Document:

LICENSE
AND SERVICES AGREEMENT

     

    THIS
LICENSE AND SERVICES AGREEMENT dated this
1st
day of April, 2008,

     

    BETWEEN:

     

    PHOTOCHANNEL NETWORKS INC., a
company having an office at Suite 590, 425
Carrall Street, Vancouver, British Columbia, Canada, V6B 6E3

     

    (hereinafter called
"PhotoChannel")

     

    
      	
              -  

            	
              and
      –

            

    

    
 

    BLACK’s  PHOTO
COPORATION

     

    (hereinafter called
"Black’s")

     

    WHEREAS PhotoChannel is the developer and owner of a
proprietary Internet based digital imaging network solution for the upload and distribution of digital images for printing
of photographs or other products (“System”);

     

    AND WHEREAS PhotoChannel is entitled to license the System
and provide the Services (as hereinafter
defined) to Black’s as provided herein;

     

    AND WHEREAS Black’s wishes to acquire a license for the System and to receive the Services as provided herein;
and

     

    AND WHEREAS Black’s wishes to acquire, and PhotoChannel
wishes to provide to Black’s, a Black’s branded System for its 1 Hour Photo
Operations (the “Branded Site”) on the terms and
conditions set out herein;

     

    NOW THEREFORE in consideration of the
premises, the mutual covenants contained in this Agreement, and other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties agree as follows:

     

    1.           The
Branded Site.    PhotoChannel
agrees to deliver the System components described in attached Schedule A in accordance with the roll-out schedule
set out in Section 2 below. PhotoChannel represents and warrants that the Branded
Site will perform the functions set out in, in the manner and to the standards
provided in, Schedule A.  PhotoChannel shall promptly correct any
errors, malfunctions or defects in the System, including any hardware supplied
or sold by PhotoChannel to Black’s.  PhotoChannel shall design, host and operate the
Branded Site subject to the following conditions:

     

    (a)            Black’s
shall have the right to preapprove the design, layout, content and look and feel
of the Branded Site, and any changes thereto.

    (b)            As
between the Consumer and PhotoChannel, PhotoChannel’s Terms and Conditions of
Use and Privacy Policy shall apply to the Branded Site, subject to Black’s
approval.  Changes will not be made to such Terms and Conditions or
Privacy Policy without the prior written consent of Black’s.

    (c)           Black’s
will provide the jump page for the link from Blackphoto.com to the Branded
Site.  The   form and content of the jump page will be
in Black's discretion.

    (d)           Black’s
controls all pricing for any products or services sold through the Branded
Site.

     

    
      
         

      

      
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    (e)            Other
than the link to and from Blackphoto.com and the data feed to a Black’s store,
the Branded Site will not be linked to any other web site and there shall be no
advertising on the Branded Site except that approved by Black’s in its sole
discretion..

    (f)           PhotoChannel
shall ensure that the Branded Site not contain any content, features, or
materials that:  (i) violate or infringe the rights of any person,
(ii) are abusive, profane, or offensive, obscene, pornographic or sexually
explicit, or (iii) are false or misleading, defamatory or harassing, excessively
violent, or which violate or encourage others to violate any applicable
law.

     

    
      	
              2.  

            	
              Roll-Out
      Schedule.  See Schedule C.

            

    

     

    3.           Support, Maintenance and
Training.  PhotoChannel shall
promptly and competently provide the support, maintenance and training services
provided for in Schedule B.

     

    4.           Billing and
Payments.  Black’s shall make the
payments set out in, and on the terms provided in, Schedule B. 

     

    5.           Project Co-ordinators. Each
party shall designate a project co-ordinator to deal with the day-to-day matters
arising under this Agreement.  These individuals will, on behalf of
their respective employers, co-ordinate the provision of the products and
services contemplated herein, including installation, acceptance, operation,
maintenance and support. 

     

    6.           Access To
Facilities.  Black’s shall at all reasonable times give
PhotoChannel and its employees, independent contractors and agents sufficient
access to the Black’s premises and assets of Black’s as is necessary to permit
PhotoChannel to fulfil its obligations under this Agreement.  At all
times while upon any premises of Black’s, PhotoChannel's employees, independent
contractors, and agents shall observe all rules which Black’s may prescribe in
writing, including Black’s’ then-current computer access rules and
policies.

     

    7.           Term.  This Agreement shall be for a term of three (3) years
commencing on the date hereof and ending on April 1, 2011 (the
“Term”).   After seventeen months Blacks shall have the
right to terminate this contract at anytime with 90 days prior written
notice.

     

    8.           Confidentiality.  Each
party agrees that the Confidential Information of the other party will be held
in confidence to the same extent and the same manner as each party protects its
own Confidential Information, but each party agrees that in no event will less
than reasonable care be used.  Each party shall, however, be permitted
to disclose relevant aspects of such Confidential Information to its officers,
employees, and consultants on a need-to-know basis, provided that they have
undertaken to protect the Confidential Information to the same extent as
required under this Agreement.  Each party agrees to use all
reasonable steps to ensure that the other party's Confidential Information
received under this Agreement is not disclosed in violation of this Section
8.  Without limiting the generality of
the foregoing, PhotoChannel acknowledges that any information from or relating
to Black’s Consumers including, without limitation, Consumer names, addresses,
lists and image files (collectively, “Consumer Information”) is Black's
Confidential Information.  Consumer Information collected by or
submitted to PhotoChannel by Black’s or its Consumers pursuant to this Agreement
is not subject to the exceptions in clauses 8(b) and (d) below simply because
Consumers share Consumer Information with PhotoChannel as part of the services
offered through the Branded Site and related customer
service.  Further, all sales related information, including, without
limitation, number of orders processed, number of prints processed and prints
per order processed, and other such sales information, whether generated on the
Branded Site or otherwise (collectively, “Sales Information”) is Black's
Confidential Information.  Each party agrees not to use the
Confidential Information of the other party other than in the performance of its
obligations under this Agreement and only in accordance with applicable law
including privacy legislation.  The terms of this Agreement shall be
deemed Confidential Information and shall not be disclosed by either party to
any third party without the other party's prior written consent.  The
obligations set forth in this Section 8 do not apply if and to the extent the
party receiving Confidential Information ("Receiving party") establishes
that:

     

    
      
         

      

      
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    (a)           the
information disclosed to the Receiving party was already known to the Receiving
party, without obligation to keep it confidential;

     

    (b)           the
Receiving party received the information in good faith from a third party
lawfully in possession thereof without obligation to keep such
information;

     

    (c)           the
information was publicly known at the time of its receipt by the Receiving party
or has become publicly known other than by a breach of this
Agreement;

     

    (d)           the
information is independently developed by the Receiving party without use of the
other party's Confidential Information; or

     

    (e)           the
information is required to be disclosed by applicable statute or regulation or
by judicial or administrative process; provided that, in the case of (a) through
(e) above, such circumstances are demonstrated with written evidence thereof and
that, in the case of (e) above, the Receiving party will use reasonable efforts
under the circumstances to notify the other party of such requirements so as to
provide such party the opportunity to obtain such protective orders or other
relief as the compelling court or other entity may grant.

     

    9.           Intellectual Property
Rights.

     

    (a)           PhotoChannel’s Intellectual
Property.   PhotoChannel
hereby grants Black’s a non-exclusive license to use during the Term and any
renewal term, if any, all copyrighted material, trademarks, inventions and all
other industrial or intellectual property rights (collectively, “PhotoChannel’s
Intellectual Property”) forming part of or necessary to use the System and the
Branded Site.  Except as set forth in this Section 9, Black’s
acknowledges that pursuant to this Agreement it is not acquiring any interest in
or right to use any of PhotoChannel’s Intellectual Property.

     

    (b)           Black’s Intellectual
Property.  Black’s hereby grants
PhotoChannel a limited, nonexclusive, nontransferable license to use during the
Term and any renewal term, if any, Black's proprietary trademarks and tradenames
(collectively, “Black’s Intellectual Property”), but solely on the Branded Site
and always in accordance with Black’s’ then current trademark usage guidelines
and prior written approval.  PhotoChannel shall not use any
trademark, service mark, logo, computer program, tradename or mark,
including Black’s Intellectual Property, whether owned by or licensed to Black’s
and presently in existence, or hereafter established, in any fashion, without
the express written consent of Black’s.  Black’s further grants to PhotoChannel a limited,
nonexclusive, nontransferable license to create the Branded Site, the hypertext
link from the Black’s.ca website to the Branded Site and the data links to the
Black’s warehouse locations in Canada designated by Black’s.  Black's
licenses to PhotoChannel will not survive termination or expiration of this
Agreement.  Except as set forth in this Section 9, PhotoChannel
acknowledges that pursuant to this Agreement it is not acquiring any interest in
or right to use any of Black’s Intellectual Property.

     

    10.           Termination.  A party shall be entitled to terminate this
Agreement if:

     

    
      	
              (a)  

            	
              the other party makes a general assignment for the
      benefit of its creditors or a proposal or arrangement under the
      Bankruptcy and
      Insolvency Act or any successor
      legislation (“the Act”), if a petition is filed against the other party
      under the Act, if the other party is declared or adjudicated bankrupt, if
      a liquidator, trustee in bankruptcy, custodian, receiver, receiver and
      manager or any other officer with similar powers shall be appointed,
      either privately or judicially, of or for the other party or if the other
      party shall commit an act of bankruptcy or propose a compromise,
      arrangement or otherwise have recourse to any law for the protection of
      debtors; or 

            

    

     

    
      
         

      

      
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              (b)  

            	
              if the other party fails to fulfil any of its
      obligations hereunder and does not cure such failure, to the reasonable
      satisfaction of the non-breaching party, within thirty (30) days
      after receiving written notice of such
  failure.

