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                                PHOTOWORKS, INC.

                            INVESTOR RIGHTS AGREEMENT
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                                PHOTOWORKS, INC.
                            INVESTOR RIGHTS AGREEMENT

     THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of February 14,
2000, by and among  PhotoWorks,  Inc., a Washington  corporation (the "Company")
and the persons  listed on the  attached  Exhibit A who from time to time become
signatories to this Agreement (collectively, the "Investors").

                                    RECITALS

     A. The Company and the  Investors  have entered  into a Series A  Preferred
Stock and Warrant Purchase Agreement for sale by the Company and purchase by the
Investors of the Company's Series A Preferred Stock and warrants to purchase the
Company's Common Stock (the "Purchase Agreement").

     B. In connection  with the purchase and sale of the  Company's  securities,
the Company and the Investors  desire to provide for the rights of the Investors
with respect to information about the Company,  the nomination of members to the
Company's  board of directors and  registration  of the Common Stock issued upon
conversion of the securities according to the terms of this Agreement.

     THE PARTIES AGREE AS FOLLOWS:

     1. Certain  Definitions.  As used in this  Agreement,  the following  terms
shall have the following respective meanings:

     1.1 "Commission"  shall mean the Securities and Exchange  Commission or any
other federal agency at the time administering the Securities Act.

     1.2  "Convertible  Securities"  shall mean the shares of Series A Preferred
Stock and the  Warrants  purchased  by the  Investors  pursuant to the  Purchase
Agreement.

     1.3  "Exchange  Act" shall mean the  Securities  Exchange  Act of 1934,  as
amended.

     1.4  "Form  S-3"  shall  mean  Form S-3  issued  by the  Commission  or any
substantially similar form then in effect.

     1.5 "Holder"  shall mean any holder of outstanding  Registrable  Securities
which have not been sold to the  public,  but only if such  holder is one of the
Investors or an assignee or  transferee of  registration  rights as permitted by
Section 12.

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     1.6 "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 and the 1999 Stock Incentive  Compensation Plan, approved
by the Company's board of directors on November 23, 1999.

     1.7  "Initiating  Holders"  shall mean Holders who in the aggregate hold at
least 50% of the Registrable Securities.

     1.8 "Material  Adverse Event" shall mean an occurrence having a consequence
that either (a) is materially adverse as to the business, properties, prospects,
or financial  condition of the Company or (b) is reasonably  foreseeable,  has a
reasonable  likelihood  of occurring,  and if it were to occur might  materially
adversely affect the business,  properties,  prospects or financial condition of
the  Company;  provided,  however,  that the  following  shall not be taken into
account in determining a "Material Adverse Event": (i) 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 (ii) any adverse 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.

     1.9 "New Securities"  shall mean any capital stock of the Company,  whether
authorized or not, and any rights, options, or warrants to purchase said capital
stock,  and  securities  of  any  type  whatsoever  that  are,  or  may  become,
convertible  into said capital stock;  provided that "New  Securities"  does not
include  (i) the  Convertible  Securities  and the Common  Stock  issuable  upon
conversion or exercise of the Convertible Securities, (ii) securities offered to
the public pursuant to a registration  statement filed under the Securities Act,
(iii) securities  issued pursuant to the  acquisition of another  corporation by
the Company by merger,  purchase of  substantially  all of the assets,  or other
reorganization,  if approved by the Company's  Board of  Directors,  (iv) shares
issued  or  issuable  to  the  Company's  officers,  directors,   employees  and
consultants,  contractors  and  advisors  to the  Company  pursuant to any stock
option,   subscription  or  stock  purchase  right  or  restricted  stock  grant
outstanding  as of the date of this  Agreement or which is  subsequently  issued
under the  Company's  Incentive  Plans as such plans have been  approved  by the
Company's Board of Directors as of the date of this Agreement, (v) shares issued
without  consideration  pursuant to a stock  dividend,  stock split,  or similar
transaction,  (vi) shares or warrants, and shares issuable upon exercise of such
warrants,  issued to  financial  institutions  or  lessors  in  connection  with
commercial credit arrangements,  equipment  financings,  leasing arrangements or
similar  transactions,  and (vii) any  other shares of Common Stock or any other

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securities  convertible into or exchangeable or exercisable for shares of Common
Stock that are  designated as excluded from the  definition of New Securities by
the vote or  written  consent  of  holders  of at least a  majority  of the then
outstanding shares of Convertible Securities.

     1.10 The  terms  "Register",  "Registered"  and  "Registration"  refer to a
registration  effected by preparing and filing a registration  statement on Form
S-1 or  S-3  (or a  successor  form)  in  compliance  with  the  Securities  Act
("Registration  Statement") and the declaration or ordering of the effectiveness
of such Registration Statement.

     1.11  "Registrable  Securities"  shall mean all Common Stock not previously
sold to the public and issued or issuable upon  conversion or exercise of any of
the Company's  Convertible  Securities  purchased by or issued to the Investors,
including  Common Stock issued  pursuant to stock  splits,  stock  dividends and
similar  distributions,  and any securities of the Company granted  registration
rights pursuant to Section 14 of this Agreement.

     1.12  "Registration  Expenses"  shall  mean all  expenses  incurred  by the
Company  in  complying  with  Section 9 of this  Agreement,  including,  without
limitation,  all federal and state registration,  qualification and filing fees,
printing  expenses,  fees and  disbursements  of counsel for the Company and one
special counsel for all Holders (if different from counsel to the Company), blue
sky fees and  expenses,  and the  expense of any special  audits  incident to or
required by any such registration.

     1.13 "Rubinstein  Debenture  Agreement"  shall mean that certain  Debenture
Subscription  Agreement  dated  August 14, 1981,  as amended by Amendment  No. 1
dated June 1984,  Amendment No. 2 dated January 1986, Amendment No. 3 dated June
1996 and Amendment No. 4 dated February 2000.

