, that there are not
sufficient assets available to permit payment in full of the Capital Adjustment,
then such remaining assets shall be distributed ratably to the holders of Common
Stock.


                  6.3 In  the  event  the  Corporation  shall  (i)  declare  any
dividend on Common Stock payable in shares of Common Stock,  (ii)  subdivide the
outstanding  Common Stock, or (iii) combine the outstanding  Common Stock into a
smaller number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction  the  numerator  of which is the number of shares of Common
Stock  outstanding  immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding  immediately prior to
such event.


         Section 7.  Consolidation,  Merger,  etc. In case the Corporation shall
enter into any consolidation,  merger, combination or other transaction in which
the shares of Common  Stock are  exchanged  for or changed  into other  stock or
securities,  cash and/or any other property, then in any such case the shares of
Series RP  Preferred  Stock  shall at the same time be  similarly  exchanged  or
changed in an amount per share equal to the Adjustment  Number (as appropriately
adjusted  as set forth in Section 6.3 to reflect  such  events as stock  splits,
stock  dividends and  recapitalizations  with respect to the Common Stock) times
the  aggregate  amount of stock,  securities,  cash  and/or  any other  property
(payable  in kind),  as the case may be,  into  which or for which each share of
Common Stock is changed or exchanged.

         Section 8. No Redemption. The shares of Series RP Preferred Stock shall
not be redeemable.

         Section 9. Ranking.  The Series RP Preferred Stock shall rank junior to
all other  series of the  Corporation's  Preferred  Stock as to the  payment  of
dividends  and the  distribution  of assets,  unless the terms of any such other
series shall provide otherwise.


         Section  10.   Amendment.   The  Amended  and   Restated   Articles  of
Incorporation of the Corporation shall not be further amended in any manner that
would  materially  alter or change the powers,  preferences or special rights of
the  Series  RP  Preferred  Stock so as to affect  them  adversely  without  the
affirmative vote of the holders of a majority or more of the outstanding  shares
of Series RP Preferred Stock, voting separately as a class.



                                       6
<PAGE>

         Section 11. Fractional Shares.  Series RP Preferred Stock may be issued
in fractions of a share which shall  entitle the holder,  in  proportion to such
holder's  fractional  shares,  to exercise  voting  rights,  receive  dividends,
participate in distributions and have the benefit of all other rights of holders
of Series RP Preferred Stock.


         RESOLVED,  that the proper  officers of the Corporation be, and each of
them hereby is,  authorized to execute a Certificate of Designation with respect
to  the  Series  RP  Preferred  Stock  pursuant  to  Section  23B.06.020  of the
Washington Business  Corporation Act and to take all appropriate action to cause
such Certificate to become effective,  including, but not limited to, the filing
and recording of such  Certificate  with and/or by the Secretary of State of the
State of Washington.

                  [REST OF PAGE INTENTIONALLY LEFT BLANK]


                                       7
<PAGE>



         IN WITNESS WHEREOF,  I have executed and subscribed to this Certificate
and do affirm the  foregoing  as true under  penalty of perjury this 16th day of
December, 1999.





                                               ---------------------------------
                                               Secretary





                                       8
<PAGE>

                                    Exhibit B

                            Form of Right Certificate

Certificate No. RP-                                                 _____ Rights

                  NOT EXERCISABLE AFTER DECEMBER 27, 2009 OR EARLIER IF REDEEMED
                  BY THE  CORPORATION.  THE RIGHTS ARE SUBJECT TO  REDEMPTION AT
                  $.001  PER  RIGHT  ON  THE  TERMS  SET  FORTH  IN  THE  RIGHTS
                  AGREEMENT.

                                Right Certificate

                             SEATTLE FILMWORKS, INC.

         This  certifies  that  __________,   or  registered   assigns,  is  the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement,  dated as of December  16,  1999 (the  "Rights  Agreement"),  between
Seattle  FilmWorks,  Inc., a Washington  corporation  (the  "Corporation"),  and
ChaseMellon  Shareholder  Services L.L.C.  (the "Rights Agent") to purchase from
the Corporation at any time after the Distribution Date (as such term is defined
in the Rights  Agreement) and prior to 5:00 P.M.,  Washington  time, on December
27, 2009, unless the Rights evidenced hereby shall have been previously redeemed
by the  Corporation,  at the  office of the  Rights  Agent  designated  for such
purpose,  or at the office of its successor as Rights Agent, one  one-thousandth
(1/1000th)  of a fully paid  non-assessable  share of Series RP Preferred  Stock
(the "Preferred  Stock") of the  Corporation,  at a purchase price of $22.00 per
one  one-thousandth  (1/1000th)  of a share of  Preferred  Stock (the  "Purchase
Price"), upon presentation and surrender of this Right Certificate with the Form
of Election to Purchase duly  executed.  The number of Rights  evidenced by this
Right Certificate (and the number of one one-thousandths  (1/1000ths) of a share
of Preferred Stock that may be purchased upon exercise  hereof) set forth above,
and the Purchase Price set forth above,  are the number and Purchase Price as of
December 27, 1999, based on the Preferred Stock as constituted at such date.

