Document:

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                                                                   EXHIBIT 10.10

                 LICENSE, DEVELOPMENT AND MARKETING AGREEMENT

     This LICENSE, DEVELOPMENT AND MARKETING AGREEMENT (the "Agreement") is made
and entered into as of September 25, 2000 (the "Effective Date") by and between
Microsoft Corporation ("Microsoft"), a Washington corporation, and NetIQ
Corporation, a Delaware corporation ("NetIQ").

                                   RECITALS

     WHEREAS, NetIQ has developed a product known as Operations Manager or OM
(as defined below) version 3.3.

     WHEREAS, the Microsoft and NetIQ (the "Parties") wish to license to each
other certain technologies.

     WHEREAS, Microsoft and NetIQ wish to engage in a three-year collaboration
(the "Collaboration"), pursuant to which the Parties will develop solutions for
managing networks from Windows consoles and management servers, including
management of Windows and non-Windows servers and clients and devices, and
Microsoft and non-Microsoft applications.

     WHEREAS, NetIQ and Microsoft wish to create the Microsoft Operations
Manager or MOM (as defined below), and to engage in joint marketing
collaboration activities intended to enhance the value of the Parties'
respective product offerings.

1.   Definitions
     -----------

In addition to the terms defined elsewhere in this Agreement, the following
terms when used herein shall have the following meanings:

     a.  "Agent" shall mean a portion of the Licensed Software or derivative
work thereof that is installed on a managed device that provides information to
the MOM Base Modules.  "Agent Subsystem" shall mean the Agent and the Manual
Agent Installer.

     b.  "AM" shall mean NetIQ's script-based operations management product
known as AppManager.

     c.  "Collaboration Period" shall mean the three-year period beginning on
the Effective Date and ending on the third anniversary of the Effective Date.

     d.  "Confidential Information" means nonpublic information that a Party to
this Agreement ("Disclosing Party") designates as being confidential to the
Party that receives such information ("Receiving Party") or which, under the
circumstances surrounding disclosure ought to be treated as confidential by the
Receiving Party.  "Confidential Information" includes, without limitation,
information in tangible or intangible form relating to and/or including released
or unreleased Disclosing Party software or hardware products, the marketing or
promotion of any Disclosing Party product, Disclosing Party's business policies
or practices, and information received from others that Disclosing Party is
obligated to treat as confidential.  Except as otherwise indicated in this
Agreement, the term "Disclosing Party" also includes all Affiliates of the
Disclosing Party and, except as otherwise indicated, the term "Receiving Party"
also includes all Affiliates of the Receiving Party.  An "Affiliate" means any
wholly-owned subsidiary of a Party.  Confidential Information shall not include
any information, however designated, that:  (i) is or subsequently becomes
publicly available without Receiving Party's breach of

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any obligation owed Disclosing Party; (ii) became known to Receiving Party prior
to Disclosing Party's disclosure of such information to Receiving Party pursuant
to the terms of this Agreement without an obligation of confidentiality prior to
the Disclosing Party's disclosure; (iii) became known to Receiving Party from a
source other than Disclosing Party other than by the breach of an obligation of
confidentiality owed to Disclosing Party; or (iv) is independently developed by
Receiving Party.

     e.  "Development Team" shall mean the NetIQ test, development, and build
engineers, and technical writers provided by NetIQ to Microsoft (each, a "Team
Member").

     f.  "Facility" shall mean a Party's premises, and the "Microsoft Facility"
shall refer to Microsoft's campus in Redmond, Washington, and the "NetIQ
Facility" shall refer to NetIQ's premises in Santa Clara, California, Houston,
Texas, or others as mutually agreed.

     g.  "Licensed Software" shall mean all source code and object code
comprising OM version 3.3, including all updates to it made during the Term,
with the following limitations: (i) only a limited set of OM Active Knowledge
Modules or "AKMs" and their corresponding reports will be included, as listed in
Exhibit A; and (ii) the proprietary portion of the NetIQ key mechanism engine
---------
technology, that would enable Microsoft to create license keys for other NetIQ
products, will not be included in the Licensed Software (however, the
encompassing code that surrounds such mechanism engine technology shall be
included).

     h.  "Licensed Materials" shall mean all design specifications, testing
specifications, test procedures (automated and/or manual), internal
documentation (e.g., design specifications, database schema designs, functional
specifications, training materials, sales guides, build procedures), external
documentation (e.g., help files, user manuals, developer guides, and support
knowledge base), internal development tools (e.g., build tools, install tools,
test tools, debug/diagnostic tools, reviewer guides), localization versions
(including all files and internal localization technologies, and current and
future lists of bugs and features requests) relevant to the Licensed Software
(including all updates to all the foregoing made during the Term).

     i.  "Microsoft NT Agent" shall mean a derivative version of the NT Agent
capable of the following limited functions (and no others):  (i) monitoring of
the Windows System Event Log, (ii) monitoring of NT service availability, and
(iii) monitoring of systems for up/down status.

     j.  "MOM" shall mean the operations management product created by Microsoft
with development assistance from NetIQ and derived from the Licensed Software
and Licensed Materials herein for use with one or more Microsoft operating
systems.

     k.  "MOM Extending Technologies" shall mean the technologies and/or
products developed or distributed by NetIQ that require MOM and (i) that
function as Agents or plug-ins that enable management of platforms or
applications from MOM, or (ii) that, operating through MOM, add additional
features or capabilities to MOM.

     l.  "NetIQ Employees" shall mean NetIQ employees or consultants.

     m.  "NT" shall mean Microsoft Windows NT 4.x, including all current and
future service packs.

     n.  "NT Agent" shall mean an Agent for NT.

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     o.  "OM Base Modules" shall include the Microsoft Management Console Snap-
ins (MMC), Web Consoles, Reporting Engine, Agent Manager, Consolidator, Database
Access Services (DAS), Database (DB), and the primary product installer, as
illustrated by Exhibit B.  "MOM Base Modules" shall include Microsoft
               ---------
derivatives of the OM Base Modules, as incorporated in MOM.  The Database,
Database Access Services, Consolidator, and Agent Manager shall comprise the "OM
Core."  The "MOM Core" shall mean the Database, Databases Access Services,
Consolidator, and Agent Manager as may be revised and/or created by Microsoft
with assistance from the Development Team.

     p.  "Operations Manager" or "OM" shall mean all versions of that software
product distributed by NetIQ currently known as Operations Manager.

     q.  "Street Date" shall mean the date upon which the first commercial
release of MOM is generally available.

2.   License Grant
     -------------

     a.  NetIQ Grant to Microsoft For OM.  NetIQ hereby grants to Microsoft,
         -------------------------------
under all NetIQ intellectual property and proprietary rights, a non-exclusive,
perpetual, worldwide, irrevocable, license to compile, make, use, sell, offer to
sell, reproduce, create derivative works, sublicense and distribute the Licensed
Software and the Licensed Materials, and derivative works thereof.   Microsoft
and NetIQ acknowledge certain limitations and restrictions on the license grants
hereunder as set forth in Sections 2(b) and 5(e).

     b.  Limitations on Microsoft's License.  The foregoing license grant is
         -------------- -------------------
limited with respect to Microsoft's ability to use the Licensed Software or
Licensed Materials to develop and ship NT Agents in the following manner.  For
any release of MOM, Microsoft shall have no right to use the Licensed Software
and Licensed Materials to develop and ship a NT Agent other than the Microsoft
NT Agent, provided that NetIQ continues to provide a NT Agent for then-current
and all prior versions of MOM, consistent with Microsoft's then-current policy
for supporting prior versions of MOM (or as mutually-agreed at the Vice
President level) (i) with at least the functionality of the OM version 3.3 NT
Agent, (ii) with at least the level of support provided for the NT Agent on the
Effective Date, and (iii) that is priced comparably with NetIQ's offerings of
Agents of similar functionality for other platforms (collectively, providing
"Market Satisfaction").  If NetIQ does not provide Market Satisfaction with
respect to the NT Agent for that release, Microsoft may notify NetIQ and NetIQ
shall have ninety (90) days to reestablish Market Satisfaction for that NT
Agent.  If NetIQ fails to reestablish Market Satisfaction, then the license
limitation set forth in this Section 2(b) shall terminate as to that release of
MOM.  NetIQ shall use commercially reasonable efforts to ship a NT Agent for any
commercial release of MOM within 60 days of general availability.

     c.  Microsoft's Grant to NetIQ.  Microsoft hereby grants to NetIQ, under
         --------------------------
all Microsoft intellectual property and proprietary rights, a non-exclusive,
perpetual, worldwide, irrevocable license to compile, make, use, sell, offer to
sell, reproduce, create derivative works of and distribute all bug fixes to the
Licensed Software, and derivative works of such bug fixes, for the sole purpose
of creating MOM Extending Technologies.  During the Collaboration Period,
Microsoft further hereby grants to NetIQ, under all Microsoft intellectual
property and proprietary rights, a non-exclusive, worldwide license to review
any reasonably necessary or useful portions of the MOM source code which
portions may not include all Microsoft source code that is a derivative of
Licensed Software solely in its read-only form and as a reference for the
purpose of developing and supporting the MOM Extending Technologies. Upon
completion of the Collaboration Period and at NetIQ's request, Microsoft shall
negotiate in good faith with NetIQ to provide NetIQ with a read-only source code
license under Microsoft's then-standard source code licensing practices.

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     d.  Ownership.  For avoidance of doubt, NetIQ shall retain all right, title
         ---------
and interest, including all intellectual property and proprietary rights, in and
to the Licensed Software and Licensed Materials, and any MOM Extending
Technologies, subject to any license grants to Microsoft hereunder, and NetIQ
shall have the right to obtain, register or otherwise perfect any of its
intellectual property rights therein.