     1.14 "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar  federal  statute,  and the rules and  regulations of the Commission
thereunder, all as the same shall be in effect at the time.

     1.15 "Selling  Expenses" shall mean all underwriting  discounts and selling
commissions  applicable to the sale of Registrable  Securities  pursuant to this
Agreement.

     1.16 "Shelf Registration Statement" shall mean a Registration Statement for
an  offering  to be made  on a  continuous  basis  pursuant  to Rule  415 of the
Securities Act (or such successor rule or similar provision then in effect)

     1.17 "Warrants" shall mean the warrants to purchase shares of the Company's
Common Stock issued to the Investors pursuant to the Purchase Agreement.

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     2. Financial  Statements and Reports. As long as an Investor holds Series A
Preferred, the Company will deliver to such Investor:

     (a) as soon  as  practicable  after  the  end of  each  fiscal  year of the
Company, and in any event within 90 days thereafter, an audited balance sheet of
the  Company  as of the end of such  year  and  audited  statements  of  income,
shareholders'  equity  and cash flow for such  year,  which  year-end  financial
reports shall be in reasonable  detail and shall be prepared in accordance  with
generally accepted  accounting  principles and accompanied by the opinion of the
Company's independent public accountants;

     (b) as soon as practicable after the end of each of first three quarters of
any  fiscal  year,  and in any event  within 45 days  thereafter,  an  unaudited
balance  sheet  of the  Company  as of the end of such  quarter,  and  unaudited
statements  of income and cash flow for such quarter and for the current  fiscal
year  to  date,  prepared  in  accordance  with  generally  accepted  accounting
principles (other than for accompanying notes);

     (c) as soon as  practicable  after the end of the  month,  and in any event
within 20  days of the end of each  month,  an  unaudited  balance  sheet of the
Company and  unaudited  statements of income and cash flow for and as of the end
of such month;

     (d) as soon as  practicable  following  submission  to and  approval by the
Board of Directors  of the Company,  but in no event later than the start of the
next fiscal year, an operating budget respecting the next fiscal year and copies
of all monthly budgets and forecasts presented to the Board of Directors;

     (e) copies of all audit  letters  delivered  by the  Company's  independent
public accountants to management;

     (f) copies of all written information distributed to the Board of Directors
at or prior to Board meetings; and

     (g) a capitalization  table reflecting the number of outstanding  shares of
capital stock, warrants,  options, rights and other convertible securities as of
the Company's  fiscal year-end and any other  capitalization  information in the
Company's possession which is reasonably requested by an Investor.

     3. Board of Directors

     3.1  Investor  Nominees.  Promptly  following  the  annual  meeting  of the
Company's  shareholders  scheduled to be held on February 15, 2000,  the Company
shall cause the Board of Directors to be  increased  to seven  members,  and the
existing directors shall appoint one individual  designated by Orca Bay Partners
("Orca  Bay") and one  individual  designated  by Madrona  Venture Fund I, L. P.

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("Madrona")  to fill the vacancies  created  thereby.  So long as the holders of
Series A Preferred  Stock have the right to elect two  directors,  the Investors
agree to vote the  shares of  Series A  Preferred  Stock  they hold to elect one
director  nominated  by Orca Bay and one  director  nominated  by Madrona to the
Board of Directors.  The size of the Board of Directors may be decreased to less
than seven in the future, provided that such decrease does not affect the rights
of the holders of Series A Preferred Stock to nominate  individuals to the Board
pursuant to the Company's articles of incorporation.

     3.2 Expenses of Attending Board  Meetings.  The Company shall reimburse the
representatives  of the  Investors  serving on the Board of Directors  for their
reasonable travel and out-of-pocket  expenses incurred in attending  meetings of
the Board of Directors or any committee on which they serve.

     3.3 Observer Rights. So long as Orca Bay Partners or its affiliates owns at
least  2,500  shares of Series A Preferred  Stock,  Tim Carver (so long as he is
affiliated  with Orca Bay Partners)  shall have the right to attend  meetings of
the Board of Directors as a non-voting observer, on behalf of Orca Bay Partners,
subject to the Board's right to call an executive session at any time outside of
Mr. Carver's presence.

     4. Right of First Refusal.

     4.1 Right of First Refusal of New Securities.  The Company hereby grants to
each  Investor the right of first refusal to purchase up to its "Pro Rata Share"
(as defined below) of New  Securities  which the Company may, from time to time,
propose to sell and issue. The Investors may purchase said New Securities on the
same terms and at the same price at which the  Company  proposes to sell the New
Securities. The "Pro Rata Share" of each Investor, for purposes of this right of
first  refusal,  is the ratio of (i) the  total number of shares of Common Stock
held by such Investor (including any shares of Common Stock into which shares of
the Convertible  Securities  held by such Investor are  convertible) to (ii) the
total  number of shares of Common  Stock  outstanding  immediately  prior to the
issuance of the New  Securities  (including  any shares of Common Stock issuable
upon exercise or conversion of all  outstanding  options,  warrants or rights to
acquire or debt or equity  securities  convertible into Common Stock,  including
all outstanding Convertible Securities).

     4.2 Notice.  In the event the Company  proposes to undertake an issuance of
New Securities,  it shall give to each Investor written notice (the "Notice") of
its intention,  describing the type of New Securities, the price, the terms upon
which the Company  proposes to issue the same,  the number of shares  which such
Investor is entitled to purchase  pursuant to Section 4.1, and a statement  that
each Investor shall have 20 days to respond to such Notice.  Each Investor shall
have 20 days from the date of receipt of the Notice to agree to purchase  any or
all of its Pro Rata Share of the New Securities for the price and upon the terms
specified  in the Notice by giving  written  notice to the  Company  and stating
therein the quantity of New  Securities to be purchased and  forwarding  payment
for such New Securities to the Company if immediate  payment is required by such
terms.