         Upon the  occurrence of a Section 11.1.2 Event (as such term is defined
in the Rights Agreement),  if the Rights evidenced by this Right Certificate are
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of an
Acquiring Person,  (ii) a transferee of an Acquiring Person (or of any Affiliate
or  Associate  thereof)  who becomes a  transferee  after the  Acquiring  Person
becomes such,  or (iii) a transferee of an Acquiring  Person (or of an Affiliate
or Associate thereof) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for  consideration)  from the Acquiring Person (or from
any  Affiliate  or  Associate  thereof) to holders of equity  interests  in such
Acquiring  Person  or to  any  Person  with  whom  the  Acquiring  Person  has a
continuing  agreement,  arrangement or  understanding  regarding the transferred
Rights or (B) a transfer  that the Board of  Directors  of the  Corporation  has
determined is part of a plan, arrangement or understanding that has as a primary


<PAGE>

purpose or effect the  avoidance of Section 7.6 of the Rights  Agreement,  shall
become null and void without any further  action and no holder hereof shall have
any rights  whatsoever with respect to such Rights,  whether under any provision
of the Rights Agreement or otherwise.

         As provided in the Rights Agreement,  the Purchase Price and the number
of one  one-thousandths  (1/1000ths)  of a share  of  Preferred  Stock  or other
securities  that may be purchased  upon the exercise of the Rights  evidenced by
this Right  Certificate  are subject to  modification  and  adjustment  upon the
happening  of  certain  events,  including  Triggering  Events  (as such term is
defined in the Rights Agreement).

         This Right  Certificate  is subject to all of the terms,  covenants and
restrictions of the Rights  Agreement,  which terms,  covenants and restrictions
are hereby  incorporated herein by reference and made a part hereof and to which
Rights Agreement  reference is hereby made for a full description of the rights,
limitations  of rights,  obligations,  duties and  immunities  hereunder  of the
Rights Agent, the Corporation and the holders of the Right  Certificates,  which
limitations of rights include the temporary  suspension of the exercisability of
such Rights under the specific  circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Corporation and the office of the Rights Agent.

         This Right Certificate, with or without other Right Certificates,  upon
surrender at the  designated  office of the Rights  Agent,  may be exchanged for
another  Right  Certificate  or  Right  Certificates  of  like  tenor  and  date
evidencing  Rights  entitling the holder to purchase a like aggregate  number of
shares of Preferred  Stock or other  securities  as the Rights  evidenced by the
Right  Certificate or Right  Certificates  surrendered  shall have entitled such
holder to purchase.  If this Right  Certificate  shall be exercised in part, the
holder  shall be  entitled  to  receive  upon  surrender  hereof  another  Right
Certificate or Right Certificates for the number of whole Rights not exercised.

         Subject to the provisions of the Rights Agreement, the Rights evidenced
by this  Certificate may be redeemed by the Corporation at a redemption price of
$.001 per Right  (subject to  adjustment  as  provided in the Rights  Agreement)
payable in cash.

         No  fractional  shares  of  Preferred  Stock  will be  issued  upon the
exercise of any Right or Rights  evidenced hereby (other than fractions that are
one  one-thousandth  (1/1000th)  or  integral  multiples  of one  one-thousandth
(1/1000th) of a share of Preferred Stock, or such other fraction as provided for
by adjustment provisions in the Rights Agreement,  which may, at the election of
the  Corporation,  be evidenced by depository  receipts),  but in lieu thereof a
cash payment will be made, as provided in the Rights Agreement.

         No  holder  of this  Right  Certificate  shall be  entitled  to vote or
receive  dividends  or be deemed  for any  purpose  the  holder of shares of the
Preferred Stock or of any other  securities of the  Corporation  that may at any
time be issuable on the exercise  hereof,  nor shall  anything  contained in the
Rights  Agreement or herein be construed  to confer upon the holder  hereof,  as
such, any of the rights of a shareholder of the Corporation or any right to vote


                                       2
<PAGE>

for the election of directors or upon any matter  submitted to  shareholders  at
any meeting thereof,  or to give or withhold consent to any corporate action, or
to receive notice of meetings or other actions affecting shareholders (except as
provided  in  the  Rights   Agreement),   or  to  receive   dividends  or  other
distributions  or  to  exercise  any  preemptive  or  subscription   rights,  or
otherwise,  until the Right or Rights evidenced by this Right  Certificate shall
have been exercised as provided in the Rights Agreement.

         This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.

         WITNESS  the  facsimile   signature  of  the  proper  officers  of  the
Corporation and its corporate seal. Dated as of __________, _____.


[SEAL]
ATTEST:
                                  SEATTLE FILMWORKS, INC.

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

Name                               Name
    -----------------------             -----------------------

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

Countersigned:

CHASEMELLON SHAREHOLDER SERVICES L.L.C.

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

Name
    -----------------------

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



                                       3
<PAGE>



                    Form of Reverse Side of Right Certificate

                               FORM OF ASSIGNMENT
                  (To be  executed  by the  registered  holder  if  such  holder
                  desires to transfer the Right Certificate.)

         FOR VALUE RECEIVED
                            ----------------------------------------------------
hereby sells, assigns and transfers unto
                                         ---------------------------------------

--------------------------------------------------------------------------------
                  (Please print name and address of transferee)

this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _______________ Attorney-in-Fact,
to  transfer  the  within  Right  Certificate  on the books of the  within-named
Corporation, with full power of substitution.