            

    

     

    Upon any
termination or expiration of this Agreement, PhotoChannel shall immediately
return to Black’s (i) all Consumer Information, including the digital images
upon Black’s written request and at Black’s cost, and (ii) all outstanding
orders, if any, in its possession.  

     

    11.           Harmful Components.  PhotoChannel represents and warrants that
any and all software, hardware or data it provides to Black’s will not
contain any program, routine, device or other undisclosed feature, including
without limitation, a so-called time bomb, virus, software lock, drop dead
device, malicious logic, worm, Trojan horse or trap or back door, or other
harmful device which is designed to delete, disable, deactivate, provide
unauthorized access, interfere with or otherwise harm any software, program,
data, device, system or service, or which is intended to provide unauthorized
access or to produce unauthorized modifications.

     

    12. Indemnification.  PhotoChannel shall hold harmless,
defend and indemnify Black’s and its affiliates (and their respective employees,
directors and representatives) against any and all claims, actions, proceedings
and suits and any and all liabilities, damages, settlements, penalties, fines,
costs or expenses (including reasonable attorneys' fees and other litigation
expenses) incurred by Black’s, arising out of or relating to:

     

    (a)            any
actual or alleged infringement or misappropriation of the intellectual property
rights of any person or entity by (i) the System (including, but not limited to,
patents, hardware and software), or (ii) any services provided on the Branded
Site by PhotoChannel or its employees, representatives or agents;

     

    
      	
              (b) 

            	
              any
      actual or alleged violation by PhotoChannel of any law, statute or
      ordinance or any administrative order, rule or regulation relating to the
      System or any services provided on the Branded Site by PhotoChannel or its
      employees, representatives or
agents;

            

    

     

    
      	
              (c) 

            	
              any
      act, activity or omission of PhotoChannel, or any of its employees,
      representatives, independent contractors or agents, including activities
      on Black's premises and the use of any vehicle, equipment, fixture or
      material of PhotoChannel in connection with any service or right provided
      by PhotoChannel under this Agreement;
or

            

    

     

    
      	
              (d) 

            	
              PhotoChannel's
      breach of any of its representations, warranties or undertakings in this
      Agreement.

            

    

    

    (e)           PHOTOCHANNEL HEREBY DISCLAIMS ANY
WARRANTIES ITS SALESPERSONS OR OTHER STAFF MAY HAVE MADE PRIOR TO THE DATE OF
THIS AGREEMENT EXCEPT THOSE EXPRESSLY STATED IN THIS
AGREEMENT.

     

    13.           Arbitration.  All
claims and disputes that (1) are between PhotoChannel and Black’s or either’s
subsidiaries, parents, affiliates, officers, directors and/or employees, and (2)
arise out of or relate to this Agreement or its subject matter, interpretation,
performance or enforcement, (including any tort or statutory claim) ("Dispute")
shall be arbitrated by a sole arbitrator in Vancouver, British Columbia, in
accordance with the British Columbia Commercial Arbitration Act and judgement
upon the award rendered by the arbitrator may be entered by any court having
jurisdiction thereof.  All documents and information relevant to the
Dispute in the possession of any party shall be made available to the other
party not later than sixty (60) days after the demand for arbitration is served,
and the arbitrator may permit such depositions or other discovery deemed
necessary for a fair hearing.  The hearing may not exceed two
days.  The award shall be rendered within 120 days of the
demand.  The parties have included these time limits to expedite the
proceeding, but they are not jurisdictional, and the arbitrator may for good
cause permit reasonable extensions which shall not affect the validity of the
award.  The arbitrator may award interim and final injunctive relief
and other remedies, but may not award punitive, exemplary, treble, or other
enhanced damages.  To the fullest extent permitted by applicable law,
no arbitration described herein shall be joined to an arbitration involving any
other party, whether through class arbitration proceedings or
otherwise.  In the case of contradiction between the provisions of
this Section and the rules of the British Columbia Commercial Arbitration Act,
this Section shall prevail.  The limitations on remedies described
above may be deemed ineffective to the extent necessary to preserve the
enforceability of the agreement to arbitrate.  If any provision of
this agreement to arbitrate is held invalid or unenforceable, it shall be so
held to the minimum extent required by law and all other provisions shall remain
valid and enforceable.

     

    
      
         

      

      
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    15.           Schedules.  Schedule A, Schedule B and Schedule C, attached hereto, are incorporated herein and form part
of this Agreement. In the event of a
conflict between the terms of this Agreement and either or both of such
Schedules, the terms of this Agreement shall supersede and
prevail.

    

    16.           Notices.  All notices, demands, approvals, consents
and acceptances under this Agreement shall be in writing and shall be deemed to
have been duly given if mailed or delivered to a party at its address mentioned
above or faxed to the attention of:

    

    
      	
               
      

            	
              TO:  PhotoChannel

              Attn:  President

              Fax No. (604)
893-8966 

            	
              TO:  Black’s

              Attn:  AGMM,
      Ancillary

              Fax No. (613)
      221-2279

            

    

                                                               

    17.           Non-Assignability.  Neither party may assign this Agreement
without the prior written consent of the other party, such consent not to be
unreasonably withheld; provided that both parties have the unrestricted
right to transfer and assign their interest in this Agreement, in whole or in
part, to any entity:  (a) acquiring all or substantially all of its
assets or stock, (b) surviving a merger or amalgamation with or resulting from a
reorganization, or (c) to any affiliate.  Subject to the provisions of
this Section 17, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective permitted
successors and assigns.

     

    18.           Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the Province of British Columbia,
Canada.  Each party submits to the non-exclusive jurisdiction of the
courts of the Province of British Columbia, Canada.

     

    19.           Entire
Agreement.    This Agreement, together with its
attachments, constitutes the entire understanding and agreement between the
parties with respect to the subject matter hereof and supersedes any and all
prior or contemporaneous oral or written communications with respect
hereto.  This Agreement may not be altered, amended, or modified
except by a written instrument signed by an authorized employee of each
party.  If there is any conflict between PhotoChannel’s
representations, warranties and indemnification obligations under this Agreement
and PhotoChannel’s Terms and Conditions, this Agreement shall supercede.

     

    
      
         

      

      
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                                              PHOTOCHANNEL NETWORKS INC.

                                            
	 	 
	 	 
	 
      	
                                              By:

                                            	 
      
	 
      	 
      	
                                              Name:

                                            
	 
      	 
      	
                                              Title:

                                            
	 	 	 
	 	 	 
	 
      	
                                              BLACK’S PHOTO
CORPORATION

                                            
	 	 
	 	 
	 
      	
                                              By:

                                            	 
      
	 
      	 
      	
                                              Name:

                                            
	 
      	 
      	
                                              Title:

                                            

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    

    
      
         

      

      
        Page 6
of 6Unassociated Document

    
       

      INTERNET PHOTO SERVICES
AGREEMENT

    

    
      

      THIS
SERVICES AGREEMENT is effective this
29th
day of April, 2008, BETWEEN:

    

    
       

      PHOTOCHANNEL NETWORKS INC., a
company having an office at Suite 590, 425
Carrall Street, Vancouver, British Columbia, Canada,
V6B 6E3

    

    
      

      (hereinafter called
"PhotoChannel")

       

    

    
      
        - and -

      

    

    
      

    

    
      COSTCO WHOLESALE CORPORATION,
a company having an office at 999 Lake Drive, Issaquah, WA 98027.

    

    
       

      (hereinafter called
"Costco")

    

    
       

      WHEREAS
PhotoChannel is the developer and owner of
a proprietary Internet based digital imaging network solution for the upload and distribution of digital images for printing
of photographs or other products;

    

    
       

      AND
WHEREAS PhotoChannel is entitled to provide the Services (as hereinafter defined) to Costco
as provided herein;

    

    
       

      AND
WHEREAS Costco wishes to use the System for its warehouse Photo Centers
(“Costco Photo Centers”) and online photo operations and to receive the Services on the terms and
conditions set out herein;

    

    
       

      NOW
THEREFORE in consideration of the premises, the mutual covenants contained in
this Agreement, and other good and valuable consideration (the receipt and
sufficiency of which are hereby acknowledged), the parties agree as
follows:

    

    
       

       

    

    
      
        	
                1.

              	
                Definitions.

              

      

    

    
       

      
        	
                1.1  

              	
                 “ASRs”
      means either party’s employees and any third party service providers,
      agents, representatives, subcontractors and/or other authorized service
      representatives.

              

      

    

    
       

      
        	
                1.2  

              	
                “Branded
      Site” means the Internet portal and pages designed, developed and hosted
      by PhotoChannel and displaying Costco trademarks through which Costco
      Members may upload photographs, store photographs, purchase prints and
      other products for mail delivery or pick-up at Costco warehouses, pay for
      said prints and products, and engage in related online
      activities.

              

      

    

    
      

      
        	
                1.3  

              	
                “Customized
      Feature” means any improvement or modification to the Branded Site created
      specifically at Costco’s
request.