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     4.3 Sale of New  Securities.  In the event an Investor fails to exercise in
full its right of first  refusal  within such 20 day period,  the Company  shall
have 90 days  thereafter  to sell or enter into an agreement  (pursuant to which
the sale of New Securities covered thereby shall be closed, if at all, within 60
days after the date of such  agreement)  to sell the New  Securities  respecting
which such  Investor's  rights were not  exercised,  at a price and upon general
terms no more  favorable to the purchaser  thereof than specified in the Notice.
In the event the  Company  has not sold the New  Securities  within  such 90 day
period (or sold and issued  New  Securities  in  accordance  with the  foregoing
within  60 days  from  the  date of  such  agreement),  the  Company  shall  not
thereafter  issue  or sell  any  New  Securities  without  first  offering  such
securities to such Investor in the manner provided above.

     (a)  Termination  of Right of First  Refusal.  The  right of first  refusal
granted  under this Section 4 shall expire upon the date on which such  Investor
no longer holds any Series A Preferred Stock.

     5. Demand Registration.

     5.1  Request  for  Registration  on Form S-3.  If a Holder or Holders of at
least 50% of the  outstanding  Registrable  Securities  request that the Company
file a  Registration  Statement on Form S-3 (or any successor  form to Form S-3)
for a public  offering of shares of Registrable  Securities and the Company is a
registrant  entitled to use Form S-3 to register the Registrable  Securities for
such an offering,  the Company  shall use all  reasonable  efforts to cause such
Registrable  Securities  to be  Registered  for the offering on such form and to
cause such Registrable  Securities to be qualified in such  jurisdictions as the
Holder or Holders may reasonably request;  provided,  however,  that the Company
shall not be  required to effect  more than two  Registrations  pursuant to this
Section 5.1. If requested by the  Initiating  Holders,  the Company shall file a
Shelf Registration  Statement for one of the Registrations  effected pursuant to
this  Section  5.1 and  shall  use its  reasonable  best  efforts  to keep  such
Registration Statement effective for a period of 12 months.

     5.2 Right of Deferral. Notwithstanding the foregoing, the Company shall not
be obligated to file a registration statement pursuant to this Section 5:

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     (a) in any particular  jurisdiction  in which the Company would be required
to  execute  a  general   consent  to  service  of  process  in  effecting  such
Registration,  qualification,  or  compliance,  unless  the  Company  is already
subject to service in such  jurisdiction  and except as may be  required  by the
Securities Act;

     (b) if the  Company,  within ten days of the  receipt of the request of the
Initiating Holders, gives notice of its bona fide intention to effect the filing
of a Registration  Statement  with the  Commission  within 90 days of receipt of
such request (other than with respect to a registration  statement relating to a
Rule 145  transaction  or an offering  solely to  employees),  provided that the
Company is actively employing in good faith all reasonable efforts to cause such
Registration Statement to become effective;

     (c) within three months  immediately  following the  effective  date of any
Registration Statement pertaining to the securities of the Company (other than a
registration  of  securities  in a Rule 145  transaction  or with  respect to an
employee benefit plan); or

     (d) if the Company shall  furnish to such Holders a  certificate  signed by
the  President  of the Company  stating  that in the good faith  judgment of the
Board of  Directors  it would be  seriously  detrimental  to the  Company or its
shareholders  for a  Registration  Statement to be filed at such time,  then the
Company's  obligation to use its best efforts to file a  Registration  Statement
shall be  deferred  for a period  not to exceed 90 days from the  receipt of the
request  to file such  registration  by  Initiating  Holders  provided  that the
Company shall not exercise the right  contained in this  paragraph (d) more than
once in any 12 month period.

     5.3   Registration  of  Other  Securities  in  Demand   Registration.   Any
Registration  Statement filed pursuant to the request of the Initiating  Holders
under this Section 5 may,  subject to the  provisions  of Section  5.4,  include
securities of the Company other than Registrable Securities.

     5.4 Underwriting in Demand Registration.

     (a) Notice of Underwriting.  If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the  Company as a part of their  request  made  pursuant to
this  Section 5. The right of any Holder to  Registration  pursuant to Section 5
shall be  conditioned  upon  such  Holder's  agreement  to  participate  in such
underwriting  and the inclusion of such Holder's  Registrable  Securities in the
underwriting.

     (b)  Inclusion  of Other  Holders in Demand  Registration.  If the Company,
officers or directors of the Company holding Common Stock other than Registrable
Securities, or holders of securities other than Registrable Securities,  request
inclusion in such Registration,  the Initiating Holders, to the extent they deem
advisable and consistent with the goals of such Registration, may, in their sole
discretion,  on behalf of all Holders,  offer to any or all of the Company, such
officers or  directors,  and such holders of securities  other than  Registrable
Securities that such securities other than Registrable Securities be included in
the  underwriting and may condition such offer on the acceptance by such persons
of the terms of this Section 5.

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     (c)  Selection of  Underwriter  in Demand  Registration.  The Company shall
(together with all Holders proposing to distribute their securities through such
underwriting)  enter  into an  underwriting  agreement  with the  representative
("Underwriter's Representative") of the underwriter or underwriters selected for
such  underwriting  by the Holders of a majority of the  Registrable  Securities
being registered by the Initiating Holders and agreed to by the Company.