Dated:__________, _____
                                    --------------------------------------------
                                    Signature

Signature Guaranteed:

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

         Signatures must be guaranteed by an "Eligible Guarantor Institution" as
defined  in Rule  17Ad-15  (or any  successor  rule or  regulation)  promulgated
pursuant to the Securities Exchange Act of 1934, as amended (this term means, in
general, banks, stock brokers, savings and loan associations, and credit unions,
in each  case with  membership  in an  approved  signature  guarantee  medallion
program).

         The undersigned  hereby certifies that (1) the Rights evidenced by this
Right Certificate are not being sold, assigned or transferred by or on behalf of
a Person who is or was an Acquiring Person or an Affiliate or Associate  thereof
(as such terms are defined in the Rights Agreement),  (2) this Right Certificate
is not being sold, assigned or transferred to or on behalf of any such Acquiring
Person,  Affiliate  or  Associate,  and (3)  after due  inquiry  and to the best
knowledge  of the  undersigned,  the  undersigned  did not  acquire  the  Rights
evidenced by this Right  Certificate  from any Person who is or was an Acquiring
Person or an Affiliate  or  Associate  thereof (as such terms are defined in the
Rights Agreement).



                                    -----------------------------------------
                                    Signature

<PAGE>



             Form of Reverse Side of Right Certificate -- continued

                          FORM OF ELECTION TO PURCHASE

            (To be executed by the  registered  holder if such holder desires to
            exercise Rights represented by the Right Certificate)

To the Rights Agent:

         The undersigned hereby  irrevocably  elects to exercise  ______________
Rights represented by this Right Certificate to purchase the shares of Preferred
Stock,  shares of Common Stock or other securities issuable upon the exercise of
such Rights and requests that  certificates  for such shares of Preferred Stock,
shares of Common Stock or other securities be issued in the name of:

Please insert social security number
or other identifying number
                           -----------------------------------------------------
--------------------------------------------------------------------------------
                         (Please print name and address)
         If such number of Rights shall not be all the Rights  evidenced by this
Right  Certificate,  a new Right  Certificate for the balance  remaining of such
Rights shall be registered in the name of and delivered to:

Please insert social security number
or other identifying number
                           -----------------------------------------------------
--------------------------------------------------------------------------------
                         (Please print name and address)
Dated:   __________, _____


                                    Signature
Signature Guaranteed:

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

         Signatures must be guaranteed by an "Eligible Guarantor Institution" as
defined  in Rule  17Ad-15  (or any  successor  rule or  regulation)  promulgated
pursuant to the Securities Exchange Act of 1934, as amended (this term means, in
general, banks, stock brokers, savings and loan associations, and credit unions,
in each  case with  membership  in an  approved  signature  guarantee  medallion
program).



<PAGE>



             Form of Reverse Side of Right Certificate -- continued

         The undersigned  hereby certifies that (1) the Rights evidenced by this
Right  Certificate are not being exercised by or on behalf of a Person who is or
was an Acquiring Person or an Affiliate or Associate  thereof (as such terms are
defined in the Rights Agreement),  (2) this Right Certificate is not being sold,
assigned or transferred by or on behalf of any such Acquiring Person,  Affiliate
or  Associate,  and (3)  after  due  inquiry  and to the best  knowledge  of the
undersigned,  the undersigned did not acquire the Rights evidenced by this Right
Certificate from any Person who is or was an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement).


                                    -----------------------------------
                                    Signature


                                     Notice

         The  signature on the foregoing  Forms of  Assignment  and Election and
certificates  must  conform to the name as  written  upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.

         In  the  event  the  certification  set  forth  above  in the  Form  of
Assignment  or the Form of  Election  to  Purchase,  as the case may be,  is not
completed,  the Corporation and the Rights Agent will deem the Beneficial  Owner
of the Rights  evidenced by this Right  Certificate to be an Acquiring Person or
an  Affiliate  or  Associate  thereof  (as such  terms are  defined in the Right
Agreement) and such Assignment or Election to Purchase will not be honored.


<PAGE>



                                    Exhibit C

                             SEATTLE FILMWORKS, INC.
                              1260 16th Avenue West
                                Seattle, WA 98134

                                     FORM OF
                          SUMMARY OF RIGHTS TO PURCHASE
                           SERIES RP PREFERRED SHARES

         The Board of Directors  (the "Board") of Seattle  FilmWorks,  Inc. (the
"Corporation")  has  declared a dividend  distribution  of one  preferred  share
purchase  right (a  "Right")  for each  outstanding  share of Common  Stock (the
"Common Stock") of the Corporation.  The dividend is payable to the shareholders
of record on December 27, 1999 (the "Record  Date"),  and with respect to shares
of Common Stock issued thereafter until the Distribution Date (as defined below)
and, in certain  circumstances,  with  respect to shares of Common  Stock issued
after the  Distribution  Date.  Except as set forth below,  each Right,  when it
becomes  exercisable,  entitles  the  registered  holder  to  purchase  from the
Corporation  one  one-thousandth  (1/1000th)  of a share of Series RP  Preferred
Stock, $.01 par value per share (the "Preferred Stock"), of the Corporation at a
price of $22.00 per one one-thousandth  (1/1000th) of a share of Preferred Stock
(the "Purchase Price"), subject to adjustment.  The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights  Agreement") between the
Corporation and ChaseMellon  Shareholder  Services L.L.C.,  as Rights Agent (the
"Rights Agent"), dated as of December 16, 1999.