              

      

    

    
       

      
        	
                1.4  

              	
                “drycreekphoto.com”
      means the website accessed through that address that provides
      photographers with additional control over the printing and appearance of
      prints ordered through the Branded
Site.

              

      

    

    
       

      
        
          
          

        

        
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15

          
            

          

        

        
          
          

        

      

       

      
        	
                1.5  

              	
                “End-Users”
      means Costco Members and any individuals who access images on the Branded
      Site with the Member’s permission. In this Agreement, “Members and
      “End-Users” may be used
interchangeably.

              

      

    

    
       

      
        	
                1.6  

              	
                “Fiscal
      Period” means each of Costco’s thirteen four-week accounting periods
      during its fiscal year.

              

      

    

    
       

      
        	
                1.7  

              	
                “Fulfillment
      Provider” means any third party who enters into an agreement with Costco
      to provide Members photo-related products sold on the Branded
      Site.

              

      

    

    
       

      
        	
                1.8  

              	
                “Launch
      Date” means the first date upon which Members may upload photographs to
      the Branded Website.  It is anticipated that the Launch date
      shall be March 18, 2008.  The Launch Date may be changed by
      mutual written agreement.

              

      

    

    
       

      
        	
                1.9  

              	
                “Member Data” includes, without limitation, Member
      names, contact information, membership numbers, member address books,
      payment-related information and images and information associated with
      images that are transferred to PhotoChannel during the transition from
      Costco’s previous system provider or that are uploaded and/or keyed into
      the System through the Branded Site by Members during the
      Term.

              

      

    

    
       

      
        	
                1.10  

              	
                “Services” means the System and Branded Site
      containing all functionality specified in Schedule A, along with any
      Updates, Upgrades, Modifications and Customized Features provided during
      the Term.  Services shall be performed outside of the United
      States.

              

      

    

    
       

      
        	
                1.11  

              	
                 “System”
      means PhotoChannel’s software, software modifications, hardware, Branded
      Site and services comprising PhotoChannel’s Internet based digital imaging
      network solution for the upload, storage and distribution of digital
      images for printing of photographs or other
  products.

              

      

    

    
       

      
        	
                1.12  

              	
                 “Term”
      means the period between the Launch Date and midnight on the three-year
      anniversary of the actual Launch Date.  Costco may extend the Term for additional one-year
      periods (each such period, a
      “Renewal Term”) unless written notice is provided by Costco to PhotoChannel at
      least ninety (90) days prior to the end of the Term or the then
      current Renewal Term (the Term and any and all Renewal Terms, as the case
      may be, are collectively referred to herein as the “Term”).

              

      

    

    
       

      2. Pre-Launch Development and
Transition Services.  Prior to Launch Date, PhotoChannel shall
develop, test and make ready for production the Branded Site containing all
functionality specified in Schedule A.   The parties agree to
cooperate in good faith to meet the Launch Date, notify each other immediately
of any actual or anticipated delay in any agreed-upon time periods and
deadlines, and shall work in good faith, to minimize all delays and impact of
delays.  PhotoChannel shall perform all pre-launch services at no cost
or expense to Costco.

    

    
       

      3. The Branded
Site.  PhotoChannel shall design,
host and operate the Branded Site as described in Schedule A and subject
to the following conditions:

    

    
      
        	
                (a)  

              	
                Costco
      shall have the right to preapprove the design, layout, content and look
      and feel of the Branded Site, and any changes
  thereto;

              

      

    

    
      
        	
                (b)  

              	
                As
      between the Member and PhotoChannel, Costco’s Terms and Conditions of Use
      and Privacy Policy shall apply to the Branded Site. PhotoChannel shall
      provide a link to Costco’s privacy policy on the Branded
    Site;

              

      

    

    
      
        	
                (c)  

              	
                Costco
      will provide the jump page for the link from Costco.com to the Branded
      Site.  The form     and content of the
      jump page will be at Costco's
discretion;

              

      

    

    
      
        	
                (d)  

              	
                PhotoChannel
      shall create user interfaces, and ordering and payment capabilities for
      products and services sold by Fulfillment Providers.  Costco
      controls all pricing for any products or services sold through the Branded
      Site;

              

      

       

      
        
          
          

        

        
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                (e)  

              	
                Except
      for any links specifically authorized by this Agreement or otherwise
      authorized in writing by Costco, the Branded Site will not be linked or
      link to any other web site;

              

      

    

    
      
        	
                (f)  

              	
                As
      provided in Schedule A and throughout the Term of this Agreement, there
      will be a staging site (“Staging Site”) available at all times for the
      parties to test updates, upgrades and Customized
  Features;

              

      

    

    
      
        	
                (g)  

              	
                PhotoChannel
      shall make the Branded Site at least as accessible to individuals with
      disabilities as the Costco.com site, and provide, at a minimum alternate
      text for images, form field labels, and keyboard compatibility for
      scripted features.  PhotoChannel shall work with Costco and take
      commercially reasonable steps to ensure accessibility on the Branded Site
      and when an area is identified that is not accessible PhotoChannel shall
      make commercially reasonable efforts to make it accessible under a SOW (as
      hereinafter defined) in a mutually agreed timely
  manner;

              

      

    

    
      
        	
                (h)  

              	
                The
      data hosting facility where the System resides shall have backup power
      capabilities to allow it to continue operating, uninterrupted, for a
      period of seven days in the event of a catastrophic power
      failure;

              

      

    

    
      
        	
                (i)  

              	
                The
      Branded Site may display a “Powered by PhotoChannel”
    notice;

              

      

    

    
      
        	
                (j)  

              	
                PhotoChannel
      may only delete or cause to be deleted images stored in the System
      pursuant to a written policy established by Costco;
  and

              

      

    

    
      
        	
                (k)  

              	
                The
      Branded Site may be customized and/or localized for other Costco country
      regions.  The customization and/or localization will be provided
      at no charge;

              

      

    

    
      
        	
                (l)  

              	
                PhotoChannel
      will maintain and update a disaster recovery plan for the Branded Site,
      that requires, at a minimum, notification to Costco within one hour of
      learning of the disaster and prompt creation of a mutually acceptable
      response plan to restore full Branded Site functionality as soon as
      reasonably possible, with hourly progress updates to Costco until full
      functionality is restored.  For purposes of this Agreement a
      “disaster” means that fifty percent or more Members are unable to access
      their images and/or data for 12 consecutive
  hours.

              

      

    

    
      

    

    
      4.  Storage of Member
Images.  As part of the System, PhotoChannel shall provide
sufficient and secure storage of Member Data on a commercially reasonable basis
in accordance with generally accepted industry
standards.  PhotoChannel may store Member Data only in the United
States and Canada.  PhotoChannel shall maintain backup of all Member
Data as provided in Schedule A.  Backup Data (as hereinafter defined)
shall be used in the event of any critical or major System outage (as described
in Schedule C) preventing Member access to Member Data.  For purposes
of this Agreement, “Backup Data” shall mean, at a minimum, information
sufficient for a Member to access stored images and to print a 5x7
print.

    

    
      

    

    
      
        5.  Updates, Upgrades and
Modifications.

      

       

    

    
      
        	
                (a)  

              	
                PhotoChannel
      Software Updates and Upgrades.  From time to time PhotoChannel
      may issue generally available updates and upgrades to the
      System.  PhotoChannel will make these updates and upgrades
      available to Costco on the Staging Site.  Costco will test such
      updates and upgrades within thirty (30) calendar days of receiving
      notification of their availability.  Costco will notify
      PhotoChannel of its acceptance or rejection of the update or upgrade, and
      if Costco accepts the update or upgrade, PhotoChannel shall implement it
      on the Branded Site in the timeframe specified in the Statement of Work
      (“SOW”) form similar to that attached hereto as Schedule B.  If
      Costco rejects an update or upgrade, it will notify PhotoChannel of its
      reasons for rejection and, if requested by Costco, PhotoChannel shall
      provide corrections for retesting by Costco.  Any failure by
      Costco to provide notification of acceptance or rejection shall be deemed
      a rejection.  Except in the limited circumstances set out below,
      Costco shall not be required to implement an update or upgrade, provided,
      however, that if an update or upgrade is provided by PhotoChannel in order
      to avoid:

              

      

    

    
 

    
      
        	
                (i)  

              	
                any
      potential, actual or alleged infringement of a third-party’s intellectual
      property rights; or

              

      

    

    
       

      
        
          
          

        

        
          Page 3
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                (ii)  

              	
                any
      potential, actual or alleged violation of any law, statute, Payment Card
      Industry Data Security Standards (“PCI DSS”), or ordinance or an
      administrative order, rule or regulation relating to the System, and the
      update or upgrade does not materially degrade service or materially
      adversely affect the functionality of the System, Costco must implement
      the update or upgrade.

              

      

    

    
      
        	
                (b)  

              	
                Storage
      Capacity Upgrades.  No less frequently than every three Fiscal
      Periods the parties shall confer and agree on image upload volume
      projections and peak daily image upload projections (including holiday
      upload volumes) for the next three Fiscal Periods.  If the
      parties fail to agree on a volume projection, the volume projection shall
      be the growth percentage exhibited in the comparable periods the previous
      year.  PhotoChannel shall promptly upgrade its hardware,
      bandwidth and connectivity to meet volume projections.  Nothing
      herein prohibits PhotoChannel from implementing additional upgrades to its
      storage capacity or diminishes any of PhotoChannel’s obligations under
      this Agreement.