3.   Acquisition of the Right to Use the Licensed Software to Develop and Ship
     -------------------------------------------------------------------------
an NT Agent. If Microsoft wishes to acquire the right to use the Licensed
-----------
Software and Licensed Materials to ship any NT Agent, other than the Microsoft
NT Agent (and provided that NetIQ has continued to provide Market Satisfaction
as set forth in Section 2(b)), Microsoft shall notify NetIQ and such notice
shall specify the purposes for which Microsoft desires to acquire such rights.
Microsoft and NetIQ agree to negotiate in good faith to determine if such
purposes may be fulfilled through some mutually agreed upon means. If Microsoft
and NetIQ cannot reach an agreement that satisfies Microsoft's stated purpose,
then, if twelve months have elapsed since the Street Date, Microsoft shall
acquire rights to develop and ship any NT Agent upon Microsoft's payment to
NetIQ of the following sums at the following time periods: (i) one hundred and
fifty million dollars ($150,000,000) between 12 months to 24 months of the
Street Date; (ii) one hundred million dollars ($100,000,000) between 24 months
and 36 months of the Street Date; and (iii) seventy-five million dollars
($75,000,000) after 36 months of the Street Date.

4.   Development Collaboration.
     -------------------------

     a.  NetIQ shall deliver to Microsoft the Licensed Software and an initial
version of the Licensed Materials within two (2) weeks of the Effective Date.
Upon receipt of such Licensed Software and Licensed Materials, Microsoft shall
evaluate such Licensed Software and Licensed Materials.  Microsoft shall
communicate to NetIQ its acceptance or rejection of the Licensed Software and
Licensed Materials within thirty (30) days of the Effective Date.  Microsoft's
acceptance shall not be deemed a waiver by Microsoft of NetIQ's obligation to
deliver the Licensed Software and Licensed Materials hereunder.  NetIQ shall
deliver the final version of the Licensed Materials within four (4) weeks of the
Effective Date.  Upon commercial release of OM version 3.3 by NetIQ, Microsoft,
upon reasonable notice, shall have the right to audit the source code tree for
OM version 3.3 during normal business hours.  Such audit shall be at Microsoft's
expense.  NetIQ agrees to provide all reasonably necessary assistance to
Microsoft to facilitate such audit.   NetIQ agrees that there will be no
material functional regression of the commercially released OM version 3.3, as
compared with OM version 3.3 existing as of the Effective Date.

     b.  During the Collaboration Period, except as limited herein and by
Section 5(a), NetIQ shall provide the Development Team, which, at Microsoft's
election, shall be comprised of a minimum of up to **** Team Members at the
Microsoft Facility and which shall consist of at least **** engineers at all
times. Ten days after the Release To Manufacturing of OM version 3.3, NetIQ
shall use commercially reasonable efforts to provide, upon thirty (30) days
prior notice from Microsoft, a maximum, at any one time, of up to **** Team
Members. During the first six months of the Collaboration Period, at least one
(1) Team Member at the Microsoft Facility shall be a build/development engineer
and such build/development engineer shall be on-site at the Microsoft Facility
within one month of the Effective Date. The remaining **** Team Members
designated for the Microsoft Facility shall be on-site at the Microsoft Facility
within two months of the Effective Date. The Team Members not designated for the
Microsoft Facility shall be at NetIQ's Facility. NetIQ acknowledges that, with
regard to the Development Team, such Development Team shall be fully dedicated
to the Microsoft work. Microsoft shall pay **** per month to NetIQ for each Team
Member, invoiced quarterly and payable within 30 days. NetIQ agrees to provide
up to **** person-years of Development Team resources to Microsoft. All work
done by the Team Members shall be on a work-for-hire basis, and Microsoft shall
own all right, title and interest to such

**** [C]onfidential treatment has been requested for the redacted portions. The
confidential redacted portions have been filed separately with the Securities
and Exchange Commission.
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work. When used herein, the terms Facility, Microsoft Facility and NetIQ
Facility shall include reasonable access to office space, telephones, computers,
and office supplies at the host Party's expense, but such expenses shall not
include travel, room or board.

     c.  At Microsoft's election, NetIQ and Microsoft will collaborate on the
definition of a licensing mechanism that provides a coherent licensing strategy
to customers of MOM and MOM Extending Technology.

     d.  Team Members shall be highly familiar with and highly experienced with
the Microsoft Windows platform and the development of OM.   NetIQ shall use
commercially reasonable efforts to ensure that (i) each Team Member meets
Microsoft's reasonable hiring standards, as communicated to NetIQ, and (ii) all
NetIQ personnel comply with Microsoft's published standard policies and
procedures with respect to on-site personnel at the Microsoft Facility.  Such
standard policies and procedures shall not alter the intellectual property
rights between the Parties set forth in this Agreement.

     e.  At NetIQ's expense, NetIQ may also maintain up to **** NetIQ Employees
as technical contacts at the Microsoft Facility during the Collaboration Period,
to aid in NetIQ's development of MOM Extending Technologies. Such **** Employees
shall not be considered as a part of the Development Team resources that NetIQ
is obligated to provide pursuant to Section 4(b). At Microsoft's expense,
Microsoft may also maintain up to **** Microsoft employees as technical contacts
at a NetIQ Facility during the Collaboration Period, to assist with Microsoft's
development obligations.

     f.  Unless mutually agreed upon differently by the Parties (at the Vice-
President level for each Party), NetIQ shall use commercially reasonable efforts
to deliver working, demonstrable betas of Agents for any three of the following
four platforms: (i) AIX, (ii) HP-UX, (iii) Solaris and (iv) Novell server
software.  NetIQ will also use commercially reasonable efforts to deliver
working, demonstrable betas of modules for any two of the following three
applications: (i) Lotus Domino, (ii) Oracle 8i Enterprise Edition, and (iii) SAP
R/3.  NetIQ shall use commercially reasonable efforts to complete all such beta
Agents or modules in time for the first official announcement of the Release To
Manufacturing version (the "Launch") of MOM.  With respect to the remaining beta
Agents and modules for the fourth platform and third application not anticipated
to be completed by the Launch, NetIQ shall use commercially reasonable efforts
to complete such Agents and modules within four months of the Launch.  NetIQ
shall use commercially reasonable efforts to complete final versions of all such
Agents and modules no later than six months after Launch.

     g.  NetIQ may, from time to time, engage Microsoft in discussions regarding
providing additional items as part of the Licensed Software and/or Licensed
Materials. Should NetIQ provide such additional items to Microsoft, the parties
shall engage in good faith negotiations regarding when Microsoft may incorporate
such items in a future release of MOM. The ultimate decision whether to include
such technologies shall reside with Microsoft.

     h.  Upon NetIQ's request, Microsoft shall use commercially reasonable
efforts to provide information to NetIQ on publicly documented application
programming interfaces and database schema ("APIs") for MOM.  NetIQ shall only
write to APIs.  Should NetIQ require a particular new API, NetIQ shall notify
Microsoft in writing, and Microsoft shall in good faith discuss the requirements
of such API with NetIQ.  Notwithstanding any provision to the contrary,
Microsoft retains sole discretion to document, expose, or otherwise make
available to any Party, including NetIQ, any APIs.

**** [C]onfidential treatment has been requested for the redacted portions. The
confidential redacted portions have been filed separately with the Securities
and Exchange Commission.

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     i.  For avoidance of doubt, NetIQ may build MOM Agent Subsystems for Win9x,
NT Embedded (based on Windows NT 4.0), WinCE, Windows ME, and future Microsoft
operating systems, whether on PCs or non-PC devices.

5.   Covenants/Restrictions/Feedback/Residuals
     -----------------------------------------

     a.  Microsoft agrees that neither the Windows Operations Management team
nor the Windows Management Instrumentation team will solicit directly, or
knowingly solicit indirectly, the employment or retention as a contractor of any
current or former Team Member during the time that such Team Member is providing
services in connection with the Collaboration and for six months thereafter.  If
any current or former Team Member does become a Microsoft employee (or
contractor), NetIQ's obligations to provide a maximum number of **** Team
Members at any one time during the Collaboration Period shall be accordingly
reduced.  In addition, the Parties shall discuss the issue at the Vice President
level, and Microsoft shall consider in good faith the possibility of reducing
the minimum number of Team Members that NetIQ is then obligated to provide.

     b.  Any NetIQ Employee who views MOM source code may not work on NetIQ
products that run on non-Microsoft platforms (excepting MOM Extending
Technologies) for a period of six months after they last view such MOM source
code.  Such NetIQ Employees may document interfaces in the source code, and
other NetIQ Employees who view such documentation will not be subject to the
limitation set forth herein.  However, NetIQ Employees viewing OM source code
separate from the MOM source code shall not be subject to the restrictions set
forth herein.

     c.  Except as provided elsewhere in this Agreement or any other written
agreement between the Parties, NetIQ hereby grants to Microsoft an unrestricted
license to make, use, sell, offer to sell, create derivative works, and
reproduce all information, feedback, suggestions and advice, in whatever form,
provided to Microsoft by any Team Member or any other NetIQ personnel during the
Collaboration Period.

     d.  Microsoft hereby grants to NetIQ the right to retain and use Residuals
from all information received or reviewed by NetIQ Employees. None of these
NetIQ Employees shall knowingly and intentionally use such Residuals to create
or contribute to products that run on non-Microsoft platforms (excepting for MOM
Extending Technologies).  The term "Residuals" means information in intangible
form, which is retained in memory by persons who have had access to the
Confidential Information, including ideas, concepts, know-how or techniques
contained therein.

     e.  The Parties shall refrain from disclosing any Confidential Information
of a Disclosing Party to third parties for five (5) years following the date
that a Disclosing Party first discloses such Confidential Information to a
Receiving Party.  The Parties agree to take reasonable security precautions, at
least as great as the precautions it takes to protect its own confidential
information, but no less than reasonable care, to keep confidential the
Confidential Information of a Disclosing Party.  The Licensed Software (to the
extent it comprises source code) and certain portions of the Licensed Materials
that are marked or otherwise known to be confidential shall be Confidential
Information of NetIQ.  The MOM source code shall be Confidential Information of
Microsoft.  Notwithstanding any provision to the contrary, Microsoft may license
any Microsoft technology incorporating the Licensed Software and Licensed
Materials (and any derivatives thereof) to third parties pursuant to Microsoft's
source code licensing practices.  For a period of three years from the Effective
Date, however, Microsoft agrees not to intentionally and knowingly license or
otherwise disclose the Licensed Software and Licensed Materials (and any
derivatives thereof, including MOM) to any systems management vendor or other
third party for the purpose of allowing such systems management vendor or third
party to create a product that competes with NetIQ's system management products.
Microsoft may publish small sections (typically less than

**** [C]onfidential treatment has been requested for the redacted portions. The
confidential redacted portions have been filed separately with the Securities
and Exchange Commission.