     (d)  Marketing  Limitation  in  Demand  Registration.   In  the  event  the
Underwriter's  Representative  advises the  Initiating  Holders in writing  that
market factors (including, without limitation, the aggregate number of shares of
Common Stock  requested to be Registered,  the general  condition of the market,
and the status of the  persons  proposing  to sell  securities  pursuant  to the
Registration)  require a limitation of the number of shares to be  underwritten,
then (i) first,  the  securities  other than  Registrable  Securities,  and (ii)
second,  the  securities  requested to be  registered  by the Company,  shall be
excluded from such Registration to the extent required by such limitation.  If a
limitation of the number of shares is still  required,  the  Initiating  Holders
shall so advise all Holders and the number of shares of  Registrable  Securities
that may be included in the  Registration  and  underwriting  shall be allocated
among all Holders in  proportion,  as nearly as  practicable,  to the respective
amounts of  Registrable  Securities  entitled to inclusion in such  Registration
held by such  Holders  at the time of  filing  the  Registration  Statement.  No
Registrable  Securities or other  securities  excluded from the  underwriting by
reason of this Section 5.4(d) shall be included in such Registration Statement.

     (e)  Right  of  Withdrawal  in  Demand  Registration.   If  any  Holder  of
Registrable Securities,  or a holder of other securities entitled (upon request)
to  be  included  in  such  Registration,   disapproves  of  the  terms  of  the
underwriting,  such person may elect to withdraw  therefrom by written notice to
the  Company,  the  Underwriter's  Representative  and  the  Initiating  Holders
delivered at least seven days prior to the  effective  date of the  Registration
Statement.  The  securities  so  withdrawn  shall  also be  withdrawn  from  the
Registration Statement.

     5.5 Blue  Sky in  Demand  Registration.  In the  event of any  Registration
pursuant to Section 5, the Company  will  exercise  its best efforts to Register
and qualify the  securities  covered by the  Registration  Statement  under such
other  securities or Blue Sky laws of such  jurisdictions as shall be reasonably
appropriate for the distribution of such securities; provided, however, that (i)
the Company shall not be required to do business or to file a general consent to
service of process in any such states or jurisdictions, and (ii) notwithstanding
anything in this  Agreement to the contrary,  in the event any  jurisdiction  in
which the securities shall be qualified imposes a non-waivable  requirement that
expenses  incurred in the connection with the qualification of the securities be
borne by  selling  shareholders,  such  expenses  shall be  payable  pro rata by
selling shareholders.

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     6. Piggyback Registration.

     6.1  Notice  of  Piggyback   Registration   and  Inclusion  of  Registrable
Securities.  Subject to the terms of this  Agreement,  if the Company decides to
Register any of its Common Stock (either for its own account or the account of a
security  holder or holders  exercising  their  respective  demand  registration
rights) on a form that would be suitable  for a  registration  involving  solely
Registrable Securities, the Company will: (i) within 15 days prior to the filing
of any  registration  statement  give each  Holder  written  notice  thereof and
(ii) include in such Registration (and any related  qualification under Blue Sky
laws or other  compliance),  and in any underwriting  involved therein,  all the
Registrable  Securities  specified in a written request delivered to the Company
by any Holder  within 20 days after  delivery  of such  written  notice from the
Company.

     6.2 Underwriting in Piggyback Registration.

     (a) Notice of Underwriting in Piggyback  Registration.  If the Registration
of which the Company gives notice is for a Registered public offering  involving
an  underwriting,  the  Company  shall so advise  the  Holders  as a part of the
written  notice given  pursuant to Section 6.1. In such event,  the right of any
Holder to  Registration  shall be  conditioned  upon such  underwriting  and the
inclusion of such Holder's  Registrable  Securities in such  underwriting to the
extent provided in this  Section 6.  All Holders  proposing to distribute  their
securities  through such  underwriting  shall (together with the Company and the
other holders  distributing their securities  through such  underwriting)  enter
into an underwriting  agreement with the Underwriter's  Representative  for such
offering. The Holders shall have no right to participate in the selection of the
underwriters for an offering pursuant to this Section 6.

     (b)  Marketing  Limitation  in  Piggyback  Registration.  In the  event the
Underwriter's   Representative  advises  the  Holders  seeking  registration  of
Registrable Securities pursuant to this Section 6 in writing that market factors
(including,  without limitation,  the aggregate number of shares of Common Stock
requested to be Registered,  the general condition of the market, and the status
of the  persons  proposing  to sell  securities  pursuant  to the  Registration)
require  a  limitation  of  the  number  of  shares  to  be  underwritten,   the
Underwriter's  Representative  (subject to the allocation  priority set forth in
Section 6.2(c))  may limit the number of shares of Registrable  Securities to be
included in such Registration and underwriting.

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     (c) Allocation of Shares in Piggyback  Registration.  In the event that the
Underwriter's  Representative  limits the number of shares to be  included  in a
Registration  pursuant to Section 6.2(b), the number of shares to be included in
such  Registration  shall be allocated in the  following  manner:  the number of
shares  that may be  included  in the  Registration  and  underwriting  shall be
allocated  first to the Company;  second,  to the Holders and Sam Rubinstein and
his  successors  and  assigns on a pro rata basis  based on the total  number of
Registrable  Securities  held by a Holder or, in the case of Sam  Rubinstein and
his successors and assigns, the total number of shares of common stock that such
person has a right to require the Company to register  under the  Securities Act
pursuant to Section 6.2 of the Rubinstein Debenture Agreement; and third, to any
shareholder  of the  Company  other  than a  Holder  or Sam  Rubinstein  (or his
successors and assigns) on a pro rata basis. No Registrable  Securities or other
securities excluded from the underwriting by reason of this Section 6.2(c) shall
be included in the Registration Statement.

