Document:

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                                                                    EXHIBIT 10.4

                                   AGREEMENT
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     This Agreement ("Agreement"), dated as of June 23, 2000 ("Effective Date"),
is between WellPoint Health Networks Inc., a Delaware corporation ("WellPoint"),
on its own behalf and on behalf of all of its Affiliates, and drugstore.com,
inc., a Delaware  corporation ("drugstore.com"), on its own behalf and on behalf
of its wholly-owned subsidiary, DS Pharmacy, Inc. ("DS Pharmacy").

                                   RECITALS
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     Whereas, WellPoint is a health care company whose Affiliate Professional
Claim Services, Inc. (doing business as WellPoint Pharmacy Management) provides
pharmacy claims administration services and clinical management services and
arranges for pharmaceutical mail service dispensing for the benefit of its
customers.  Certain other Affiliates of WellPoint, including but not limited to
Blue Cross of California, BC Life & Health Insurance Company and UNICARE Life &
Health Insurance Company, arrange for the provision of health care services for
the benefit of enrolled or eligible populations, on an insured, partially
insured and/or self-funded basis.  All benefits and obligations referred to
herein as those of WellPoint shall be deemed to refer as well to all of
WellPoint's Affiliates.

     Whereas, drugstore.com is an Internet Pharmacy which owns and operates an
Internet based online shopping site for the retail sale of products customarily
sold in retail pharmacies.

     In consideration of the agreements, covenants and conditions set forth
herein, the parties hereto agree as follows:

Section 1.  Definitions

     Whenever used in this Agreement with initial letters capitalized, the
following terms will have the following specified meanings:

     "Above-the-Fold" means situated within the portion of a page of a Site that
is designed to be visible on a standard computer screen without requiring the
user to scroll horizontally or vertically through the page.

     "Affiliate" means, with respect to a party, any Person that, directly or
indirectly, Controls, or is Controlled by, or is under common Control with, such
party.

     "Change in Control" means (i) the time at which a Person, or two or more
Persons acting in concert, acquire more than 50% of the voting power of the
entity; (ii) the shareholders of a party approve a plan of complete liquidation
of an entity; or (iii) the shareholders of an entity approve an agreement for
the sale or disposition by such entity of all or substantially all of the assets
of such entity, or any transaction having a similar effect.
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     "Competitor" of WellPoint means any Third Party that is either a PBM or a
Health Plan.  "Competitor" of drugstore.com means a Third Party that, directly
or through an Affiliate, sells via the Internet (i) Pharmaceutical Products or
(ii) Pharmaceutical Products and OTC Products.

     "Confidential Information" means all trade secrets, know-how and nonpublic
information that relates to research, development, trade secrets, know-how,
inventions, source code, technical data, software programming, concepts,
designs, procedures, manufacturing, purchasing, accounting, engineering,
marketing, merchandising, selling, business plans or strategies and other
proprietary or confidential information, protectable under the laws of the
United States or any other nation, state or jurisdiction (including, but not
limited to, any foreign equivalents thereto).

     "Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether by contract or through the ownership of voting securities, including the
ownership of more than fifty percent (50%) of the equity, partnership or similar
interest in such Person.

     "drugstore.com Site" means the site currently located at www.drugstore.com
and any successor site or Mirror Site.

     "Health Plan" means any Person, such as an insurance company, health
maintenance organization, health plan or other Person, in the business of
arranging for the provision of health care services, for the benefit of an
enrolled or eligible population, on an insured, partially insured and/or self-
funded basis.

     "Home Page" means (i) with respect to the drugstore.com Site, the page that
is displayed to the user when the URL www.drugstore.com or any successor URL is
entered (ii) with respect to the WellPoint Site, the page that is displayed to
the user when the URL www.WellPointRx.com or any successor URL is entered, and
(iii) with respect to the sites of any WellPoint's Affiliates that are Health
Plans, such pages as WellPoint shall reasonably determine provided that such
                                                          -------------
pages are prominent within such sites.  For the purposes of the foregoing
sentence, drugstore.com acknowledges and agrees that "prominent" does not
necessarily mean the first page of a Site or the first item presented on any
particular page.

     "Identified Members" are WellPoint Members that are identified by
drugstore.com as WellPoint Members whether by means of a drugstore.com-approved
Link from the WellPoint Site or the website of a WellPoint Plan Sponsor, by
means of a Link from a drugstore.com promotional URL delivered by WellPoint to
WellPoint Members via e-mail or other promotions or by other means as mutually
agreed in writing by WellPoint and drugstore.com.

     "Internet Pharmacy" means a pharmacy that receives orders from customers
through the Internet, including without limitation the Internet division or
operations of pharmacy chains or other retail merchants (such as supermarket
chains and discount stores) that dispense prescriptions drugs and that, as an
adjunct to their traditional

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pharmacy operations, also accept prescriptions orders via the Internet and mail
or deliver the Pharmaceutical Products to their customers.

     "Internet" means the Internet or the World Wide Web (or any successor or
other online network including those using delivery over television, cable, set
top boxes, intranets, extranets and personal digital assistants (but does not
mean traditional telephone service)).

     "IP Right" means any copyright, Trademark, patent, trade secret, moral
right or other intellectual property or proprietary right of any kind (including
applications therefor and, in the case of patents, any continuation or
divisional patent applications claiming priority thereto), whether arising under
the laws of the United States or any other nation, state or jurisdiction
(including any foreign equivalents thereto).

     "Link" means a hypertext link connecting a website to another.

     "Member Data" means any and all information regarding WellPoint Members
(who are identified as such) including, without limitation, any and all
information reasonably obtainable in connection with any WellPoint Member
purchases facilitated through the drugstore.com Site, whether in separately
identifiable or aggregated form, including, without limitation, first or last
name; E-mail or other address; postal code; gender or other demographic
characteristics; year or date of birth; social security or other tax
identification number; occupation or other socio-economic or financial
information; nature, subject matter, date or amount paid in any purchase(s),
preferences or habits; plan type, site of origination and any other identifying
information, to be mutually agreed upon, whether or not actually provided,
collected, derived or deduced, and regardless of its accuracy or completeness.

     "Mirror Site" means an Internet Site that (i) contains the exact form and
content of a Site, (ii) is located at a geographic location distinct from a Site
and (iii) is created for the purpose of improving the performance of and/or
accessibility to a Site.

     "OTC Products" means health, beauty, wellness and personal care products,
including over-the-counter drugs, first aid, contraceptives, vitamins and
fitness supplements, natural health remedies (such as nutritional supplements,
herbs and homeopathy), personal care products relating to hair care, body care,
skin care and eye care (e.g., contact lens solutions, but not contact lenses).

     "PBM" means any Person that engages in any of the following activities as a
significant line of business of such Person:  contracting with a Health Plan to
provide prescription drug benefits via mail order, point-of-sale electronic
processing of pharmacy claims, formulary development and administration, or
developing and/or maintaining retail pharmacy networks for fulfillment of
consumer orders for Pharmaceutical Products for members of a prescription drug
benefit plan; provided, however, that a Health Plan whose principal business
involves offering policies or plans of comprehensive health care and which
engages in such activities solely for the benefit of its policyholders or

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members of its comprehensive health plans shall not be deemed to be a PBM for
purposes of this Agreement.

     "Person" means any individual, corporation, partnership, limited liability
company, trust, association or other entity or organization, including any
governmental or political subdivision or any agency or instrumentality thereof.

     "Pharmaceutical Products" means any product that under law may not be
dispensed except pursuant to a prescription order written by a licensed medical
professional and dispensed by a licensed pharmacy.

     "Pharmacy Provider Agreement" means the agreement entered into by and
between WellPoint and DS Pharmacy in substantially the form attached hereto as
Exhibit A.
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     "Term" means the period commencing on the Effective Date and ending on the
fifth anniversary of such date, subject to extension in accordance with Section
14.4.

     "Third Party" means any Person that is not a party hereto or an Affiliate
of a party hereto.

     "Site" means a location accessible on the Internet through the World Wide
Web and which provides multimedia content via a graphical user interface.

     "Trademark(s)" means all common law or registered trademarks, logos,
service marks, trade names, Internet domain names and trade dress rights and
similar or related rights arising under any of the laws of the United States or
any other country or jurisdiction, whether now existing or hereafter adopted or
acquired.

     "WellPoint Member" means any individual who is entitled to benefits under a
prescription drug plan provided by WellPoint or any Affiliates of WellPoint or
who is given the benefit of this Agreement as part of  an agreement or
arrangement entered into between any Person and WellPoint or any Affiliate of
WellPoint pursuant to which WellPoint or its Affiliate agrees to provide health
or pharmacy benefits to such Person.

     "WellPoint Networks" means all of the networks of retail pharmacies
contracted with WellPoint or any Affiliate of WellPoint, including without
limitation Blue Cross of California, BC Life & Health Insurance Company and
UNICARE Life & Health Insurance Company, and  all entities under contract with
WellPoint to dispense Pharmaceutical Products to WellPoint Members.  A pharmacy
network that is contracted by a WellPoint Plan Sponsor and merely administered
by WellPoint for such WellPoint Plan Sponsor shall not be deemed to be a
WellPoint Network for purposes of this Agreement.

     "WellPoint Plan Sponsor" means a Health Plan, an employer, a Taft-Hartley
plan, a PBM , or any other Person acting on behalf of a WellPoint plan sponsor
who contracts with WellPoint or one of its Affiliates to provide a prescription
drug benefit or beneficial arrangement (such as discount cards) to members or
eligible persons of such health plan.

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     "WellPoint Sites" means the Site currently located at www.wellpoint.com,
                                                           -----------------
the Site currently located at www.wellpointrx.com and the Sites of any Health
Plan or PBM Controlled by WellPoint (and, with respect to each of such Sites,
any successor Site or Mirror Site).

     "World Wide Web" means a method of representing and obtaining graphical
data and linking data items used by Internet users.

Section 2. Affiliation Grants

     2.1   WellPoint Grant.

     (a)   Subject to the terms and conditions of this Agreement and the
conditions described below, WellPoint agrees that drugstore.com shall be
WellPoint and its Affiliates' preferred Internet Pharmacy and shall be the
exclusive Internet Pharmacy which WellPoint and/or its Affiliates actively
promotes to WellPoint Members (except as otherwise provided in Section 2.1 or
Section 3.1 of this Agreement), it being understood that other Internet
Pharmacies may be listed in the network directories and/or pharmacy locators of
WellPoint and its Affiliates, and, provided further, that drugstore.com's status
as WellPoint and its Affiliates' preferred Internet Pharmacy and the provisions
of this Section 2.1 shall not apply to mail service pharmacy activities (i.e.,
those involving a greater than 34 day supply of Pharmaceutical Products).
Nothing in this Section 2.1(a) shall preclude the listing of other Internet
Pharmacies in a WellPoint Plan Sponsor's provider directory or pharmacy locator.
The right of WellPoint, its Affiliates and WellPoint Plan Sponsors to list other
pharmacies on a list that is accessible via the Internet or other electronic
media (as opposed to tangible printed lists as to which such conditions shall
not apply) is conditioned upon the absence of promotions of the Sites of such
pharmacies, and, to the extent possible given the nature and structure of such
list, the listing of drugstore.com first in any list of Internet Pharmacies, the
significantly larger display of the drugstore.com name and logo than the name of
any other Internet Pharmacy, and the absence of logos of any Internet Pharmacy
other than that of drugstore.com. WellPoint (i), unless specifically requested
not to do so by a WellPoint Plan Sponsor, shall include drugstore.com in all the
WellPoint Networks and (ii) with respect to each pharmacy network that is
contracted by a WellPoint Plan Sponsor and merely administered by WellPoint for
such WellPoint Plan Sponsor and therefore is not deemed to be a WellPoint
Network for purposes of this Agreement, shall use reasonable best efforts to
include drugstore.com in such pharmacy network but does not guarantee that
drugstore.com shall be included in such network. Notwithstanding the foregoing
sentence, drugstore.com acknowledges that a WellPoint Plan Sponsor may require
that one or more other Internet Pharmacies be included in the network for that
WellPoint Plan Sponsor, or that one or more Internet Pharmacies (which might
include drugstore.com) be excluded from the network for that WellPoint Plan
Sponsor.

     (b)   The terms and conditions upon which DS Pharmacy will fulfill orders
for Pharmaceutical Products shall be governed by the Pharmacy Provider
Agreement.  The terms of the Pharmacy Provider Agreement shall govern over any
inconsistent term in the body of this Agreement or in any other agreement
between the parties executed prior to

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the execution of the Pharmacy Provider Agreement with respect to the matters
addressed therein.

     2.2  drugstore.com Grant.  drugstore.com agrees that WellPoint shall be
designated as drugstore.com's preferred Health Plan.  drugstore.com shall
promote WellPoint as its preferred Health Plan in accordance with Section 4.2 of
this Agreement.  If drugstore.com enters into an agreement with another Health
Plan or PBM that provides the other Health Plan or PBM with a lower
reimbursement rate (AWP discount and fill fee together) for the same days'
supply that drugstore.com is permitted to fill under the Pharmacy Provider
Agreement, or commits drugstore.com to offer through the Health Plan or PBM a
program that offers a superior discount program to the Health Plan's or PBM's
members, drugstore.com shall notify WellPoint of such agreement ("Third Party
Agreement") within ten (10) days of entering into the Third Party Agreement.
Following receipt of such notice, WellPoint may unilaterally amend the Pharmacy
Provider Agreement to match the reimbursement rate (in total) or amend the then
current WellPoint Member discount program to match the program provided for in
the Third Party Agreement.  Short-term promotions and discount program that are
put in place for less than 120 continuous days shall not be covered under this
Section 2.2.  In addition,  the provisions of this Section 2.2 shall not apply
to guaranteed or minimum fees offered under a Third Party Agreement with a
Health Plan or PBM offering drugstore.com access to a Health Plan membership
base that is substantially larger (i.e., larger by 25% or more members) than the
membership that drugstore.com may access pursuant to this Agreement.

     2.3  Member Identification.

     (a)  Both parties agree to develop appropriate technology and web
interfaces to identify and track Member Data necessary for calculating all
payments hereunder. The parties shall work together to enable drugstore.com to
identify WellPoint Members coming from WellPoint or Affiliate sites to the
drugstore.com Site, including without limitation enabling WellPoint Members to
provide drugstore.com with identifying, verifiable membership numbers related to
their Health Plans.

     (b)  drugstore.com shall provide WellPoint with Member Data necessary to
calculate fees owed WellPoint pursuant to Section 6 of this Agreement only in
aggregate form.  WellPoint understands that drugstore.com shall not provide any
individual Member Data to WellPoint in order to maintain WellPoint Member
confidentiality.  drugstore.com shall provide to WellPoint summary reports
indicating the number of Identified Members visiting and/or making purchases at
the drugstore.com Site and the aggregate amount of such purchases.    There
shall be ordinary data exchange between DS Pharmacy as a contracting pharmacy
and WellPoint and its Affiliates in conformity with the Pharmacy Provider
Agreement and in conformity with applicable laws and regulations.

     (c)  drugstore.com shall not disclose any individually identifiable Member
Data to any Third Party in violation of any applicable law or regulation or
generally applicable policy of WellPoint that WellPoint provides in writing to
drugstore.com.

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Section 3.  Exclusivity and Non-competition

     3.1    WellPoint shall not, and shall not permit any entity that it
Controls to contravene the terms of Section 2.1(a) hereof by actively promoting
any Person that is a drugstore.com Competitor to WellPoint Members or WellPoint
Plan Sponsors during the term of this Agreement (except as otherwise provided in
Section 2.1 or Section 3.1 of this Agreement); provided, however, that the
foregoing shall not preclude WellPoint from (1) holding an ownership interest in
drugstore.com, or (2) conducting activities relating to the drugstore.com Site
and the WellPoint Sites as set forth in Section 4.1 of this Agreement, (3)
listing Internet Pharmacies in the provider directories or pharmacy finders of
WellPoint or a WellPoint Plan Sponsor subject to the terms and conditions of
Section 2.1(a) of this Agreement, or (4) honoring existing contractual
obligations of a business or entity acquired by WellPoint under agreements
existing at the time of execution of the definitive agreement for such or (5)
continuing WellPoint's relationship and arrangements with companies that are
participating in WellPoint's Healthy Extensions program.

     3.2    Each party agrees that neither it nor any entity that it Controls
will at any time from the date of this Agreement until the date upon which the
Term of this Agreement expires, solicit for employment any employee of the other
party, except with the consent of the other party. Advertisements in the media
shall not constitute solicitation for purposes of this Section.

     3.3    Nothing herein shall restrict drugstore.com from entering into any
relationship with any other PBM or health care or managed care entity that does
not contravene the terms of this Agreement.

     3.4    drugstore.com will not permit any entity that it Controls to (i)
take any action to attempt to convert WellPoint Members ordering a greater than
34 days supply of a Pharmaceutical Product to a 34 or fewer days supply or (ii)
initiate contact with any WellPoint Plan Sponsors without WellPoint's prior
written consent; provided, however, that general solicitations or promotions
targeted at the general population or drugstore.com's general member base,
whether on the drugstore.com Site or otherwise, shall not be deemed to violate
this Section 3.4.

Section 4.  Promotion/ Co-Branded Effort

     4.1    WellPoint Promotion.  WellPoint shall promote drugstore.com and its
relationship with drugstore.com as follows:

     (a)    WellPoint shall designate drugstore.com as WellPoint's preferred
Internet Pharmacy partner.

     (b)    WellPoint shall promote drugstore.com on the WellPoint Sites and
shall provide a Link to the drugstore.com Site from the WellPointRx.com Site,
the Sites of WellPoint's Affiliates that are Health Plans and such other of the
WellPoint Sites as are mutually agreed upon by the parties. The placement of
such Links shall be mutually agreed upon by the parties and shall conform with
the rules of the Blue Cross and Blue

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Shield Association as applicable provided that the Link to DS shall be
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prominently displayed Above-the-Fold on the pharmacy fulfillment-related pages
of such WellPoint Sites or as otherwise mutually agreed by the parties.
WellPoint agrees to work with drugstore.com in testing the effectiveness of
Links to the drugstore.com Site from various WellPoint Sites and to the various
pages on the drugstore.com Site, including without limitation the drugstore.com
Home Page and the drugstore.com pharmacy page.