              

      

    

    
      
        	
                (c)  

              	
                Customized
      Features. Without limiting PhotoChannel’s rights under subsection 5(a), if
      Costco desires a Customized Feature, Costco shall so notify
      PhotoChannel.  PhotoChannel shall promptly propose an
      implementation plan for the Customized Feature, on a
      SOW.   If parties agree to the proposal, they shall sign a
      SOW.  Changes to any SOW must be mutually agreed upon in writing
      and signed by both parties.  Unless otherwise agreed by the
      parties in the applicable SOW, Costco shall have an exclusive right to the
      Customized Feature and derivatives thereof during the Term provided however, that
      PhotoChannel may never allow use of the customized features by
      Sam’s Club, Wal-Mart or BJ’s Wholesale and further provided that where
      PhotoChannel can show that it had committed to delivering a Customized
      Feature incorporating the same or substantially the same functionality as
      said Customized Feature within a period of six (6) months from the date
      Costco delivered the relevant SOW, no such exclusivity shall
      apply.

              

      

    

    
      
        	
                (d)  

              	
                Integrated
      Shopping Cart.  The Parties agree that an integrated shopping
      cart is a mutually desirable feature for the Branded Site, and shall
      cooperate with each other to implement this feature as soon as reasonably
      practical without risking disruption to or degradation of User experience
      on the Branded Site.

              

      

    

    
      

    

    
      
        	
                6.  

              	
                Support and
      Maintenance.  PhotoChannel shall operate the
      Branded Site and provide Members and Costco Photo Center employees service
      level support as described in
  Schedule C.

              

      

    

    
      

    

    
      
        	
                7.  

              	
                Payment to
      PhotoChannel.  Costco shall pay PhotoChannel as provided
      in Schedule F.

              

      

    

    
      

    

    
      
        	
                8. 

              	
                Fulfillment
      Providers.  Prior to Launch and during the Term, Costco
      may enter into agreements with Fulfillment Providers, in a form similar to
      that attached to this Agreement as Schedule D.  PhotoChannel
      agrees to exert commercially reasonable efforts to implement connectivity
      between the Branded Site and any Fulfillment
      Provider.  Integration between the System and the Fulfillment
      Provider shall be without additional charge to Costco or its Fulfillment
      Providers.

              

      

    

    
      

    

    
      
        	
                (a)  

              	
                Payment.  PhotoChannel
      shall be Costco’s agent for collecting payment from Members for products
      and services provided by Fulfillment Providers and, unless otherwise
      agreed, paying Fulfillment Providers on behalf of
      Costco.  Payment mechanisms on the Branded Site shall allow
      electronic payment by all methods then available on Costco.com (other than
      Costco Cash Cards), and shall capture all transaction information captured
      in Costco.com transactions.  Payment shall be processed through
      the credit card processor or processors designated by
      Costco.  Payments are not subject to offset and PhotoChannel
      shall not actually or legally possess payments or monies owed to Costco
      for the sale of products on the Branded Site, but will solely be
      responsible for the secure receipt and relay of the Member’s credit card
      information to Costco’s
      payment processor.

              

      

       

      
        
          
          

        

        
          Page 4
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                (b)  

              	
                PhotoChannel
      shall allow Members the option to store their credit card account numbers
      until the Parties implement an integrated shopping cart.  All
      payment and payment-related activities shall comply with PCI DSS, as
      amended from time to
time.  

              

      

    

    
      
        	
                (c)  

              	
                PhotoChannel
      shall be Costco’s agent, by way of its hosting of the Branded Site, for
      maintaining up-to-date sales tax information and charging Members sales
      tax for purchases made through the Branded Site, through Vertax or a
      similar sales tax program approved by Costco.  PhotoChannel is
      responsible for providing to Costco tax reports consistent with Costco’s
      own tax reporting practices.

              

      

    

    
      
        	
                (d)  

              	
                Special terms for
      drycreekphoto.com.  The Branded Site shall provide a link and
      continuous connectivity to drycreekphoto.com and a notice to Members that
      they are leaving the Branded Site and that the Terms and Conditions of Use
      and Privacy Policy of drycreekphoto.com will apply to the Member’s use of
      that site.

              

      

    

    
       

    

    
      
        	
                9.

              	
                Reports.  PhotoChannel
      will provide Costco with the following
      reports and other reports as reasonably requested by Costco, in formats
      mutually agreed by the parties.  Unless otherwise specified,
      each report is due within five days of the end of the prior
      week.  For purposes of this
      Agreement a weeks is defined as Monday through
    Sunday.

              

      

       

    

    
      
        	
                (a)  

              	
                Weekly summary report of sales of products by
      item description per unit (including item number and SKU), sell, total
      units ordered, total dollars, per unit cost, total cogs. (This report is
      currently called Costco Photo Center Revenue
      Report)

              

      

    

    
      
        	
                (b)  

              	
                Daily report that will include date, express
      uploads, regular uploads, email uploads, organizer uploads, total uploads,
      online prints, retail prints, total prints, wpu %, online prints per
      order, retail prints per order, total prints per order, new registrants,
      print orders, non-print orders, total orders. (This report is currently
      called Costco Daily Report).  This report will be compiled into
      weekly and monthly
reports.

              

      

    

    
      
        	
                (c)  

              	
                Weekly transaction report of upload fees by
      warehouse location will include upload fee, # of uploads, fees calculated,
      warehouse #, warehouse location, % of store revenue, uploads $ amount
      calculated.  (This report is currently called Costco Store
      Report)

              

      

    

    
      
        	
                (d)  

              	
                Monthly refunds reports by date of credit, refund
      #, order #, order type, person issuing credit, return reason, comments,
      amounts credit.  (This report is currently called CS Refund
      Report)

              

      

    

    
      
        	
                (e)  

              	
                Monthly summary report of sales by item, sell
      price, units, dollars, fiscal year totals and accumulated
      total.  (This report is currently called Costco Products by
      Month Cumulative)

              

      

    

    
      
        	
                (f)  

              	
                Monthly summary report of accounts deletions by
      month, accounts deleted last month, accounts scheduled to be deleted this
      month, % deleted scheduled vs. actual.  (This report is
      currently called Photo Center Accounts Deleted Total
      Page)

              

      

    

    
      
        	
                (g)  

              	
                Monthly report containing emails for all new
      registrants

              

      

    

    
      
        	
                (h)  

              	
                Weekly report summarizing customer service calls
      and emails including weekly calls
      received, calls answered, reason for call, resolution to call, calls
      escalated for higher tier service, calls abandoned, percentage of calls
      abandoned, average hold time, and average talk time.  Same type
      of information should be provided for email support including # of emails
      received, reason for email, email response time, % resolved on initial
      email.

              

      

    

    
      
        	
                (i)  

              	
                Daily unshipped orders report including time at
      fulfillment vendor, order basket id #, shipping method, order type, order
      id #, customer id #, time order placed, time order received at fulfillment
      vendor, time between Photo Channel and fulfillment vendor. (This report is
      currently called the COSTCO Daily Ops Aging
  Report)

              

      

    

    
      
        	
                (j)  

              	
                Daily not acknowledged report including order
      basket id #, received at Photo Channel, Sent to fulfillment vendor, status
      code, order type, customer id #, Photo Channel order id #, member email
      address.  (This report is currently called COSTCO Daily Ops
      NoAck Reports)

              

      

    

    
      

      
        
          
          

        

        
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                (k)  

              	
                Quantity and dollar amount, share emails, image uploads, and all Member and
      Costco Photo Center employee telephone activity, including weekly calls received, calls answered, reason for
      call, resolution to call, calls escalated for higher tier service, calls
      abandoned, percentage of calls abandoned, average hold time, and average
      talk time.  

              

      

    

    
      
        	
                (l)  

              	
                Weekly transaction report (“Transaction Report”)
      showing the items listed below and in a format and delivery method agreed
      upon by the parties.  The Transaction Report shall be delivered
      to Costco by noon Pacific Time of the Monday following the reporting
      week.  Transaction Reports may include
      transactions and amounts from previous weeks, not previously reported, due
      to operational delays such as the lapse of time between the placing of an
      order and the receipt of shipping confirmation messages from external
      Fulfillment Provider
systems.

              

      

    

    
       

    

    
      
        	
                1.  

              	
                Costco Member name, address, county, city, state
      zip

              

      

       

    

    
      
        	
                2.  

              	
                Total amount for each member
      transaction

              

      

       

    

    
      
        	
                3.  

              	
                Type of credit card
  used

              

      

       

    

    
      
        	
                4.  

              	
                Type of product(s) and quantity
      ordered

              

      

       

    

    
      
        	
                5.  

              	
                Purchase amount for each
      product

              

      

       

    

    
      
        	
                6.  

              	
                Shipping and Handling
  amount

              

      

       

    

    
      
        	
                7.  

              	
                Tax
amount

              

      

       

    

    
      
        	
                8.  