     (d) Withdrawal in Piggyback Registration.  If any Holder disapproves of the
terms of any such  underwriting,  such person may elect to withdraw therefrom by
written notice to the Company and the Underwriter's  Representative delivered at
least seven days prior to the effective date of the Registration Statement.  Any
Registrable  Securities  or other  securities  excluded or  withdrawn  from such
underwriting shall be withdrawn from such Registration.

     7.  Expenses  of  Registration.   All  Registration  Expenses  incurred  in
connection  with  two  Registrations   pursuant  to  Section 5.1  and  unlimited
Registrations  pursuant  to  Section  6,  shall  be borne  by the  Company.  All
Registration  Expenses  incurred  in  connection  with any  other  Registration,
qualification,  or compliance,  shall be apportioned among the Holders and other
holders of the  securities so registered on the basis of the number of shares so
registered.  Notwithstanding the above, the Company shall not be required to pay
for any expenses of any  Registration  proceeding begun pursuant to Section 5 if
the Registration request is subsequently withdrawn at the request of the Holders
of a majority of the  Registrable  Securities  to be registered  (which  Holders
shall bear such  expenses),  unless the Holders of a majority of the Registrable
Securities  agree to forfeit  their  right to one demand  Form S-3  Registration
pursuant to Section 5;  provided further,  however,  that if at the time of such
withdrawal, the Holders have learned of a Material Adverse Event with respect to
the condition, business, or prospects of the Company not known to the Holders at
the time of their request,  then the Holders shall not be required to pay any of
such expenses and shall retain their rights  pursuant to Section 5.  All Selling
Expenses shall be borne by the holders of the securities  Registered pro rata on
the basis of the number of shares Registered.

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     8. Termination of Registration  Rights.  The rights to cause the Company to
register  securities  granted  under  Sections 5 and 6 of this  Agreement  shall
terminate,  with respect to each  Holder,  as soon as such Holder is eligible to
sell  all  of  such  Holder's  Registrable  Securities  under  Rule  144  of the
Securities  Act within any three month period  without  volume  limitations,  or
under Rule 144(k) thereunder.

     9.  Registration  Procedures and Obligations.  Whenever required under this
Agreement to effect the registration of any Registrable Securities,  the Company
shall, as expeditiously as reasonably possible:

     (a) Prepare and file with the  Commission  a  Registration  Statement  with
respect to such Registrable  Securities and use all reasonable  efforts to cause
such Registration  Statement to become  effective,  and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder,  keep
such Registration  Statement effective for up to 120 days, or in the case of the
Shelf Registration Statement, 12 months.

     (b) Prepare and file with the Commission such amendments and supplements to
such  Registration  Statement and the  prospectus  used in connection  with such
registration  statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement.

     (c)  Furnish  to the  Holders  such  numbers  of  copies  of a  prospectus,
including a preliminary  prospectus,  in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.

     (d) Use all  reasonable  efforts to register  and  qualify  the  securities
covered by such  registration  statement under such other securities or Blue Sky
laws of such  jurisdictions  as shall be  reasonably  requested  by the Holders,
provided that the Company shall not be required in connection  therewith or as a
condition  thereto  to qualify to do  business  or to file a general  consent to
service of process in any such states or  jurisdictions,  and  provided  further
that in the event any  jurisdiction  in which the securities  shall be qualified
imposes a non-waivable requirement that expenses incurred in connection with the
qualification of the securities be borne by selling shareholders,  such expenses
shall be payable pro rata by selling shareholders.

     (e) In the  event  of any  underwritten  public  offering,  enter  into and
perform its obligations under an underwriting  agreement, in usual and customary
form, with the managing underwriter of such offering.  Each Holder participating
in such  underwriting  shall also enter into and perform its  obligations  under
such an agreement.

                                       11

<PAGE>

     (f) Promptly notify each Holder of Registrable  Securities  covered by such
Registration  Statement  at any  time  when a  prospectus  relating  thereto  is
required to be delivered  under the  Securities  Act (i) of the happening of any
event  as a  result  of  which  the  prospectus  included  in such  Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material  fact  required to be stated  therein or  necessary to
make the  statements  therein not  misleading in the light of the  circumstances
then existing,  (ii) of any request by the SEC or any state securities authority
for amendments and supplements to a Registration Statement and prospectus or for
additional information after the Registration Statement has become effective and
(iii) of the issuance by the SEC or any state  securities  authority of any stop
order suspending the effectiveness of a Registration Statement or the initiation
of any  proceedings  for  that  purpose.  In the  case of a  Shelf  Registration
Statement, the Company agrees that, upon the happening of any event described in
subsections  (i), (ii) and (iii) of this Section 9(f), the Company shall use its
best efforts to file and have  declared  effective  (if an amendment) as soon as
practicable an amendment or supplement to the Shelf  Registration  Statement and
shall extend the period during which such Shelf Registration  Statement shall be
maintained  effective by the number of days in the period from and including the
date of the  giving of notice of such event to and  including  the date when the
Company  gives  notice  that the  amendment  or  supplement  has been  filed and
declared effective (if an amendment).

     (g) Provide a transfer agent and registrar for all  Registrable  Securities
registered  pursuant to such  Registration  Statement and a CUSIP number for all
such Registrable  Securities,  in each case not later than the effective date of
such registration.

     (h)  Furnish,  at the  request of any  Holder  requesting  registration  of
Registrable  Securities  pursuant  to this  Agreement,  on the  date  that  such
Registrable  Securities are delivered for sale in connection with a registration
pursuant  to this  Agreement,  (i) an opinion,  dated such date,  of the counsel
representing  the Company for the  purposes  of such  registration,  in form and
substance as is customarily  given to  underwriters  in an  underwritten  public
offering,  and (ii) a letter  dated such date,  from the  independent  certified
public accountants of the Company, in form and substance as is customarily given
by independent  certified public  accountants to underwriters in an underwritten
public offering, addressed to the underwriters.