     (c)  WellPoint shall market drugstore.com and its internet pharmacy
services to WellPoint Members and to WellPoint Plan Sponsors, including without
limitation offering WellPoint customers a direct Link to drugstore.com from
WellPoint Plan Sponsors' intranets and by promoting drugstore.com through all
reasonably available channels, including among other things (i) the inclusion of
information and mutually agreed upon promotions in fifty percent (50%),of all
regular mailings to WellPoint Members that reference pharmacy and an agreed-upon
portion of all other regular mailings; (ii) physical and E-mail mailings on
behalf of drugstore.com to all Members (costs of preparing the drugstore.com-
specific inserts to be borne by drugstore.com in accordance with Section 4.4 of
this Agreement) so as to provide drugstore.com with a minimum of twenty million
(20,000,000) messages to WellPoint Members about drugstore.com or drugstore.com
promotions per year of the Term with uniform distribution of such "impressions"
if reasonably practical through the Term (drugstore.com acknowledging that a
large number of mail impressions are during plan enrollment periods) (iii)
reference to drugstore.com on telephone hold messages as appropriate, including
associated with prescription ordering; and (iv) reference to the drugstore.com
URL on prescription benefit cards. In addition, drugstore.com , provided it
enters into the standard agreement for participation therein ("HE Agreement")
will be included in the WellPoint Healthy Extensions program and throughout the
term of this Agreement will be promoted in such program on a basis no less
favorable than that afforded to any other party to an HE Agreement. With respect
to WellPoint Plan Sponsors that are not WellPoint Affiliates, drugstore.com
acknowledges that WellPoint may need to obtain such WellPoint Plan Sponsor's
consent before engaging in certain of these activities that relate specifically
to the WellPoint Plan Sponsor or its members. WellPoint agrees that it shall
exercise commercial best efforts to obtain any such consents as soon as
possible.

     (d)  All WellPoint Member materials as may be designated by WellPoint as
furthering the purposes of this Agreement shall indicate that drugstore.com is
WellPoint's Internet Pharmacy provider, subject to client/Plan Sponsor review
and approval of the form and content of such materials where applicable.

     (e)  WellPoint shall make commercially reasonable efforts to obtain and
provide to drugstore.com WellPoint Plan Sponsor e-mail addresses and, in
WellPoint's reasonable judgment (with respect to Plan Sponsor's that are not
Affiliates of WellPoint), introduce drugstore.com personnel to appropriate
WellPoint Plan Sponsor contact persons so that the parties may announce their
relationship and explain its benefits to WellPoint Plan Sponsors.

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     (f)  WellPoint, where commercially appropriate, shall include drugstore.com
product and service information in responding to requests for proposals and in
presentations that WellPoint prepares for clients or potential clients.

     (g)  WellPoint shall invite drugstore.com to participate jointly in
exhibits at key healthcare conferences as appropriate.

     4.2  drugstore.com Promotion. drugstore.com shall promote WellPoint and its
relationship with WellPoint as follows:

     (a)  drugstore.com shall designate WellPoint as drugstore.com's preferred
Health Plan.  drugstore.com shall use all commercially reasonable efforts to
provide, within ninety (90) days of the Effective Date, visitors to the
drugstore.com Site with access to a list of Health Plans from one or more Links
on the drugstore.com Site and shall provide preferential placement on such list
to Health Plans that are Affiliates of WellPoint or, as specified by WellPoint,
WellPoint Plan Sponsors.  drugstore.com shall test the effectiveness of the
placement of the Links to such list, including by means of a Link from, among
other pages, the drugstore.com Home Page, pharmacy page and insurance-related
pages.  drugstore.com will test the effectiveness of a Link from the
drugstore.com Home Page to such list of entities for a minimum of ninety (90)
days.  If the Home Page  placement is less effective than alternative
placements, drugstore.com may elect not to continue such placement in favor of
an alternative placement, which will include at least the main drugstore.com
insurance-related page; provided, however, that at all times drugstore.com shall
list WellPoint, WellPoint Pharmacy Management, the Affiliates of WellPoint that
are Health Plans and WellPoint Plan Sponsors (but only those WellPoint Plan
Sponsors that promote drugstore.com in a manner consistent with this Agreement)
first among all other listings on the list directly available from the
drugstore.com Home Page for so long as such list is linked from the Home Page.
Upon WellPoint's request and reasonable notice, drugstore.com will provide
information to WellPoint Members regarding certain benefits provided by their
respective Health Plans.

     (b)  drugstore.com shall provide resources and capabilities to establish
Links to the drugstore.com Site from WellPoint Plan Sponsors' home pages and
other pages as mutually agreed by WellPoint, the WellPoint Plan Sponsors, as
applicable, and drugstore.com.

     (c)  To the extent permissible under law and by other agreements of
drugstore.com, drugstore.com shall use commercially reasonable efforts to work
with retail pharmacies in WellPoint's pharmacy network that are not Internet
Pharmacies to allow WellPoint Members to pick up prescription items ordered on
the drugstore.com Site at such pharmacy locations, upon agreement between such
pharmacies and drugstore.com on fees to be paid to drugstore.com for such
efforts and provided that this obligation shall apply only to such pharmacies
that can communicate electronically with drugstore.com.

     (d)  Subject to WellPoint's reasonable approval, drugstore.com shall
provide to WellPoint Members medical and pharmacy information on-line on the Co-
branded

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Websites provided for in Section 4.3 but only to the extent that drugstore.com
has access to such information.

     (e)  drugstore.com agrees to develop and implement a frequent buyer program
or discount program for WellPoint Members for purchases of OTC Products. That
program, whose features will be mutually agreed upon by the parties, will be
subject to the "most favored nation" provisions of Section 2.2 with respect to
the financial value provided by the program to WellPoint Members.

     4.3  Co-branded Websites.

     (a)  drugstore.com shall use all commercially reasonable efforts to cause,
within ninety (90) days of the Effective Date, Identified Members to be
presented with a co-branded drugstore.com Home Page and such other pages on the
drugstore.com Site as mutually agreed by the parties, including without
limitation the drugstore.com pharmacy page, that at a minimum prominently
features the Trademark of WellPoint Pharmacy Management or of the relevant
Affiliate of WellPoint.  Such co-branding will contain a Link to a landing page
that is intended to explain to WellPoint Members the nature of the
drugstore.com-WellPoint (or Affiliate of WellPoint) relationship and facilitate
the conversion of WellPoint Members to drugstore.com purchasers (the "Landing
Page").  drugstore.com will also provide a persistent "button" on its website's
pages for WellPoint Members that "linked" to the drugstore.com Site from a
WellPoint Site or a WellPoint Affiliate's Site or, in the case of a WellPoint
Member that has already identified himself to drugstore.com as a WellPoint
Member and has made a purchase from drugstore.com, by means of such WellPoint
Member's identifying "member profile" that allows drugstore.com to identify any
person based upon his or her user identification and password.  Identified
Members shall be presented on the Landing Page with a Link to the provider of
WellPoint's mail order services for Pharmaceutical Products provided that such
                                                            -------------
service provider cooperates with drugstore.com in establishing such
relationship, including without limitation the payment to drugstore.com of a fee
to cover the cost of designing and creating such Link, not to exceed $5000,
integrating the offering by drugstore.com and such service provider and an
agreement by such service provider not to promote DS Competitors to such
Identified Members with respect to the purchase of OTC Products.  The mock-ups
attached as Exhibit B indicates the parties' current thinking with respect to
            ---------
the co-branding contemplated by this Section 4.3 but WellPoint acknowledges and
agrees that such co-branding shall be subject to changes in drugstore.com's
discretion in light of possible re-designs of the drugstore.com Home Page and
other co-branded pages.

     (b)  The co-branded website content, sponsorship and advertising available
above to Identified WellPoint Members may be different from that which is
available to non-WellPoint Members.

     (c)  drugstore.com shall work with WellPoint to develop ways to
appropriately demonstrate to WellPoint Plan Sponsors WellPoint's benefits in
connection with the drugstore.com relationship.

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     (d)  drugstore.com does not currently sell banner advertising on the
drugstore.com Site.  In the event that drugstore.com changes such policy,
drugstore.com agrees that all revenue from such advertising placed on the
drugstore.com Site which was brought to the Site by reason of the efforts of
WellPoint in securing such advertising shall be shared by WellPoint and
drugstore.com as mutually agreed by the parties following good faith
negotiations.  All advertising revenue derived from advertising on the WellPoint
Sites shall be retained solely by WellPoint.  With respect to advertising on the
Landing Page, as defined in Section 4.3, drugstore.com and WellPoint will share
equally in such revenues unless otherwise mutually agreed by the parties.

     4.4  Promotional Materials.  The parties shall work together to create
collateral materials to market drugstore.com, such as package inserts for
WellPoint, WellPoint Affiliates, WellPoint Plan Sponsors and WellPoint Members
in a mutually agreeable format.  Any form of branded communication and
documentation must be agreed in writing by the parties before it is issued,
published or otherwise made available (in any form or medium).  WellPoint will
use commercially reasonable efforts to approve documentation and promotions
provided by drugstore.com and in any event will provide comments, if any, or
approval within five (5) working days of receipt of each draft copy.
drugstore.com shall be responsible for the cost of producing (e.g. printing
costs) stand-alone promotional materials where such materials only include
drugstore.com promotions.  The costs of other materials shall be paid by
WellPoint.  All communications from drugstore.com targeted specifically to
WellPoint Members and WellPoint Plan Sponsors (unless the WellPoint Plan Sponsor
initiated contact with drugstore.com) shall require WellPoint's prior written
approval, except to any party who is a drugstore.com customer.

     4.5  drugstore.com Home Page.

     (a)  With respect to Identified Members, drugstore.com will, in accordance
with Section 4.3(a), place the logo of WellPoint Pharmacy Management and/or the
Identified Member's Health Plan on the Home Page of the drugstore.com Site.

     (b)  WellPoint shall provide drugstore.com with samples of WellPoint
Trademarks for use in advertising and on the drugstore.com Site. Without
WellPoint's prior written approval, which shall not be unreasonably withheld,
drugstore.com may not use Trademarks owned by WellPoint.

     4.6  WellPoint Home Pages.

     (a)  One of the drugstore.com Trademarks designated by drugstore.com and
acceptable to WellPoint, which acceptance shall not be unreasonably withheld,
shall be featured on the Home Page of WellPointRx.com and such pages of
WellPoint.com as mutually agreed by the parties consistent with the goals of
this Agreement, and on the Home Pages of WellPoint's Affiliates that are Health
Plans.

     (b)  drugstore.com shall provide WellPoint with samples of drugstore.com
Trademarks for use in advertising and on the WellPoint Sites.  Without
drugstore.com's

                                       11
<PAGE>

written approval, which shall not be unreasonably withheld, WellPoint may not
use Trademarks owned by drugstore.com.

     4.7  Clinical Content.

     (a)  WellPoint shall provide clinical content to drugstore.com pursuant to
its obligations contained in this Agreement. WellPoint shall not provide any
clinical content to any other Internet Pharmacy or allow any other Internet
Pharmacy to use or display any WellPoint clinical content during the term of
this Agreement. All clinical content made available only to WellPoint Members
under the terms of this Agreement shall be subject to WellPoint's prior approval
and its peer review procedures.

     (b)  WellPoint shall not knowingly publish on the WellPoint Site, and
drugstore.com shall not knowingly publish on the drugstore.com Site, any
content, including Links, that is contrary to law or false or misleading in any
material respect, that promotes products generally acknowledged to be injurious
to good health (e.g., cigarettes and other smoking products, alcoholic
beverages) or that would reasonably be expected to be offensive to a reasonable
person.  Any content that either party reasonably determines to be contrary to
law or false or misleading in any material respect shall be removed, upon notice
from the determining party, as soon as practicable by the offending party.
After such removal, the parties may bring the dispute for immediate resolution
pursuant to Section 13 of this Agreement.

     (c)  WellPoint shall have final approval regarding any representations made
relating to the quality of WellPoint services.  drugstore.com shall have final
approval regarding any representations made relating to the quality of
drugstore.com services.

     4.8  Additional Obligations. With respect to Identified Members, at no time
during the Term of this Agreement shall drugstore.com engage in prescribing
medicine or referring consumers to physicians or other medical, dental or other
professionals to obtain prescriptions for Pharmaceutical Products in violation
of federal, state or local laws or regulations and/or VIPPS rules or create any
Links available to Identified Members to any sites on the Internet which it
knows or should reasonably have known are engaged in such practices.

Section 5.   License

     5.1  License to Trademarks.

     (a)  Subject to Section 4, drugstore.com hereby grants to WellPoint and any
of its wholly owned entities a non-exclusive, royalty-free, non-transferable
(except as provided in Section 15.2), non-sublicensable worldwide license in all
jurisdictions in which drugstore.com has any rights, to use, reproduce,
distribute and display the drugstore.com Trademarks in connection with the
agreements among the parties with respect to advertising and promotions and the
performance of its obligations hereunder.

     (b)  Subject to Section 4, WellPoint hereby grants to drugstore.com and any
of its wholly owned entities a non-exclusive, royalty-free, non-transferable
(except as provided

                                       12
<PAGE>

in Section 15.2), non-sublicensable worldwide license in all jurisdictions in
which WellPoint has any rights, to use, reproduce, distribute and display the
WellPoint Trademarks in connection with the agreements among the parties with
respect to advertising and promotions and the performance of its obligations
hereunder.

     (c)  Each party shall have the right to exercise quality control over the
use of its Trademarks by the other party to the degree necessary, in the sole
opinion of the owner of such Trademarks, to maintain the validity and
enforceability of such Trademarks and to protect the goodwill associated
therewith. Each party shall, in its use of the other's Trademarks, adhere to a
level of quality required by the Trademark owner. If the owner of a Trademark,
in its reasonable opinion, finds that use of such Trademark by the other party
materially threatens the goodwill of such Trademark, the user of such Trademark
shall, upon notice from the owner, immediately, and no later than ten (10) days
after receipt of such owner's notice, take all measures reasonably necessary to
correct the deviation(s) or misrepresentation(s) in, or misuse of, the
applicable Trademark. All goodwill associated with the use of the other's
trademarks hereunder shall inure to the benefit of the owner of such Trademark.

     (d)  Each party shall use the other's Trademarks in accordance with sound
trademark and trade name usage principles and in compliance with all applicable
laws and regulations of the United States (including all laws and regulations
relating to the maintenance of the validity and enforceability of such
Trademarks) and shall not use the Trademarks in any manner that might tarnish,
disparage, or reflect adversely on the Trademarks or the owner of such
Trademarks. Each party shall use, in connection with the other's Trademarks, all
legends, notices and markings required by law. No party may materially alter the
appearance of another's Trademarks in any advertising, marketing, distribution,
or sales materials, or any other publicly distributed materials without the
prior written consent of the other party.

Section 6.  Compensation

     6.1  In consideration of the rights granted to drugstore.com and the
obligations performed by WellPoint under this Agreement, drugstore.com shall pay
WellPoint fees based on the schedule attached hereto as Exhibit C.

     6.2  WellPoint shall be entitled  to have a national public accounting firm
reasonably agreeable to the parties audit no more frequently than once per year
drugstore.com's applicable books and records in order to monitor drugstore.com's
compliance with its payment obligations described in this Agreement, subject to
such accounting firm's execution of drugstore.com's confidentiality agreement.
WellPoint will provide drugstore.com with at least fifteen (15) business days'
notice and such audit shall take place at such location where drugstore.com
maintains its books and records and during reasonable business hours. All audits
shall be at the expense of WellPoint; provided, however, that if any annual
audit reveals an underpayment by drugstore.com of at least 5% of the amounts due
and payable to WellPoint, such audit shall be at the expense of drugstore.com.
In the event any annual audit reveals a shortfall in

                                       13
<PAGE>

drugstore.com's annual payment obligations under this Agreement, drugstore.com
shall immediately make payments to WellPoint in order to cover such shortfall.

     6.3  drugstore.com shall, within 30 days of the Effective Date, grant
WellPoint 750,000 shares of drugstore.com common stock (the "Shares") subject to
the following conditions:

               (i)   WellPoint acknowledges and agrees that the Shares have not
been registered under the Securities Act of 1933, as amended or applicable state
securities laws, and no interest may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering any such
transaction involving said securities, (b) drugstore.com receives an opinion of
legal counsel for WellPoint satisfactory to drugstore.com stating that such
transaction is exempt from registration, or (c) drugstore.com otherwise
satisfies itself that such transaction is exempt from registration. A legend
setting forth or referring to the above restrictions shall be placed on any
certificate issued to WellPoint representing the Shares, and a stop transfer
order shall be placed on the books of drugstore.com and with any transfer agent
until such securities may be legally sold or otherwise transferred.

               (ii)  By accepting the Shares, WellPoint represents that it is
acquiring the Shares for investment and not with a view to, or for sale in
connection with, any distribution thereof.  In addition, in connection with the
issuance of the Shares, WellPoint specifically represents to drugstore.com those
representations set forth on Exhibit D  attached hereto.
                             ---------

               (iii) Notwithstanding anything herein to the contrary, if
requested by drugstore.com and an underwriter of common stock (or other
securities) of drugstore.com, WellPoint shall not sell or otherwise transfer or
dispose of the Shares then owned by WellPoint during the one hundred eighty
(180) day period (or such lesser period (a) as is permitted by the underwriter
generally or (b) as is permitted with respect to any holder of stock equal to or
greater than the number of the Shares or (c) as is permitted with respect to any
agreement reached with any of drugstore.com's stockholders that hold greater
than 1% of drugstore.com's common stock, or (d) as is permitted with respect to
any of drugstore.com's executive officers) following the effective date of such
underwritten public offering. The obligations described in this Section 6.3(iii)
shall not apply to a registration relating solely to employee benefit plans on
Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or
a registration relating solely to an SEC Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future, and shall not apply to
registrations solely of securities held by stockholders of drugstore.com In
order to enforce the above covenant, drugstore.com shall have the right to place
restrictive legends on the certificates representing the Shares and to impose
stop-transfer instructions with respect to the securities subject to the
foregoing restriction until the end of such one hundred eighty (180) day (or
other applicable) period.