         Initially, the Rights will be attached to all certificates representing
shares  of  Common  Stock  then  outstanding,   and  no  separate   certificates
representing the Rights ("Right  Certificates") will be distributed.  The Rights
will  separate  from the Common Stock upon the earliest to occur of (i) a person
or group of affiliated or associated persons having acquired,  without the prior
approval  of the  Corporation's  Board of  Directors,  beneficial  ownership  of
securities  which represent 15% or more of the voting power (the "Voting Power")
of the then outstanding voting securities of the Corporation (except pursuant to
a Permitted  Offer, as hereinafter  defined) or (ii) 10 days (or such later date
as the Board may determine) following the commencement of, or announcement of an
intention to make, a tender offer or exchange  offer the  consummation  of which
would result in a person or group of affiliated or associated  persons  becoming
an Acquiring Person (as hereinafter defined) (the "Distribution Date"). A person
or group whose  acquisitions of shares of Common Stock cause a Distribution Date
pursuant to clause (i) above is an "Acquiring  Person," with certain  exceptions
as set forth in the Rights  Agreement.  The date that a person or group is first
publicly  announced  to have become such by the  Corporation  or such  Acquiring
Person  is the  "Shares  Acquisition  Date."  If any  security  holder  provides
evidence  satisfactory to the Board of beneficial  ownership of shares of Common
Stock  representing  15% or more of the Voting Power as of immediately  prior to
the first public  announcement  of the execution of the Rights  Agreement,  then
such security holder will not be deemed an Acquiring Person with respect to such
securities.


<PAGE>

         The Rights Agreement  provides that,  until the Distribution  Date, the
Rights will be transferred  with and only with the  associated  shares of Common
Stock.  Until the Distribution Date (or earlier  redemption or expiration of the
Rights),  new  Common  Stock  certificates  issued  after the  Record  Date upon
transfer  or new  issuance  of shares of Common  Stock  will  contain a notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier  redemption or expiration of the Rights),  the surrender for transfer of
any certificates  for shares of Common Stock  outstanding as of the Record Date,
even  without such  notation or a copy of this Summary of Rights being  attached
thereto,  will also  constitute the transfer of the Rights  associated  with the
shares of Common Stock represented by such  certificate.  As soon as practicable
following  the  Distribution  Date,  Right  Certificates  will be  mailed to the
holders of record of the shares of Common  Stock as of the Close of Business (as
defined in the Rights  Agreement) on the Distribution  Date (and to each initial
record  holder of certain  shares of Common Stock issued after the  Distribution
Date), and such separate Right Certificates alone will evidence the Rights.

         The Rights are not  exercisable  until the  Distribution  Date and will
expire at the close of business on December 27, 2009, unless earlier redeemed by
the Corporation as described below.

         In the event  that any  person  becomes  an  Acquiring  Person  (except
pursuant to a tender or exchange  offer which is for all  outstanding  shares of
Common Stock at a price and on terms which a majority of certain  members of the
Board  determines to be adequate and in the best  interests of the  Corporation,
its  shareholders and other relevant  constituencies,  other than such Acquiring
Person, its affiliates and associates (a "Permitted  Offer")),  each holder of a
Right will  thereafter  have the right (the  "Flip-In  Right") to receive,  upon
exercise, the number of shares of Common Stock (or, in certain circumstances, of
one  one-thousandths  (1/1000ths)  of  a  share  of  Preferred  Stock  or  other
securities  of the  Corporation)  having  a  value  (immediately  prior  to such
triggering  event)  equal  to  two  times  the  exercise  price  of  the  Right.
Notwithstanding  the foregoing,  following the occurrence of the event described
above,  all Rights that are, or (under  certain  circumstances  specified in the
Rights  Agreement)  were,  beneficially  owned by any  Acquiring  Person  or any
affiliate or associate  thereof will be null and void. The Board has the option,
at any time after any person  becomes an  Acquiring  Person,  to exchange all or
part of the  then-exercisable  Rights (excluding those that have become void, as
described in the immediately  preceding sentence) for shares of Common Stock, at
an exchange ratio determined by dividing the  then-applicable  Purchase Price by
the  then-current  market  price  per  share of Common  Stock as  determined  in
accordance with the Rights Agreement.  However, this option generally terminates
if any person becomes the beneficial owner of shares representing 50% or more of
the Voting Power.

         In the event that, at any time following the Shares  Acquisition  Date,
(i) the  Corporation  is  acquired  in a merger  or other  business  combination
transaction  in which the  holders  of all of the  outstanding  shares of Common
Stock  immediately  prior to the  consummation  of the  transaction  are not the
holders of all of the surviving  corporation's  voting power,  or (ii) more than
50% of the  Corporation's  assets or earning  power is sold or  transferred,  in
either case with or to (x) an  Acquiring  Person or any  affiliate  or associate
thereof or (y) any other  person in which such  Acquiring  Person,  affiliate or
associate  has an interest or any person  acting on behalf of or in concert with


                                       2
<PAGE>

such Acquiring Person,  affiliate or associate,  or (z) if, in such transaction,
all holders of shares of Common Stock are not treated  alike,  any other person,
then each holder of a Right (except Rights which  previously have been voided as
set forth  above) shall  thereafter  have the right (the  "Flip-Over  Right") to
receive,  upon exercise,  common shares of the acquiring company (or, in certain
circumstances, its parent), having a value equal to two times the exercise price
of the Right.  The holder of a Right will continue to have the  Flip-Over  Right
whether or not such holder exercises or surrenders the Flip-In Right.