     10. Information  Furnished by Holder. It shall be a condition  precedent of
the Company's  obligations  under this Agreement that each Holder of Registrable
Securities included in any Registration  furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder or Holders as
the Company may reasonably request.

                                       12

<PAGE>

     11. Indemnification.

     11.1 Company's  Indemnification of Holders. To the extent permitted by law,
the  Company  will  indemnify  each  Holder,  each of its  officers,  directors,
constituent partners, legal counsel for the Holders, and each person controlling
such Holder, with respect to which Registration, qualification, or compliance of
Registrable  Securities has been effected  pursuant to this Agreement,  and each
underwriter,  if any, and each person who controls any  underwriter  against all
claims,   losses,   damages,   liabilities,   or  actions  in  respect   thereof
(collectively,  "Damages")  to the extent such Damages arise out of or are based
upon any untrue  statement  (or alleged  untrue  statement)  of a material  fact
contained  in  any   prospectus  or  other   document   (including  any  related
Registration  Statement or amendment or supplement thereto) incident to any such
Registration,  qualification,  or  compliance,  or are based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading,  or any violation by
the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state  securities law applicable to the Company in connection  with any such
Registration,  qualification, or compliance; and the Company will reimburse each
such Holder, each such underwriter, and each person who controls any such Holder
or  underwriter,  for any legal and any other  expenses  reasonably  incurred in
connection  with  investigating  or  defending  any such  claim,  loss,  damage,
liability,  or action;  provided,  however, that the indemnity contained in this
Section 11.1  shall not apply to amounts paid in  settlement of any such Damages
if  settlement  is effected  without the consent of the Company  (which  consent
shall not  unreasonably be withheld);  and provided,  further,  that the Company
will not be liable in any such case to the extent  that any such  Damages  arise
out of or are based upon any untrue  statement  or omission  based upon  written
information furnished to the Company by such Holder, underwriter, or controlling
person and stated to be for use in connection with the offering of securities of
the Company.

     11.2 Holder's  Indemnification of Company.  To the extent permitted by law,
each Holder will, if Registrable  Securities held by such Holder are included in
the securities as to which such  Registration,  qualification  or, compliance is
being effected  pursuant to this Agreement,  indemnify the Company,  each of its
directors and officers,  each legal  counsel and  independent  accountant of the
Company, each underwriter, if any, of the Company's securities covered by such a
Registration Statement, each person who controls the Company or such underwriter
within the meaning of the  Securities  Act, and each other such Holder,  each of
its officers,  directors,  and constituent partners, and each person controlling
such other Holder,  against all Damages  arising out of or based upon any untrue
statement (or alleged untrue statement) of a material fact contained in any such
Registration Statement or amendment or supplement thereto, prospectus,  offering
circular,  or other  document,  or any omission  (or alleged  omission) to state

                                       13

<PAGE>

therein a material fact  required to be stated  therein or necessary to make the
statements  therein  not  misleading,  or any  violation  by such  Holder of the
Securities  Act,  the  Exchange  Act,  any state  securities  law or any rule or
regulation  promulgated  under the Securities Act, the Exchange Act or any state
securities  law   applicable  to  such  Holder  in  connection   with  any  such
Registration, qualification, or compliance, and will reimburse the Company, such
Holders, such directors,  officers, partners, persons, law and accounting firms,
underwriters or control persons for any legal and any other expenses  reasonably
incurred in connection  with  investigating  or defending any such claim,  loss,
damage,  liability,  or  action,  in each  case to the  extent,  but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such Registration Statement,  prospectus,  offering
circular,  or other  document in reliance  upon and in  conformity  with written
information   furnished  to  the  Company  by  such  Holder  and  stated  to  be
specifically  for use in  connection  with the  offering  of  securities  of the
Company,  provided,  however,  that the indemnity contained in this Section 11.2
shall not apply to amounts paid in  settlement of any such Damages if settlement
is  effected  without the consent of such  Holder  (which  consent  shall not be
unreasonably withheld) and provided, further, that each Holder's liability under
this  Section  11.2 shall not  exceed  such  Holder's  gross  proceeds  from the
offering of securities made in connection with such Registration.

     11.3  Indemnification  Procedure.  Promptly after receipt by an indemnified
party under this Section 11 of notice of the  commencement  of any action,  such
indemnified  party will, if a claim in respect  thereof is to be made against an
indemnifying  party  under this  Section 11,  notify the  indemnifying  party in
writing of the  commencement  thereof and generally  summarize such action.  The
indemnifying  party  shall  have the right to  participate  in and to assume the
defense of such claim;  provided,  however, that the indemnifying party shall be
entitled to select  counsel  for the defense of such claim with the  approval of
any  parties   entitled  to   indemnification,   which  approval  shall  not  be
unreasonably  withheld;   provided  further,   however,  that  if  either  party
reasonably  determines that there may be a conflict  between the position of the
Company and the  Investors in  conducting  the defense of such action,  suit, or
proceeding by reason of recognized  claims for indemnity under this  Section 11,
then  counsel  for such party  shall be  entitled  to conduct the defense to the
extent  reasonably  determined  by such  counsel to be  necessary to protect the
interest of such party and the fees and expenses of counsel for such party shall
be paid by the Company.  The failure to notify an indemnifying party promptly of
the  commencement  of any such  action,  if  prejudicial  to the  ability of the
indemnifying party to defend such action, shall relieve such indemnifying party,
to the extent so  prejudiced,  of any liability to the  indemnified  party under
this Section 11,  but the omission so to notify the indemnifying  party will not
relieve such party of any liability that such party may have to any  indemnified
party otherwise other than under this Section 11.