              	
                Total per image upload
  fees

              

      

       

    

    
      
        	
                (m)  

              	
                A weekly "Internet Report" showing, at
      a minimum, (i) the number of express
      uploads, regular uploads and total uploads by email and cell phone; (ii)
      the number of mail order prints, mail order Fulfillment Provider products
      and prints for pick-up at Costco Warehouses; (iii) total print orders;
      (iv) total Fulfillment Provider product orders; (v) total orders, (vi)
      Costco Member registrations and deactivations; and (vii) total
      images deleted. 

              

      

    

    
      
        	
                (n)  

              	
                A
      Fiscal Period site metrics report that at a minimum analyzes abandoned
      carts, unique visitors, page views, total sessions, top pages browsed,
      average session length, conversion rate, top visited pages, top departure
      pages, natural research sites that are bringing in traffic by sessions,
      buyers and visitors, number of error/error pages, site availability,
      homepage load time, average and detail image download time and other
      information mutually agreed upon between the
  parties.

              

      

    

    
      

    

    
      
        	
                10.

              	
                Information
      Security. PhotoChannel agrees
      to establish and maintain adequate physical, technological and
      administrative security measures to protect the security and
      confidentiality of Member Data and Costco’s Confidential Information (as
      defined in Section 13 below) that are consistent with industry standard
      security practices.  PhotoChannel shall immediately notify
      Costco of any security breach, complaints received, and/or notices of
      investigation related to or affecting Member Data or Confidential
      Information as soon as reasonably possible after becoming aware of same,
      and to cooperate with Costco to rectify any breach, satisfy any notice
      requirement, and/or other legal requirements related to the
      breach.  PhotoChannel shall amend or correct any Member Data
      upon request by Costco or the Member, and shall notify Costco of any
      Member request for access to any Member Data and cooperate with Costco to,
      subject to applicable law, provide or deny access as directed by
      Costco.  Costco, or its authorized representative upon
      reasonable notice to PhotoChannel, may audit the security infrastructure
      protecting Member Data.

              

      

    

    
       

      
        
          
          

        

        
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                11.

              	
                Access To
      Facilities; Costco Audit Rights.  Costco shall
      at all reasonable times give PhotoChannel’s ASRs reasonable and sufficient
      access to the Costco premises and assets of Costco as necessary to permit
      PhotoChannel to fulfill its obligations under this
      Agreement.  At all times PhotoChannel's ASR’s shall observe all
      generally-applicable employment and security rules and policies, as well
      as the terms of this
Agreement.

              

      

    

    
      

    

    
      PhotoChannel
shall at all reasonable times give Costco’s ASRs reasonable and sufficient
access to the PhotoChannel premises and assets of PhotoChannel and its third
party vendors as necessary to permit Costco to audit PhotoChannel’s compliance
with this Agreement.  At all times Costco’s ASR’s shall observe all
generally-applicable employment and security rules and/or the adequacy of data
security policies, as well as the terms of this
Agreement.  PhotoChannel will also permit and actively cooperate with
state or federal regulatory authorities having jurisdiction over Costco to audit
PhotoChannel’s compliance with the terms and conditions of this
Agreement    Costco shall bear all reasonable costs and
expenses of any audit conducted by Costco or its regulators unless: (i) the
reason for the audit is a breach of PhotoChannel security; (ii) the audit
reveals that PhotoChannel has materially underpaid taxes or made significant
revenue recording errors; or (iii) it is demonstrated that PhotoChannel has
overcharged Costco in the aggregate by more than five percent (5%) of the amount
actually due for the audit period.  In the case of such events,
PhotoChannel will reimburse Costco all reasonable costs and expenses incurred as
a result of the audit and will also (if applicable) immediately repay any
amounts determined due to Costco.

       

      

    

    
      
        	
                12. 

              	
                Designated
      Contacts. Each party shall designate
      relationship managers, technical contacts and project coordinators.  These individuals
      will, on behalf of the respective parties, make decisions and co-ordinate
      activities as necessary to meet the Launch Date, to perform the parties’
      respective obligations under this Agreement, and for operation of the
      Branded Site.  The parties’ Designated Contacts are listed on
      Schedule E.

              

      

    

    
      

    

    
      
        	
                13.

              	
                Confidentiality.
      "Confidential Information" means each party’s data and information,
      whether accessed electronically or otherwise, of a confidential or
      proprietary nature to which a party has access or that is provided
      pursuant to this Agreement, including trade secrets, functional and
      technical specifications, designs, drawings, translations, analysis,
      research, processes, computer programs, beta versions, algorithms,
      methods, ideas, “know how,” and other technical information, sales and
      marketing research, materials, plans, projects, and other business
      information, accounting and financial information, other information
      concerning the products, services and business of the parties, the terms
      of this Agreement, and information concerning Fulfillment Providers and
      third-party suppliers or customers of the parties. Information shall be considered to be
      Confidential Information:  (a) if marked as such;  (b)
      if the disclosing party orally or in writing has advised the receiving
      party of the confidential nature of the information; or (c) if, due to its
      character or nature, reasonable people in a like position and under like
      circumstances would treat it as confidential. Further, all sales related information, including,
      without limitation, all information created or developed pursuant to
      Section 9 and other such sales information, whether generated on the
      Branded Site or otherwise (collectively, “Sales Information”) is Costco's
      Confidential
Information.

              

      

    

    
      

    

    
      Each
party agrees that the Confidential Information of the other party will be held
in confidence to the same extent and the same manner as each party protects its
own Confidential Information, but each party agrees that in no event will less
than reasonable care be used.  Each party however, shall, be permitted
to disclose relevant aspects of such Confidential Information to its officers,
employees, and consultants on a need-to-know basis, and provided that they have
undertaken to protect the Confidential Information to the same extent as
required under this Agreement.  Each party agrees to use all
reasonable steps to ensure that the other party's Confidential Information
received under this Agreement is not disclosed in violation of this
Section.  Each party agrees not to use the Confidential Information of
the other party other than in the performance of its obligations under this
Agreement.

    

    
      

      
        
          
          

        

        
          Page 7
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      The
obligations set forth in this Section do not apply if and to the extent the
party receiving Confidential Information ("Receiving party") establishes
that:

       

    

    
      
        	
                (a)  

              	
                the
      information disclosed to the Receiving party was already known to the
      Receiving party, without obligation to keep it
    confidential;

              

      

    

    
      
        	
                (b)  

              	
                the
      Receiving party received the information in good faith from a third party
      lawfully in possession thereof without obligation to keep such
      information;

              

      

    

    
      
        	
                (c)  

              	
                the
      information was publicly known at the time of its receipt by the Receiving
      party or has become publicly known other than by a breach of this
      Agreement;

              

      

    

    
      
        	
                (d)  

              	
                the
      information is independently developed by the Receiving party without use
      of the other party's Confidential Information;
  or

              

      

    

    
      
        	
                (e)  

              	
                the
      information is required to be disclosed by applicable statute or
      regulation or by judicial or administrative process; provided that, in the
      case of (a) through (d) above, the Receiving party will use reasonable
      efforts under the circumstances to notify the other party of such
      requirements so as to provide such party the opportunity to obtain such
      protective orders or other relief as the compelling court or other entity
      may grant.

              

      

    

    
      

      Without limiting its obligations under this Section,
PhotoChannel acknowledges that all Member Data, is Costco's Confidential
Information.  Member Data is not subject to the exceptions in clauses
13 (b), and (c).

    

    
      

      Nothing in this Section reduces or modifies
PhotoChannel’s obligations under the PCI DSS.

    

    
       

    

    
      
        	
                14. 

              	
                PhotoChannel’s
      Warranties.  PhotoChannel hereby represents and warrants
      to Costco that:

              

      

       

      

    

    
      
        	
                (a)  

              	
                The Branded Site will perform the functions set
      out in, in the manner and to the standards provided in this Agreement and
      in Schedule A. PhotoChannel shall promptly correct any errors,
      malfunctions or defects in the System, including any hardware supplied or
      sold by PhotoChannel to Costco;

              

      

    

    
      
        	
                (b)  

              	
                It will perform its duties and obligations under
      this Agreement using the highest standards of care, skill and diligence
      used in its industry by those providing similar
      services;

              

      

    

    
      
        	
                (c)  

              	
                It will not act or fail to act in any way that
      would injure the goodwill of
Costco;

              

      

    

    
      
        	
                (d)  

              	
                It
      has the full power and authority to enter into and perform this Agreement
      and that the execution and delivery of this Agreement has been duly
      authorized and that this Agreement does not violate any law or breach any
      other agreement to which PhotoChannel is a party or is
    bound;

              

      

    

    
      
        	
                (e)  

              	
                All
      software, hardware and Services will be provided free and clear of defects
      in title, all liens, restrictions, reservations, encumbrances, and
      security interests of all
kinds;

              

      

    

    
      
        	
                (f)  

              	
                It
      will not display anything on the Branded Site that contains any content,
      features, or materials that:  (i) violate or infringe the rights
      of any person, (ii) are abusive, profane, offensive, obscene, pornographic
      or sexually explicit, or (iii) are false or misleading, defamatory or
      harassing, excessively violent, or which violate or encourage others to
      violate any applicable law;

              

      

    

    
      
        	
                (g)  

              	
                No
      component of the System contains any program, routine, device or other
      undisclosed feature, including without limitation, a time bomb, virus,
      software lock, drop dead device, malicious logic, worm, Trojan horse or
      trap or back door, or other harmful device which is designed to delete,
      disable, deactivate, provide unauthorized access, interfere with or
      otherwise harm any software, program, data, device, system or service, or
      which is intended to provide unauthorized access or to produce
      unauthorized modifications.  It will use best-in-class virus
      protection technology throughout the
Term;