         The  Purchase  Price  payable,  and the  number of shares of  Preferred
Stock, shares of Common Stock or other securities issuable, upon exercise of the
Rights are subject to  adjustment  from time to time to prevent  dilution (i) in
the  event  of  a  stock   dividend  on,  or  a   subdivision,   combination  or
reclassification  of,  the  Preferred  Stock,  (ii) upon the grant to holders of
shares of the Preferred  Stock of certain rights or warrants to subscribe for or
purchase  Preferred Stock at a price, or securities  convertible  into Preferred
Stock with a conversion  price,  less than the then current  market price of the
Preferred  Stock or (iii)  upon the  distribution  to  holders  of shares of the
Preferred  Stock of  evidences  of  indebtedness  or assets  (excluding  regular
quarterly  cash  dividends) or of  subscription  rights or warrants  (other than
those referred to above).

         The number of outstanding Rights and the number of one  one-thousandths
(1/1000ths)  of a share of Preferred  Stock issuable upon exercise of each Right
are also subject to adjustment in the event of a stock split of the Common Stock
or a stock dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring,  in any such case,
prior to the Distribution Date.

         Preferred  Stock  purchasable  upon  exercise of the Rights will not be
redeemable.  Each  share  of  Preferred  Stock  will be  entitled  to a  minimum
preferential quarterly dividend payment of $1.00 per share but, if greater, will
be  entitled to an  aggregate  dividend  per share of 1,000  times the  dividend
declared per share of Common Stock. In the event of liquidation,  the holders of
shares  of the  Preferred  Stock  will be  entitled  to a  minimum  preferential
liquidation  payment  per share in an amount  equal to the  greater of $22.00 or
1,000 times the payment  made per share of Common  Stock plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to  the  date  of  such  payment  (the  "Series  RP  Liquidation   Preference");
thereafter,  and after the  holders  of shares  of the  Common  Stock  receive a
liquidation  payment of an amount equal to the quotient obtained by dividing the
Series RP Liquidation  Preference by 1,000 (subject to certain  adjustments  for
stock splits, stock dividends and  recapitalizations  with respect to the Common
Stock),  the  holders of shares of the  Preferred  Stock and the  holders of the
Common  Stock  will  share the  remaining  assets in the ratio of 1,000 to 1 (as
adjusted)  for  each  share  of  Preferred  Stock  and  Common  Stock  so  held,
respectively.  Finally,  in the  event  of any  merger,  consolidation  or other
transaction  in which  shares  of  Common  Stock are  exchanged,  each  share of
Preferred  Stock will be entitled to receive 1,000 times the amount received per
share of Common  Stock.  These rights are  protected  by customary  antidilution
provisions.  In the event that the amount of accrued and unpaid dividends on the
Preferred  Stock is  equivalent  to six full  quarterly  dividends or more,  the
holders of shares of the  Preferred  Stock  shall  have the  right,  voting as a
class,  to elect two  directors  in  addition  to the  directors  elected by the
holders of shares of the Common  Stock  until all  cumulative  dividends  on the
Preferred  Stock  have  been  paid or set apart  for  payment  through  the last


                                       3
<PAGE>

quarterly dividend payment date. No fractional shares of Preferred Stock will be
issued  (other  than  fractions  which  are one  one-thousandth  (1/1000th),  or
integral  multiples  of one  one-thousandth  (1/1000th)  of a share of Preferred
Stock, which may, at the election of the Corporation, be evidenced by depositary
receipts) and in lieu  thereof,  an adjustment in cash will be made based on the
market price of the Preferred Stock on the last trading day prior to the date of
exercise.

         With certain  exceptions,  no adjustment in the Purchase  Price will be
required until  cumulative  adjustments  require an adjustment of at least 1% in
such Purchase Price.

         At any time prior to the  earlier to occur of (i) a person  becoming an
Acquiring  Person or (ii) the expiration of the Rights,  and under certain other
circumstances,  the Corporation may redeem the Rights in whole, but not in part,
at a price (payable in cash or, at the Corporation's  election, in Common Stock)
of $.001 per Right (the "Redemption Price"), which redemption shall be effective
upon the action of the Board.  Additionally,  following  the Shares  Acquisition
Date, the Corporation may redeem the then  outstanding  Rights in whole, but not
in part, at the Redemption Price, provided that such redemption is in connection
with  a  merger  or  other  business   combination   transaction  or  series  of
transactions  involving the Corporation in which all holders of shares of Common
Stock are treated alike but not involving an Acquiring  Person or its affiliates
or associates.

         Other  than  those  provisions  relating  to  the  rights,  duties  and
obligations of the Rights Agent,  all of the provisions of the Rights  Agreement
may be  amended  by the  Board  of  Directors  of the  Corporation  prior to the
Distribution Date, except that the affirmative vote of the holders of a majority
of the then  outstanding  Rights  (excluding  Rights  which have  become void in
accordance  with the Rights  Agreement)  will be required  (i) to  increase  the
Purchase  Price,  to reduce the price at which the Rights may be redeemed and/or
to amend,  in a manner  adverse to the  interests of the holders of Rights,  the
exchange  ratio of  rights  for  shares of Common  Stock  and (ii)  following  a
Distribution  Date, to supplement or amend any provision of the Rights Agreement
or the Rights in any other respect.