                                       14
<PAGE>

            (iv) If during the period following the date of the issuance of the
shares, drugstore.com proposes to file a registration statement under the
Securities Act of 1933, as amended (other than a registration relating solely to
employee benefit plans on Form S-1 or Form S-8 or similar forms that may be
promulgated in the future, or a registration relating solely to an SEC Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future),
drugstore.com shall give written notice of such filing to WellPoint at least ten
(10) days prior to filing.  If WellPoint desires to include shares in such
offering, WellPoint shall reply in writing to drugstore.com within five (5) days
of receipt of notice, indicating the number of shares WellPoint would like to
include in the filing. drugstore.com  shall use reasonable commercial efforts to
include WellPoint's shares in the offering, provided that WellPoint's rights
under this Section are expressly subordinate in all respects to all registration
rights of stockholders of drugstore.com, including subject to rights of all
existing drugstore.com shareholders to first include their shares in any
offering, and is subject to the right of the lead underwriter to cutback
WellPoint's shares due to market or other conditions that could adversely effect
drugstore.com's offering.

            (v)  WellPoint shall not sell or otherwise dispose of, during any
ninety (90)-day period, more than 325,000 of the Shares. A legend setting forth
or referring to the above restrictions shall be placed on any certificate issued
to WellPoint representing the Shares, and a stop transfer order shall be placed
on the books of drugstore.com and with any transfer agent with respect thereto.

     6.4 In the event that, at the two-year anniversary of the Effective Date
(the "Determination Date"), the fair market value of the Shares is not equal to
or greater than $10 million, drugstore.com shall issue to WellPoint within
twenty (20) days of the Determination Date, at drugstore.com's discretion,
either (i) cash equal to the difference between $10 million and the aggregate
fair market value of the Shares or (ii) that number of additional shares of
common stock whose aggregate fair market value as of their issuance date equals
the difference between $10 million and the aggregate fair market value of the
Shares. However, with respect to the issuance of shares, if the additional
shares issued to WellPoint are not freely tradable within thirty (30) days of
the date of issue, WellPoint may require drugstore.com to buy back the
additional shares back from WellPoint for cash at the value of the shares on the
date of issuance. For the purposes of this Section, "fair market value" of the
shares of drugstore.com common stock shall be determined as follows: (i) if
traded on a securities exchange or the Nasdaq National Market, the fair market
value of the drugstore.com common stock shall be deemed to be the average of the
closing or last reported sale prices of the drugstore.com common stock on such
exchange or market over the ten (10) trading day period ending five business
days prior to the Determination Date; (ii) if otherwise traded in an over-the-
counter market, the fair market value of the drugstore.com common stock shall be
deemed to be the average of the closing ask prices of the drugstore.com common
stock over the ten (10) trading day period ending five business days prior to
the Determination Date; or (iii) if there is no public market for the
drugstore.com common stock, then fair market value shall be determined by mutual
agreement of drugstore.com and WellPoint, and if drugstore.com and WellPoint are
unable to so agree, at drugstore.com and WellPoint's

                                       15
<PAGE>

equally shared expense by an investment banker of national reputation selected
by drugstore.com and reasonably acceptable to WellPoint.

Section 7. IP Rights Ownership

     7.1   Ownership by WellPoint.  As between WellPoint and drugstore.com,
WellPoint shall own all WellPoint IP Rights and all IP rights in materials
created solely by WellPoint.  drugstore.com shall not distribute any such
materials to other than WellPoint Members without the approval of WellPoint.

     7.2   Ownership by drugstore.com.  As between WellPoint and drugstore.com,
drugstore.com shall own all drugstore.com IP Rights and all IP rights in
materials created solely by drugstore.com.

     7.3   Program Ownership.  Notwithstanding any other provision of this
Agreement, all content and tools that are jointly developed during the course of
the parties' relationship pursuant to this Agreement, such as guidelines and
therapeutic substitution programs, may be used by other parties with no duty of
accounting and may be available to Persons other than WellPoint Members;
provided, however, that such materials may not be made available to any
Competitor of WellPoint; and further provided, however, all content and tools
shall be presumed not to have been jointly developed by the parties absent a
written agreement by the parties reflecting such joint development.  All
clinical programs and guidelines developed by WellPoint independent of
drugstore.com will be solely owned by WellPoint and are to be made available to
WellPoint Members only, unless both parties agree to make such materials
available to Persons other than WellPoint Members.  All content and tools
independently developed by drugstore.com will be solely owned by drugstore.com
and will be made available to Persons at drugstore.com's sole discretion.

Section 8. Technical and Advertising Communications

     8.1   Advertising and Promotions.  drugstore.com shall appoint such account
managers, and sales and marketing personnel that shall be dedicated to working
with WellPoint Members and WellPoint Plan Sponsors as are reasonably necessary
to carry out drugstore.com's obligations under this Agreement.

     8.2   FTE Programmer. During the term of this Agreement, drugstore.com
shall provide to WellPoint one FTE web site designer/programmer to work on-site
on WellPoint premises if the parties deem it necessary to help make the
WellPoint Sites and drugstore.com Site complement each other as provided for in
this Agreement and to enhance the operational functionality of the WellPoint
Sites.

     8.3   Oversight.  Each party will appoint a project manager responsible, as
appropriate, to oversee the activities under this Agreement and to address any
issues that may arise under this Agreement.  Such project managers shall meet,
either in person or by telephone conference, at least once each calendar
quarter.

                                       16
<PAGE>

Section 9. Representations and Warranties

     9.1   Representations and Warranties of drugstore.com. drugstore.com hereby
represents and warrants to WellPoint:

     (a)   Authorization. All corporate action on the part of drugstore.com, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement by and between drugstore.com and WellPoint, and
the performance of all obligations of drugstore.com hereunder has been taken,
and this Agreement, when executed and delivered by drugstore.com, will
constitute valid and legally binding obligations of drugstore.com, enforceable
against drugstore.com in accordance with its terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws of general application affecting enforcement of
creditors' rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies.

     (b)   Intellectual Property. To its knowledge, drugstore.com owns or
possesses sufficient legal rights to all IP Rights necessary for its businesses
now conducted without conflict with, or infringement of the rights of others. To
its knowledge, drugstore.com technology or Trademarks do not violate any of the
IP Rights of any Third Party.

     (c)   Compliance with Other Instruments. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any violation of or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any provision of drugstore.com's or any of its subsidiaries'
charter or bylaws or any instrument, judgment, order, writ, decree or contract
to which drugstore.com or any of its subsidiaries is a party or by which
drugstore.com or any of its subsidiaries is bound, or any provision of any
federal or state statute, rule or regulation applicable to drugstore.com or any
of its subsidiaries, the effect of which would have a material adverse effect on
the ability of drugstore.com or any of its subsidiaries to perform its
obligations under this Agreement or result in the creation of any lien, charge
or encumbrance upon any assets of drugstore.com or any of its subsidiaries.

     (d)   NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, DRUG
STORE.COM MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER,
DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER THIS AGREEMENT, OTHER THAN
THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT.

     9.2   Representations and Warranties of WellPoint. WellPoint hereby
represents and warrants to drugstore.com:

                                       17
<PAGE>

     (a)  Authorization.  All corporate action on the part of WellPoint, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement by and between WellPoint and drugstore.com, and
the performance of all obligations of WellPoint hereunder has been taken, and
this Agreement, when executed and delivered by WellPoint, will constitute valid
and legally binding obligations of WellPoint, enforceable against WellPoint in
accordance with its terms except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other laws of
general application affecting enforcement of creditors' rights generally, as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.

     (b)  Intellectual Property.  To its knowledge, WellPoint owns or possesses
sufficient legal rights to all IP Rights necessary for its businesses now
conducted without conflict with, or infringement of the rights of others.  To
its knowledge, WellPoint technology or Trademarks do not violate any of the IP
Rights of any Third Party

     (c)  Compliance with Other Instruments. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any violation of or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any provision of WellPoint's or any of its subsidiaries' charter
or bylaws or any instrument, judgment, order, writ, decree or contract to which
WellPoint or any of its subsidiaries is a party or by which WellPoint or any of
its subsidiaries is bound, or any provision of any federal or state statute,
rule or regulation applicable to WellPoint or any of its subsidiaries, the
effect of which would have a material adverse effect on the ability of WellPoint
or any of its subsidiaries to perform its obligations under this Agreement or
result in the creation of any lien, charge or encumbrance upon any assets of
WellPoint or any of its subsidiaries.

     (d)  NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, WELLPOINT
MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, DIRECTLY OR
INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT
TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER THIS AGREEMENT, OTHER THAN THOSE
EXPRESSLY SET FORTH IN THIS AGREEMENT.

Section 10.  Indemnification

     10.1 Indemnification.  Subject to section 10.2, WellPoint and drugstore.com
each shall indemnify and hold harmless the other and its divisions, its
Affiliates and its officers, directors, employees, representatives and agents
(the "Indemnified Parties") from and against (i) any and all liabilities, suits,
costs, judgments, penalties, expenses, and obligations arising from or related
to claims or actions made by a Third Party, including any obligation or
liability which may be imposed upon any of the Indemnified Parties as a matter
of law, and constituting, or in any way based upon, resulting from or arising
out of any breach or alleged breach by WellPoint or drugstore.com, as
applicable,

                                       18
<PAGE>

of any representation, warranty, agreement or covenant made by such party in
this Agreement, and (ii) any cost or expense (including legal fees and out-of-
pocket expenses) reasonably incurred by any of the Indemnified Parties (and
their counsel) in investigating, preparing for, defending against or otherwise
taking any action in connection with any of the foregoing (collectively
"Damages"). A party's Damages shall be calculated net of any tax benefit such
party would be entitled to in respect of such Damages.

     10.2 Procedure. If any claim, demand, assessment or liability or cost
incidental thereto (collectively, an "Indemnified Claim"), is asserted against
an Indemnified Party in respect of which the Indemnified Party proposes to
demand indemnification from the other party (the "Indemnifying Party") pursuant
to Section 10.1, such Indemnified Party will promptly notify the Indemnifying
Party in writing. No failure of an Indemnified Party to so notify the
Indemnifying Party shall relieve the Indemnifying Party from the obligation to
indemnify the Indemnified Party unless and to the extent the Indemnifying Party
is actually prejudiced by such failure. Such Indemnified Party will accord the
Indemnifying Party the opportunity to assume entire control for the defense,
compromise or settlement of any such Indemnified Claim through its own counsel
and at its own expense; provided that no such compromise or settlement shall
include any non-monetary terms and conditions applicable to such Indemnified
Party without the consent of the Indemnified Party, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the forgoing, Indemnified
Party may retain its own counsel at its own expense (the Indemnifying Party
shall only be liable for the reasonable cost of one such counsel for all
Indemnified Parties) if (i) the Indemnifying Party, within thirty (30) days
after notice of any Indemnified Claim, fails to assume the defense of such
Indemnified Claim or (ii) the representation of both the Indemnifying Party and
the Indemnified Party would, in the reasonable judgment of the parties, be
inappropriate due to actual or potential conflicting interests between them. If
the Indemnifying Party does not assume entire control of the defense, compromise
or settlement of such Indemnified Claim, the Indemnified Party may compromise or
settle any such Indemnified Claim. drugstore.com and WellPoint each agree to
reasonably cooperate with respect to the defense of any Indemnified Claim, at
the indemnifying party's expense.

Section 11.  Infringement Claims

     11.1 Legal Action for Infringement of IP Rights.

     (a)  WellPoint reserves any and all rights to commence, prosecute,
compromise and settle any claim, action or proceeding for infringement, unfair
competition, unauthorized use, misappropriation or violation of any of the
WellPoint IP Rights by any Third Party. WellPoint may commence, prosecute,
compromise or settle any such claim, action or proceeding, as well as any claim,
action or proceeding to defend any of the WellPoint IP Rights, in its sole
discretion, but shall not have any obligation to do so.

     (b)  drugstore.com reserves any and all rights to commence, prosecute,
compromise and settle any claim, action or proceeding for infringement, unfair
competition, unauthorized use, misappropriation or violation of any of the
drugstore.com IP Rights by any Third Party. drugstore.com may commence,
prosecute, compromise or

                                       19
<PAGE>

settle any such claim, action or proceeding, as well as any claim, action or
proceeding to defend any of the drugstore.com IP Rights, in its sole discretion,
but shall not have any obligation to do so.

     (c)  No party shall have the right to commence or prosecute any legal
action with regard to the IP Rights of the other party, without such other
party's prior written consent in such other party's sole discretion.

     (d)  If either party becomes the subject of a claim, action or proceeding
for infringement, unfair competition, unauthorized use, misappropriation or
violation of any IP Rights of a Third Party as a result of its use of the other
party's IP Rights pursuant to this Agreement, then the party owning such IP
Rights shall upon the request of such other party defend and indemnify the
requesting party from and against such Third Party claim, action or proceeding
("IP Claim") and shall pay any and all damages, liabilities, costs and attorneys
fees awarded against a party arising out of such IP Claim ; provided that: the
party owning such IP Rights has sole control over the defense or settlement of
such IP Claim, the requesting party shall provide the party owning such IP
Rights prompt notice of the IP Claim, and such assistance in defense of the
claim, action or proceeding as the owning party may reasonably request and shall
comply with any settlement or court order made in connection with the claim,
action or proceeding (e.g., relating to the future use of any infringing IP
Rights). In any case, the requesting party shall be entitled to participate in
the defense of any such claim, action or proceeding, at its own cost, with
counsel of its choice.

     (e)  In the event either party should have a claim against the other party
for infringement, unfair competition, unauthorized use, misappropriation or
violation of any of its IP Rights as a result of the use of its IP Rights by the
other party pursuant to this Agreement, the parties shall resort to the dispute
resolution provisions set forth in Section 13.

Section 12.  Additional Obligations of the Parties

     12.1 Nondisclosure.

     (a)  A party (the "Receiving party") receiving any Confidential Information
of the other party (the "Disclosing party") will exercise a reasonable degree of
care, but in no event less than the same degree of care that it uses to protect
its own confidential information of a like nature, to keep confidential and not
disclose such Confidential Information. Without limiting the generality of the
foregoing, the Receiving Party shall disclose the Confidential Information of
the other party only to those of its employees and contractors (a) who have a
need to know the Confidential Information in order to exercise its license to
such Confidential Information, and (b) who are contractually obligated to
maintain the confidentiality of the Confidential Information.

     (b)  The obligations set forth in Section 12.1(a) above shall not apply to
any Confidential Information to the extent it: (a) is approved by prior written
authorization of the Disclosing party for release by the Receiving Party; (b) is
disclosed in order to

                                       20
<PAGE>

comply with a judicial order issued by a court of competent jurisdiction, in
which event the Receiving Party shall give prior written notice to the
Disclosing Party of such disclosure as soon as practicable and shall cooperate
with the Disclosing party in using all reasonable efforts to obtain an
appropriate protective order or equivalent, provided that the information shall
continue to be Confidential Information to the extent it is covered by such
protective order or equivalent; (c) becomes generally available to the public
through any means other than a breach by the Receiving party of its obligations
under this Agreement; (d) was in the possession of the Receiving party without
obligation of confidentiality prior to receipt or disclosure under this
Agreement as evidenced by written records made prior to such receipt or
disclosure; (e) is developed independently by the Receiving party without the
use of or benefit from any of the Confidential Information of the other party or
without breach of this Agreement, as evidenced by records of the Receiving
party; or (f) is required to be disclosed by any national securities exchange,
by government rule or regulation (e.g., in connection with a securities filing)
or by any other provisions of applicable law, provided that the Receiving party
gives the Disclosing party advance written notice (to the extent practicable) of
the disclosure and cooperates with the Disclosing party in any reasonable
attempt to limit the scope of the required disclosure. In any dispute over
whether information is Confidential Information under this Agreement, it will be
the burden of the Receiving party to show that such contested information falls
within the exceptions set forth in this Section 12.1(b).

     12.2 No Contest of WellPoint IP Rights.  drugstore.com shall not contest or
otherwise challenge (e.g., in any legal action or otherwise), or assist or
encourage any other Person to contest or challenge, the validity of any
WellPoint IP Rights; provided that the foregoing shall not preclude
drugstore.com from claiming that the IP Rights in question are drugstore.com IP
Rights.

     12.3 No Contest of drugstore.com IP Rights.  WellPoint shall not contest or
otherwise challenge (e.g., in any legal action or otherwise), or assist or
encourage any other Person to contest or challenge, the validity of any
drugstore.com IP Rights; provided that the foregoing shall not preclude
WellPoint from claiming that the IP Rights in question are WellPoint IP Rights.

Section 13.  Resolution of Disputes

     13.1 General.  If any dispute arises between the parties relating to this
Agreement, each party will follow the dispute resolution procedures set forth in
this Section 13 prior to initiating any litigation or pursuing other available
remedies unless otherwise agreed in writing by the parties at the time the
dispute arises.  Notwithstanding the foregoing, any party may commence
litigation without having first complied with the provisions of this Section 13
if such commencement occurs within thirty (30) days prior to the date after
which the commencement of litigation would be barred by any statute of
limitations, statute of repose or other law, rule, regulation, or order of
similar import or in order to request injunctive or other equitable relief
necessary to prevent irreparable harm.  In such event, the parties will (except
as may be prohibited by judicial order) nevertheless continue thereafter to
follow the procedures set forth in this Section 13.

                                       21
<PAGE>

     13.2 Initiation of Procedures.  If a party seeks to initiate the procedures
under this Section 13, such party will give written notice thereof to the other
party.  Such notice will (i) state that it is a notice initiating the procedures
under this section, (ii) describe briefly the nature of the dispute and the
initiating party's claim or position in connection with the dispute, and (iii)
identify an individual with authority to settle the dispute on such party's
behalf.  Within ten (10) days after receipt of any notice under this Section
13.2, the receiving party will give the initiating party written notice that
describes briefly the receiving party's claims and positions in connection with
the dispute and identifies an individual with the authority to settle the
dispute on behalf of the receiving party.