              

      

    

    
      

      
        
          
          

        

        
          Page 8
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                (h)  

              	
                Except
      as provided in Section 14(i), below, all software and any modifications
      included in the System are the original work of PhotoChannel and do not
      infringe or will not infringe the Intellectual Property Rights of any
      third party.  In this Agreement, "Intellectual Property Rights"
      means all the intellectual property, industrial and other proprietary
      rights, protected or protectable, under the laws of the United States, any
      foreign country, or any political subdivision thereof, including, without
      limitation, (i) all trade names, trade dress, trademarks, service marks,
      logos, brand names and other identifiers; (ii) copyrights, moral rights
      (including rights of attribution and rights of integrity); (iii) all trade
      secrets, inventions, discoveries, devices, processes, designs, techniques,
      trade secrets, ideas, know how and other confidential or proprietary
      information, whether or not reduced to practice; (iv) all domestic and
      foreign patents and the registrations, applications, renewals, extensions
      and continuations (in whole or in part) thereof; and (v) all goodwill
      associated therewith and all rights and causes of action for infringement,
      misappropriation, misuse, dilution or unfair trade practices associated
      with (i) through (iv) above;

              

      

    

    
      
        	
                (i)  

              	
                If
      PhotoChannel does not own all such software or modifications included in
      the System, PhotoChannel has sufficient right, title, and interest in and
      to all Intellectual Property Rights and other proprietary rights relating
      to such software and modifications to enter into and perform under this
      Agreement and to grant the rights and licenses in this
      Agreement;

              

      

    

    
      
        	
                (j)  

              	
                It
      will operate the System and the Branded Site securely and in compliance
      with all applicable laws and with Costco’s privacy policy, as amended from
      time to time; and

              

      

    

    
      
        	
                (k)  

              	
                It
      has all necessary import and export licenses or license exemptions for
      components of the System that cross international
  borders.

              

      

       

    

    
      
        	
                15.

              	
                Costco’s
      Warranties.  Costco hereby
      represents and warrants to PhotoChannel
  that:

              

      

    

    
      

    

    
      
        	
                (a)  

              	
                It
      has the full power and authority to enter into and perform this Agreement
      and that the execution and delivery of this Agreement has been duly
      authorized and that this Agreement does not violate any law or breach any
      other Agreement to which Costco is a party or is
  bound;

              

      

    

    
      
        	
                (b)  

              	
                It will not act or fail to act in any way that
      would injure the goodwill of
  PhotoChannel;

              

      

    

    
      
        	
                (c)  

              	
                Costco’s
      trademarks, domain names and any other material Costco provides for the
      Branded Site do not infringe and will not infringe the Intellectual
      Property Rights of any third party.  "Intellectual Property
      Rights" has the same meaning as set forth in Section 14 (h)
      above.

              

      

    

    
      
        	
                (d)  

              	
                No
      component of Costco.com contains any program, routine, device or other
      undisclosed feature, including without limitation, a time bomb, virus,
      software lock, drop dead device, malicious logic, worm, Trojan horse or
      trap or back door, or other harmful device which is designed to delete,
      disable, deactivate, provide unauthorized access, interfere with or
      otherwise harm any software, program, data, device, system or service on
      the Branded Site, or which is intended to provide unauthorized access or
      to produce unauthorized modifications to the Branded
  Site.

              

      

    

    
      
        	
                (e)  

              	
                It
      will not provide any material for the Branded site that contains any
      content, features, or components that:  (i) violate or infringe
      the rights of any person, (ii) are abusive, profane, offensive, obscene,
      pornographic or sexually explicit, or (iii) are false or misleading,
      defamatory or harassing, excessively violent, or which violate or
      encourage others to violate any applicable
law.

              

      

    

    
      
        	
                (f)  

              	
                It
      will obey all laws as they apply to its relationship to PhotoChannel and
      its performance of this
Agreement.

              

      

    

    
      

      
        
          
          

        

        
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      16.  Intellectual Property;
Licenses.

       

    

    
      
        	
                (a)  

              	
                PhotoChannel’s
      Intellectual Property.   PhotoChannel hereby grants
      Costco a non-exclusive license to use during the Term and all copyrighted
      material, trademarks, inventions and all other industrial or intellectual
      property rights (collectively, “PhotoChannel’s Intellectual Property”)
      forming part of or necessary to use the System and the Branded
      Site.  Except as set forth
      in this Section 16, Costco
      acknowledges that pursuant to this Agreement it is not acquiring any
      interest in or right to use any of PhotoChannel’s Intellectual Property
      and, as between the parties, PhotoChannel will own exclusively all
      right, title and interest in and to the System and acknowledges
      that nothing herein shall be construed to accord to Costco any rights in
      the System, except as expressly provided herein and Costco hereby
      disclaims all such right, title and interest.

              

      

    

    
      
        	
                (b)  

              	
                Costco’s Intellectual
      Property.  Costco hereby
      grants PhotoChannel a limited, nonexclusive, non-transferable license to
      use during the Term and Costco's proprietary trademarks and trade names,
      and the domain name www.costcophotocenter.com, but solely on the Branded Site and always in
      accordance with Costco's then current trademark usage guidelines and prior
      written approval.  Costco further grants to PhotoChannel a
      limited, nonexclusive, non-transferable license to create the links and
      provide System connectivity from the Costco.com website to the Branded
      Site and the to all Costco warehouse locations in the United States that
      exist during the Term.  Except as set forth in this Section 16,
      PhotoChannel acknowledges that pursuant to this Agreement it is not
      acquiring any interest in or right to use any of Costco’s Intellectual
      Property or any other licenses and, as between the parties, Costco will
      own exclusively all right, title and interest in and to the Costco
      Intellectual Property, and PhotoChannel hereby disclaims all such
      right, title and interest.

              

      

    

    
       

      
        	
                17. 

              	
                Termination.  A party shall be entitled to
      terminate this Agreement
if:

              

      

    

    
      

    

    
      
        	
                (a)  

              	
                The other party makes a general assignment for the
      benefit of its creditors or a proposal or arrangement under the United
      States or Canadian Bankruptcy laws, if a petition is filed against the
      other party under any such laws, if the other party is declared or
      adjudicated bankrupt, if a liquidator, trustee in bankruptcy, custodian,
      receiver, manager or any other officer with similar powers shall be
      appointed, either privately or judicially, of or for the other party or if
      the other party shall commit an act of bankruptcy or propose a compromise,
      arrangement or otherwise have recourse to any law for the protection of
      debtors; 

              

      

    

    
      
        	
                (b)  

              	
                If the other party fails to fulfill any of its
      obligations hereunder and does not cure such failure, to the reasonable
      satisfaction of the non-breaching party, within thirty (30) days
      after receiving written notice of such failure;

              

      

    

    
      
        	
                (c)  

              	
                The System experiences a critical outage (as
      defined in Schedule C) that persists for seventy-two (72) hours;
      or

              

      

    

    
      
        	
                (d)  

              	
                Costco may terminate this Agreement, in its
      sole discretion, without cause, upon one-hundred and eighty 180) days
      prior written notice.

              

      

    

    
       

    

    
      
        	
                18. 
    

              	
                Effect of
      Termination.  If Costco
      elects to transition the services to another party, PhotoChannel shall
      fully and promptly cooperate with Costco and its designees to transition
      all Member Data and information and services as necessary to allow any new
      entity or entities designated by Costco to provide without interruption
      any or all of the services provided by PhotoChannel under this
      Agreement.  Transition shall occur on a reasonable schedule to
      be determined by Costco in consultation with PhotoChannel, provided,
      however, that Costco may at its sole discretion extend the Term of this
      Agreement for up to 90 days after the termination date in order to
      facilitate transition.  PhotoChannel shall use commercially
      reasonable efforts to ensure that any transition occurs without service
      interruption.  Services for orders outstanding at the time of
      termination shall be processed as directed by Costco.

              

      

       

      
        
          
          

        

        
          Page 10
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      Upon
completion of transition or upon termination if there is no transition,
PhotoChannel shall immediately return to Costco all Member Data, including the
digital images, or at Costco’s request, certify destruction of
same.  Each party will be responsible for its own transition costs,
and Costco (or PhotoChannel’s successor) will be responsible for connectivity
charges incurred to transfer Member Data. Notwithstanding the foregoing, should
Costco elect to terminate this Agreement, without cause, upon one hundred eighty
(180) days prior written notice before the Agreement has been effective for
thirty (30) months, Costco shall be responsible for all costs associated with
the transition to a new provider per this section and shall reimburse
PhotoChannel up to six hundred thousand dollars of its cost of procuring
sufficient storage for the performance of this Agreement, such reimbursement to
be reduced on a declining balance basis according to the following
schedule:

       

    

    
      
        	
                (a)  

              	
                The
      $600,000.00 termination liability shall be reduced by $33,333.00 per month
      during the first twelve months of the
Agreement.

              

      

       

    

    
      
        	
                (b)  

              	
                The
      balance of the termination liability remaining at the end of the first
      twelve months, which shall be $200,000.00, shall be further reduced by
      $16,666.00 per month during the second twelve months of the
      Agreement.