         Until a Right is exercised,  the holder thereof,  as such, will have no
rights as a shareholder of the Corporation,  including,  without limitation, the
right to vote or to receive dividends. While the distribution of the Rights will
not be taxable to shareholders of the Corporation,  shareholders may,  depending
upon the  circumstances,  recognize  taxable  income  should the  Rights  become
exercisable or upon the occurrence of certain events thereafter.

         A copy of the Rights  Agreement has been filed with the  Securities and
Exchange  Commission  as an Exhibit to a  Registration  Statement on Form 8-A. A
copy of the Rights  Agreement is available free of charge from the  Corporation.
This  summary  description  of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement,  which is hereby
incorporated herein by reference.




                                       4
<PAGE>




                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                              <C>
                                                                                                               PAGE


1.  Certain Definitions...........................................................................................1

2.  Appointment Of Rights Agent...................................................................................6

3.  Issuance Of Right Certificates................................................................................7

4.  Form Of Right Certificate.....................................................................................8

5.  Countersignature And Registration.............................................................................9

6.  Transfer, Split-Up, Combination And Exchange Of Right Certificates; Mutilated, Destroyed, Lost Or Stolen Right
     Certificates................................................................................................10

7.  Exercise Of Rights; Purchase Price; Expiration Date Of Rights................................................11

8.  Cancellation And Destruction Of Right Certificates...........................................................13

9.  Reservation And Availability Of Preferred Stock..............................................................13

10.  Preferred Stock Record Date.................................................................................15

11.  Adjustment Of Purchase Price, Number And Kind Of Shares Or Number Of Rights.................................15

12.  Certificate Of Adjusted Purchase Price Or Number Of Shares..................................................22

13.  Consolidation, Merger Or Sale Or Transfer Of Assets Or Earning Power........................................23

14.  Fractional Rights And Fractional Shares.....................................................................25

15.  Rights Of Action............................................................................................27

16.  Agreement Of Right Holders..................................................................................27

17.  Right Certificate Holder Not Deemed A Shareholder...........................................................28

18.  Concerning The Rights Agent.................................................................................28

19.  Merger Or Consolidation Or Change Of Name Of Rights Agent...................................................29

20.  Duties Of Rights Agent......................................................................................30

21.  Change Of Rights Agent......................................................................................32

22.  Issuance Of New Right Certificates..........................................................................33

23.  Redemption And Termination..................................................................................34

24.  Notice Of Certain Events....................................................................................35

25.  Miscellaneous...............................................................................................36

26.  Exchange....................................................................................................38


Exhibit A - Form of Certificate of Designation, Preferences and Rights..........................................A-1
Exhibit B - Form of Right Certificate...........................................................................B-1
Exhibit C - Form of Summary of Rights...........................................................................C-1


</TABLE>

<PAGE>
                                  Exhibit 5.10

   Form of Employee Confidentiality, Inventions, and Noncompetition Agreement


                      EMPLOYEE CONFIDENTIALITY, INVENTIONS,
                          AND NONCOMPETITION AGREEMENT

         Agreement made between PhotoWorks,  Inc., a corporation in the State of
Washington and its  wholly-owned  subsidiaries,  including  without  limitation,
OptiColor,  Inc. and Seattle FilmWorks Manufacturing Company (collectively,  the
"Company"), and ________________________________________ Employee.

         Whereas,  the Company,  is engaged in the  development and marketing of
online digital imaging services,  including but not limited to sharing, viewing,
printing,  storing  and  preserving  digital  images  and sale of  photo/imaging
related  products or software and scanning or digital  image  related  services,
spooling and processing of both  specialty  (motion  picture films  converted to
still camera use) and  standard  films,  design,  development  and  marketing of
preloaded  reusable cameras,  and further that the Company has developed special
ways of designing, making, selling and shipping these products, and because such
special  techniques make the Company's  products more attractive and valuable to
customers,  they help to maintain and protect existing jobs and create new jobs.
Therefore  the  business  requires  that its  methods,  data and systems be kept
secret; and

         Whereas,  for the proper protection of the business of the Company,  it
is essential that all matters connected with and arising out of or pertaining to
the Company business,  methods,  data,  processes and the names of the Company's
customers and suppliers be kept secret; and

         Whereas,  the  Company  has and will  continue  to  acquire a list of a
substantial number of customers,  partners,  suppliers and vendors who have been
and will be solicited by the Company through the Internet and other  advertising
media and a large,  valuable and nationwide  trade has been and will continue to
be established and maintained at great expense to the Company; and

         Whereas,  the  Company  will  suffer  loss and  damage if the  employee
violates any term of this agreement;

         Now, therefore, the parties agree as follows:

         1. The Company agrees to offer  Employee  company stock options per the
attached Stock Option Agreement.

         2. Employee  acknowledges that during the term of his/her employment or
engagement  with the Company,  Employee will have access to and become  familiar
with various trade secrets,  consisting of formulas,  patterns,  devices, secret
inventions,   processes   and   compilations   of   information,   records   and
specifications  which are owned by the Company and which are  regularly  used in
the  operation  of the  business of the Company.  Employee  agrees that,  either
during his/her employment or engagement with the Company,  or at any time within
a period of five (5) years from the date Employee  voluntarily or  involuntarily
terminates  employment  or  engagement  by the  Company,  except as  required by
Employee's duties as an employee of the Company,  Employee shall not directly or
indirectly  disclose to any person or entity any "trade secrets" of the Company,