     13.3 Pre-Litigation Discussion.  The parties will cause the individuals
identified in their respective notices under Section 13.2 to promptly make such
investigation of the dispute as such individuals deem appropriate.  Promptly and
in no event later than ten (10) days after the date of the initiating party's
notice under Section 13.2, such individuals will commence discussions concerning
resolution of the dispute.  If the dispute has not been resolved within 30 days
after commencement of such discussions, then the parties shall submit the
dispute for non-binding mediation to a mutually agreed upon mediator or
mediation firm.  The parties will use their best efforts to cause the mediator
to resolve the dispute within 15 days of its submission thereto. If the mediator
is unable to resolve the dispute within such time period, any party may submit
the dispute to litigation.

Section 14.  Termination; Extension

     14.1 The following shall be Events of Default under this Agreement:

     (a)  WellPoint is in material breach of any of its material obligations
under this Agreement (including any material breach or inaccuracy of its
representations or warranties that has a material adverse effect on the ability
of WellPoint to perform its obligations under this Agreement ), which breach
WellPoint does not cure within thirty (30) days after drugstore.com gives
WellPoint written notice thereof;

     (b)  drugstore.com is in material breach by of any of its material
obligations under this Agreement (including any material breach or inaccuracy of
its representations or warranties that has a material adverse effect on the
ability of drugstore.com to perform its obligations under this Agreement ),
which breach drugstore.com does not cure within thirty (30) days after WellPoint
gives drugstore.com written notice thereof;

     (c)  drugstore.com fails to pay any payments due hereunder to WellPoint
when due, and such failure is not cured within ten (10) business days after the
receipt of the notice of such failure.

     (d)  drugstore.com is in material breach of any material obligation under
Section 4.8 of this Agreement or fails to maintain its privacy structure in
accordance with state and federal regulatory requirements and industry standards
as may be reflected in certification standards of organizations such as Trust e,
BBB, VIPPS, the NABP or similar organizations and at a level comparable to that
maintained by other Internet

                                       22
<PAGE>

Pharmacies, and such breach or failure is not corrected within thirty (30) days
of drugstore.com's receipt of written notice from WellPoint of such failure.

     14.2 Termination

     (a)  If an Event of Default occurs under Section 14.1 and such default is
not cured within the prescribed notice period, the non-defaulting party may
immediately terminate this Agreement.

     (b)  If either party (i) ceases to do business, or otherwise terminates its
business operation or (ii) is declared insolvent or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding., the other party may immediately terminate this
Agreement.

     (c)  In the event that drugstore.com is, following a Change in Control of
drugstore.com, subject to the Control of a Competitor of WellPoint, WellPoint
may terminate this Agreement on sixty (60) days' prior written notice to
drugstore.com, so long as such notice of termination is given no later than
three (3) months after such Change in Control.  It shall be considered a Change
in Control of drugstore.com to a Competitor if drugstore.com is, following a
Change in Control of drugstore.com, subject to the Control of a Third Party that
is either (a) a PBM or (b) a Health Plan or (c) is an organization that owns,
controls or operates either (i) a PBM that services 1 million or more persons or
(ii) a Health Plan that has annual premiums and premium equivalents in excess of
$500 million.

     14.3 Survival and Continuing Obligations

     (a) Sections 6.2 (but only for a period of one year following the date of
termination of this Agreement), 7, 10, 11, 12, 13, 14.3 and 15 (but not Section
15.2) and the third sentence of the first paragraph of Exhibit C (with respect
to Repeat Customer Fees as set forth in such paragraph) shall survive
termination of this Agreement.

     14.4 Extension. This Agreement shall continue throughout the Term.. Upon
the expiration of the Term, this Agreement shall automatically renew for
additional one (1) year terms at each anniversary of the Effective Date, unless
(i) either party gives written notice of its intent not to renew no later than
ninety (90) days prior to the expiration of the Term or any renewal term, or
(ii) this Agreement is terminated pursuant to its terms.

Section 15.  Miscellaneous

     15.1 Relationship.  The parties are independent contractors under this
Agreement.  Each party acknowledges and agrees that it is not and will not be
during the Term an employee or an agent of the other party.  Nothing in this
Agreement will be deemed to constitute, create, give effect to or otherwise
recognize a joint venture, partnership, franchise or business entity of any
kind.

                                       23
<PAGE>

     15.2 Assignment; Sale of Assets or Capital Stock.  This Agreement shall be
binding upon and inure to the benefit of the parties hereto, and the legal
representatives, successors in interest and permitted assigns, respectively, of
each such party.  This Agreement shall not be assigned in whole or in part by
any party without the prior written consent of the other party, which shall not
be unreasonably withheld. It shall be considered an assignment of this Agreement
by drugstore.com  which requires WellPoint's prior written consent if
drugstore.com is, following a Change in Control of drugstore.com, subject to the
control of a Competitor of WellPoint as described in Section 14.2 (c).

     15.3 Contract Modifications for Prospective Legal Events. Nothing contained
in this Agreement shall be construed to require the commission of an act
contrary to law, and whenever there is any conflict between any provision of
this Agreement and any statute, law, ordinance or regulation, the latter shall
prevail. In such event, and in any case in which any provision of this Agreement
is determined to be in violation of a statute, law, ordinance or regulation, the
affected provision(s) shall be limited only to the extent necessary to bring it
within the requirements of the law and, insofar as possible under the
circumstances, to carry out the purposes of this Agreement. The other provisions
of this Agreement shall remain in full force and effect, and the invalidity or
unenforceability of any provision hereof shall not affect the validity and
enforceability of the other provisions of this Agreement, nor the availability
of all remedies in law or equity to the parties with respect to such other
provisions.

     In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the Effective Date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, WellPoint and drugstore.com shall
amend this Agreement, to the maximum extent possible, to preserve the underlying
economic and financial arrangements between WellPoint and drugstore.com.

     15.4 Notices.  All notices, requests, demands, applications, services of
process, and other communications that are required to be or may be given under
this Agreement shall be in writing and shall be deemed to have been duly given
if sent by telecopy or facsimile transmission, answer back requested, or
delivered by courier or mailed, certified first class mail, postage prepaid,
return receipt requested, to the parties to this Agreement at the following
addresses:

     If to WellPoint:    WellPoint Health Networks, Inc.
                         1 WellPoint Way
                         Thousand Oaks, CA 91362
                         Attention: President, Senior and Specialty Businesses
                         Division
                         Fax:  (808) 557-6823

     With a copy to:     WellPoint Health Networks, Inc.
                         1 WellPoint Way

                                       24
<PAGE>

                         Thousand Oaks, CA 91362
                         Attention: General Counsel
                         Fax:  (805) 557-6820

     If to drugstore.com:

     drugstore.com, inc.

                         13920 SE Eastgate Way, Suite 300
                         Bellevue, WA 98005
                         Attention: General Counsel
                         Fax:  (425) 372-3808

or to such other address as the party shall have furnished to the other party by
notice given in accordance with this Section 15.4.  Such notice shall be
effective (i) if delivered in person or by courier, upon actual receipt by the
intended recipient, or (ii) if sent by telecopy or facsimile transmission, on
the date of transmission unless transmitted after normal business hours, in
which case on the following date, or (iii) if mailed, upon the date of first
attempted delivery.

     15.5 Waiver. No provision of this Agreement shall be deemed to be waived
and no breach excused unless such waiver or consent shall be in writing and
signed by the party that is claimed to have waived or consented. The failure of
a party at any time, or from time to time, to require performance by the other
party of any provision hereof shall in no way affect the rights of such party
thereafter to enforce the same nor shall the waiver by a party of any breach of
any provision hereof by the other party constitute a waiver of any succeeding
breach of such provision, or a waiver of any provision itself, or a waiver of
any other provisions hereof.

     15.6 Severability.  This Agreement will be enforced to the fullest extent
permitted by applicable law.  If for any reason any provision of this Agreement
is held to be invalid or unenforceable to any extent, then: (a) such provision
will be interpreted, construed or reformed to the extent reasonably required to
render the same valid, enforceable and consistent with the original intent
underlying such provision; (b) such provision will be void to the extent it is
held to be invalid or unenforceable; (c) such provision will remain in effect to
the extent that it is not invalid or unenforceable; and (d) such invalidity or
unenforceability will not affect any other provision of this Agreement or any
other agreement between the parties.

     15.7 Remedies. Except as otherwise expressly provided in this Agreement,
each and all of the rights and remedies provided in this Agreement, and each and
all of the remedies allowed at law and in equity, will be cumulative, and the
exercise of one right or remedy will not be exclusive of the right to exercise
or resort to any and all other rights or remedies provided in this Agreement or
at law or in equity.

     15.8 Injunctive Relief.  The parties acknowledge that a material breach of
Sections 7 or 12 of this Agreement would cause irreparable harm, the extent of,
which

                                       25
<PAGE>

would be difficult to ascertain. Accordingly, they agree that, in addition to
any other legal remedies to which the non-breaching party may be entitled, such
party will be entitled to obtain immediate injunctive relief in the event of a
material breach of this Agreement.

     15.9  Governing Law.  This Agreement will be governed by and construed
according to the laws of the State of California without regard to its choice of
law provisions.  The parties consent to the jurisdiction of such courts and
waive any right to assert that any such court constitutes an inconvenient or
improper forum.

     15.10 Publicity.  Neither party shall, without the approval of the other,
make any press release or other public announcement concerning the transactions
contemplated by the Agreements, except as and to the extent that any such party
shall be so obligated by law or by the rules, regulations or policies of any
national securities exchange or association or governmental entity, in which
case the other party shall be advised and the parties shall use reasonable
efforts to cause a mutually agreeable release or announcement to be issued;
provided, however, that the parties hereby acknowledge and agree that
communications among employees of the parties and their attorneys,
representatives and agents necessary to consummate the transactions contemplated
hereby shall not be deemed a public announcement for purposes of this Section
15.10.  Upon the execution and delivery of this Agreement, the parties hereto
will cooperate in respect of the immediate issuance of a mutually acceptable
press release relating to the transactions contemplated by the Agreements.

     15.11 Entire Agreement.  All Exhibits and Schedules to this Agreement are
incorporated in and constitute a part of this Agreement.  This Agreement,
including the Exhibits and Schedules hereto, each as amended from time to time,
constitute the entire understanding between the parties in relation to the
subject matter hereof and supersede all prior discussions, agreements and
representations related to this subject matter, whether oral or written and
whether or not executed by a party.  Unless otherwise provided in this
Agreement, no modification, amendment or other change may be made to this
Agreement or any part thereof unless reduced to writing and executed by
authorized representatives of all parties.

     15.12 Counterparts.  This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

     15.13 Titles and Subtitles. The titles and subtitles used in this Agreement
and in the Exhibits and Schedules hereto are used for convenience only and are
not to be considered in construing or interpreting this Agreement.

     15.14 Force Majeure.  Neither party shall be responsible for a failure to
meet its obligations under this Agreement to the extent caused by the following:
(i) materially inaccurate data submitted by the other party; (ii) any material
failure of equipment, facilities or services not controlled or supplied by such
party; or (iii) failure(s) caused by acts of God, acts of nature, riots and
other major civil disturbances, strike by such party's personnel, sabotage,
injunctions or applicable laws or regulations, in each case without

                                       26
<PAGE>

breach by such party of any obligations under this Agreement with regard to
either such event or such failure. WellPoint or drugstore.com, as applicable,
agrees to use its commercially reasonable efforts to restore performance of its
obligations under this Agreement as soon as reasonably practicable following any
such event.

     15.15 Effective Date. This Agreement shall become effective at the
Effective Date.

                           [Signature Page Follows]

                                       27
<PAGE>

     IN WITNESS WHEREOF, the parties have duly entered into this Agreement as of
the date first written above.

WellPoint:                                   drugstore.com:

WELLPOINT HEALTH NETWORKS INC.               DRUGSTORE.COM, INC.

By: /s/ Joan Herman                          By: /s/ Mark Silverman

Name:   Joan Herman                          Name:   Mark Silverman

Title:  Executive Vice President             Title:  Vice President, Business
                                             Development

                                       28
<PAGE>

                                   Exhibit A

                          Pharmacy Provider Agreement
                          ---------------------------

                                (see attached)

                                       29
<PAGE>

                                   Exhibit B

                           Mock-Ups for Section 4.3
                           ------------------------

                                       30
<PAGE>

                                   Exhibit C

                     Compensation to Be Paid to WellPoint

For each New Customer acquired by drugstore.com during the Term, drugstore.com
shall pay WellPoint $10.00 during the year of such acquisition (the "New
Customer Fees"). In addition, drugstore.com shall pay WellPoint $2.50 in each
subsequent year that a New Customer purchases an OTC Product from drugstore.com,
through the fourth year after the year in which the New Customer first purchased
from drugstore.com (the "Repeat Customer Fees"). The Repeat Customer Fees will
continue to be paid beyond termination of this Agreement (other than by
drugstore.com under Sections 14.2(a) for so long as the Pharmacy Provider
Agreement remains in effect and drugstore.com is reimbursed for prescriptions it
fills for WellPoint Members. Collectively, the New Customer Fees and the Repeat
Customer Fees are the "Customer Fees". A "New Customer" is an Identified Member
that purchases an OTC Product from drugstore.com and has not made a prior
purchase from drugstore.com.

drugstore.com shall pay WellPoint minimum Customer Fees ("Minimum Fees")
according to the following schedule:

     Year 1 of the Term:  $1.0 million

     Year 2 of the Term:  $1.5 million

     Year 3 of the Term:  $2.0 million

     Year 4 of the Term:  $2.5 million

     Year 5 of the Term:  $3.0 million

For the purpose of this Exhibit C, "Year 1 of the Term" means the initial 12-
month period following the Effective Date, and each successive 12-month period
during the Term is noted Year 2 of the Term and so forth.

With respect to each Year of the Term, Minimum Fees shall be due and payable
quarterly in advance, the first payment being due at signing and the remaining
payments due by the fifth day of the following quarter.  All Customer Fees due
and payable shall be offset by the Minimum Fees paid by drugstore.com.  During
each Year of the Term, when Customer Fees exceed the Minimum Fees, such excess
Customer Fees shall be due and payable within 30 days following the end of each
Year of the Term.

In addition to the Customer Fees, drugstore.com shall pay WellPoint bonus
Customer Fees ("Bonus Fees"), if any, according to the following schedule:

     Upon reaching 50,000 New Customers within Year 1 of the Term, drugstore.com
shall pay to WellPoint a one-time Bonus Fee of $100,000 and upon reaching
100,000

                                       31
<PAGE>

cumulative New Customers within Year 1 of the Term, drugstore.com shall pay to
WellPoint an additional one-time Bonus Fee of $250,000.

     Upon reaching 250,000 cumulative New Customers by the last day of Year 2 of
the Term, drugstore.com shall pay to WellPoint a one-time Bonus Fee of $400,000.

     Upon reaching 500,000 cumulative New Customers by the last day of Year 3 of
the Term, drugstore.com shall pay to WellPoint a one-time Bonus Fee of $500,000.

     Upon reaching 800,000 cumulative New Customers by the last day of Year 4 of
the Term, drugstore.com shall pay to WellPoint a one-time Bonus Fee of $750,000.

     Upon reaching 1,000,000 cumulative New Customers by the last day of Year 5
of the Term , drugstore.com shall pay to WellPoint a one-time Bonus Fee of
$1,000,000.

Notwithstanding anything to the contrary in this Agreement, in the event that
drugstore.com has acquired fewer than 100,000 New Customers in the aggregate by
the thirtieth (30/th/) month after the Effective Date, the schedule of Minimum
Fees shall be adjusted to the following:

     Year 4 of the Term:  $2.0 million

     Year 5 of the Term:  $2.0 million

Notwithstanding anything to the contrary in this Agreement, in the event that
(i) WellPoint or any of its Affiliates actively promotes to WellPoint Members a
company that sells OTC Products (other than pursuant to the agreement described
in Section 3.1(5), AND (ii) drugstore.com has acquired fewer than 100,000 New
Customers in the aggregate by the 30/th/ month after the Effective Date, the
schedule of Minimum Fees shall be adjusted to the following:

     Year 4 of the Term:  $1.0 million

     Year 5 of the Term:  $1.0 million

If for any reason drugstore.com is at any time during the Term (1) excluded from
pharmacy networks that cover 25% or more of all WellPoint Members as of the
Effective Date or (2) precluded from placement on WellPoint Sites accessible by,
and/or from marketing (such as via mailings) pursuant to this Agreement to, 75%
of all WellPoint Members as of the Effective Date, the Minimum Fees shall be
reduced to $500,000 per year for each period following such event.  If for any
reason drugstore.com is at any time during the Term (1) excluded from pharmacy
networks that cover 50% or more of all WellPoint Members as of the Effective
Date, (2) if Blue Cross of California is sold or is no longer an Affiliate of
WellPoint (and it excludes drugstore.com from its networks), or (3) any two or
more PBMs or Health Plans that are Affiliates of WellPoint are sold or are no
longer Affiliates of WellPoint (and such Affiliates exclude drugstore.com from
their

                                       32
<PAGE>

networks), Minimum Fees shall no longer be payable to WellPoint for periods
following such event.

                                       33
<PAGE>

                                   Exhibit D

                     WellPoint Investment Representations

          (i)    WellPoint is aware of drugstore.com's business affairs and
financial condition, and has acquired information about drugstore.com sufficient
to reach an informed and knowledgeable decision to acquire the Shares. WellPoint
is acquiring the Shares for its own account for investment purposes only and not
with a view to, or for the resale in connection with, any "distribution" thereof
for purposes of the Securities Act. WellPoint hereby represents that WellPoint
is an "accredited investor" as defined in Rule 501 promulgated under the
Securities Act of 1933, as amended.

          (ii)   WellPoint understands that the Shares have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of WellPoint's
investment intent as expressed herein.  In this connection, WellPoint
understands that, in the view of the SEC, the statutory basis for such exemption
may be unavailable if WellPoint's representation was predicated solely upon a
present intention to hold the Shares for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Shares, or for a period of one year or any
other fixed period in the future.

          (iii)  WellPoint further understands that the Shares must be held
indefinitely unless subsequently registered under the Securities Act and any
applicable state securities laws, or unless exemptions from registration are
otherwise available.  Moreover, WellPoint understands that drugstore.com is
under no obligation to register the Shares.