              

      

       

    

    
      
        	
                19.

              	
                Contingency for PhotoChannel
      Inability to Perform.  Schedule E contains the names and
      contact information of at least three employees at PhotoChannel who are
      capable of operating the Branded Site and who have expertise in the
      System.  PhotoChannel shall update the employee information as
      necessary throughout the Term to maintain its
      accuracy.  PhotoChannel employees shall be informed that they
      have been designated as contingency contacts for Costco. PhotoChannel
      shall arrange for Costco to have access to its hosting facility and all
      other assets and facilities used to operate the Branded Site or in the
      performance of this Agreement in the event that PhotoChannel becomes
      unable to perform this Agreement without transferring its obligations to a
      capable successor.  It is the parties’ mutual intent that if
      such event occurs, Costco shall have access to expertise and facilities as
      necessary to continue undiminished and uninterrupted operations of the
      Branded Site for at least as long as required to transition to a new
      provider.  PhotoChannel shall not enter into any agreements or
      arrangements that would diminish or impair Costco’s rights under this
      section.

              

      

    

    
       

      
        	
                20.

              	
                Indemnification by
      PhotoChannel.  PhotoChannel
      shall hold harmless, defend and indemnify Costco and its affiliates
      (and their respective employees, directors and representatives) against
      any and all claims, actions, proceedings and suits and any and all
      liabilities, damages, settlements, penalties, fines, costs or expenses
      (including reasonable attorneys' fees and other litigation expenses)
      (collectively, “Losses”) incurred by Costco, arising out of or relating
      to:

              

      

    

    
      
        	
                (a)  

              	
                any
      actual or alleged infringement or misappropriation of the intellectual
      property rights of any person or entity by (i) PhotoChannel’s Intellectual
      Property, (ii) the System, or (iii) any services provided on the Branded
      Site by PhotoChannel or its
ASR’s;

              

      

    

    
      
        	
                (b)  

              	
                any
      actual or alleged violation by PhotoChannel of any law, statute, PCI DSS,
      or ordinance or an administrative order, rule or regulation relating to
      the System or any services provided on the Branded Site by PhotoChannel,
      or its ASR’s in connection with this
Agreement;

              

      

    

    
      
        	
                (c)  

              	
                any
      act, activity or omission of PhotoChannel, or any of its ASR’s, including
      activities on Costco's premises and the use of any vehicle, equipment,
      fixture or material of PhotoChannel in connection with any service or
      right provided by PhotoChannel under this Agreement;
  or

              

      

    

    
      
        	
                (d)  

              	
                PhotoChannel's
      breach of any of its representations, warranties or undertakings in this
      Agreement.

              

      

    

    
      Provided
that PhotoChannel shall have no indemnification obligations under this section
to the extent that:

    

    
      
        	
                (e)  

              	
                such
      Losses arise from Costco’s failing to implement all mandatory updates
      pursuant to subsection 5(a);
or

              

      

    

    
      
        	
                (f)  

              	
                such
      Losses arise from the acts or omissions of Members that are inconsistent
      with Costco’s Terms and Conditions of Use and Privacy
    Policy.

              

      

    

    
      

      
        
          
          

        

        
          Page 11
of 15

          
            

          

        

        
          
          

        

      

       

      
        	
                21. 

              	
                Indemnification by
      Costco.  Costco shall
      hold harmless, defend and indemnify PhotoChannel and its affiliates
      (and their respective employees, directors and representatives) against
      any and all claims, actions, proceedings and suits and any and all
      liabilities, damages, settlements, penalties, fines, costs or expenses
      (including reasonable attorneys' fees and other litigation expenses)
      incurred by PhotoChannel, arising out of or relating
  to:

              

      

    

    
      
        	
                (a)  

              	
                any
      actual or alleged infringement or misappropriation of the intellectual
      property rights of any person or entity by Costco’s Intellectual
      Property;

              

      

    

    
      
        	
                (b)  

              	
                Costco's
      breach of any of its representations, warranties or undertakings in this
      Agreement

              

      

    

    
       

      
        	
                22. 

              	
                Special Terms Related to
      Interruption of Basic Functionality. PhotoChannel shall maintain
      web, registration, authentication, transactional, security, email and
      upload standards in compliance with Section (1)(a) of Schedule C (“basic
      functionality”). The parties agree that in the event of a critical, major
      or important failure of basic functionality, Costco’s actual damages,
      including damage to its goodwill and Member relationships, will be
      difficult or impossible to determine.  To the extent System
      outages exceed the standard set forth in Schedule C (1)(a) in any rolling
      four-week period, Costco shall be entitled as liquidated damages and not
      as a penalty an amount equal to twenty-five percent (25%) of the average
      amount of gross sales generated per hour through the Branded Site during
      the immediately preceding week, times the number of hours or portion of
      hours during which the outage persists. PhotoChannel’s liability under
      this section shall not exceed five hundred thousand dollars US (USD
      500,000).

              

      

    

    
       

      
        	
                23.

              	
                Limitation of Liability.
      OTHER THAN THE PARTIES’ INDEMNIFICATION OBLIGATIONS, PHOTOCHANNEL’s
      OBLIGATIONS UNDER SECTION 22 OR A BREACH OF THE CONFIDENTIALITY
      OBLIGATIONS HEREIN, TO THE MAXIMUM EXTENT PERMITTED BY LAW, NEITHER PARTY
      HERETO SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL,
      EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR SPECIAL DAMAGES, HOWEVER
      ARISING, INCLUDING WITHOUT LIMITATION DAMAGES ARISING OUT OF OR IN
      CONNECTION WITH ANY LOSS OF PROFIT, OR LOSS OF BUSINESS OR ANTICIPATORY
      PROFITS, WHETHER IN CONTRACT, TORT, NEGLIGENCE OR OTHERWISE, EVEN IF SUCH
      PARTY HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH
  DAMAGES.

              

      

    

    
       

      
        	
                24.

              	
                Indemnification
      Procedure.   The indemnified party shall promptly
      notify the other party in the event of a claim or other occurrence for
      which the indemnified party claims a right to indemnity, and if the
      occurrence involves a claim by a third party, shall tender defence of the
      claim to the indemnified party.  The indemnifying party shall
      assume defence of any third party claim, provided, however that the
      indemnified party shall have the right to participate in the defence of
      any claim with separate counsel of its choosing and at its own
      expense.  Any settlement that contains a remedy other than the
      payment of money damages must be approved in writing in advance by the
      indemnified party, which approval shall not be unreasonably withheld or
      delayed.  If it is ultimately determined by a court or
      arbitrator that the indemnifying party had no obligation to defend or
      indemnify, then the indemnified party shall promptly reimburse the
      indemnifying party all costs and expenses of indemnification, excluding
      any cost or expense relating to the determination of the indemnification
      obligation itself.

              

      

    

    
       

      
        	
                25.

              	
                Arbitration.  All
      claims and disputes other than claims that would determine the extent or
      general validity of either party’s Intellectual Property and that (1) are
      between PhotoChannel and Costco or either’s subsidiaries, parents,
      affiliates, officers, directors and/or employees, and (2) arise out of or
      relate to this Agreement or its subject matter, interpretation,
      performance or enforcement, (including any tort or statutory claim)
      ("Dispute") shall be arbitrated by a sole arbitrator in Seattle,
      Washington, in accordance with the Center for Public Resources' Rules for
      Non-Administered Arbitration (the "CPR Rules") and judgement upon the
      award rendered by the arbitrator may be entered by any court having
      jurisdiction thereof.

              

      

    

    
       

      
        
          
          

        

        
          Page 12
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      All
documents and information relevant to the Dispute in the possession of any party
shall be made available to the other party not later than sixty (60) days after
the demand for arbitration is served, and the arbitrator may permit such
depositions or other discovery deemed necessary for a fair
hearing.  The hearing may not exceed two days.  The award
shall be rendered within 120 days of the demand.  The parties have
included these time limits to expedite the proceeding, but they are not
jurisdictional, and the arbitrator may for good cause permit reasonable
extensions, which shall not affect the validity of the award.  The
arbitrator may award interim and final injunctive relief and other remedies, but
may not award punitive, exemplary, treble, or other enhanced
damages.  To the fullest extent permitted by applicable law, no
arbitration described herein shall be joined to an arbitration involving any
other party, whether through class arbitration proceedings or
otherwise.  In the case of contradiction between the provisions of
this Section and the CPR Rules, this Section shall prevail.  The
limitations on remedies described above may be deemed ineffective to the extent
necessary to determine the validity or general extent of either party’s
Intellectual Property Rights or preserve the enforceability of the agreement to
arbitrate.  If any provision of this agreement to arbitrate is held
invalid or unenforceable, it shall be so held to the minimum extent required by
law and all other provisions shall remain valid and
enforceable.

    

    
       

      
        	
                26.