                                       14

<PAGE>

     11.4 Contribution.  If the indemnification  provided for in this Section 11
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with  respect to any Damages  referred to therein,  then the  indemnifying
party,  in  lieu  of  indemnifying  such  indemnified  party  hereunder,   shall
contribute to the amount paid or payable by such  indemnified  party as a result
of such Damages in such  proportion  as is  appropriate  to reflect the relative
fault of the indemnifying  party on the one hand and of the indemnified party on
the other in connection  with the  statements or omissions that resulted in such
Damages as well as any other  relevant  equitable  considerations.  The relative
fault of the indemnifying party and of the indemnified party shall be determined
by  reference  to,  among other  things,  whether  the untrue or alleged  untrue
statement of a material fact or the omission to state a material fact relates to
information  supplied by the indemnifying  party or by the indemnified party and
the parties' relative intent, knowledge, access to information,  and opportunity
to correct or prevent such statement or omission;  provided, however, that in no
event shall any  contribution  by a Holder  exceed the gross  proceeds  from the
offering of securities  made in connection  with such  Registration  received by
such Holder.

     11.5  Conflicts.  Notwithstanding  the  foregoing,  to the extent  that the
provisions on  indemnification  and  contribution  contained in the underwriting
agreement  entered into in connection with the underwritten  public offering are
in conflict with the foregoing  provisions,  the provisions in the  underwriting
agreement shall control.

     11.6 Survival of  Obligations.  The  obligations of the Company and Holders
under  this  Section 11   shall  survive  the  completion  of  any  offering  of
Registrable  Securities  in a  registration  statement  under this  Agreement or
otherwise.

     12.  Transfer of Rights.  The rights to information  under  Section 2,  the
right of first  refusal  under  Section 4  and the right to cause the Company to
Register securities granted by the Company to the Investors under this Agreement
may be assigned  by any Holder to a  transferee  or assignee of any  Convertible
Securities or  Registrable  Securities  which is a subsidiary,  parent,  general
partner, limited partner, retired partner, member or retired member of a Holder;
provided, however, that (i) the Company must receive written notice prior to the
time of said  transfer,  stating  the name and  address  of said  transferee  or
assignee and  identifying  the securities  with respect to which such rights are
being assigned, and (ii) the transferee or assignee of such rights must not be a
person  deemed by the  Board of  Directors  of the  Company,  in its  reasonable
judgment, to be a competitor or potential competitor of the Company.

                                       15

<PAGE>

     13.  Market  Stand-off.  Each Holder hereby agrees that, if so requested by
the Company and the Underwriter's Representative (if any) in connection with any
Registration effected by the Company, such Holder shall not sell, make any short
sale of, loan,  grant any option for the  purchase of, or otherwise  transfer or
dispose of any Registrable Securities or other securities of the Company without
the prior written consent of the Underwriter's Representative for such period of
time (not to exceed 180 days)  following  the effective  date of a  Registration
Statement of the Company filed under the  Securities  Act as may be requested by
the Underwriter's Representative.

     14.  No-Action  Letter  or  Opinion  of  Counsel  in Lieu of  Registration;
Conversion of Preferred Stock.  Notwithstanding anything else in this Agreement,
if the Company shall have obtained from the  Commission a "no-action"  letter in
which the  Commission  has  indicated  that it will take no action  if,  without
Registration  under the  Securities  Act,  any Holder  disposes  of  Registrable
Securities  covered by a request for Registration  made under Section 5.1 in the
specific  manner in which such  Holder  proposes  to dispose of the  Registrable
Securities included in such request, and that such Registrable Securities may be
sold to the public without Registration, or if in the opinion of counsel for the
Company concurred in by counsel for such Holder,  which concurrence shall not be
unreasonably  withheld,  no Registration under the Securities Act is required in
connection  with such  disposition and that such  Registrable  Securities may be
sold to the public without Registration,  the Registrable Securities included in
such  request  pursuant to Section 5.1 shall not be  eligible  for  Registration
under this Agreement;  provided, however, that any Registrable Securities not so
disposed of shall be eligible for  Registration  in accordance with the terms of
this  Agreement  with  respect  to other  proposed  dispositions  to which  this
Section 14  does not  apply.  The  Registration  rights  of the  Holders  of the
Registrable  Securities  set forth in this  Agreement are  conditioned  upon the
conversion of the Registrable  Securities with respect to which  registration is
sought  into  Common  Stock  prior  to the  effective  date of the  Registration
Statement.

     15. Reports Under the Exchange Act. With a view to making  available to the
Holders the benefits of Rule 144  promulgated  under the  Securities Act and any
other rule or regulation of the Commission  that may at any time permit a Holder
to sell securities of the Company to the public without Registration or pursuant
to a registration on Form S-3, the Company agrees to:

     (a) file with the  Commission  in a timely  manner  all  reports  and other
documents required of the Company under the Securities Act and the Exchange Act;
and

     (b)  furnish  to any  Holder,  so long as the Holder  owns any  Registrable
Securities, promptly upon request (i) a written statement by the Company that it
has complied with the reporting requirements of Rule 144, the Securities Act and
the Exchange Act, or that it qualifies as a registrant  whose  securities may be
resold  pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly
report of the  Company  and such other  reports  and  documents  so filed by the
Company,  and (iii) such other  information  as may be  reasonably  requested in
availing any Holder of any rule or  regulation of the  Commission  which permits
the  selling of any such  securities  without  Registration  or pursuant to such
form.

                                       16

<PAGE>

     16. Miscellaneous.

     16.1 Governing  Law. This Agreement  shall be governed by, and construed in
accordance  with, the laws of the State of Washington  excluding those laws that
direct the application of the laws of another jurisdiction.

     16.2 Counterparts.  This Agreement may be executed in counterparts, each of
which shall be deemed an original,  but all of which together  shall  constitute
one and the same instrument.