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100 lines) of source code for the purposes of SDK samples. Where these sections
of code contain fragments of Licensed Software, Microsoft must obtain approval
of a NetIQ Vice President before publishing such SDK samples.

6.  Nonassertion of Patent Claims
    -----------------------------

In addition to the license grants set forth in Section 2, each Party hereby
agrees not to assert against the other Party (or such other Party's customers)
any claims of any patents owned or licensable by the Party with an effective
filing date before one year after the end of the Collaboration Period, or one
year after the termination or cancellation of this Agreement, which claims cover
any modifications, updates, or extensions to the Licensed Software, Licensed
Materials, or MOM Extending Technologies on Microsoft platforms. Microsoft's
agreement not to assert patents does not apply to NetIQ's creation of
technologies running on non-Microsoft platforms, except for MOM Extending
Technologies.

7.   Warranties/Indemnities/Patent Enforcement
     -----------------------------------------

     a.  NetIQ hereby warrants that the Licensed Software and Licensed Materials
are owned by NetIQ or that NetIQ otherwise has sufficient rights to the Licensed
Software and Licensed Materials to grant the rights set forth herein.  NetIQ
hereby warrants that the Licensed Software and Licensed Materials do not
infringe any copyright, trade secret, or other proprietary right of any third
party.  NetIQ warrants that, to the best of its knowledge on the Effective Date,
the Licensed Software and the Licensed Materials do not infringe any patents
held by any third party.

     b.  NetIQ's delivery of the Licensed Software and Licensed Materials to
Microsoft, and/or the performance of any other NetIQ obligation hereunder shall
not violate any agreement or obligation between NetIQ and any third party.
Microsoft's performance of any of Microsoft's obligations hereunder shall not
violate any agreement or obligation between Microsoft and any third party.

     c.  The Licensed Software shall not contain any Open Source.  "Open Source"
means any software code that contains, or is derived in any manner (in whole or
in part) from, any software that is distributed under any of the following
licenses or distribution models, or licenses or distribution models similar to
any of the following: (a) GNU's General Public License (GPL) or Lesser/Library
GPL (LGPL), (b) The Artistic License (e.g., PERL), (c) the Mozilla Public
License, (d) the Netscape Public License, (e) the Berkeley software design (BSD)
license including Free BSD or BSD-style license, (f) the Sun Community Source
License (SCSL), (g) an Open Source Foundation License (e.g., CDE and Motif UNIX
user interfaces), and (h) the Apache Server license.

     d.  In the event of a breach by NetIQ of any of the warranties set forth
above, NetIQ warrants that it shall use best efforts to ensure that Microsoft
has all rights to the Licensed Software and Licensed Materials that Microsoft
would otherwise have if NetIQ were not in breach of such warranties.  In no
event shall NetIQ be required to expend more than the remaining amount of its
total liability cap of One Hundred Million Dollars (as set forth in Section
12(d)) to satisfy its best efforts obligations hereunder.

     e.  NetIQ shall, at its expense, defend any claim or action brought against
Microsoft, and Microsoft's subsidiaries, affiliates, directors, officers,
employees, agents, or independent contractors, to the extent that such claim or
action is based on a claim or action caused by NetIQ's breach of any of NetIQ's
warranties as set forth herein ("Claims").  Microsoft will give NetIQ reasonable
notice upon learning of any Claim and will reasonably assist NetIQ in the
defense and settlement of such Claim.  NetIQ will indemnify Microsoft for any
reasonable costs, expenses, and other fees reasonably incurred by

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Microsoft in connection with such Claim. NetIQ shall defend the Claim with
counsel reasonably acceptable to Microsoft and NetIQ shall only settle such
Claim with Microsoft's reasonable consent.

     f.  NetIQ agrees it will Enforce (as defined herein), at the request of and
expense of Microsoft, any rights it has in the NetIQ patents licensed to
Microsoft ("NetIQ Licensed Patents") against a third party who is infringing the
NetIQ Licensed Patents.  "Enforce" means giving notice of a patent infringement
claim to the third party and the filing and service of a patent infringement
complaint in a court of competent jurisdiction within a time period agreeable to
the Parties, together with the diligent and competent prosecution of any
litigation so initiated.

8.   Collaboration Restrictions
     --------------------------

     a.  If, at any time after the date that is twelve months after the Street
Date, NetIQ announces, promotes or releases a NetIQ product that runs on a
Microsoft platform on which MOM is available, and such NetIQ technology and
marketing efforts could have the effect of or are designed to have the effect of
supplanting or eliminating the need for the MOM Core, then effective as of such
announcement, promotion or release date, all of Microsoft's marketing
obligations under Section 10 herein shall terminate.  In addition, Microsoft
shall be relieved of any further obligation to pay the Marketing Collaboration
Support Fee (as defined below) and the unpaid portion of the Licensing Fee
payable hereunder shall be reduced by the lesser of (a) Fifty Million Dollars
(US $50,000,000), or (b) the amount not yet due and payable.

     b.  NetIQ actions in (i) announcing, promoting, or releasing OM and AM
prior to the date that is twelve months after the Street Date (the "NetIQ
Released Products"), (ii) releasing bug fixes or QFEs for such NetIQ Released
Products at any time, and (iii) such other actions as mutually agreed upon by
the Parties (at the Vice President level), shall not be considered actions that
supplant the MOM Core.  For the avoidance of doubt, NetIQ's sales of licenses to
NetIQ Released Products after the period which is twelve months after the Street
Date shall not be considered actions that supplant the MOM Core.

     c.  If NetIQ licenses or sells the OM Base Modules source code to any third
party, then Microsoft shall be relieved of all marketing obligations under
Section 10, and all obligations to pay any unpaid portion of the Licensing Fee
and Marketing Collaboration Support Fee not accrued on the date of such license.
The foregoing shall not apply to NetIQ's distribution of its own commercial
products that utilize or incorporate the OM Base Modules.

9.   Fees
     ----

     a.  Microsoft shall pay to NetIQ a fee in the amount of One Hundred
Seventy-Five Million Dollars (US$175,000,000) (the "Licensing Fee").  This
Licensing Fee shall be paid according to the payment schedule set forth in
Exhibit C.
---------

     b.  Microsoft shall provide Ten Million Dollars (US$10,000,000) for each
year of the Collaboration Period from the Effective Date for marketing and
collaboration support of MOM and MOM Extending Technologies (the "Marketing
Collaboration Support Fee").  Of such amounts, Microsoft shall pay to NetIQ One
Million Two Hundred and Fifty Thousand Dollars (US$1,250,000) each calendar
quarter, during the first week of the second month of each quarter, commencing
November 2000.  NetIQ shall spend this amount in its reasonable discretion for
activities relevant to the Collaboration and NetIQ shall provide a report to
Microsoft describing such activities and the corresponding expenditures on a
quarterly basis within 30 days after the end of the quarter.  The balance of
Five Million Dollars annually will be spent by Microsoft upon mutual agreement
of the Parties and Microsoft shall provide to NetIQ a report describing such
mutually-agreed upon activities and the expenditures thereon on a quarterly
basis

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within 30 days after the end of the quarter. The Parties' direct employee-
related costs shall not be considered in calculating the expenditures.

10.  Marketing Collaboration
     -----------------------

All the following marketing collaboration activities shall be undertaken during
the Collaboration Period (unless otherwise specified) and shall be subject to
the use of commercially reasonable efforts by the Parties:

     a.  Quarterly Meetings.  Microsoft and NetIQ shall conduct quarterly
         ------------------
meetings at the Microsoft Facility, as an audio or video teleconference, or as
otherwise mutually agreed, between their respective marketing management and
development management personnel for the purpose of discussing, maintaining
and/or improving the Collaboration and the relationship between the two
companies via the exchange of mutually beneficial information.   Annual
                                                                 ------
Meetings. Microsoft and NetIQ shall also conduct an annual meeting at the
--------
Microsoft Facility, as an audio or video teleconference, or as otherwise
mutually agreed, between designated representatives of NetIQ and the Microsoft
Vice Presidents in charge of development and marketing of MOM for the purpose of
discussing, maintaining and/or improving the Collaboration and the relationship
between the two companies via the exchange of mutually beneficial information.

     b.  Ongoing Training.  NetIQ and Microsoft shall identify opportunities to
         ----------------
provide training and knowledge transfer on a "train-the trainer" basis on their
respective products to their direct and indirect sales channels.  To this end,
each Party commits to provide twelve (12) training days per year to be provided
to the other Party's personnel at no cost; provided, that such training is
conducted at the relevant training Party's Facilities and travel expenses and
costs of the trained personnel shall be borne by the Party receiving such
training unless otherwise specifically agreed.  In addition to these training
obligations, Microsoft shall field four (4) management champions to sell and
promote MOM and to promote the adoption of NetIQ's value-add solutions and
services for MOM, and the promotion of the alliance relationship with NetIQ
within the Microsoft sales organizations.

     c.  Upgrade Program.  The Parties shall collaborate to offer an Upgrade
         ---------------
Program that shall comprise a special discounted upgrade license, training, and
sales/migration support (such as Microsoft Consulting Services). As part of the
Upgrade Program, Microsoft will offer a standard Microsoft discounted Version
Upgrade Product license ("VUP") to enable existing NetIQ OM or AM customers (the
"Existing NetIQ Customers") to ease the upgrade to MOM.  This VUP will be
available for a period of two (2) years after the Street Date.   Alternatively,
if an Existing NetIQ Customer who has purchased up to one year of maintenance
from NetIQ, on terms and conditions substantially similar to standard NetIQ
maintenance contracts on the Effective Date, elects to use MOM as an alternative
to some or all of its NetIQ products ("Replaced Products"), such Existing NetIQ
Customer shall receive an upgrade to MOM and Microsoft maintenance for MOM for
the remainder of such Existing NetIQ Customer's maintenance contract with NetIQ
at no cost to the Existing NetIQ Customer, provided that such Existing NetIQ
Customer enters into a maintenance contract with Microsoft for the remainder of
the period otherwise covered by its existing NetIQ maintenance contract.
Thereupon, NetIQ shall transfer to Microsoft the prorated, unused portion of the
maintenance fees attributable to the Replaced Products paid by such Existing
NetIQ Customers to NetIQ.