          (iv)   WellPoint is aware of the provisions of Rule 144 and 144A,
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: the availability of certain public information about
drugstore.com, the resale occurring not less than one year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934, as amended) and the amount of securities being sold during any three-month
period not exceeding the specified limitations stated therein.

          (v)    WellPoint further understands that at the time it wishes to
sell the Shares there may be no public market upon which to make such a sale,
and that, even if such a public market then exists, drugstore.com may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, WellPoint may be precluded from selling the Shares under
Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.

                                       34
<PAGE>

          (vi)   WellPoint further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the
Securities Act or another registration exemption will be required; and that, not
withstanding the fact that Rule 144 and 144A are not exclusive, the Staff of the
SEC has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 and 144A will have a substantial burden of proof in establishing that
an exemption from registration is available for such offers or sales, and that
such persons and their respective brokers who participate in such transactions
do so at their own risk.

                                       35<PAGE>

                                                                   EXHIBIT 10.23

                    PRIVATE EQUITY LINE OF CREDIT AGREEMENT

                                 BY AND AMONG

                               CERTAIN INVESTORS

                                      AND

                    ADVANCED AERODYNAMICS & STRUCTURES, INC
                    ---------------------------------------

        ________________________________________________________________

                          DATED AS OF AUGUST 15, 2000

        ________________________________________________________________

                                       1
<PAGE>

          This PRIVATE EQUITY LINE OF CREDIT AGREEMENT is entered into as of the
15/th/ day of August, 2000 (this "Agreement"), by and between the various
investors identified on Schedule A hereto (each an "Investor" or "Investors"),
and Advanced Aerodynamics & Structures, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Company").

          WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to each Investor,
from time to time as provided herein, and each Investor shall purchase his
Proportionate Share of up to $20,000,000 of the Common Stock (as defined below);
and

          WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.

          NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE I

                              CERTAIN DEFINITIONS

          Section 1.1  "Average Daily Price" shall be the price based on the
VWAP.

          Section 1.2  "Bid Price" shall mean the closing bid price (as reported
by Bloomberg Financial) of the Common Stock on the Principal Market.

          Section 1.3  "Capital Shares" shall mean the Common Stock and any
shares of any other class of common stock whether now or hereafter authorized,
having the right to participate in the distribution of earnings and assets of
the Company.

          Section 1.4 "Closing" shall mean one of the closings of a purchase and
sale of the Common Stock pursuant to Section 2.1.

          Section 1.5  "Closing Date" shall mean, with respect to a Closing at
the election of the Investor made from time to time either the eighth Trading
Day following the Optional Purchase Date related to such Closing and/or the
second Trading Day following the Valuation Period, provided all conditions to
such Closing have been satisfied on or before such Trading Day.

          Section 1.6  "Commitment Amount" shall mean the $20,000,000 up to
which the Investors have agreed to provide to the Company in order to purchase
Put Shares pursuant to the terms and conditions of this Agreement.

          Section 1.7  "Commitment Period" shall mean the period commencing on
the earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investors shall have purchased
Put Shares pursuant to this Agreement for an aggregate Purchase Price of
$20,000,000, (y) the date this Agreement is terminated pursuant to Section 2.5,
or (z) the date occurring twenty-four (24) months from the date of commencement
of the Commitment Period.

                                       2
<PAGE>

  Section 1.8  "Common Stock" shall mean the Company's Class A common stock,
$.001 par value per share.

  Section 1.9  "Common Stock Equivalents" shall mean any securities that are
convertible into or exchangeable for Common Stock or any warrants, options or
other rights to subscribe for or purchase Common Stock or any such convertible
or exchangeable securities.

  Section 1.10 "Condition Satisfaction Date" See Section 7.2.

  Section 1.11 "Legend" See Section 9.1.

  Section 1.12 "Damages" shall mean any loss, claim, damage, liability, costs
and expenses (including, without limitation, reasonable attorneys' fees and
disbursements and costs and expenses of expert witnesses and investigation).

  Section 1.13 "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering resale of the
Registrable Securities as set forth in Section 7.2(a).

  Section 1.14 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and the regulations promulgated thereunder.

  Section 1.15 "Finder" shall mean the persons described in Section 13.2 hereof.

  Section 1.16 "Floor Price" shall mean eighty-five cents ($0.85) per share.

  Section 1.17 "Investment Amount" shall mean the dollar amount (within the
range specified in Section 2.2) to be invested by the Investor to purchase Put
Shares with respect to any Optional Purchase Date as notified by the Company to
the Investor in accordance with Section 2.2 hereof.

  Section 1.18 "Material Adverse Effect" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company or to the Company and such other entities
controlling or controlled by the Company, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise interfere
with the ability of the Company to enter into and perform its obligations under
any of (a) this Agreement and (b) the Registration Rights Agreement.

  Section 1.19 "Maximum Put Amount" shall mean the amounts set forth in the
following table:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
VWAP                    Average Daily        Average Daily         Average Daily         Average Daily
                        Trading Volume of    Trading Volume of     Trading Volume of     Trading Volume of
                        20,000-50,000        50,001-75,000         75,001-100,000        100,001 or more
<S>                    <C>                  <C>                   <C>                   <C>
-----------------------------------------------------------------------------------------------------------
1.00-2.00               $200,000             $  300,000            $  500,000            $  650,000
-----------------------------------------------------------------------------------------------------------
2.01-3.00               $300,000             $  500,000            $  650,000            $  750,000
-----------------------------------------------------------------------------------------------------------
3.01-4.00               $400,000             $  600,000            $  750,000            $  850,000
-----------------------------------------------------------------------------------------------------------
4.01-5.00               $600,000             $  750,000            $  850,000            $1,000,000
-----------------------------------------------------------------------------------------------------------
5.01-6.00               $750,000             $  900,000            $1,000,000            $1,000,000
-----------------------------------------------------------------------------------------------------------
Above 6.01              $800,000             $1,000,000            $1,250,000            $1,500,000
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                       3
<PAGE>

"Average Daily Trading Volume" shall mean the average daily volume of shares of
Common Stock traded on Trading Days during the preceding thirty (30) calendar
days. The Maximum Put Amount represents the aggregate of all Proportionate
Shares of all Investors.

     Section 1.20 "NASD" shall mean the National Association of Securities
Dealers, Inc.

     Section 1.21 "Optional Purchase Date" shall mean any Trading Day during the
Commitment Period that an Optional Purchase Notice to sell Common Stock to the
Investor is deemed delivered pursuant to Section 2.2(b) hereof.

     Section 1.22 "Optional Purchase Notice" shall mean a written notice to the
Investor setting forth the Investment Amount that the Company intends to sell to
the Investor.

     Section 1.23 "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively the "Shares"), shall mean, at any date as of which
the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.

     Section 1.24 "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.

     Section 1.25 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq Small-Cap Market, the American Stock Exchange or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock.

     Section 1.26 "Proportionate Share" shall mean the proportion of the
Commitment Amount agreed to be purchased by each Investor as set forth on
Schedule A.

     Section 1.27 "Purchase Price" as used in this Agreement shall mean the
following: For each Trading Day during a Valuation Period (or such other date on
which the Purchase Price is calculated in accordance with the terms and
conditions of this Agreement) (i) the VWAP is more than $6.00, then the Purchase
Price shall be 93% of the VWAP; and (ii) if the VWAP is $6.00 or less, then the
Purchase Price shall be 92% of the VWAP. Each of the foregoing percentages is a
"Purchase Price Percentage."

     Section 1.28 "Put" shall mean each occasion the Company elects to exercise
its right to tender an Optional Purchase Notice requiring the Investor to
purchase a discretionary amount of the Company's Common Stock, subject to the
terms of this Agreement which tender must be given to each Investor for such
Investor's Proportionate Share.

     Section 1.29 "Put Shares" shall mean all shares of Common Stock issued or
issuable pursuant to a Put that has occurred or may occur in accordance with the
terms and conditions of this Agreement.

     Section 1.30 "Registrable Securities" shall mean the Put Shares and the
Warrant Shares until (i) the Registration Statement has been declared effective
by the SEC and all Put Shares and Warrant Shares have been disposed of pursuant
to the Registration Statement, (ii) all Put Shares and Warrant Shares have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) all Put Shares and Warrant Shares have been otherwise
transferred to holders who may trade such shares without restriction

                                       4
<PAGE>

under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (iv) such time as, in the opinion of counsel to the Company, which counsel
shall be reasonably acceptable to the Investor, all Put Shares and Warrant
Shares may be sold without any time, volume or manner limitations pursuant to
Rule 144(k) (or any similar provision then in effect) under the Securities Act.

     Section 1.31  "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors as of
the Subscription Date.

     Section 1.32  "Registration Statement" shall mean a registration statement
on Form SB-2 (if use of such form is then available to the Company pursuant to
the rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement and the Registration Rights Agreement, and in accordance with the
intended method of distribution of such securities), for the registration of the
resale by the Investor and Finder of the Registrable Securities under the
Securities Act.

     Section 1.33  "Regulation D" shall mean Regulation D of the Securities Act.

     Section 1.34  "SEC" shall mean the Securities and Exchange Commission.

     Section 1.35  "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.

     Section 1.36  "Securities Act" shall have the definition ascribed to it in
the recitals of this Agreement.

     Section 1.37  "SEC Documents" shall mean the Company's latest Form 10-K as
of the time in question, all Forms 10-Q and 8-K filed thereafter, and the Proxy
Statement for its latest fiscal year as of the time in question until such time
the Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.

     Section 1.38  "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.

     Section 1.39  "Trading Cushion" shall mean, at any time, the mandatory
thirty (30) calendar days between Optional Purchase Dates.

     Section 1.40  "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.

     Section 1.41  "Valuation Event" shall mean an event in which the Company at
any time during a Valuation Period takes any of the following actions:

                   (a) subdivides or combines its Common Stock;

                   (b) pays a dividend in its Capital Stock or makes any other
             distribution of its Capital Shares;

                                       5
<PAGE>

               (c)    issues any additional Capital Shares ("Additional Capital
          Shares"), otherwise than as provided in the foregoing Subsections (a)
          and (b) above, at a price per share less, or for other consideration
          lower, than the Bid Price in effect immediately prior to such
          issuance, or without consideration;

               (d)    issues any warrants, options or other rights to subscribe
          for or purchase any Additional Capital Shares and the price per share
          for which Additional Capital Shares may at any time thereafter be
          issuable pursuant to such warrants, options or other rights shall be
          less than the Bid Price in effect immediately prior to such issuance;

               (e)    issues any securities convertible into or exchangeable for
          Capital Shares and the consideration per share for which Additional
          Capital Shares may at any time thereafter be issuable pursuant to the
          terms of such convertible or exchangeable securities shall be less
          than the Bid Price in effect immediately prior to such issuance;

               (f)    makes a distribution of its assets or evidences of
          indebtedness to the holders of its Capital Shares as a dividend in
          liquidation or by way of return of capital or other than as a dividend
          payable out of earnings or surplus legally available for dividends
          under applicable law or any distribution to such holders made in
          respect of the sale of all or substantially all of the Company's
          assets (other than under the circumstances provided for in the
          foregoing subsections (a) through (e); or

               (g)    takes any action affecting the number of Outstanding
          Capital Shares, other than an action described in any of the foregoing
          Subsections (a) through (f) hereof, inclusive, which in the opinion of
          the Company's Board of Directors, determined in good faith, would have
          a materially adverse effect upon the rights of the Investor at the
          time of a Put.

     Section 1.42 "Valuation Period" shall mean the period of fourteen (14)
Trading Days during which the Purchase Price of the Common Stock is determined,
which period shall be with respect to the Purchase Prices on any Optional
Purchase Date, the fourteen (14) Trading Days following the Trading Day on which
an Optional Purchase Notice is deemed to be delivered, provided, however, that
if a Valuation Event occurs during any Valuation Period, at the election of the
Investor, a new Valuation Period shall begin on the Trading Day immediately
after the occurrence of such Valuation Event and end on the fifth Trading Day
thereafter.

     Section 1.43  "VWAP" shall mean the daily volume weighted average price of
the Common Stock on the Principal Market as reported by Bloomberg Financial
using the AQR function.

     Section 1.44  "Warrants" shall mean the common stock purchase warrants of
the Company described in Section 13.2, a form of which is annexed hereto as
Exhibit E.

     Section 1.45  "Warrant Shares" shall mean the Common Stock issuable upon
exercise of the Warrants.

                                       6
<PAGE>

                                  ARTICLE II

                       PURCHASE AND SALE OF COMMON STOCK

     Section 2.1  Investments.
                  -----------

                  (a) Puts.  Upon the terms and conditions set forth herein
                      ----
(including, without limitation, the provisions of Article III hereof), on any
Optional Purchase Date the Company may exercise a Put by the delivery of an
Optional Purchase Notice. The number of Put Shares that the Investor shall
receive pursuant to such Put shall be determined by dividing the relevant
portions of the Investment Amount specified in the Optional Purchase Notice by
the corresponding Purchase Prices for each Trading Day during the Valuation
Period.

                  (b) Maximum Amount of Put Shares. Unless the Company obtains
                      ----------------------------
the requisite approval of its shareholders in accordance with the corporate laws
of Delaware and the applicable rules of the Principal Market, no more than
3,200,000 shares of Common Stock may be issued and sold pursuant to Puts.

     Section 2.2  Mechanics.
                  ---------

                  (a) Optional Purchase Notice. At any time during the
                      ------------------------
Commitment Period, the Company may deliver an Optional Purchase Notice to the
Investor, subject to the conditions set forth in Section 7.2; provided, however,
the Investment Amount for each Put as designated by the Company in the
applicable Optional Purchase Notices shall be neither less than $200,000 in the
aggregate to all Investors nor more than the Maximum Put Amount.

                  (b) Date of Delivery of Optional Purchase Notice. An Optional
                      --------------------------------------------
Purchase Notice shall be deemed delivered on (i) the Trading Day it is received
by facsimile or otherwise by the Investor if such notice is received prior to
12:00 noon New York time, or (ii) the immediately succeeding Trading Day if it
is received by facsimile or otherwise after 12:00 noon New York time on a
Trading Day or at any time on a day which is not a Trading Day. No Optional
Purchase Notice may be deemed delivered, on a day that is not a Trading Day.

                  (c) Determination of Put Shares Issuable. The Purchase Price
                      ------------------------------------
shall be based on the Average Daily Price on each separate Trading Day during
the Valuation Period. The number of Put Shares to be purchased by each Investor
with respect to such Investor's Proportionate Share shall be determined on a
daily basis during each Valuation Period and settled on the Closing Date. The
portion of Investment Amount for which Put Shares may be issued for each Trading
Day during the Valuation Period may not exceed one-fourteenth (1/14/th/) of the
Investment Amount.

                  (d) Floor Price Limitation. If the Average Daily Price on any
                      ----------------------
Trading Day during the Valuation Period is less than the Floor Price, the
Company shall not sell and the Investor shall not purchase the Put Shares
otherwise to be purchased for such Trading Day. In such case, one-fourteenth
(1/14/th/) of the Investment Amount shall be withdrawn from the Investment
Amount for each such Trading Day.

                  (e) Maximum Optional Purchase Notices/Amount. There shall be a
                      ----------------------------------------
maximum of twenty-four (24) Option Purchase Notices given during the term of
Agreement this Agreement. The Company shall have the right to issue each
Optional Purchase Notice for an Investment Amount up to the Maximum Put Amount.

                                       7
<PAGE>

     Section 2.3  Closings.    On each Closing Date for a Put the Company shall
                  --------
deliver to the Investor one or more certificates, at the Investor's option,
representing the Put Shares to be purchased by the Investor pursuant to Section
2.1 herein, after the Optional Purchase Date and on or prior to the Closing
Date, registered in the name of the Investor or, at the Investor's option,
deposit such certificate(s) into such account or accounts previously designated
by the Investor (including by electronic transfer if such Shares are DTC
eligible) and the Investor shall deliver to escrow the Investment Amount
specified in the Optional Purchase Notice by wire transfer of immediately
available funds to an account designated by the Company on or before the Closing
Date. In addition, on or prior to the Closing Date, each of the Company and the
Investor shall deliver all documents, instruments and writings required to be
delivered or reasonably requested by either of them pursuant to this Agreement
in order to implement and effect the transactions contemplated herein. Payment
of funds to the Company and delivery of the certificates to the Investor shall
occur out of escrow in accordance with the escrow agreement referred to in
Section 7.2(p) following (x) the Company's deposit into escrow of the
certificates representing the Put Shares and (y) the Investor's deposit into
escrow of the Investment Amount; provided, however, that to the extent the
Company has not paid the fees, expenses and disbursements of the Investor's
counsel in accordance with Section 13.1, the amount of such fees, expenses and
disbursements shall be paid in immediately available funds drawn out of the
deposited funds, at the direction of the Investor, to Investor's counsel with no
reduction in the number of Put Shares issuable to the Investor on such Closing
Date.

     Section 2.4  Liquidated Damages.  In the event the Put Shares are not
                  ------------------
timely delivered by the Company on a Closing Date, the Company will pay the
Investor, as liquidated damages for such failure to deliver and not as a
penalty, one percent (1%) of the applicable Investment Amount for each seven (7)
day period, or part thereof following such failure, in cash, until such Put
Shares have been delivered. The Escrow Agent shall be directed to pay such
liquidated damages to the Investor out of the Investment Amount delivered by the
Investor to the Escrow Agent.

     Section 2.5  Termination of Investment Obligation. The obligation of the
                  ------------------------------------
Investor to purchase shares of Common Stock shall terminate permanently
(including with respect to a Closing Date that has not yet occurred) in the
event that (i) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for a consecutive ten day calendar
period or for an aggregate of thirty (30) Trading Days during the Commitment
Period, for any reason, or (ii) the Company shall at any time fail to comply
with the requirements of Section 6.2, 6.3, 6.4, 6.5 or 6.6.

                                  ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF INVESTOR

     The Investor represents and warrants to the Company that:

     Section 3.1  Intent.   The Investor is entering into this Agreement for its
                  ------
own account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.