                                       1
<PAGE>

nor use  such  "trade  secrets"  in any way.  As used  herein,  the term  "trade
secrets" shall include, but not be limited to tangible or intangible information
or knowledge relating to the Company's  business,  business partners,  products,
services or sales including  without  limitation,  the Company's:  client lists;
supplier lists; vendor lists;  marketing programs,  techniques used for products
and  services;   research  and   development   relating  to  digital  media  and
photofinishing  services and products and other online digital imaging  services
and products; Web site statistics and processes,  management information systems
and technology  systems;  customer order processing;  software  developed by the
Company; products and services relating to archiving, sharing, viewing, printing
and managing  personal  digital  images;  processing  of  film-based  images and
slides; all PhotoWorks(R)  software; and processes for production of Pictures On
Disk(TM) or preloaded cameras.

         3. Employee agrees to safeguard and keep  confidential  the proprietary
information of customers, partners, vendors, consultants, and other parties with
which the Company does  business to the same extent as if it were the  Company's
"trade secrets".  Employee will not, during his/her  employment with the Company
or otherwise, use or disclose to the Company any confidential,  trade secret, or
other  proprietary  information  or material of any  previous  employer or other
person,  and Employee will not bring onto the Company's premises any unpublished
document or any other  property  belonging  to any former  employer  without the
written consent of that former employer.

         4. Employee agrees that, either during his/her employment or engagement
with the  Company or at any time  within a period of two (2) years from the date
Employee voluntarily or involuntarily terminates employment or engagement by the
Company,  Employee shall not directly or indirectly contact, solicit, divert, or
take away any customer,  partner,  supplier,  vendor or account of any kind with
which the  Company  had any  contact  regarding  any  actual or  possible  sale,
license, or transfer of any kind, of any products or services,  whether prior to
or during the  employment  of  Employee.  The terms of this  paragraph  shall be
applicable to any  geographic  area where the Company has done business prior to
or during  Employee's  period of employment or engagement.  This geographic area
shall include locations within and outside borders of the United States, in view
of the international market for the Company's products and services.

         5. Employee agrees that, either during his/her employment or engagement
with the  Company or at any time  within a period of two (2) years from the date
Employee voluntarily or involuntarily  terminates  employment or engagement with
the Company,  Employee will not engage in competitive  activity. As used herein,
the term  "competitive  activity" shall include acting directly or indirectly as
an agent, employees,  officer, director,  partner, or as a representative of any
other person,  firm or legal entity,  or any other capacity  whatsoever,  in any
business in  competition,  directly or  indirectly,  with the Company,  or which
transacts any business in similar  products or services as those of the Company.
The terms of this paragraph shall be applicable to any geographic area where the
Company has done business prior to or during  Employee's period of employment or
engagement.  This geographic area shall include locations within and outside the
borders  of the  United  States,  in view of the  international  market  for the
Company's products and services.

         6. All inventions,  ideas,  designs,  circuits,  schematics,  formulas,
algorithms,  trade  secrets,  works of  authorship,  mask  works,  developments,
processes, techniques, improvements, and related know-how which result from work
performed  by Employee,  alone or with others,  on behalf of the Company or from
access to the Company's  trade secrets,  information or property  whether or not
patentable,  copyrightable,  or qualified for mask work protection (collectively
"Inventions") shall be the property of the Company, and, to the extent permitted
by law,  shall be "works made for hire."  Employee  hereby assigns and agrees to
assign to the Company or its designee, without further consideration, Employee's
entire right,  title,  and interest in and to all  Inventions,  other than those
described  in  Paragraph 7 of this  Agreement,  including  all rights to obtain,
register, perfect, and enforce patents,  copyrights, mask work rights, and other
intellectual property protection for Inventions. Employee will disclose promptly
and in writing to the  individual  designated  by the  Company or to  Employee's
immediate  supervisor,  all  Inventions  which  Employee  has made or reduced to
practice.  During Employee's  employment and for two years after,  Employee will
assist the Company (at its expense) to obtain and enforce  patents,  copyrights,
mask work  rights,  and  other  forms of  intellectual  property  protection  on
Inventions.



                                       2
<PAGE>

         7. In accordance  with the  Company's  policy and  Washington  law, the
Company hereby  notifies  Employees  that this Agreement  (other than section 7)
does not apply to, and Employee has no obligation to assign to the Company,  any
invention  for which no Company  trade  secrets  and no  equipment,  supplies or
facilities  of the  Company  were  used and  which  was  developed  entirely  on
Employee's own time unless:  (i) the invention  related directly to the business
of Employer,  (ii) the invention  relates to actual or demonstrably  anticipated
research or development work of the Company, or (iii) the invention results from
any work performed by Employee for the Company.

         8. To determine whether Employee has an obligation to assign particular
intellectual  properties  to the  Company,  Employee  shall  promptly  make full
written  disclosure  to  the  President  of  the  Company  of  all  Intellectual
Properties  which he/she makes or on which he/she is working  during the term of
his/her  employment or during the six-month period thereafter that arises out of
employment  or  engagement  with the  Company or which is  competitive  with the
Company's products or services.