     d.  Distribution Rights.  Microsoft and NetIQ will enter into a standard
         -------------------
Microsoft ISV Royalty License and Distribution Agreement for three (3) years
from the Street Date, pursuant to which NetIQ will be granted rights to include
MOM, SQL and other mutually agreeable Microsoft products consistent with the
terms of such agreement(s) with NetIQ's products and license such products
through NetIQ's direct and indirect sales channels.  The Parties will work in
good faith on a program pursuant to

                                       9
<PAGE>

which NetIQ will report to Microsoft sales of products that include MOM such
that Microsoft may credit the Microsoft sales force that otherwise would have
sold MOM with the sales accrued through such programs. Microsoft shall assist
NetIQ in identifying and entering into the most-favorable distribution and
support programs that meet NetIQ's requirements and for which NetIQ qualifies.
When including MOM in a value-add product, NetIQ may alter the visual appearance
of MOM by substituting the product name, icons, and other graphical elements
with similar elements provided by NetIQ, provided that NetIQ include a prominent
Microsoft-related tag-line approved by Microsoft (e.g., "Powered by MOM"), and
NetIQ shall credit Microsoft appropriately in the license. Consistent with
Microsoft's engineering obligations under this Agreement, Microsoft will support
the ability of NetIQ to make such alterations. NetIQ will ensure that products
distributed under the ISV Royalty License and Distribution Agreement do not
disable any functionality or impair upgradeability of MOM or other products as
distributed by Microsoft. Any covenants in this Section 10(d) may be included
with the Microsoft ISV Royalty License and Distribution Agreement.

     e.  Joint Promotion of NetIQ Products and MOM.  Microsoft and NetIQ will
         -----------------------------------------
engage in activities that promote the sale and distribution of NetIQ's products
and MOM through their direct and indirect sales channels, including Microsoft's
affiliated partners.  Such activities shall include targeted joint field sales
calls, jointly sponsored seminars and webcasts as described in Section 10(j)
below, and selective targeted channel activity focused on establishing NetIQ
channel relationships with key Microsoft alliance partners focused in the MOM
market space. In addition, the Parties will jointly target in good faith, over
the Collaboration Period, 450 accounts as follows:  100 discrete accounts in the
first year after the Street Date, 150 discrete accounts in the second year after
the Street Date, and 200 discrete accounts in the third year after the Street
Date.

     f.  Public Announcement.  Microsoft and NetIQ will jointly issue a public
         -------------------
announcement of the alliance between Microsoft and NetIQ at a Microsoft event,
with NetIQ positioned as described in Section 10(k) below.  In addition, NetIQ
will be positioned as described in Section 10(k) during the Launch of MOM,
providing opportunities to showcase NetIQ's value-added solutions for MOM.

     g.  Quarterly Announcements.  NetIQ and Microsoft intend to collaborate to
         -----------------------
generate events, press related-activities or case studies each quarter designed
to promote the MOM solution and NetIQ's value-add offerings.

     h.  Notices.  All MOM products that incorporate the Licensed Software shall
         -------
have the appropriate NetIQ copyright notices, including a URL to a Microsoft web
site that will redirect to the NetIQ web site.

     i.  Tags.  Microsoft will provide a mutually agreeable special NetIQ-
         ----
exclusive tag line for the relationship.  This tag line can be used by the
Parties during marketing activities and such tag line will be introduced at the
Launch.

     j.  Joint Marketing to Customers/EBC.  The Parties shall mutually agree
         --------------------------------
upon and conduct joint-marketing campaigns promoting the products and technology
of NetIQ and Microsoft to each other's installed base of users and new
prospective customers, including a minimum of 10 seminars and 2 webcasts per
calendar year, which shall be paid from the Marketing Collaboration Support Fee.
These campaigns may include other partners of the Parties as mutually agreed.
Microsoft shall include MOM Extending Technologies whose primary purpose is to
extend MOM on Windows in the Executive Briefing Centers Showcase, Competency
Centers, Solutions Centers, and other similar facilities, where appropriate.

                                       10
<PAGE>

     k.  Premier ISV.  For a two year period commencing on the Effective Date
         -----------
and in connection with the marketing activities set forth in this Agreement and
other appropriate corporate-driven activities, Microsoft shall designate NetIQ
as Microsoft's publicly acknowledged Premier ISV, or similar designation,
provided only to NetIQ, which shall be the highest level of designation that
Microsoft provides for any ISV that provides the equivalent of MOM Extending
Technologies, and shall make use of the tag line in Section 10(i) above.  The
Parties currently anticipate that the following shall be MOM Extending
Technologies by the Launch of MOM and thus NetIQ shall be the Premier ISV for
each of the following:  Security Management, Windows NT4 Operations Management,
Operations Management of non-Microsoft platforms and applications from MOM,
Network Performance Management, Extended Reporting and others as mutually
agreed.  The aggregate endorsement of NetIQ around MOM Extending Technologies
shall be greater than for any other ISV for the equivalent of MOM Extending
Technologies.  Microsoft shall also provide NetIQ with a marketing endorsement
of NetIQ as a marketing partner of administration products for NT and Windows
2000 and any other mutually agreeable areas, which do not compete with the
proposed Microsoft Operations Manager for Windows 2000 software product or other
Microsoft management solutions.  If NetIQ provides Microsoft with information
that Microsoft is not adhering to the designation obligations set forth above,
Microsoft shall confirm such information and, if appropriate as reasonably
determined by Microsoft, shall take corrective action.  Provided that the public
relationship is successful, the Parties may agree to extend this to the end of
the Collaboration Period.  For each particular product, NetIQ shall ensure that
such product is "best of breed," and if such product is clearly not "best of
breed" as reasonably determined by Microsoft, Microsoft may suspend NetIQ's
status as Microsoft's Premier ISV as to such product.  NetIQ may improve such
product and reapply for Premier ISV status with respect to such product.

     l.  Links.  Microsoft will provide links from its Microsoft.com website in
         -----
one or more appropriate locations providing information on MOM to NetIQ areas
promoting technologies extending MOM.   NetIQ would provide links to Microsoft's
management sites from appropriate links in NetIQ's websites for management
services and software.

     m.  General Marketing Collateral.  Microsoft and NetIQ will provide the
         ----------------------------
following general marketing collateral and initiatives using funds from the
Marketing Collaboration Support Fee, which marketing collateral and initiatives
shall include, as appropriate with mutually agreed upon content:  (a) public
relations support, including supporting quotes in NetIQ press releases related
to MOM Extending Technologies; (b) joint events, including conferences,
seminars, tradeshows, webcasts; (c) presentations at appropriate Microsoft
internal events, including MTB, Fusion, SE Airlifts, sponsor/promote regional
events; and (d) joint advertising, collateral, case studies, white papers,
brochures and videos.

     n.  Adaptation of Discovery Mechanism.  The Parties will mutually agree to
         ---------------------------------
an adaptation of the current NetIQ discovery mechanism within MOM toward the
goal of directing customers to a Microsoft website that contains nonexclusive
links to the NetIQ website promoting or selling MOM Extending Technologies.

     o.  Global Technology Partner.  Microsoft will place NetIQ in the category
         -------------------------
of Global Technology Partner or its equivalent, on the terms and conditions of
such program.

11.  Term and Termination
     --------------------

     a.  The term of this Agreement shall begin on the Effective Date and end
the earlier of (i) three and a half years commencing as of the Effective Date,
or (ii) three years after the Street Date (the "Term").

                                       11
<PAGE>

     b.  In the event of an alleged material breach of a material provision by
one of the Parties, the aggrieved Party shall notify the alleged breaching Party
of the breach, and the Parties shall invoke the dispute escalation procedures
set forth in Section 14(c).  Upon completion of the dispute escalation and,
assuming that the breaching Party has not cured the alleged breach within 60
days of the notification thereof, or has not commenced and is not diligently
pursuing a cure in the event that such a breach cannot be cured within 60 days,
(i) Microsoft may terminate this Agreement for cause if NetIQ is the breaching
Party, or (ii) in the event Microsoft is the breaching Party (a) any unpaid
portion of the Marketing Collaboration Support Fee for the entire Collaboration
Period shall become immediately due and payable, (b) the license restrictions
imposed on Microsoft with respect to Microsoft's use of the Licensed Software or
Licensed Materials in connection with developing and shipping a NT Agent
pursuant to Section 2(b) shall become permanent, and (c) Microsoft's right to
acquire the right to ship the NT Agent pursuant to Section 3 shall terminate.

     c.  In the event of termination of this Agreement, Sections 1, 2 (except as
set forth in Section 2(c) with regard to the read-only source code license), 5,
6, 7, 9(a), 9(b) (but only to the extent amounts are earned), 11(c), 12, 13, and
14 shall survive termination.

12.  No Other Warranties/Limitation of Liability
     -------------------------------------------

     a.  Disclaimer.  OTHER THAN AS SET FORTH IN SECTION 7, ALL SOFTWARE AND
         ----------
TECHNOLOGY PROVIDED BY ONE PARTY TO THE OTHER PARTY IS PROVIDED "AS IS" WITHOUT
WARRANTY OF ANY KIND.  THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF SUCH
SOFTWARE AND TECHNOLOGY IS ASSUMED BY THE RECEIVING PARTY.  OTHER THAN AS SET
FORTH IN SECTION 7, THE PARTIES HEREBY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS,
IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

     b.  Disclaimer of Indirect Damages.  TO THE MAXIMUM EXTENT PERMITTED BY
         ------------------------------
APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL,
INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR IN
ANY WAY RELATED TO THE USE OF OR INABILITY TO USE THE LICENSED SOFTWARE,
LICENSED MATERIALS OR OTHER TECHNOLOGY PROVIDED BY EITHER OF THE PARTIES HERETO
IN CONNECTION WITH THIS AGREEMENT.

     c.  Microsoft Liability.  From the Effective Date to the date that is one
         -------------------
year after the Street Date, Microsoft's total liability under this Agreement
shall not exceed Two Hundred and Seventy-Five Million Dollars (US$275,000,000).
From the date is one year after the Street Date, Microsoft's total liability
under this Agreement shall not exceed One Hundred and Seventy-Five Million
Dollars (US$175,000,000).

     d.  NetIQ Liability.  NetIQ's total liability under this Agreement shall
         ---------------
not exceed One Hundred Million Dollars (US$100,000,000).