     Section 3.2  Sophisticated Investor.   The Investor is a sophisticated
                  ----------------------
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in Common Stock and has the capacity to
protect its own interests in

                                       8
<PAGE>

connection with the transactions. The Investor acknowledges that an investment
in the Common Stock is speculative and involves a high degree of risk.

     Section 3.3  Authority.   This Agreement has been duly authorized and
                  ---------
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.

     Section 3.4  Not an Affiliate.   The Investor is not an officer, director
                  ----------------
or to Investor's good faith belief, an "affiliate" (as that term is defined in
Rule 405 of the Securities Act) of the Company.

     Section 3.5  Absence of Conflicts.   The execution and delivery of this
                  --------------------
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or, to
the Investor's knowledge, (a) violate any provision of any indenture, instrument
or agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound, (b) conflict with or constitute a material default
thereunder, (c) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (d) require the
approval of any third-party (which has not been obtained) pursuant to any
material contract, agreement, instrument, relationship or legal obligation to
which Investor is subject or to which any of its assets, operations or
management may be subject.

     Section 3.6  Disclosure; Access to Information.   Investor has received all
                  ---------------------------------
documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Company is
subject to the periodic reporting requirements of the Exchange Act, and Investor
has had access to copies of any such reports that have been requested by it.

     Section 3.7  Manner of Sale.   At no time was Investor presented with or
                  --------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.

                                  ARTICLE IV

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company represents and warrants to the Investor that:

     Section 4.1  Organization of the Company.   The Company is a corporation
                  ---------------------------
duly organized and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. Except as set forth in the SEC
Documents, the Company does not have any subsidiaries. The Company is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect.

     Section 4.2  Authority.   (i) The Company has the requisite corporate power
                  ---------
and authority to enter into and perform its obligations under this Agreement and
the Registration Rights Agreement and to issue the Put Shares; (ii) the
execution, issuance and delivery of this Agreement and the Registration Rights
Agreement and the consummation by it of the transactions contemplated hereby
have been duly

                                       9
<PAGE>

authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required; and (iii) this Agreement and the Registration Rights Agreement have
been duly executed and delivered by the Company and constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.

     Section 4.3  Capitalization. As of June 30, 2000  the authorized capital
                  --------------
stock of the Company consists of 60,000,000 shares of Class A Common Stock, of
which 7,008,162 shares were issued and outstanding;10,000,000 shares of Class B
Common Stock, of which 1,900,324 shares were issued and outstanding; 4,000,000
shares of Class E-1 Common Stock of which 4,000,000 shares were issued and
outstanding; 4,000,000 shares of ClassE-2 Common Stock, of which 4,000,000
shares were issued and outstanding; and 5,000,000shares of Preferred Stock, of
which 100,000 shares were designated as Series A 5% Cumulative Preferred Stock,
of which 74,750 such shares were issued and outstanding. Except as set forth in
the SEC Documents, there are no options, warrants, or rights to subscribe to,
securities, rights or obligations convertible into or exchangeable for or giving
any right to subscribe for any shares of capital stock of the Company. All of
the outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable.

     Section 4.4  Common Stock.  The Company has registered its Common Stock
                  ------------
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company presently
satisfies all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the Nasdaq National
Market.

     Section 4.5  SEC Documents.  The Company has delivered or made available to
                  -------------
the Investor true and complete copies of the SEC Documents (including, without
limitation, proxy information and solicitation materials). The Company has not
provided to the Investor any information that, according to applicable law, rule
or regulation, should have been disclosed publicly prior to the date hereof by
the Company, but which has not been so disclosed. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and rules and
regulations of the SEC promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such SEC Documents, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).

     Section 4.6  Valid Issuances.  The Put Shares may and will be properly
                  ---------------
issued pursuant to Section 4(2), Regulation D and/or any applicable state law.
When issued, the Put Shares shall be duly and validly issued, fully paid, and
nonassessable.  Neither the sales of the Put Shares pursuant to, nor the
Company's performance of its obligations under, this Agreement or the
Registration Rights Agreement

                                       10
<PAGE>

will (i) result in the creation or imposition of any liens, charges, claims or
other encumbrances upon the Put Shares or any of the assets of the Company, or
(ii) entitle the holders of Outstanding Capital Shares to preemptive or other
rights to subscribe to or acquire the Capital Shares or other securities of the
Company. The Put Shares shall not subject the Investor to personal liability by
reason of the possession thereof.

     Section 4.7  No General Solicitation or Advertising in Regard to this
                  --------------------------------------------------------
Transaction.  Neither the Company nor any of its affiliates nor any distributor
-----------
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, or (ii) made any
offers or sales of any security or solicited any offers to buy any security
under any circumstances that would require registration of the Common Stock
under the Securities Act.

     Section 4.8  Corporate Documents.   The Company has furnished or made
                  -------------------
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").

     Section 4.9  No Conflicts.  The execution, delivery and performance of this
                  ------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including, without limitation, the issuance of Common Stock
do not and will not (i) result in a violation of the Company's Articles of
Incorporation or By-Laws or (ii) conflict with, or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture, instrument or any "lock-up"
or similar provision of any underwriting or similar agreement to which the
Company is a party, or (iii) result in a violation of any federal, state, local
or foreign law, rule, regulation, order, judgment or decree (including federal
and state securities laws and regulations) applicable to the Company or by which
any property or asset of the Company is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect) nor is the Company otherwise in violation of, conflict with or
in default under any of the foregoing; provided that, for purposes of the
Company's representations and warranties as to violations of foreign law, rule
or regulation referenced in clause (iii), such representations and warranties
are made only to the best of the Company's knowledge insofar as the execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby are or may be affected by
the status of the Investor under or pursuant to any such foreign law, rule or
regulation. The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock in accordance with the terms hereof
(other than any SEC, NASD or state securities filings that may be required to be
made by the Company subsequent to any Closing, any registration statement that
may be filed pursuant hereto, and any shareholder approval required by the rules
applicable to companies whose common stock trades on the Nasdaq National Market
referenced in Section 5.1); provided that, for purposes of the representation
made in this sentence, the Company is assuming and relying upon the accuracy of
the relevant representations and agreements of the Investor herein.

     Section 4.10 No Material Adverse Change.   Since December 31, 1999, no
                  --------------------------
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents.

                                       11
<PAGE>

     Section 4.11 No Undisclosed Liabilities.   The Company has no liabilities
                  --------------------------
or obligations which are material, individually or in the aggregate, and are not
disclosed in the SEC Documents or otherwise publicly announced, other than those
incurred in the ordinary course of the Company's business since December 31,
1999 and which, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company.

     Section 4.12 No Undisclosed Events or Circumstances.   Since December 31,
                  --------------------------------------
1999, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the SEC Documents.

     Section 4.13 No Integrated Offering.  Neither the Company, nor any of its
                  ----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.

     Section 4.14 Litigation and Other Proceedings. Except as may be set forth
                  --------------------------------
in the SEC Documents, there are no lawsuits or proceedings pending or to the
best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.

     Section 4.15 No Misleading or Untrue Communication. The Company and any
                  -------------------------------------
Person representing the Company, in connection with the transactions
contemplated by this Agreement, have not made, at any time, any oral
communication in connection with the offer or sale of the same which contained
any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.

     Section 4.16 Material Non-Public Information.  The Company is not in
                  -------------------------------
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.

                                   ARTICLE V

                           COVENANTS OF THE INVESTOR

     Section 5.1  Compliance with Law.   The Investor's trading activities with
                  -------------------
respect to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and the
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.

     Section 5.2  No Short Sales.  The Investor and its affiliates shall not
                  --------------
engage in short sales of the Company's Common Stock at a per share price less
than $10.00; provided, however, that the Investor may enter into any short sale
or other hedging or similar arrangement it deems appropriate with respect to Put
Shares after it receives an Optional Purchase Notice with respect to such Put
Shares so long as such

                                       12
<PAGE>

sales or arrangements do not involve more than the number of such Put Shares
(determined as of the date of such Optional Purchase Notice).

                                  ARTICLE VI

                           COVENANTS OF THE COMPANY

     Section 6.1  Registration Rights.   The Company shall cause the
                  -------------------
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all respects with the terms thereof. Failure to obtain timely
effectiveness of the Registration Statement within the time period set forth in
the Registration Rights Agreement shall terminate the Company's right to give
Optional Purchase Notices.

     Section 6.2  Reservation of Common Stock.    Prior to the delivery of any
                  ---------------------------
Optional Put Notice, the Company will have reserved and the Company shall
continue to reserve and keep available at all times, thereafter, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue the Put Shares; such amount of shares
of Common Stock to be reserved shall be calculated based upon the minimum
Purchase Price therefor under the terms of this Agreement.

     Section 6.3  Listing of Common Stock.  The Company shall maintain the
                  -----------------------
listing of the Common Stock on a Principal Market, and as soon as practicable
(but in any event prior to the commencement of the Commitment Period) to list
the Put Shares. The Company further shall, if the Company applies to have the
Common Stock traded on any other Principal Market, include in such application
the Put Shares, and shall take such other action as is necessary or desirable in
the opinion of the Investor to cause the Common Stock to be listed on such other
Principal Market as promptly as possible. The Company shall take all action
necessary to continue the listing and trading of its Common Stock on the
Principal Market (including, without limitation, maintaining sufficient net
tangible assets) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the NASD and the
Principal Market.

     Section 6.4  Exchange Act Registration.  The Company shall (i) cause its
                  -------------------------
Common Stock to continue to be registered under Section 12(g) or 12(b) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any document
(whether or not permitted by said Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Act. The Company will take all action to continue the
listing and trading of its Common Stock on the Principal Market and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.

     Section 6.5  Legends.   The certificates evidencing the Common Stock to be
                  -------
sold by the Investor pursuant to Section 9.1 shall be free of legends, except as
set forth in Article IX.

     Section 6.6  Corporate Existence.  The Company will take all steps
                  -------------------
necessary to preserve and continue the corporate existence of the Company.

     Section 6.7  Additional SEC Documents.  The Company will deliver to the
                  ------------------------
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC.

                                       13
<PAGE>

     Section 6.8  Blackout Period.  The Company will immediately notify the
                  ---------------
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
Registrable Securities; (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the Registration Statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such registration statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Optional Purchase Notice during
the continuation of any of the foregoing events.

     Section 6.9  Expectations Regarding Optional Purchase Notices.  Within ten
                  ------------------------------------------------
(10) Trading Days after the commencement of each calendar quarter occurring
subsequent to the commencement of the Commitment Period, the Company undertakes
to notify the Investor as to its reasonable expectations as to the dollar amount
it intends to raise during such calendar quarter, if any, through the issuance
of Optional Purchase Notices. Such notification shall constitute only the
Company's good faith estimate and shall in no way obligate the Company to raise
such amount, or any amount, or otherwise limit its ability to deliver Optional
Purchase Notices. The failure by the Company to comply with this provision can
be cured by the Company's notifying the Investor at any time as to its
reasonable expectations with respect to the current calendar quarter.

     Section 6.10 Disclosure of Material Information.   In the event that any
                  ----------------------------------
or all of the information set forth on Schedule 8.2(a) hereto becomes material,
the Company shall make full and complete public disclosure in accordance with
all applicable law.

     Section 6.11 Consolidation; Merger.  The Company shall not, at any time
                  ---------------------
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.

     Section 6.12 Issuance of Put Shares.  The sale and issuance of the Put
                  ----------------------
Shares shall be made in accordance with the provisions and requirements of
Regulation D and any applicable state law.

                                       14
<PAGE>

                                  ARTICLE VII

                      CONDITIONS TO DELIVERY OF OPTIONAL
                  PURCHASE NOTICES AND CONDITIONS TO CLOSING

   Section 7.1 Conditions Precedent to the Obligation of the Company to Issue
               --------------------------------------------------------------
and Sell Common Stock. The obligation hereunder of the Company to issue and sell
---------------------
the Put Shares to the Investor incident to each Closing is subject to the
satisfaction, at or before each such Closing, of each of the conditions set
forth below.

               (a) Accuracy of the Investor's Representation and Warranties.The
                   --------------------------------------------------------
           representations and warranties of the Investor shall be true and
           correct in all material respects as of the date of this Agreement and
           as of the date of each such Closing as though made at each such time.

               (b) Performance by the Investor.   The Investor shall have
                   ---------------------------
           performed, satisfied and complied in all respects with all covenants,
           agreements and conditions required by this Agreement to be performed,
           satisfied or complied with by the Investor at or prior to such
           Closing.

 Section   7.2 Conditions Precedent to the Right of the Company to Deliver an
               --------------------------------------------------------------
Optional Purchase Notice and the Obligation of the Investor to Purchase Put
---------------------------------------------------------------------------
Shares. The right of the Company to deliver an Optional Purchase Notice and the
------
obligation of the Investor hereunder to acquire and pay for the Put Shares
incident to a Closing is subject to the satisfaction, on (i) the date of
delivery of such Optional Purchase Notice and (ii) the applicable Closing Date
(each a "Condition Satisfaction Date"), of each of the following conditions:

               (a) Registration of the Common Stock with the SEC. As set forth
                   ---------------------------------------------
           in the Registration Rights Agreement, the Company shall have filed
           with the SEC a Registration Statement with respect to the resale of
           the Registrable Securities that shall have been declared effective by
           the SEC prior to the first Optional Purchase Date, but in no event
           later than ninety (90) days after Subscription Date.

               (b) Effective Registration Statement.  As set forth in the
                   --------------------------------
           Registration Rights Agreement, the Registration Statement shall have
           previously become effective and shall remain effective on each
           Condition Satisfaction Date and (i) neither the Company nor the
           Investor shall have received notice that the SEC has issued or
           intends to issue a stop order with respect to the Registration
           Statement or that the SEC otherwise has suspended or withdrawn the
           effectiveness of the Registration Statement, either temporarily or
           permanently, or intends or has threatened to do so, and (ii) no other
           suspension of the use or withdrawal of the effectiveness of the
           Registration Statement or related prospectus shall exist.

               (c) Accuracy of the Company's Representations and Warranties. The
                   --------------------------------------------------------
           representations and warranties of the Company shall be true and
           correct in all material respects as of each Condition Satisfaction
           Date as though made at each such time (except for representations and
           warranties specifically made as of a particular date) with respect to
           all periods, and as to all events and circumstances occurring or
           existing to and including each Condition Satisfaction Date, except
           for any conditions which have temporarily caused any representations
           or warranties herein to be incorrect and which have been corrected
           with no continuing impairment to the Company or the Investor.

                                       15
<PAGE>

              (d)  Performance by the Company.  The Company shall have
                   --------------------------
          performed, satisfied and complied in all material respects with all
          covenants, agreements and conditions required by this Agreement and
          the Registration Rights Agreement to be performed, satisfied or
          complied with by the Company at or prior to each Condition
          Satisfaction Date.

              (e)  No Injunction.  No statute, rule, regulation, executive
                   -------------
          order, decree, ruling or injunction shall have been enacted, entered,
          promulgated or endorsed by any court or governmental authority of
          competent jurisdiction that prohibits or directly and adversely
          affects any of the transactions contemplated by this Agreement, and no
          proceeding shall have been commenced that may have the effect of
          prohibiting or adversely affecting any of the transactions
          contemplated by this Agreement.

              (f)  Adverse Changes.   Since the date of filing of the Company's
                   ---------------
          most recent SEC Document, no event that had or is reasonably likely to
          have a Material Adverse Effect has occurred.

              (g)  No Suspension of Trading In or Delisting of Common Stock.
                   --------------------------------------------------------
          The trading of the Common Stock (including without limitation the Put
          Shares) shall not have been suspended by the SEC, the Principal Market
          or the NASD and the Common Stock (including without limitation the Put
          Shares) shall have been approved for listing or quotation on and shall
          not have been delisted from the Principal Market. The issuance of
          shares of Common Stock with respect to the applicable Closing, if any,
          shall not violate the shareholder approval requirements of the
          Principal Market.

              (h)  Legal Opinions.  The Company shall have caused to be
                   --------------
          delivered to the Investor and Finders, within five (5) Trading Days of
          the effective date of the Registration Statement, an opinion of the
          Company's independent counsel in the form of Exhibit B hereto,
          addressed to the Investor and Finders; provided, however, that in the
          event that such an opinion cannot be delivered by the Company's
          independent counsel to the Investor, the Company shall promptly revise
          the Registration Statement and shall not deliver an Optional Purchase
          Notice. If an Optional Purchase Notice shall have been delivered in
          good faith without knowledge by the Company that an opinion of
          independent counsel can not be delivered as required, then such
          Closing may be cancelled at the option of the Investor. Liquidated
          damages determined pursuant to Section 2.4 shall be calculated and
          payable on the Closing Date. The Company's independent counsel shall
          also deliver to the Investor and Finders upon execution of this
          Agreement an opinion in form and substance reasonably satisfactory to
          the Investor and Finders addressing, among other things, corporate
          matters and the exemption from registration under the Securities Act
          of the issuance of the Registrable Securities by the Company to the
          Investor and Finders under this Agreement.

              (i)   Due Diligence.  No dispute between the Company and the
                    -------------
          Investor shall exist pursuant to Section 8.2(c) as to the adequacy of
          the disclosure contained in the Registration Statement.

              (j)  Ten Percent Limitation.  On each Closing Date, the number of
                   ----------------------
          Put Shares then to be purchased by the Investor shall not exceed the
          number of such shares that, when aggregated with all other shares of
          Common Stock then owned by the Investor beneficially or deemed
          beneficially owned by the Investor, would result in the Investor
          owning more than 9.9% of all of such Common Stock as would be
          outstanding on such

                                       16
<PAGE>

          Closing Date, as determined in accordance with Section 16 of the
          Exchange Act and the regulations promulgated thereunder. For purposes
          of this Section 3.2(k), in the event that the amount of Common Stock
          outstanding as determined in accordance with Section 16 of the
          Exchange Act and the regulations promulgated thereunder is greater on
          a Closing Date than on the date upon which the Optional Purchase
          Notice associated with such Closing Date is given, the amount of
          Common Stock outstanding on such Closing Date shall govern for
          purposes of determining whether the Investor, when aggregating all
          purchases of Common Stock made pursuant to this Agreement and, if any,
          Shares, would own more than 9.9% of the Common Stock following such
          Closing Date.