         9. Employee agrees that, either during his/her employment or engagement
with the  Company or at  anytime  within a period of two (2) years from the date
Employees  voluntarily or involuntarily  terminates  employment or engagement by
the Company,  Employee will not solicit, entice, induce or attempt to influence,
directly or  indirectly,  any other  employee  of the  Company to cease  his/her
relationship with the Company, nor shall Employee recruit, hire or assist others
in hiring any other employee of the Company.

        10.  Employee  agrees to return to the  Company  at the  termination  of
his/her  work for the  Company  all  papers,  notes,  books,  drawings  or other
documents,  software  in any form,  models,  equipment,  parts or tools  thereof
belonging to the Company and relating to its  business,  present or future,  and
also to return to the Company any keys, pass cards, credit cards, identification
cards, and all other property belonging to the Company.

        11.  Employee  represents  that there are no other  contracts  to assign
inventions  that are now in  existence  between  any other  person or entity and
Employee.  Employee  further  represents  that he/she has no other  employments,
consultancies, or undertakings which would restrict and impair my performance of
this Agreement.

        12.  Employee  acknowledges  that the Company from time to time may have
agreements  with other persons or with the United States  Government or agencies
thereof  which  impose  obligations  or  restrictions  on the Company  regarding
Inventions made during the course of work under such agreements or regarding the
confidential  nature  of such  work.  Employee  agrees  to be  bound by all such
obligations or  restrictions  and to take all action  necessary to discharge the
obligations of the Company thereunder.

        13.  Employee  agrees that any  violation of this  agreement by Employee
will cause  irreparable  injury to the Company and the Company shall be entitled
to  extraordinary  relief in court,  including,  but not  limited  to  temporary
restraining  orders,  preliminary  injunctions and permanent  injunction without
necessity of posting bond or security which is expressly waived by Employee.



                                       3
<PAGE>

         If for any reason  Employee  violates this  agreement,  Employee agrees
that in addition to injunctive relief:

         (a)      If  Employee  acquires  or  otherwise  obtains,  by any  means
                  whatsoever,  any customer of the Company, or provides products
                  or services to any customer of the Company, Employee shall pay
                  to the  Company  fifty  (50)  percent  of the  gross  revenues
                  obtained  from the sale of  products  or services to each such
                  customer  for a period  of two (2) years  commencing  with the
                  date Employee first renders services to such customers; or

         (b)      If Employee otherwise violates this agreement,  Employee shall
                  pay to the  Company  twenty-five  (25)  percent of  Employee's
                  monthly  salary or  compensation  for each month that Employee
                  violates  this  agreement  for  a  period  of  two  (2)  years
                  commencing   with  the  dates  Employee  first  violates  this
                  agreement.

         (c)      If  paragraph  (a)  and  (b)  above  are  each  applicable  to
                  Employee, then, at the sole election of the Company,  Employee
                  shall pay to the Company the amount  calculated  according  to
                  paragraph (a) and (b), whichever is the greater amount.

        14. Employee expressly agrees that, in addition to extraordinary  relief
for any violation of this  agreement by Employee,  the Company shall be entitled
to  such  other  remedies  as  provided  by  law,  e.g.,  compensatory  damages,
reasonable attorney's fees and court costs.

        15.  The  Company  shall have the sole  discretion  to assign any rights
acquired under the terms of this agreement.

         16. This agreement  supercedes all previous oral and written agreements
between the Company and Employee.

        17. This agreement does not constitute nor imply an employment  contract
or promise future employment between the Company and Employee. The Company is an
at-will employer.

        18. Governing Law; Venue.  This Agreement shall be governed by the local
laws of the State of Washington.  The parties hereby consent to the jurisdiction
of the state and  federal  courts  sitting in King  County,  Washington  for all
matters and actions arising under this Agreement.  The prevailing party shall be
entitled to reasonable  attorneys'  fees and costs  incurred in connection  with
such litigation.

        19.  Arbitration.  Employee  further  agrees  that the  Company,  at its
option, may elect to submit any dispute or controversy arising out of or related
to this  Agreement  for final  settlement by  arbitration  conducted in Seattle,
Washington  in  accordance   with  the  then  existing  rules  of  the  American
Arbitration Association, and judgment upon the award rendered by the arbitrators
shall  be  specifically  enforceable  and may be  entered  in any  court  having
jurisdiction thereof.


                                       4
<PAGE>

         In the event that any provision of this  Agreement  shall be determined
by any court or  arbitrator of competent  jurisdiction  to be  unenforceable  or
otherwise  invalid for any reason,  including but not limited to the duration of
such provision,  its geographic scope or the extent of the activities prohibited
or required by it, such provision  shall be enforced and validated to the extent
permitted  by law,  and the  court or  arbitrator  shall  have  the  power to be
enforceable  under  applicable  law.  The  invalidity  of any  portion  of  this
Agreement  will not and shall not be deemed to affect the  validity of any other
provision.  In the event that any  provision is held to be invalid,  the parties
agree that the remaining  portion shall be deemed to be in full force and effect


                                       4
<PAGE>

as if they had been executed by the parties subsequent to the expungement of the
invalid provision.


         In witness whereof, the parties have hereunto set their hands and seals
on the date of                                   ,2001.
               ----------------------------------

PhotoWorks, Inc.
The Company:

By ___________________________              _________________________
                                                     Employee
Its __________________________


                                       5