                                       12
<PAGE>

13.  Notices
     -------

All notices and requests in connection with this Agreement shall be deemed given
as of the day they are received either by messenger, delivery service, overnight
courier service or in the United States of America mails, postage prepaid,
certified or registered, return receipt requested, and addressed as follows:

To NetIQ:

NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, CA  95054

Attention:  Chief Financial Officer
Phone:  (408) 330-7000
Fax:    (408) 330-0959

Copy to:  Contracts Department
Phone:  (408) 330-7000
Fax:    (408) 330-0959

To Microsoft:

Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399

Attention:  Platforms Business Development
Copy to: Deborah Black, Vice President
Phone:  (425) 882-8080
Fax:    (425) 936-7329

Copy to: Law & Corporate Affairs
Fax:    (425) 936-7409

or to such other address as a Party may designate pursuant to this notice
provision.

14.  General
     -------

     a.  Governing Law/Jurisdiction/Attorneys' Fees.  This Agreement shall be
         ------------------------------------------
construed and controlled by the laws of the State of Washington, and NetIQ
consents to exclusive jurisdiction and venue in the federal courts sitting in
King County, Washington, unless no federal subject matter exists, in which case
NetIQ consents to exclusive jurisdiction and venue in the Superior Court of King
County, Washington.  Process may be served on either Party by U.S. Mail, postage
prepaid, certified or registered, return receipt requested, or by such other
method as is authorized by the Washington Long Arm Statute.  If either Microsoft
or NetIQ employs attorneys to enforce any rights arising out of or relating to
this Agreement, the prevailing Party shall be entitled to recover its reasonable
attorneys' fees, costs and other expenses.

     b.  Notices and Requests.  All notices, authorizations, and requests given
         --------------------
by NetIQ or Microsoft in connection with this Agreement shall be deemed given on
the day they are (i) deposited in

                                       13
<PAGE>

the mail, postage prepaid, certified or registered, return receipt requested; or
(ii) sent by air express courier, charges prepaid; to the address listed in this
Agreement.

     c.  Dispute Escalation.  In the event that the Parties have a dispute or
         ------------------
disagreement with regard to any material provision of this Agreement or with
regard to any obligation or alleged breach under this Agreement, and such
dispute or disagreement is not reasonably resolved by the Parties within ten
(10) days after commencement of the dispute or disagreement, the aggrieved Party
may request to have such dispute or disagreement escalated to the executive
management of both Parties by sending a formal written notice by air courier
express, charges prepaid.  The executive management of both Parties shall
discuss such dispute or disagreement within a commercially reasonable period of
time, but, unless otherwise mutually agreed to by Vice Presidents of both
Parties, no longer than twenty (20) days.  If the executive management of both
Parties are unable to resolve the dispute or disagreement, then the aggrieved
Party shall provide written notice explaining the dispute or disagreement to the
other Party and such other Party shall have thirty (30) days to resolve the
dispute, disagreement or breach to the reasonable satisfaction of the aggrieved
Party.  If, upon completion of such thirty (30) day period, the dispute or
disagreement is not resolved to the satisfaction of the aggrieved Party, such
aggrieved Party may exercise any other legal right to which such Party is
entitled.

     d.  Export Restrictions.  Microsoft and NetIQ acknowledge that the software
         -------------------
licensed by one Party to the other is of U.S. or U.K. origin.  Each Party agrees
to comply with all applicable international and national laws that apply to such
software, including the U.S. Export Administration Regulations, as well as end-
user, end-use and destination restrictions issued by U.S. and other governments.
For additional information, see http://www.microsoft.com/exporting/.
                                -----------------------------------

     e.  Amendments in Writing.  This Agreement shall not be modified except by
         ---------------------
a written agreement dated subsequent to the date of this Agreement and signed on
behalf of Microsoft and NetIQ by their duly authorized representatives.

     f.  Assignment.  Neither Party may assign this Agreement, or any rights or
         ----------
obligations hereunder, whether by contract or by operation of law, except with
the express written consent of the other Party, and any attempted assignment by
either Party in violation of this Section shall be void.  For purposes of this
Agreement, an "assignment" by a Party shall be deemed to include, without
limitation, the following:  (i) a merger of the Party with a third party,
whether or not the Party is the surviving entity, where the third party has a
market capitalization, number of employees or past twelve months' revenues, as
of the end of the month preceding the announcement of the merger, equal to or
greater than forty percent (40%) of the Party's market cap, number of employees
or past twelve months' revenues; (ii) the acquisition of more than forty percent
(40%) of any class of the Party's voting stock (or any class of non-voting
security convertible into voting stock) by a third party or group (whether in a
single transaction or series of transactions); (iii) the acquisition of more
than thirty percent  (30%) of any class of the Party's voting stock (or any
class of non-voting security convertible into voting stock) by a third party or
group (whether in a single transaction or series of transactions), and after
such acquisition, the third party or group effects a change in management
control of the Party; or (iv) the sale of more than fifty percent (50%) of the
Party's assets (whether in a single transaction or series of transactions).  In
the event of such assignment or attempted assignment of the types listed in
subsections (i) through (iv) of this Section 14(f) by NetIQ, NetIQ shall notify
Microsoft of such transaction and include the name and description of the
parties to the merger, share purchase or asset purchase, as the case may be.
Microsoft shall review such transaction.  If Microsoft reasonably determines
that the parties involved in the transaction include a direct competitor to
Microsoft's platform business, Microsoft may elect to disapprove the assignment.
If Microsoft disapproves the assignment, NetIQ nonetheless may complete the
transaction.  If NetIQ completes the transaction and assigns the Agreement
despite the disapproval, Microsoft may elect to (a) terminate its marketing and
development obligations hereunder, subject to

                                       14
<PAGE>

continued payment of all unpaid Marketing Collaboration Support Fees due
hereunder; and/or (b) gain the right to use the Licensed Software and Licensed
Materials to create a fully functional NT Agent, by payment of fifty percent
(50%) of the fee which would otherwise be then due and payable under Section 3.
For purposes of this Section 14(f), the fee payable under Section 3 for the
period between the Effective Date and the first anniversary of the Street Date
shall be $175 Million. In the event Microsoft elects either or both of options
(a) or (b), above, NetIQ may elect to accelerate payment of the remaining unpaid
portion of the Licensing Fee.

     g.  Severability.  If any provision of this Agreement other than Section
         ------------
2(a) shall be held by a court of competent jurisdiction to be illegal, invalid,
or unenforceable, the remaining provisions shall remain in full force and
effect.  The Parties agree that if the provisions of Section 2(a) are held by a
court of competent jurisdiction to be illegal, invalid, or unenforceable, this
entire Agreement shall be rendered null and void, other than the confidentiality
provisions of Section 5(e).

     h.  Relationship of the Parties.  Neither this Agreement, nor any terms and
         ---------------------------
conditions contained herein, shall be construed as creating a partnership, joint
venture, agency, or franchise relationship.

     i.  Entire Agreement.  This Agreement, including Exhibits A, B, and C
         ----------------                             ----------  -     --
attached hereto, shall constitute the entire agreement between the Parties with
respect to its subject matter and merges all prior and contemporaneous
communications, both written and oral.  This Agreement shall not be modified
except by a written agreement signed on behalf of NetIQ and Microsoft by their
respective duly authorized representatives.

     j.  Waiver.  No waiver of any breach of any provision of this Agreement
         ------
shall constitute a waiver of any prior, concurrent or subsequent breach of the
same or any other provisions hereof, and no waiver shall be effective unless
made in writing and signed by an authorized representative of the waiving Party.

     k.  Section Headings.  The Section headings used in this Agreement are
         ----------------
intended for convenience only and shall not be deemed to supersede or modify any
provisions.

IN WITNESS WHEREOF, Microsoft and NetIQ have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.

Microsoft Corporation                           NetIQ Corporation

One Microsoft Way                               5410 Betsy Ross Drive
Redmond, WA 98052-6399                          Santa Clara, CA 95054

By ___________________________________          ______________________________
(Sign)                                          (Sign)
______________________________________          ______________________________
Name (Print)                                    Name (Print)
______________________________________          ______________________________
Title                                           Title

                                       15
<PAGE>

                                   Exhibit A
                                   ---------

                    Licensed AKMs and corresponding Reports
                    ---------------------------------------

OM ActiveKnowledge Modules:
--------------------------

     Microsoft Distributed Transaction Coordinator (MSDTC)
     Microsoft Domain Name Service (DNS)
     Microsoft Dynamic Host Configuration Protocol (DHCP)
     Microsoft Exchange
     Microsoft Internet Information Server (IIS)
     Microsoft Message Queue (MSMQ)
     Microsoft Proxy Server
     Microsoft Routing and Remote Access Service (RRAS)
     Microsoft Site Server
     Microsoft SNA Server
     Microsoft SQL Server
     Microsoft Systems Management Server (SMS)
     Microsoft Transaction Server (MTS)
     Microsoft Windows 2000 Active Directory
     Microsoft Windows 2000 Operating System
     Microsoft Windows Internet Naming Service (WINS)
     Microsoft Windows Terminal Server
     Default Event Collection for Microsoft Windows NT and 2000
     Limited Version of Microsoft Windows NT 4.0 Operating System

OM Reports:  Those reports as shipped in OM version 3.3 under the following
----------
categories:

     Active Directory Auditing
     Active Directory Discovery
     Active Directory Health Monitoring and Operational Recovery
     Active Directory Replication Monitoring
     Exchange Capacity Planning Graphs
     Exchange Mailbox and Folder Sizes
     Exchange Operations
     Exchange Performance Analysis Graphs
     Exchange Traffic Analysis
     Internet Information Server Operations
     Internet Information Server Performance Analysis
     NetIQ Operations Manager and Security Manager
     Remote Access Service
     SQL Server Capacity Planning
     SQL Server Operations
     SQL Server Performance Analysis
     Windows NT/2000 Capacity Planning Graphs
     Windows NT/2000 Operations
     Windows NT/2000 Performance Analysis Graphs
     Windows Terminal Server

                                       16
<PAGE>

                                   Exhibit B
                                   ---------

                   Diagram of Licensed Software Architecture
                   -----------------------------------------

                                       17
<PAGE>

                                   Exhibit C
                                   ---------

                               Payment Schedule
                               ----------------

DATE          PAYMENT ($M)   CUMULATIVE TOTAL
----          ------------   ----------------
1 Nov 2000         5         5

1 Feb 2001         10        15

1 May 2001         10        25

1 Aug 2001         15        40

1 Nov 2001         20        60

1 Feb 2002         25        85

1 May 2002         25        110

1 Aug 2002         25        135

1 Nov 2002         20        155

1 Feb 2003         10        165

1 May 2003         5         170

1 Aug 2003         5         175

                                       18<PAGE>

                                                                   Exhibit 10.42

                            RESTATED LOAN AGREEMENT
                            -----------------------

     This Restated Loan Agreement (this "Agreement" or "Restated Loan
Agreement") dated as of August 21, 2000, among Star Scientific, Inc., a Delaware
corporation ("Star"), Star Tobacco and Pharmaceuticals, Inc., a Virginia
corporation ("Star Tobacco"), and Brown & Williamson Tobacco Corporation, a
Delaware corporation (the "Lender") individually a "Party" and collectively the
"Parties".

     Recitals.  Star and Lender entered into a Loan Agreement dated October 12,
     --------
1999 whereby Lender agreed, subject to the terms and conditions therein
contained, to lend Star $22,000,000.  Lender has also advanced to Star
$11,000,000 against future delivery of tobacco leaf and Lender has agreed to
loan $4,950,000 to Star Tobacco provided that (i) Star Tobacco grants Lender a
first priority security interest in Star Tobacco's Intellectual Property to
secure the Obligations; (ii) Star Tobacco guarantee the payment of Star's
primary or direct Obligations, (iii) Star guarantee the payment of Star
Tobacco's primary or direct Obligations; (iv) the Leaf Purchase Advance is
secured by the Collateral; and (v) the Collateral Documents secure all of the
Obligations in the manner and priority set forth in Section 7.01.

                                  ARTICLE I.
                                  DEFINITIONS

     For the purposes of this Agreement, the following terms shall have the
meanings set forth below:

     "Barns" means the specially fabricated tobacco curing barns utilized by
      -----
Obligor to reduce the nitrosamine levels in tobacco.

     "Business Day" shall mean any day other than a Saturday, Sunday, or public
      ------------
or Lender holiday or the equivalent for Lenders generally under the laws of the
State of Virginia.

     "B&W Affiliates" shall have the meaning ascribed to it in the Master
      --------------
Agreement, as amended.

     "Collateral" shall mean the Star Collateral, the Star Tobacco Collateral,
      ----------
the Star Guaranty and the Star Tobacco Guaranty.

     "Collateral Documents" shall mean the Restated Star Tobacco Security
      --------------------
Agreement, the Star Tobacco Security Agreement and all related financing
statements to each of the foregoing, the Star Guaranty and the Star Tobacco
Guaranty.

     "Credit Facility C Advance" shall mean the advance by the Lender of Credit
      -------------------------
Facility C under the Loan to Star Tobacco.
<PAGE>

     "Debt" shall mean (A) indebtedness for borrowed money or for the deferred
      ----
purchase price of property or services, (B) obligations as lessee under leases
which shall have been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (C) obligations under direct
or indirect guaranties in respect of, and obligations (contingent or otherwise)
to purchase or otherwise acquire, or otherwise to assure a creditor against loss
in respect of, indebtedness or obligations of others of the kinds referred to in
clause (A) or (B) above, (D) liabilities incurred in respect of benefit
commitments in excess of plan assets under pension plans.

     "Event of Default" shall have the meaning ascribed to it in Section 6.01
      ----------------
hereof.

     "GAAP" shall mean generally accepted accounting principals, consistently
      ----
applied.

     "Intellectual Property" shall mean [***]
      ---------------------

     "Intellectual Property Collateral" shall mean the Intellectual Property of
      --------------------------------
Star and Star Tobacco.

     "Leaf Purchase Advance" means the $11,000,000 previously advanced by B&W to
      ---------------------
Star as an advance payment against future delivery of Star Cure(TM) flue cured
Tobacco pursuant to the Purchase Intention Commitments.

     "Loan Agreement" shall mean this Restated Loan Agreement.
      --------------

     "Loan" shall mean Leaf Purchase Advance and the term loans made and/or to
      ----
be made subject to the terms and conditions contained herein, evidenced by four
separate credit facilities:  (i) one to Star in the amount of $13,200,000
("Credit Facility A"), (ii) one to Star in the amount of $8,800,000 ("Credit
Facility B"), (iii) one to Star Tobacco in the amount of $4,950,000 ("Credit
Facility C"), and (iv) one to Star in the amount of $11,000,000 to document and
evidence the Leaf Purchase Advance ("Credit Facility D"), evidenced by Note A,
Note B, Note C, and Note D respectively, and secured by the Collateral
Documents.

     "Loan Documents" shall mean this Restated Loan Agreement, Note A, Note B,
      --------------
Note C, Note D and the Collateral Documents.

     "Master Agreement" shall mean an agreement dated October 11, 1999 between
      ----------------
Lender and Star, as amended, relating to, inter alia, the purchase of low-TSNA
                                          ----- ----
tobacco from Star by Lender [***].

                                      -2-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

     "Note A" shall mean the promissory note executed by Star dated December 19,
      ------
1999 payable to Lender in the principal amount of $13,200,000, in the form
attached hereto as Exhibit A.

     "Note B" shall mean the promissory note to be executed by Star in the event
      ------
that Credit Facility B is funded payable to the Lender in the principal amount
of $8,800,000, in the form attached hereto as Exhibit B.

     "Note C" shall mean the promissory note executed by Star Tobacco dated as
      ------
of the date of this Restated Loan Agreement in the amount of $4,950,000 in the
form attached hereto as Exhibit C.

     "Note D" shall mean the promissory note executed by Star dated as of the
      ------
date of this Restated Loan Agreement in the amount of $11,000,000 to evidence
the Leaf Purchase Advance in the form attached hereto as Exhibit D.

     "Note" shall mean any of the Notes.
      ----

     "Notes" shall mean Note A, Note B, Note C and Note D.
      -----

     "Obligations"  means the obligation of each of the Obligors, either as a
      -----------
maker or as a guarantor:  (A) to pay the principal of and any interest due on
Note A, Note B (but only to the extent funded), Note C and Note D in accordance
with the terms thereof and to satisfy all of its other liabilities to the Lender
arising under the Loan Documents, whether now existing or hereafter incurred,
matured or unmatured, direct or contingent, including any extensions,
modifications, renewals thereof and substitutions therefor; (B) to repay to the
Lender all amounts advanced by the Lender hereunder or otherwise on behalf of
the applicable Obligor in connection with the Loan, including, but without
limitation, advances for the payment of insurance, repairs to or maintenance or
storage of any of the Collateral; and (C) to reimburse the Lender, on demand,
for all of the Lender's expenses and costs, including the reasonable fees and
expenses of its counsel, in connection with the enforcement of this Agreement
and the documents required hereunder, including, without limitation, any
proceeding brought or threatened to enforce payment of any of the obligations
referred to in clauses (A) and (B) above.

     "Obligor" means either Star or Star Tobacco.
      -------

     "Obligors" means each of Star and Star Tobacco.
      --------

     "Person" shall mean any individual, corporation, partnership, trust,
      ------
unincorporated association, joint venture, joint stock company or other entity.

                                      -3-

<PAGE>

     "Prime Rate" shall mean that rate of interest published in The Wall Street
      ----------                                                ---------------
Journal in the Money Rates Section from time to time as the Prime Rate.
-------

     "Purchase Intention Commitments" means the letter [***]
      ------------------------------

     "Restated Star Security Agreement" shall mean the restated and amended
      --------------------------------
security agreement between Star and Lender dated as of the date of this Restated
Loan Agreement in the form attached as Exhibit F.

     "Star Collateral" shall mean the property interests in Barns, leaf
      ---------------
inventory, Intellectual Property and proceeds thereof in which Star has granted
Lender a security interest pursuant to the Restated Star Security Agreement.

     "Star Guaranty" shall mean the guaranty of payment by Star of Star
      -------------
Tobacco's direct and primary Obligations to Lender under this Restated Loan
Agreement in the form attached as Exhibit G.

     "Star Tobacco Collateral" shall mean Star Tobacco's Intellectual Property
      -----------------------
and the proceeds thereof as more fully defined in the Star Tobacco Security
Agreement.

     "Star Tobacco Guaranty Agreement" shall mean the guaranty of payment by
      -------------------------------
Star Tobacco of Star's obligations to Lender under this Restated Loan Agreement
in the form attached as Exhibit H.

     "Star Tobacco Security Agreement" shall mean the security agreement between
      -------------------------------
Star Tobacco and Lender dated as of the date of this Restated Loan Agreement in
the form attached hereto as Exhibit I.

     "Taxes" shall mean all federal, state and local income taxes payable by
      -----
Obligor during a specified period of time.

     "Unfunded Liabilities" shall have the meaning ascribed to it in Section
      --------------------
4.01(f) hereof.

     "Unmatured Event of Default" shall mean any event of condition which with
      --------------------------
passage of time or giving of notice or both would become or create an Event of
Default.