               (k)  Cross Default.  The Company shall not be in default of a
                    --------------
          material term, covenant, warranty or undertaking of any other
          agreement to which the Company and Investor are parties, nor shall
          there have occurred an event of default under any such other agreement

               (l)  Minimum Average Trading Volume. The average trading volume
                    ------------------------------
          for the Common Stock over the previous thirty (30) Trading Days equals
          or exceeds 20,000 shares per Trading Day.

               (m)  No Knowledge. The Company shall have no knowledge of any
                    ------------
          event more likely than not to have the effect of causing such
          Registration Statement to be suspended or otherwise ineffective (which
          event is more likely than not to occur within the fifteen Trading Days
          following the Trading Day on which such Notice is deemed delivered).

               (n)  Trading Cushion. The Trading Cushion shall have elapsed
                    ---------------
          since the immediately preceding Optional Purchase Date.

               (o)  Shareholder Vote. The issuance of shares of Common Stock
                    ----------------
          with respect to the applicable Closing, if any, shall not violate the
          shareholder approval requirements of the Principal Market.

               (p)  Escrow Agreement.  The parties hereto shall have entered
                    ----------------
          into a mutually acceptable escrow agreement for the Purchase Prices
          due hereunder.

               (q)  Other.  On each Condition Satisfaction Date, the Investor
                    -----
          shall have received and been reasonably satisfied with such other
          certificates and documents as shall have been reasonably requested by
          the Investor in order for the Investor to confirm the Company's
          satisfaction of the conditions set forth in this Section 7.2.,
          including, without limitation, a certificate in substantially the form
          and substance of Exhibit C hereto, executed in either case by an
          executive officer of the Company and to the effect that all the
          conditions to such Closing shall have been satisfied as at the date of
          each such certificate.

                                  ARTICLE VIII

         DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION

         Section 8.1 Due Diligence Review. The Company shall make available for
                     --------------------
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), any underwriter participating in

                                       17
<PAGE>

any disposition of the Registrable Securities on behalf of the Investor pursuant
to the Registration Statement, any such registration statement or amendment or
supplement thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investor and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.

     Section 8.2  Non-Disclosure of Non-Public Information.
                  ----------------------------------------

                  (a) Except as set forth on Schedule 8.2(a) hereof, the Company
represents and warrants that the Company and its officers, directors, employees
and agents have not disclosed any non-public information to the Investor or
advisors to or representatives of the Investor. The Company covenants and agrees
that it shall refrain from disclosing, and shall cause its officers, directors,
employees and agents to refrain from disclosing, (including, without limitation,
in connection with the giving of the Adjustment Period Notice pursuant to
Section 2.4), unless prior to disclosure of such information the Company
identifies such information as being non-public information and provides the
Investor, such advisors and representatives with the opportunity to accept or
refuse to accept such non-public information for review. The Company may, as a
condition to disclosing any non-public information hereunder, require the
Investor's advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Investor.

                  (b) The Company acknowledges and understands that the Investor
is entering into this Agreement and the Registration Rights Agreement at the
request of the Company and in good faith reliance on (i) the Company's
representation set forth in Section 4.16 that neither it nor its agents have
disclosed to the Investor any material non-public information; and (ii) the
Company's covenant set forth in Section 6.10 that if all or any portion of the
information set forth on Schedule 8.2(a) becomes material, the Company shall
timely make full and complete public disclosure of all or such portion of such
information that shall have become material in accordance with all applicable
law.

                  (c) Nothing herein shall require the Company to disclose non-
public information to the Investor or its advisors or representatives, and the
Company represents that it does not disseminate non-public information to any
investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section 8.2 shall be
construed to mean that such persons or entities other than the Investor (without
the written consent of the Investor prior to disclosure of such information) may
not obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
such persons or entities from notifying the Company of their opinion that based
on such due diligence

                                       18
<PAGE>

by such persons or entities, that the Registration Statement contains
an untrue statement of a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.

                                  ARTICLE IX

                                    LEGENDS

     Section 9.1  Legends.  Unless otherwise provided below, each certificate
                  -------
representing Registrable Securities will bear the following legend (the
"Legend"):

               THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
               BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
               AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
               APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
               RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
               REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
               SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST
               OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
               ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED,
               HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT
               TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
               SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS
               EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
               HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF
               CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A
               PRIVATE EQUITY LINE OF CREDIT AGREEMENT AMONG ADVANCED
               AERODYNAMICS & STRUCTURES, INC. AND CERTAIN INVESTORS
               DATED AUGUST 15, 2000. A COPY OF THE PORTION OF THE
               AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE
               OBTAINED FROM THE COMPANY'S EXECUTIVE OFFICES.

     Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit D hereto.  Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement.  It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:

               (a) at any time after the Effective Date, upon surrender of one
     or more certificates evidencing Common Stock that bear the Legend, to the
     extent accompanied by a notice requesting the issuance of new certificates
     free of the Legend to replace those surrendered; provided that (i) the
     Registration Statement shall then be effective; (ii) the Investor confirms
     to
                                       19
<PAGE>

     the transfer agent that it has sold, pledged or otherwise transferred or
     agreed to sell, pledge or otherwise transfer such Common Stock in a bona
     fide transaction to a third party that is not an affiliate of the Company;
     and (iii) the Investor confirms to the transfer agent that the Investor has
     complied with the prospectus delivery requirement; and

               (b) at any time upon any surrender of one or more certificates
     evidencing Registrable Securities that bear the Legend, to the extent
     accompanied by a notice requesting the issuance of new certificates free of
     the Legend to replace those surrendered and containing representations that
     (i) the Investor is permitted to dispose of such Registrable Securities
     without limitation as to amount or manner of sale pursuant to Rule 144(k)
     under the Securities Act or (ii) the Investor has sold, pledged or
     otherwise transferred or agreed to sell, pledge or otherwise transfer such
     Registrable Securities in a manner other than pursuant to an effective
     registration statement, to a transferee who will upon such transfer be
     entitled to freely tradeable securities.  Any of the notices referred to
     above in this Section 9.1 may be sent by facsimile to the Company's
     transfer agent.

     Section 9.2  No Other Legend or Stock Transfer Restrictions.   No legend
                  ----------------------------------------------
other than the one specified in Section 9.1 has been or shall be placed on the
share certificates representing the Common Stock and no instructions or "stop
transfers orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.

     Section 9.3  Investor's Compliance.  Nothing in this Article IX shall
                  ---------------------
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.

                                   ARTICLE X

                              CHOICE OF LAW/VENUE

     Section 10.1  Choice of Law/Venue.   This Agreement and the Registration
                   -------------------
Rights Agreement shall be governed by and construed in accordance with the laws
of the State of New York without regard to principles of conflicts of laws.  Any
action brought by either party against the other concerning the transactions
contemplated by this Agreement or the Registration Rights Agreement shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York.  Both parties and the individuals executing this
Agreement and other agreements on behalf of the Company agree to submit to the
jurisdiction of such courts and waive trial by jury.  The prevailing party shall
be entitled to recover from the other party its reasonable attorney's fees and
costs.  In the event that any provision of this Agreement or any other agreement
delivered in connection herewith is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law.  Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.

                                   ARTICLE XI

              ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; TERMINATION

     Section 11.1  Assignment.  Neither this Agreement nor any rights of the
                   ----------
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of

                                       20
<PAGE>

any of the Common Stock purchased or acquired by the Investor hereunder with
respect to the Common Stock held by such person, and (b) the Investor's interest
in this Agreement may be assigned at any time, in whole or in part, to any other
person or entity (including any affiliate of the Investor) effective upon
written notice to the Company. The Company shall have the right to require any
assignee to execute a counterpart of this Agreement.

     Section 11.2  Termination.  This Agreement shall terminate twenty-four (24)
                   -----------
months after the commencement of the Commitment Period; provided, however, that
the provisions of Articles VI, VII, VIII, X, XI, and XII shall survive the
termination of this Agreement.

     Section 11.3  Entire Agreement, Amendment.  This Agreement and the
                   ---------------------------
Registration Rights Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth in
this Agreement or therein. Except as expressly provided in this Agreement,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by both parties hereto.

                                  ARTICLE XII

                            NOTICES; INDEMNIFICATION

     Section 12.1  Notices.   All notices, demands, requests, consents,
                   -------
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.  The addresses for
such communications shall be:

  If to Advanced Aerodynamics & Structures, Inc.:

     Advanced Aerodynamics & Structures, Inc.
     3205 Lakewood Boulevard
     Long Beach Airport, CA 90808
     Telecopier: (562) 938-8620

 with a copy to (which communication shall not constitute notice):

     Otto Sorensen, Esq.
     Luce, Forward, Hamilton & Scripps, LLP
     600 West Broadway, Suite 2600
     San Diego, CA 92101
     Telecopier: (619) 645-5324

                                       21
<PAGE>

  If to the Investor:

     To the address and telecopier number set forth on Schedule A hereto

  with a copy to (which communication shall not constitute notice):

     Grushko & Mittman, P.C.
     551 Fifth Avenue, Suite 1601
     New York, New York 10176
     Telecopier: (212) 697-3575

Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.

     Section 12.2  Indemnification.
                   ---------------

                   (a) The Company agrees to indemnify and hold harmless the
Investor, its partners, Affiliates, officers, directors, employees, and duly
authorized agents, and each Person or entity, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the Controlling Persons (as defined in the
Registration Rights Agreement) from and against any Damages, joint or several,
and any action in respect thereof to which the Investor, its partners,
Affiliates, officers, directors, employees, and duly authorized agents, and any
such Controlling Person becomes subject to, resulting from, arising out of or
relating to any misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of Company contained in
this Agreement in any event as such Damages are incurred.

                   (b) The Investor agrees to indemnify and hold harmless the
Company, its partners, Affiliates, officers, directors, employees, and duly
authorized agents, and each Person or entity, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the Controlling Persons (as defined in the
Registration Rights Agreement) from and against any Damages, joint or several,
and any action in respect thereof to which the Company, its partners,
Affiliates, officers, directors, employees, and duly authorized agents, and any
such Controlling Person becomes subject to, resulting from, arising out of or
relating to any misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of Investor contained
in this Agreement in an aggregate amount not to exceed one-tenth of each such
Investor's Proportionate Share.

     Section 12.3  Method of Asserting Indemnification Claims.  All claims for
                   ------------------------------------------
indemnification by any Indemnified Party (as defined below) under Section 12.2
will be asserted and resolved as follows:

                   (a) In the event any claim or demand in respect of which any
person claiming indemnification under any provision of Section 12.2 (an
"Indemnified Party") might seek indemnity under Section 12.2 is asserted against
or sought to be collected from such Indemnified Party by a person other than the
Company, the Investor or any affiliate of the Company or (a "Third Party
Claim"), the Indemnified Party shall deliver a written notification, enclosing a
copy of all papers served, if any, and specifying the nature of and basis for
such Third Party Claim and for the Indemnified Party's claim for indemnification
that is being asserted under any provision of Section 12.2 against any person
(the "Indemnifying Party"), together with the amount or, if not then reasonably
ascertainable, the estimated amount, determined in good faith, of such Third
Party Claim (a "Claim Notice") with reasonable

                                       22
<PAGE>

promptness to the Indemnifying Party. If the Indemnified Party fails to provide
the Claim Notice with reasonable promptness after the Indemnified Party receives
notice of such Third Party Claim, the Indemnifying Party will not be obligated
to indemnify the Indemnified Party with respect to such Third Party Claim to the
extent that the Indemnifying Party's ability to defend has been irreparably
prejudiced by such failure of the Indemnified Party. The Indemnifying Party will
notify the Indemnified Party as soon as practicable within the period ending
thirty (30) calendar days following receipt by the Indemnifying Party of either
a Claim Notice or an Indemnity Notice (as defined below) (the "Dispute Period")
whether the Indemnifying Party disputes its liability or the amount of its
liability to the Indemnified Party under Section 12.2 and whether the
Indemnifying Party desires, at its sole cost and expense, to defend the
Indemnified Party against such Third Party Claim.

          1.   If the Indemnifying Party notifies the Indemnified Party within
the Dispute Period that the Indemnifying Party desires to defend the Indemnified
Party with respect to the Third Party Claim pursuant to this Section 12.3(a),
then the Indemnifying Party will have the right to defend, with counsel
reasonably satisfactory to the Indemnified Party, at the sole cost and expense
of the Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings will be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party in the case of any settlement that provides for any relief
other than the payment of monetary damages or that provides for the payment of
monetary damages as to which the Indemnified Party will not be indemnified in
full pursuant to Section 12.2). The Indemnifying Party will have full control of
such defense and proceedings, including any compromise or settlement thereof;
provided, however, that the Indemnified Party may, at the sole cost and expense
of the Indemnified Party, at any time prior to the Indemnifying Party's delivery
of the notice referred to in the first sentence of this clause (i), file any
motion, answer or other pleadings or take any other action that the Indemnified
Party reasonably believes to be necessary or appropriate to protect its
interests; and provided further, that if requested by the Indemnifying Party,
the Indemnified Party will, at the sole cost and expense of the Indemnifying
Party, provide reasonable cooperation to the Indemnifying Party in contesting
any Third Party Claim that the Indemnifying Party elects to contest. The
Indemnified Party may participate in, but not control, any defense or settlement
of any Third Party Claim controlled by the Indemnifying Party pursuant to this
clause (i), and except as provided in the preceding sentence, the Indemnified
Party will bear its own costs and expenses with respect to such participation.
Notwithstanding the foregoing, the Indemnified Party may take over the control
of the defense or settlement of a Third Party Claim at any time if it
irrevocably waives its right to indemnity under Section 12.2 with respect to
such Third Party Claim.

          2.   If the Indemnifying Party fails to notify the Indemnified Party
within the Dispute Period that the Indemnifying Party desires to defend the
Third Party Claim pursuant to Section 12.3(a), or if the Indemnifying Party
gives such notice but fails to prosecute vigorously and diligently or settle the
Third Party Claim, or if the Indemnifying Party fails to give any notice
whatsoever within the Dispute Period, then the Indemnified Party will have the
right to defend, at the sole cost and expense of the Indemnifying Party, the
Third Party Claim by all appropriate proceedings, which proceedings will be
prosecuted by the Indemnified Party in a reasonable manner and in good faith or
will be settled at the discretion of the Indemnified Party (with the consent of
the Indemnifying Party, which consent will not be unreasonably withheld).  The
Indemnified Party will have full control of such defense and proceedings,
including any compromise or settlement thereof; provided, however, that if
requested by the Indemnified Party, the Indemnifying Party will, at the sole
cost and expense of the Indemnifying Party, provide reasonable cooperation to
the Indemnified Party and its counsel in contesting any Third Party Claim which
the Indemnified Party is contesting.  Notwithstanding the foregoing provisions
of this clause (2), if the Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party disputes its liability or
the amount of its liability hereunder to the Indemnified Party with respect to
such Third Party Claim and if such dispute is resolved in favor of the
Indemnifying Party

                                       23
<PAGE>

in the manner provided in clause (3) below, the Indemnifying Party will not be
required to bear the costs and expenses of the Indemnified Party's defense
pursuant to this clause (2) or of the Indemnifying Party's participation therein
at the Indemnified Party's request, and the Indemnified Party will reimburse the
Indemnifying Party in full for all reasonable costs and expenses incurred by the
Indemnifying Party in connection with such litigation. The Indemnifying Party
may participate in, but not control, any defense or settlement controlled by the
Indemnified Party pursuant to this clause (2), and the Indemnifying Party will
bear its own costs and expenses with respect to such participation.

          3.   If the Indemnifying Party notifies the Indemnified Party that it
does not dispute its liability or the amount of its liability to the Indemnified
Party with respect to the Third Party Claim under Section 12.2 or fails to
notify the Indemnified Party within the Dispute Period whether the Indemnifying
Party disputes its liability or the amount of its liability to the Indemnified
Party with respect to such Third Party Claim, the Loss in the amount specified
in the Claim Notice will be conclusively deemed a liability of the Indemnifying
Party under Section 12.2 and the Indemnifying Party shall pay the amount of such
Loss to the Indemnified Party on demand.  If the Indemnifying Party has timely
disputed its liability or the amount of its liability with respect to such
claim, the Indemnifying Party and the Indemnified Party will proceed in good
faith to negotiate a resolution of such dispute, and if not resolved through
negotiations within the Resolution Period, such dispute shall be resolved by
arbitration in accordance with paragraph (c) of this Section 12.3.

               (b) In the event any Indemnified Party should have a claim under
Section 12.2 against the Indemnifying Party that does not involve a Third Party
Claim, the Indemnified Party shall deliver a written notification of a claim for
indemnity under Section 12.2 specifying the nature of and basis for such claim,
together with the amount or, if not then reasonably ascertainable, the estimated
amount, determined in good faith, of such claim (an "Indemnity Notice") with
reasonable promptness to the Indemnifying Party.  The failure by any Indemnified
Party to give the Indemnity Notice shall not impair such party's rights
hereunder except to the extent that the Indemnifying Party demonstrates that it
has been irreparably prejudiced thereby.  If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim or the amount of the claim
described in such Indemnity Notice or fails to notify the Indemnified Party
within the Dispute Period whether the Indemnifying Party disputes the claim or
the amount of the claim described in such Indemnity Notice, the Loss in the
amount specified in the Indemnity Notice will be conclusively deemed a liability
of the Indemnifying Party under Section 12.2 and the Indemnifying Party shall
pay the amount of such Loss to the Indemnified Party on demand.  If the
Indemnifying Party has timely disputed its liability or the amount of its
liability with respect to such claim, the Indemnifying Party and the Indemnified
Party will proceed in good faith to negotiate a resolution of such dispute, and
if not resolved through negotiations within the Resolution Period, such dispute
shall be resolved by arbitration in accordance with paragraph (c) of this
Section 12.3.

                                 ARTICLE XIII

                                 MISCELLANEOUS

     Section 13.1  Fees and Expenses.   Each of the Company and the Investor
                   -----------------
agrees to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of the Investor's counsel in an amount not to exceed $15,000, of
which $7,500 shall be payable upon the execution of this Agreement and not less
than $2,500 per Closing.