     16.3  Headings.  The  headings of the  Sections of this  Agreement  are for
convenience  and shall not by themselves  determine the  interpretation  of this
Agreement.

     16.4 Notices.  Any notice required or permitted hereunder shall be given in
writing  and  shall be  conclusively  deemed  effectively  given  upon  personal
delivery or delivery by courier, or on the first business day after transmission
if sent by confirmed facsimile transmission or electronic mail transmission,  or
five days after  deposit in the United  States mail,  by registered or certified
mail, postage prepaid,  addressed (i) if to the Company,  as set forth below the
Company's  name  on the  signature  page of this  Agreement,  and  (ii) if to an
Investor,  at such Investor's address as set forth on the signature page to this
Agreement,  or at  such  other  address  as the  Company  or such  Investor  may
designate by 10 days' advance written notice to the other parties hereto.

     16.5 Amendment or Waiver.  This  Agreement may be amended or modified,  and
the  obligations  of the  Company  under the  Agreement  may be  waived  (either
generally   or  in  a   particular   instance   and  either   retroactively   or
prospectively), only upon the written consent of the Company and holders of more
than a majority of the Registrable  Securities.  Any amendment,  modification or
waiver pursuant to, and in accordance with, this  Section 16.5  shall be binding
on the Company,  all holders of Registrable  Securities at the time  outstanding
and each future holder of any such  securities.  Notwithstanding  the foregoing,
this  Agreement may be amended by the Company with no further action on the part
of any other  party  hereto to include as  Investors  hereunder  any  persons or
entities who purchase Convertible  Securities in a "Subsequent Closing" pursuant
to the Purchase Agreement,  which amendment will be effective when the purchaser
evidences  his, her or its agreement to be bound by the terms of this  Agreement
by executing a counterpart signature page of this Agreement as an Investor,  and
thereby shall be deemed  "Holders" for all purposes  under this  Agreement.  The
foregoing  notwithstanding,  this Agreement and any term thereof may be amended,
waived,  discharged or terminated  by a written  instrument  signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.

                                       17

<PAGE>

     16.6  Severability.  In case  any  provision  of this  Agreement  shall  be
invalid, illegal or unenforceable,  the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

     16.7 Entire Agreement;  Successors and Assigns.  This Agreement constitutes
the entire contract among the Company and the Investors  relative to the subject
matter  hereof.  Any  previous  agreement  between the Company and any  Investor
concerning  Registration rights is superseded by this Agreement.  Subject to the
exceptions  specifically  set forth in this  Agreement  and the  limitations  on
transfer set forth in  Section 12,  the terms and  conditions of this  Agreement
shall  inure to the  benefit of and be binding  upon the  respective  executors,
administrators, heirs, successor, and permitted assigns of the parties.

                                       18

<PAGE>

     IN WITNESS  WHEREOF,  the parties hereto have executed this Investor Rights
Agreement as of the day and year first above written.

Company:              PHOTOWORKS, INC., a Washington corporation

                      By:    /s/ Gary Christopherson
                             Gary Christophersen, President and CEO

                      Address:      1260 16th Avenue West
                                    Seattle, Washington 98119
                                    Fax No. (206) 284-5357


Investors:            MADRONA VENTURE FUND I-A, L.P.
                      By Madrona Investment Partners, LLC,
                      its General Partner

                      By:          /s/ Paul Goodrich

                      Name:        Paul Goodrich

                      Title:       Managing Director

                      Address:     1000 Second Avenue, Suite 3700
                                   Seattle, WA  98104

                  {SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}

<PAGE>

                      MADRONA VENTURE FUND I-B, L.P.
                      By Madrona Investment Partners, LLC,
                      its General Partner

                      By:          /s/ Paul Goodrich

                      Name:        Paul Goodrich

                      Title:       Managing Director

                      Address:     1000 Second Avenue, Suite 3700
                                   Seattle, WA  98104




                      MADRONA MANAGING DIRECTOR FUND, LLC

                      By:          /s/ Paul Goodrich

                      Name:        Paul Goodrich

                      Title:       Managing Director

                      Address:     1000 Second Avenue, Suite 3700
                                   Seattle, WA  98104

                  {SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}

<PAGE>

                      THE TAHOMA FUND, L.L.C.

                      By:          /s/ Ross Chapin

                      Name:        Ross Chapin

                      Title:       Managing Member

                      Address:     P.O. Box 21749
                                   Seattle, WA  98111



                      ORCA BAY CAPITAL CORPORATION

                      By:          /s/ Stanley McCammon

                      Name:        Stanley McCammon

                      Title:       President

                      Address:     P.O. Box 21749
                                   Seattle, WA  98111



                      TIM and ALEXA CARVER

                      By:          /s/ Tim Carver

                      Name:        Tim Carver

                      By:          /s/ Alexa Carver

                      Name:        Alexa Carver

                      Address:     P.O. Box 21749
                                   Seattle, WA  98111

                  {SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}

<PAGE>

                      STANLEY McCAMMON

                      By:          /s/ Stanley McCammon

                      Name:        Stanley McCammon

                      Address:     P.O. Box 21749
                                   Seattle, WA  98111



                      AARON SINGLETON

                      By:          /s/ Aaron Singleton

                      Name:        Aaron Singleton

                      Address:     P.O. Box 21749
                                   Seattle, WA  98111

                  {SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT}

<PAGE>

                                   EXHIBIT A
                              SCHEDULE OF INVESTORS

      The Tahoma Fund, L.L.C.

      Orca Bay Capital Corporation

      Tim and Alexa Carver

      Stanley McCammon

      Aaron Singleton

      Madrona Venture Fund I-A, L.P.

      Madrona Venture Fund I-B, L.P.

      Madrona Managing Director Fund, LLC