                                      -4-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

                                  ARTICLE II.
                         AMOUNTS AND TERMS OF THE LOAN

     SECTION 2.01.  Credit Facilities. The Lender has previously fully funded
                    -----------------
Credit Facility A and Credit Facility D, and the Lender agrees, on the terms and
conditions hereinafter set forth, including without limiting the generality of
the foregoing, the conditions precedent set forth in Article III hereof, to
make: (i) a one year term loan to Star Tobacco in the amount of $4,950,000
("Credit Facility C") evidenced by Note C, and (ii) subject to the occurrence of
certain conditions, the occurrence of which is solely in Lender's discretion, a
term loan to Star in the amount of $8,800,000 ("Credit Facility B") evidenced by
Note B, for the purpose of financing the acquisition of additional Barns by
Star.  The Obligors agree jointly and severally to repay the Obligations (to the
extent funded) upon the terms and conditions and as required by the Loan
Documents.  No funds will be advanced by Lender to Star pursuant to Credit
Facility B unless Lender gives Star [***].

     SECTION 2.02  Interest Rate and Payments of Interest.  Interest shall be
                   --------------------------------------
paid as follows:

          (a) Interest shall be due and payable as provided for in the Notes.

          (b) Interest shall be calculated on the basis of a 360-day year,
counting the actual number of days elapsed, and shall be payable monthly on the
outstanding principal balances as provided for in the Notes.

     SECTION 2.03.  Advances.  Each Obligor acknowledges that Credit Facilities
                    --------
A and D are fully funded.  Subject to fulfillment of applicable conditions in
Article III, Credit Facility C is being funded to Star Tobacco concurrently with
the execution of this Restated Loan Agreement. Upon two (2) Business Days prior
written notice to Lender, Star may request advances under Credit Facility B for
the sole purpose of acquiring Barns at the rate of [***]. With the exception of
the first and last advance under Note B, the minimum advance under Credit
Facility B shall be [***]. Lender may disburse such advances directly to Star or
on behalf of and for the account of Star directly to the manufacturer of the
Barns.

     SECTION 2.04  Repayment of Principal.  The principal advanced and
                   ----------------------
outstanding under Credit Facility A, Credit Facility B, Credit Facility C and
Credit Facility D shall be repaid as provided for in Note A, Note B, Note C and
Note D respectively.  Star will curtail or paydown Credit Facility D by
delivering to Lender Star Flue Cured Tobacco from the year 2001 Flue cured crop
pursuant to the Purchase Intention Commitments, as amended, on or

                                      -5-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

before December 31, 2001 and that only in the event Star fails to deliver such
tobacco in accordance with the Purchase Intention Commitments, as amended, on or
before December 31, 2001 will Credit Facility D be repaid in U.S. dollars.

     SECTION 2.05  Payment to the Lender.  All sums payable to the Lender
                   ---------------------
hereunder shall be paid directly to the Lender in immediately available funds by
wire transfer to:

  [***].

     SECTION 2.06.  Prepayments.  Obligor may prepay the Loan in whole or in
                    -----------
part only on the dates for regularly scheduled principal and interest payments
upon five (5) days prior written notice to Lender.  Any amounts prepaid by
Obligor may not be re-borrowed.

     SECTION 2.07.  Payment on Non-Business Days.  Whenever any payment to be
                    ----------------------------
made hereunder or under the Note shall be stated to be due on a day other than a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the compensation of
payment of interest.

                                 ARTICLE III.
                             CONDITIONS OF LENDING

     SECTION 3.01.  Condition Precedent to Credit Facility C.  The obligation of
                    ----------------------------------------
the Lender to make the Credit Facility C Advance is subject to the condition
precedent that the Lender shall have received on or before the day of the
request for the funding of the Credit Facility C Advance all of the following
agreements, duly executed, and other documents, certificates and items, all of
which shall be in form and substance satisfactory to Lender:

          (a) Note C and Note D;

          (b) The Restated Star Security Agreement, the Star Tobacco Security
Agreement,  together with such UCC financing statements or other documents as
Lender shall deem necessary or appropriate, the Star Guaranty and the Star
Tobacco Guaranty;

          (c) Copy of the certificate of authority to transact business in any
jurisdiction in which the nature of each Obligor's activities require it to
register as a foreign corporation in such jurisdiction;

          (d) Copy of the articles of incorporation of Star Tobacco, certified
by the Clerk of the State Corporation Commission of Virginia;

                                      -6-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

          (e) Copies of the bylaws of Star Tobacco, certified by the Secretary
of Obligor;

          (f) Copies of a resolution of the board of directors of each Obligor,
approving the Loan and the execution and delivery of the Loan Documents to which
it is a party, certified by the Secretary of each Obligor;

          (g) A good standing certificate for Star from the Secretary of State
of the State of Delaware;

          (h) A good standing certificate for Star Tobacco from the Clerk, State
Corporation Commission of Virginia;

          (i) Legal opinion of Paul, Hastings, Janofsky & Walker LLP, counsel to
Obligors, in form reasonably acceptable to Lender's counsel;

          (j) UCC, judgment and Federal tax lien searches for each Obligor in
such jurisdictions as Lender may request;

          (k) Signature and incumbency certificates with respect to each officer
executing the Loan Documents on behalf of each Obligor; and

          (l) Such other documents or certificates as Lender shall reasonably
require.

     SECTION 3.02.  Conditions Precedent to any Subsequent Advance.  The
                    ----------------------------------------------
obligation of the Lender to make any subsequent advance under Credit Facility B
shall be subject to the satisfaction of the following additional conditions
precedent on or before the date of the request for the funding of such advance:

          (a)  the Lender shall have received a certificate signed by Obligor,
dated the date of the request for the funding of the advance, stating that, as
of such date, the following statements are true:

               (i)    the representations and warranties contained in the Loan
Documents are correct on and as of such date;

               (ii)   no event has occurred and is continuing, or would result
from the Loan, which constitutes an Event of Default or would constitute an
Unmatured Event of Default, and

               (iii)  the number of Barns being acquired with such advance and
the serial numbers of such Barns.

                                      -7-

<PAGE>

               (b) the Lender shall have received such other approvals, opinions
or documents as the Lender may reasonably request.

     SECTION 3.03.  Priority of Security Interests.  The security interests in
                    ------------------------------
the Collateral in favor of Lender to secure the Loan shall be perfected and a
first priority on the Collateral

     SECTION 3.04.  Condition Precedent to Credit Facility B.  [***]
                    ----------------------------------------

                                  ARTICLE IV.
                        REPRESENTATIONS AND WARRANTIES

     SECTION 4.01.  Representations and Warranties of Obligors. Obligors jointly
                    ------------------------------------------
and separately represent and warrant to Lender as follows:

          (a) Each Obligor is duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation and is qualified to do
business as a foreign corporation and in good standing in each jurisdiction
where such qualification is necessary.

          (b) The execution, delivery and performance of the Loan Documents to
which it is a party are within each Obligor's corporate powers, have been
authorized by all necessary corporate action, does not contravene its (i)
articles of incorporation or bylaws or (ii) any law or regulation binding on or
affecting it, or any contractual restriction binding on or affecting it and
(iii) does not result in or require the creation of any lien, security interest
or other charge of encumbrance (other than pursuant to the Loan Documents) upon
or with respect to any of its properties.

          (c) No authorization, consent or approval or other action by, and no
notice to or registration or filing with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
each Obligor of any Loan Document to which it is a party.

          (d) This Agreement and all of the other Loan Documents to which each
Obligor is a party are legal, valid and binding obligations of the respective
Obligor enforceable against such Obligor in accordance with their respective
terms.

                                      -8-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

          (e) There is no material pending, or to the best of each Obligor's
knowledge, threatened action or proceeding at law or in equity before any court,
governmental agency, or arbitrator affecting either Obligor.

          (f) Each Obligor (i) is not party to any indenture, agreement or other
instrument or subject to any restriction materially adversely affecting its
business, properties, assets, operations or conditions (financial or otherwise),
and (ii) is not in material default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
material agreement or instrument to which it is a party.

          (g) Each Obligor has obtained all material licenses, permits,
franchises, or other governmental authorizations reasonably necessary for the
ownership of its properties and the conduct of its business.  Each Obligor
possesses adequate licenses, patents, patent applications, copyrights,
trademarks, trademark applications, and trade names to continue its business as
heretofore conducted by it, without any conflict with the rights of any other
person or entity.

          (h) Obligors have not received any communication from any Person that
asserts that any Intellectual Property utilized by any Obligor is infringing the
rights of any Person.

                                  ARTICLE V.
                           COVENANTS OF THE OBLIGORS

     SECTION 5.01.  Affirmative Covenants.  So long as any Obligation shall
                    ---------------------
remain unpaid each Obligor will, unless the Lender shall otherwise consent in
writing:

          (a)  Maintain Corporation.  Do or cause to be done all things
               --------------------
necessary to preserve and keep in full force and effect its corporate existence,
rights and franchises; continue to conduct and operate its business
substantially as conducted and operated during the present and preceding
calendar year; at all times maintain, preserve and protect all franchises and
trade names and preserve all the remainder of its property used or useful in the
conduct of its business and keep the same in good repair, working order and
condition; and from time to time, make, or cause to be made, all needed and
proper repairs, renewals, replacements, betterments and improvements thereto so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.

          (b) Compliance with Laws, Agreements, Etc.  Comply (i) in all material
              --------------------------------------
respects with all applicable laws, rules, regulations, and orders, such
compliance to include, without limitation, paying before the same becomes
delinquent all taxes, assessments and governmental charges imposed upon it or
upon its property except to the extent contested in

                                      -9-

<PAGE>

good faith, and strictly with all Loan Documents, and other material agreements
and all governmental regulatory requirements.

          (c) Insurance.  Keep its insurable properties adequately insured and
              ---------
maintain (i) insurance against fire and other risks customarily insured against
by companies engaged in the same or a similar business, (ii) necessary worker's
compensation insurance, (iii) public liability, and (iv) such other insurance as
may be required by law or as may be reasonably required in writing by the
Lender, all of which insurance shall be in such amounts, containing such terms,
in such form, for such purposes and written by such companies as may be
satisfactory to the Lender.  Each Obligor will deliver evidence satisfactory to
the Lender that such insurance has been so procured and, with respect to
casualty insurance, an endorsement to reflect that Lender is a loss payee.  If
Obligors, or either of them, fail to maintain satisfactory insurance as herein
provided, the Lender shall have the option to do so, and Obligors agree to repay
the Lender on demand, with interest at the rate of [***] per annum above the
Prime Rate, on all amounts so expended by the Lender.