              	
                Insurance.  PhotoChannel shall give Costco Certificates
      of Insurance for all times relevant to the Agreement naming Costco
      Wholesale Corporation as an "additional insured" in protecting all parties
      from liability under this Agreement.  PhotoChannel's insurers
      must be Best’s rated B+, V11 or better.  Evidence of the
      following coverage is
required:

              

      

    

    
      
        	
                (a)  

              	
                Commercial
      General Liability insurance (occurrence form) including contractual
      liability, products and completed operations, personal and advertising
      injury, and contractual liability enforcement, with minimum primary limits
      of $1 million for each occurrence and an aggregate cap of no less than $2
      million;

              

      

    

    
      
        	
                (b)  

              	
                U.S.
      Workers’ Compensation insurance, for U.S. employees, with statutory limits
      and employer’s liability insurance with minimum limits of
      $2,000,000;

              

      

    

    
      
        	
                (c)  

              	
                Proof
      of PhotoChannel’s account standing with the Canadian Workers’ Compensation
      Board;

              

      

    

    
      
        	
                (d)  

              	
                Automobile
      Liability insurance with $1,000,000 coverage limits for each accident,
      including owned, non-owned and hired vehicles;
  and

              

      

    

    
      
        	
                (e)  

              	
                Professional Liability Insurance:
      covering errors and omissions and wrongful acts in the performance of this
      Agreement.  Such errors and omissions insurance will include
      coverage for claims of infringement of the copyrights, trademarks, trade
      dress and patents and misappropriation of trade secrets.  Such
      insurance will bear a combined single limit per occurrence of not less
      than $2,000,000.

              

      

    

    
      

      Policy
limits may not be reduced, terms changed if the changes reduce Costco’s
protection under this section, or policies cancelled with less than thirty (30)
days prior written notice to Costco.  PhotoChannel's insurance shall
be primary and contain a waiver of subrogation by PhotoChannel's insurance
carrier with respect to all obligations assumed by PhotoChannel pursuant to the
Agreement.  If any penalties, etc. are applied to Costco or its
subsidiaries as a result of inadequate Workers’ Compensation coverage in either
the United States or Canada, PhotoChannel will be responsible to reimburse
Costco for the full amount.  PhotoChannel understands
that statutory liability limitations may apply to claims by its employees, and
waives those limits to the extent they might apply to any claim for
indemnification by Costco.  Coverages and limits will not limit
the liability of PhotoChannel.

    

    
       

    

    
      
        	
                27.

              	
                Employment Practices; Costco’s
      Approval of ASRs.  In providing the Services,
      PhotoChannel shall not permit employment of unfit persons or persons not
      skilled in tasks assigned to them.  PhotoChannel and its ASR’s
      shall comply with all laws, statutes, ordinances, administrative orders,
      rules and regulations, including (without limitation) immigration laws,
      relating to the services provided under this
      Agreement.  PhotoChannel and any ASRs shall pay their employees
      at least ninety percent (90%) of Prevailing Wage for performance of
      services.

              

      

       

      
        
          
          

        

        
          Page 13
of 15

          
            

          

        

        
          
          

        

      

       

      For
purposes of this Section, Prevailing Wage shall mean the hourly wage customarily
paid for similar work in the local trade area where the services are performed
by competitive service providers that comply with the law. PhotoChannel agrees
not to allow any third party ASRs to work on the Branded Site without Costco’s
prior written approval.

    

     

    
      
        	
                28. 

              	
                Code of Conduct.  PhotoChannel acknowledges receipt of
      and agrees to comply with Costco’s Code of Conduct applicable to all
      vendors, as such code may be amended during the
    Term.

              

      

       

    

    
      
        	
                29.

              	
                Notices.  All notices, demands, approvals,
      consents and acceptances under this Agreement shall be in writing and
      shall be deemed to have been duly given if mailed or delivered to a party
      at its address mentioned above or faxed to the attention
      of:

              

      

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          	
                                                  TO:

                                                	
                                                  PhotoChannel Networks, Inc.

                                                	
                                                  TO:

                                                	
                                                  Costco Wholesale
  Corporation

                                                
	 
      	
                                                  425 Carrall Street

                                                	
                                                	

                                                  999 Lake Drive

                                                
	 
      	
                                                  Suite 590

                                                	
                                                	

                                                  Issaquah, WA 98027

                                                
	 
      	
                                                  Vancouver, British Columbia

                                                	 
      	 
      
	 
      	
                                                  Canada V6B 6E3

                                                	 
      	 
      
	 
      	 
      	 
      	 
      
	
                                                  Attn:

                                                	
                                                  President

                                                	
                                                  Attn:

                                                	
                                                  Glen Hutchinson,
      AGMM/Operations

                                                
	 
      	
                                                	 
      	

                                                  Manager, Image Processing &
      Film

                                                
	 
      	 
      	 
      	 
      
	 
      	
                                                  Fax No.: 604.893.8966

                                                	
                                                  Fax No: 425.313.6500

                                                
	 
      	 
      	 
      	 
      
	 
      	
                                                	
                                                  

                                                    With a copy to:  Corporate
      Counsel

                                                  

                                                
	 
      	
                                                	

                                                  Fax.No.
  425.313-8114

                                                

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        
           

        

      

    

    
      
        	
                 30. 

              	
                Opportunity for Costco
      Affiliates. Costco affiliates
      operating in other countries may enter into agreements with PhotoChannel
      for the same terms as described in this Agreement on terms that are in the
      aggregate at least as favourable to the Costco affiliate as the terms of
      this Agreement.

              

      

    

    
       

      
        	
                31. 

              	
                Severability – If any provision of this Agreement is held to be
      unenforceable, in whole or in part, such holding will not affect the
      validity of the other provisions of this
  Agreement.

              

      

    

    
       

      
        	
                32.

              	
                Non-Assignability.  Neither party may assign this
      Agreement without the prior written consent of the other party, such
      consent not to be unreasonably withheld; provided that both parties
      have the unrestricted right to transfer and assign its interest in this
      Agreement, in whole or in part, to any entity:  (a) acquiring
      all or substantially all of its assets or stock, (b) surviving a merger
      with or resulting from a reorganization, or (c) to any
      affiliate.  An “affiliate” is an entity controlling, controlled
      by or under common control with the assigning party.  Subject to
      the provisions of this Section 32, this Agreement will be binding
      upon, inure to the benefit of and be enforceable by the parties hereto and
      their respective successors and assigns.

              

      

    

    
       

      
        	
                33.

              	
                Publicity.  Neither party will issue a press
      release or other public announcement concerning the existence of this
      Agreement or its contents or the transactions contemplated herein without
      the express written consent of the other
  party.

              

      

    

    
       

      
        	
                34.

              	
                Relationship.  Nothing in this Agreement is intended
      to create an agency, partnership or joint venture
      relationship.  The parties are acting solely as independent
      contractors, and have no fiduciary duty to one
      another.  PhotoChannel is solely responsible for the wages,
      benefits, withholding taxes and/or compensation of its employees and
      ASR’s.

              

      

    

    
       

      
        
          
          

        

        
          Page 14
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                35.

              	
                Governing Law.  This Agreement shall be governed by
      and construed in accordance with the laws of the State of Washington,
      U.S.A.  Each party submits to the non-exclusive jurisdiction of
      the courts of the State of Washington, U.S.A.

              

      

    

    
       

      
        	
                36.

              	
                Waiver.  No waiver of breach of any provision
      of this Agreement by either party will constitute a waiver of any
      subsequent breach of the same or of any other provision, nor shall any
      waiver be effective unless in writing and signed by both
      parties.

              

      

    

    
       

      
        	
                37.

              	
                Force Majeure.  Except as preventable by compliance
      with the terms of this Agreement, neither party shall be liable for
      inability to perform due to natural catastrophes, governmental acts or
      omissions, laws or regulations, transportation stoppages, or acts of war
      or terrorism.

              

      

    

    
       

      
        	
                37.

              	
                  Interpretation.  The captions and headings used in this
      Agreement are for convenience only and do not constitute substantive
      matter and are not to be construed as interpreting the contents of this
      Agreement.  The word “or” is not exclusive and the word
      “including” is not limiting (whether or not non-limiting language such as
      “without limitation” or “but not limited to” or other words of similar
      import are used with references
thereto).

              

      

    

    
       

      
        	
                39.

              	
                Survival.  The provisions of Sections
      13(Confidentiality), 18(Effect of Termination), 19
      (Contingency),  20(Indemnification by PhotoChannel),
      21(Indemnification by Costco), 24(indemnification Procedure),
      25(Arbitration), 29(Notices), 31(Severability) and 34-40 of this Agreement
      shall survive its
termination.

              

      

    

    
       

      
        	
                40.

              	
                Entire
      Agreement.    This Agreement, together with its
      attachments, constitutes the entire understanding and agreement between
      the parties with respect to the subject matter hereof and supersedes any
      and all prior or contemporaneous oral or written communications with
      respect hereto.  This Agreement may not be altered, amended, or
      modified except by a written instrument signed by an authorized employee
      of each party.  If there is any conflict between this Agreement
      and any Schedules or Exhibits attached hereto, this Agreement shall
      supersede.

              

      

    

    
      

      In
WITNESS WHEREOF, the undersigned have caused this License and Service Agreement
to be duly executed and delivered as of the effective date of this
Agreement.

       

    

    
      	
              
                PHOTOCHANNEL NETWORKS INC.

              

            	
              
                COSTCO WHOLESALE
      CORPORATION

              

            
	
              
                By:

              

            	
              
                By:

              

            	 
      
	
              
                Name:

              

            	
              
                Name:

              

            	 
      
	
              
                Title:

              

            	
              
                Title:

              

            	 
      
	 
      	 
      

    

    
      

      
        
          
          

        

        
          Page 15
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