     SECTION 5.02.  Negative Covenants.  So long as any amount under the Loan
                    ------------------
shall remain unpaid, neither Obligor will, without the prior written consent of
the Lender:

          (a) Liens, Etc.  Create or suffer to exist, any lien, security
              -----------
interest or other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to any of the Collateral whether now owned or
hereafter acquired, or assign, any right to receive income, in each case to
secure any Debt of any Person, other than as created or assigned under the Loan
Documents.

          (b) Debt.  Create or suffer to exist any Debt other than Debt under
              ----
the Loan Documents, and other Debt entered into in the ordinary course of
business.

          (c) Mergers, Etc.  Merge or consolidate with or into, or convey,
              -------------
transfer, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to, or acquire all or substantially all of the
assets of, any person or entity.

          (d) Sales, Etc. of Assets.  Sell, lease, transfer or otherwise dispose
              ---------------------
of any of its assets or any of its interests therein other than in the normal
course of its business without the prior written consent of Lender (which
consent may be conditioned upon using the proceeds of such sale or other
disposition to prepay the Notes).

          (e) Maintenance of Licenses and Authorizations.  Take or fail to take
              ------------------------------------------
any action which shall result directly or indirectly in the suspension,
revocation or termination of any license, franchise or other authorization held
by Obligor and necessary for its operations.

                                     -10-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

          (f) Extension of Credit.  Make loans, advances or extensions of credit
              -------------------
to any Person, except for sales on open account and in the ordinary course of
business.

          (g) Guarantee Obligations.  Guarantee or otherwise in any way become
              ---------------------
or be responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, or agreement for the furnishing
of funds of any other Person through the purchase of goods, supplies or services
(or by way of stock purchase, capital contribution, advance or loan) for the
purpose of paying or discharging the indebtedness of any other Person, or
otherwise, except for the endorsement of negotiable instruments in the ordinary
course of business for collection.

          (h) Prepayment of Debt.  Except as provided for in Section 2.06, make
              ------------------
any payment in reduction of the principal amount of any Debt (other than Debt
evidenced by the Notes) in advance of the scheduled maturity of such Debt except
in the ordinary course of business.

                                  ARTICLE VI.
                               EVENTS OF DEFAULT

     SECTION 6.01.  Events of Default.  If any of the following events ("Events
                    -----------------
of Default") shall occur and be continuing:

          (a) Any Obligor shall fail to pay: (i) the principal of any Note when
due, or (ii) interest on the Note when due and such failure continues for more
than 60 days after written notice from the Lender to the Obligor; or

          (b) Lender elects to terminate the Master Agreement pursuant to the
provisions of Section 10.02(b), (c), or (d) thereof; or

          (c) A material cessation or stoppage by Star to deliver to any B&W
Affiliates the quantities of Star Cure Tobacco ordered for such year;

Lender may accelerate all amounts due hereunder, and the same shall be
immediately due and payable, without presentment, demand, protest, or further
action of any kind, all of which are waived by the Borrowers.

                                     -11-

<PAGE>

                                 ARTICLE VII.
                                   SECURITY

     SECTION 7.01  Composition of the Collateral.  The Collateral, together with
                   -----------------------------
all of each Obligor's other property of any kind held by the Lender, shall stand
as one general, continuing collateral security for all Obligations and may be
retained by the Lender until all Obligations have been satisfied in full.  The
Collateral shall secure the Obligations as follows:  (a) the Star Collateral
shall first secure Obligations arising under Note A and Note B (to the extent
funded) pari passu, and shall next secure Obligations arising under Note D and
        ---- -----
shall next secure Star's guaranty of Star Tobacco's Obligations arising under
the Star Guaranty with respect to Note C; and (b) the Star Tobacco Collateral
shall first secure Obligations arising under Note C, and shall next secure Star
Tobacco's guaranty of Star's Obligations arising under the Star Tobacco Guaranty
of Star with respect to Note B, and shall next secure Obligations arising under
the Star Tobacco Guaranty with respect to Note A and Note D, pari passu.  After
                                                             ---- -----
the payment of Note C and Note D and prior to the payment in full of the
Obligations evidenced by Note A and Note B, Lender will forebear enforcing its
security interest in the Intellectual Property Collateral so long as none of the
Obligors are in a bankruptcy proceeding under Title 11 of the U.S. Code or other
insolvency, reorganization or receivership proceeding, whether under state or
federal law.  If no Event of Default has occurred prior to January 1, 2003,
Lender will release its security interest in the Intellectual Property
Collateral effective as of such date.  The provisions of this Section 7.01
supercede any conflicting provisions of the Restated Star Security Agreement and
the Star Tobacco Security Agreement.

     SECTION 7.02  Rights in Property Held by the Lender.  As further security
                   -------------------------------------
for the prompt satisfaction of all Obligations, each Obligor hereby assigns,
transfers and sets over to the Lender all of its right, title and interest in
and to, and grants the Lender a lien on and a security interest in, all amounts
that may be owing from time to time by the Lender to Obligor in any capacity,
including, but without limitation, any account with the Lender, which lien and
security interest shall be independent of any right of set-off which the Lender
may have.

                                 ARTICLE VIII.
                                 MISCELLANEOUS

     SECTION 8.01.  Amendments, Etc.  No amendment or waiver of any provision of
                    ----------------
this Agreement or the Note, nor consent to any departure by Obligors, or either
of them, therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instances and for the specific purpose for which
given.

                                     -12-

<PAGE>

     SECTION 8.02.  Notices, Etc.  All notices and other communications provided
                    -------------
for hereunder shall be in writing (including telegraphic communication) and
shall be effective when delivered or when mailed, postage prepaid, by United
States certified or registered mail, return receipt requested, addressed as
follows:

          If to Obligors:

          Star Scientific, Inc.
          801 Liberty Way
          Chester, VA  23836
          Attention: Jonnie R. Williams
          Telecopier No.:(804) 530-9257

          Star Tobacco & Pharmaceuticals, Inc.
          801 Liberty Way
          Chester, VA  23836
          Attention: Jonnie R. Williams
          Telecopier No.: (804) 530-9257

          with a copy to:

          Paul, Hastings, Janofsky & Walker LLP
          1299 Pennsylvania Avenue, N.W., 10th Fl.
          Washington, D.C.  20004-2400
          Attention:  Paul L. Perito, Esq.
          Telecopier No.:  (202) 508-9700

          and

          Paul, Hastings, Janofsky & Walker LLP
          600 Peachtree Street, Suite 2400
          Atlanta, Georgia  30308
          Attention:  W. Andrew Scott, Esq.
          Telecopier No.  (404) 815-2424

          And if to the Lender, to:

          Brown & Williamson Tobacco Corporation
          1500 Brown & Williamson Tower
          Louisville, KY 40232
          Attention:  [***]

                                     -13-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.
<PAGE>

          Telecopier No. (502) 568-7107

  with a copy to:

          Wiley, Rein & Fielding
          1776 K Street, N.W.
          Washington, D.C.  20006
          Attention:  Stuart F. Carwile
          Telecopier No. (202) 719-7049

or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party.

     SECTION 8.03.  No Waiver; Remedies.  No failure on the part of the Lender
                    -------------------
to exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right.  The remedies provided in the Loan Documents
are cumulative and not exclusive of any remedies existing law, in equity or
otherwise.

     SECTION 8.04.  Accounting Terms.  All accounting terms not specifically
                    ----------------
defined herein shall be construed in accordance with generally accepted
accounting principles consistently applied, except as otherwise stated herein.

     SECTION 8.05.  Right of Set-Off.  Upon the occurrence and during the
                    ----------------
continuance of any Event of Default the Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set-off and
apply any and all other indebtedness at any time owing by the Lender to or for
the credit or the account of the Obligor against any and all of the Obligations,
irrespective of whether or not the Lender shall have made any demand respecting
such Obligations and although such Obligations may be unmatured.  The rights of
the Lender under this Section are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which the Lender may
have.

     SECTION 8.06  Binding Effect; Governing Law.  This Agreement shall be
                   -----------------------------
binding upon and inure to the benefit of Obligor and the Lender and their
respective successors and assigns, except that Obligor shall not have the right
to assign its rights hereunder or any interest herein without the prior written
consent of the Lender.  This Agreement, the Note and the other Loan Documents
(except where otherwise expressly so stated) shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Virginia.

                                     -14-

<PAGE>

     SECTION 8.07  Petition Under 11 U.S.C. (S) 303.  Lender agrees to give
                   --------------------------------
Borrowers thirty (30) days advance written notice in the event that Lender
intends to join in a petition seeking the involuntary bankruptcy of Borrowers or
either of them under 11 U.S.C. (S) 303.

     SECTION 8.08  Counterparts.  This Restated Loan Agreement and any
                   ------------
amendments, waivers, consents, or supplements may be executed in counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument.

                            [SIGNATURE PAGE FOLLOWS]

                                     -15-

<PAGE>

                   SIGNATURE PAGE TO RESTATED LOAN AGREEMENT
                   -----------------------------------------

     IN WITNESS WHEREOF, the Obligor and the Lender have caused this Loan
Agreement to be executed by their respective officers thereunto duly authorized,
all as of the date first above written.

                              STAR SCIENTIFIC, INC.

                              By:____________________________________
                              Name:
                              Title:

                              STAR TOBACCO AND PHARMACEUTICALS, INC.

                              By:____________________________________
                              Name:
                              Title:

                              BROWN & WILLIAMSON TOBACCO CORPORATION

                              By:____________________________________
                              Name:
                              Title:

                                     -16-

Note: Redacted portions have been marked with [***].  The redacted portions are
subject to a request for confidential treatment that has been filed with the
Securities and Exchange Commission.

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