     Section 13.2  Brokerage.   Each of the parties hereto represents that it
                   ---------
has had no dealings in connection with this transaction with any finder or
broker who will demand payment of any fee or commission from the other party
except as described on Schedule 13.2("Finder").  The Company agrees to pay to
the Finder a fee equal to two percent (2%) ("Finder's Fee") of the Investment
Amount received

                                       24
<PAGE>

by the Company as set forth on Schedule 13.2 hereto. Said sum shall be paid out
of the escrow account established for deposit of Investment Amounts. The Finder
shall also receive the Warrants in the aggregate amount set forth on Schedule
13.2 hereto. A form of Warrant is annexed hereto as Exhibit E. The Warrants
shall be issued upon the execution of this Agreement. The per share purchase
price of the Warrants is set forth on Schedule 13.2 hereto. The Finders are
granted the registration rights set forth in the Registration Rights Agreement
with respect to the Warrant Shares. The Company's obligations to the Finders is
binding even if the Registration Rights Agreement is not signed by the Finders.
A default by the Company of the Company's obligations to the Finders shall be
deemed a default under the Agreement and shall terminate the Investment
Obligation. The Investment Obligation shall terminate if the Finder does not
receive the Finder's Fee or Warrants on or before a Closing Date or if the
Warrants deliverable upon execution of this Agreement are not delivered within
five (5) days of the execution of this Agreement. The Company on the one hand,
and the Investor, on the other hand, agree to indemnify the other against and
hold the other harmless from any and all liabilities to any other persons
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.

     Section 13.3  Counterparts.  This Agreement may be executed in multiple
                   ------------
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.

     Section 13.4  Entire Agreement.   This Agreement, the Exhibits hereto and
                   ----------------
the Registration Rights Agreement set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof.  The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as if fully set forth herein.

     Section 13.5  Survival; Severability.   The representations, warranties,
                   ----------------------
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.

     Section 13.6  Title and Subtitles.   The titles and subtitles used in this
                   -------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

     Section 13.7  Reporting Entity for the Common Stock.  The reporting entity
                   -------------------------------------
relied upon for the determination of the VWAP, trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto.  The written mutual consent
of the Investor and the Company shall be required to employ any other reporting
entity.

                                       25
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Private Equity Line
of Credit Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.

                          ADVANCED AERODYNAMICS &
                          STRUCTURES, INC.

                          By: /s/ Carl L. Chen
                             ---------------------------------------------
                              Name: Carl L. Chen
                              Title: Chairman and Chief Executive Officer

                              /s/ illegible
                          ------------------------------------------------
                          Investor - AUSTINVEST ANSTALT BALZERS

                              /s/ illegible
                          ------------------------------------------------
                          Investor - ESQUIRE TRADE & FINANCE, INC.

                          ------------------------------------------------
                          Investor - BATTLECREAK INVESTMENTS LIMITED

                              /s/ First Island  BA
                          ------------------------------------------------
                          Investor - FERNBRIGG PARTNER, LTD.

                              /s/ illegible
                          ------------------------------------------------
                          Investor - TALBIYA B. INVESTMENTS LTD.

                              /s/ illegible
                          ------------------------------------------------
                          Investor - NESHER LTD.

                              /s/ illegible
                          ------------------------------------------------
                          Investor - KESHET L.P.

                              /s/ illegible
                          ------------------------------------------------
                          Investor - THE KESHET FUND, L.P.

                              /s/ illegible
                          ------------------------------------------------
                          Investor - THE ENDEAVOUR CAPITAL FUND, S.A.

                                       26
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Private Equity Line
of Credit Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.

                                   ADVANCED AERODYNAMICS &
                                   STRUCTURES, INC.

                                   By:  /s/ Carl L. Chen
                                      -------------------------------------
                                        Name: Carl L. Chen
                                        Title: Chairman and CEO

                                        /s/ illegible
                                   ----------------------------------------
                                   Investor - RHOSSILI INVESTMENTS LIMITED

                                       27
<PAGE>

                                  SCHEDULE A
                                  ----------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
INVESTOR                                                    PROPORTIONATE SHARE
--------------------------------------------------------------------------------------
<S>                                                         <C>
AUSTINVEST ANSTALT BALZERS                                  20%
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
Fax: 011-534-534100
--------------------------------------------------------------------------------------
ESQUIRE TRADE & FINANCE, INC.                               27%
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
Fax: 011-41-41-760-1031
--------------------------------------------------------------------------------------
RHOSSILI INVESTMENTS LIMITED                                15%
C/o Ultra Finanz Ltd.
Grossmuensterplatz 6, P.O. Box 4401
Zurich, CH-8022, Switzerland
Fax: 011-411-262-5515
--------------------------------------------------------------------------------------
FERNBRIGG PARTNER, LTD.                                     10%
P.O. Box Abbott Bldg
Main St.
Road Town, Tortola, B.V.I.
Fax: 011-972-2-625-9262
--------------------------------------------------------------------------------------
TALBIYA B. INVESTMENTS, LTD.                                4%
Ragnall House
18 Peel Road
Douglas, Isle of Man
IMI 4L2, United Kingdom
Fax: 011-44-1624-661594
--------------------------------------------------------------------------------------
NESHER LTD.                                                 3%
Ragnall House
18 Peel Road
Douglas, Isle of Man
IMI 4L2, United Kingdom
Fax: 011-44-1624-661594
--------------------------------------------------------------------------------------
KESHET L.P.                                                 6%
Ragnall House
18 Peel Road
Douglas, Isle of Man
IMI 4L2, United Kingdom
Fax: 011-44-1624-661594
--------------------------------------------------------------------------------------
THE  KESHET FUND, L.P.                                      5%
Ragnall House
18 Peel Road
Douglas, Isle of Man
IMI 4L2, United Kingdom
Fax: 011-44-1624-661594
--------------------------------------------------------------------------------------
THE ENDEAVOUR CAPITAL FUND, S.A.                            10%
The Maduro Building, P.O. Box 662
Wickhams, Cay, Road Town
Tortola, British Virgin Islands
Fax: 1-284-494-3917
--------------------------------------------------------------------------------------
TOTAL                                                       100%
--------------------------------------------------------------------------------------
</TABLE>

                                       28
<PAGE>

                                   EXHIBIT B

             FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
               WITHIN 5 TRADING DAYS FOLLOWING EFFECTIVE DATE OF
                            REGISTRATION STATEMENT

TO:

     We have acted as counsel to Advanced Aerodynamics & Structures, Inc., a
Delaware corporation (the "Company"), in connection with the Private Equity Line
of Credit Agreement between the Company and you, dated as of August 15, 2000
(the "Line of Credit Agreement"), pursuant to which the Company will issue to
you from time to time shares of Common Stock, no par value (the "Put Shares")
and the Registration Rights Agreement between you and the Company, dated August
15, 2000 (the "Registration Rights Agreement," and together with the Line of
Credit Agreement, the "Agreements").  This opinion is rendered to you pursuant
to Section 7.2(h) of the Line of Credit Agreement.  Capitalized terms used
without definition in this opinion have the meanings given to them in the Line
of Credit Agreement.

In connection with this opinion, we have assumed the authenticity of all
records, documents, and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all records, documents, and instruments submitted
to us as copies.  We have also assumed that there are no facts or circumstances
relating to you that might prevent you from enforcing any of the rights to which
our opinion relates.  We have based our opinion upon our review of the following
records, documents and instruments:

     (a) The Articles of Incorporation of the Company, as amended to date (the
"Articles"), certified by the Delaware Secretary of State as of ____________,
2000 and certified to us by an officer of the Company as being complete and in
full force and effect as of the date of this opinion;

     (b) The Bylaws of the Company certified to us by an officer of the Company
as being complete and in full force and effect as of the date of this opinion
(the "Bylaws");

     (c) Records certified to us by an officer of the Company as constituting
all records of proceedings and actions of the Board of Directors and the
shareholders of the Company relating to the transactions contemplated by the
Agreement;

     (d)  The Agreements;

     (e) A certificate related to the good standing of the Company issued by the
Secretary of State of the State of Delaware dated __________, 2000;

     (f) A Certificate of the Chief Executive Officer of the Company as to
certain factual matters (the "Officer's Certificate");

     (g)  The SEC Documents.

     With your consent, we have based our opinion expressed in paragraph 1 below
as to the good standing of the Company solely upon the documents enumerated in
(e) and (f) above.

                                       29
<PAGE>

     Where our opinion relates to our "knowledge," such knowledge is based upon
our examination of the records, documents, instruments, and certificates
enumerated or described above and the actual knowledge of attorneys in this firm
who are currently involved in substantive legal representation of the Company on
matters related to the Agreements. With your consent, we have not examined any
records of any court, administrative tribunal or other similar entity in
connection with our opinion expressed in paragraph 2 of Part III below. We have
assumed for purposes of our opinion to the effect that the Put Shares are fully
paid and nonassessable that the consideration for such Put Shares will be
received by the Company in accordance with the Line of Credit Agreement.

     We express no opinion as to any anti-fraud provisions of applicable federal
or state securities laws, any tax, anti-trust, land use, export, safety,
environmental or hazardous materials laws, rules or regulations.

     This opinion is limited to the federal laws of the United States of America
and the laws of the States of Delaware and New York.  We disclaim any opinion as
to the laws of any other jurisdiction and we further disclaim any opinion as to
any statute, rule, regulation, ordinance, order or other promulgation of any
regional or local governmental body.

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

     1.   The Company has been duly incorporated and is validly existing and in
good standing under the laws of the State of Delaware and has all requisite
power and authority to carry on its business and to own, lease and operate its
properties and assets as described in the SEC Documents.  To our knowledge the
Company does not have any subsidiaries other than as set forth in the SEC
Documents.

     2.   To our knowledge, except as described in the SEC Documents, there are
no claims, actions, suits, proceedings or investigations that are pending
against the Company or its properties, or to our knowledge, any officer or
director of the Company in his or her capacity as such, nor to our knowledge has
the Company received any written threat of any such claims, actions, suits,
proceedings or investigations.

     3.   To our knowledge, except as described in the Company's representations
and warranties contained in Article IV of the Line of Credit Agreement, there
are no outstanding options, warrants, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understanding, or arrangements by which
the Company is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common Stock.

     4.   Subject to the accuracy of your representations in Article III of the
Line of Credit Agreement on the date hereof and on the date of issuance of any
Put Shares and Warrant Shares and the statement in the Officer's Certificate
that the Company has not offered or sold, and will not offer or sell, any Put
Shares by means of advertising or public solicitation, the issuance of the Put
Shares and Warrant Shares in conformity with the terms of the Line of Credit
Agreement constitutes transactions exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended.  The Put Shares and Warrant
Shares when issued in compliance with the Line of Credit Agreement, will be duly
authorized, validly issued, fully paid, and non-assessable and free of
preemptive rights set forth in the Articles, Bylaws and any agreement filed as
an exhibit to the SEC Documents, provided, however, that the Put

                                       30
<PAGE>

Shares and Warrant Shares may be subject to restrictions on transfer under state
and federal securities laws, but only to the extent set forth in the Line of
Credit Agreement.

     5.   The Company has the requisite corporate power and authority to enter
into and perform its obligations under the Agreements and to issue the Put
Shares.

     Each of the Agreements has been duly authorized, executed and delivered by
the Company and the consummation by it of the transactions contemplated thereby
has been duly authorized by all necessary corporate action and no further
consent or authorization of the Company's board of directors or shareholders is
required. Each of the Agreements has been duly executed and delivered on the
part of the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject, as to
enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other laws of general applicability relating to or affecting
creditors' rights, (ii) to general principles of equity, whether such
enforcement is considered in a proceeding in equity or at law, and (iii) to
limitations imposed by applicable law or public policy on the enforceability of
the indemnification provisions contained in the Agreements.

     6.   The execution, delivery and performance of and compliance with the
respective terms of each of the Agreements, and issuance of the Put Shares and
Warrant Shares in accordance with the Line of Credit Agreement, will not violate
any provision of the Articles or Bylaws or any law applicable to the Company.

     In connection with the registration of the Put Shares and Warrant Shares,
we advised the Company as to the requirements of the Securities Act and the
applicable Rules and Regulations and rendered other legal advice and assistance
in the course of preparation of the Registration Statement and Prospectus,
including review and discussion of the contents thereof.  On the basis of the
information that was developed in the course of the performance of such services
considered in the light of our understanding of the Securities Act, including
the requirements of Form S-__, we have no reason to believe that (i) the
Registration Statement (other than the financial statements and related
statements and schedules, as to which we express no belief) as of its Effective
Date contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) the Prospectus (other than the
financial statements and related statements and schedules, as to which we
express no belief) as of the Effective Date of the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  The limitations inherent in the independent verification of
factual matters and the character of determinations involved in the registration
process are such, however, that except as set forth in this opinion letter we do
not assume any responsibility for the accuracy,  completeness or fairness of the
statements contained in the Registration Statement or the Prospectus.

     Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:

     A.   The effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting the relief of debtors or the rights
and remedies of creditors generally, including without limitation the effect of
statutory or other law regarding fraudulent conveyances and preferential
transfers.

     B.   Limitations imposed by state law, federal law or general equitable
principles upon the specific enforceability of any of the remedies, covenants or
other provisions of any applicable agreement

                                       31
<PAGE>

and upon the availability of injunctive relief or other equitable remedies,
regardless of whether enforcement of any such agreement is considered in a
proceeding in equity or at law.

     C.   This opinion letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, including the
General Qualifications and the Equitable Principles Limitation, and this opinion
letter should be read in conjunction therewith.

     This opinion is rendered as of the date first written above, is solely for
your benefit in connection with the Agreement and may not be relief upon or used
by, circulated, quoted, or referred to nor may any copies hereof by delivered to
any other person without our prior written consent.  We disclaim any obligation
to update this opinion letter or to advise you of facts, circumstances, events
or developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinions expressed herein.

                                        Very truly yours,

                                       32
<PAGE>

                                   EXHIBIT C

                            COMPLIANCE CERTIFICATE
                    ADVANCED AERODYNAMICS & STRUCTURES, INC.

     The undersigned, _______________, hereby certifies, with respect to shares
of common stock of the Advanced Aerodynamics & Structures, Inc. (the "Company")
issuable in connection with the Optional Purchase Notice, dated  (the "Notice"),
delivered pursuant to Article II of the Private Equity Line of Credit Agreement,
dated August 15, 2000, by and among the Company and certain Investors (the
"Agreement"), as follows:

     1.   The undersigned is the duly elected Chairman and Chief Executive
Officer of the Company.

     2.   The representations and warranties of the Company set forth in Article
IV of the Agreement are true and correct in all material respects as though made
on and as of the date hereof.

     3.   The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in Article VI and Article VII of the
Agreement.

     The undersigned has executed this Certificate this ____ day of ________,
2000.

                                   ADVANCED AERODYNAMICS &
                                   STRUCTURES, INC.

                                   By:_____________________________________
                                        Name:
                                        Chairman and Chief Executive Officer

                                       33
<PAGE>

                                   EXHIBIT D

                        INSTRUCTIONS TO TRANSFER AGENT
                   ADVANCED AERODYNAMICS & STRUCTURES, INC.

Name, address and phone and fax number of Transfer Agent

Dear Sirs:

     Reference is made to the Private Equity Line of Credit Agreement (the
"Agreement"), dated as of August 15, 2000 among certain Investors (the
"Investor") and Advanced Aerodynamics & Structures, Inc. (the "Company").
Pursuant to the Agreement, subject to the terms and conditions set forth in the
Agreement the Investor has agreed to purchase from the Company and the Company
has agreed to sell to the Investor from time to time during the term of the
Agreement shares of Common Stock of the Company, $.001 par value (the "Common
Stock").  As a condition to the effectiveness of the Agreement, the Company has
agreed to issue to you, as the transfer agent for the Common Stock (the
"Transfer Agent"), these instructions relating to the Common Stock to be issued
to the Investor (or a permitted assignee) pursuant to the Agreement. All terms
used herein and not otherwise defined shall have the meaning set forth in the
Agreement.

     1.   ISSUANCE  OF COMMON STOCK WITHOUT THE LEGEND

Pursuant to the Agreement, the Company is required to prepare and file with the
Commission, and maintain the effectiveness of, a registration statement or
registration statements registering the resale of the Common Stock to be
acquired by the Investor under the Agreement. The Company will advise the
Transfer Agent in writing of the effectiveness of any such registration
statement promptly upon its being declared effective. The Transfer Agent shall
be entitled to rely on such advice and shall assume that the effectiveness of
such registration statement remains in effect unless the Transfer Agent is
otherwise advised in writing by the Company and shall not be required to
independently confirm the continued effectiveness of such registration
statement. In the circumstances set forth in the following two paragraphs, the
Transfer Agent shall deliver to the Investor certificates representing Common
Stock not bearing the Legend without requiring further advice or instruction or
additional documentation from the Company or its counsel or the Investor or its
counsel or any other party (other than as described in such paragraphs).

     At any time after the effective date of the applicable registration
statement (provided that the Company has not informed the Transfer Agent in
writing that such registration statement is not effective) upon any surrender of
one or more certificates evidencing Common Stock which bear the Legend, to the
extent accompanied by  a notice requesting the issuance of new certificates free
of the Legend to replace those surrendered, the Transfer Agent shall deliver to
the Investor the certificates representing the Common Stock not bearing the
Legend, in such names and denominations as the Investor shall request, provided
that:

     (a) in connection with such event, the Investor (or its permitted assignee)
shall confirm in writing to the Transfer Agent that (i) the Investor confirms to
the transfer agent that it has sold, pledged or otherwise transferred or agreed
to sell, pledge or otherwise transfer such Common Stock in a bona fide
transaction to a designated transferee that is not an affiliate of the Company;
and (ii) the Investor confirms to the transfer agent that the Investor has
complied with the prospectus delivery requirement;

                                       34
<PAGE>

     (b) the Investor (or its permitted assignee) shall represent that it is
permitted to dispose thereof with limitation as to amount of manner of sale
pursuant to Rule 144(k) under the Securities Act; or

     (c) the Investor, its permitted assignee, or either of their brokers
confirms to the transfer agent that (i) the Investor has held the shares of
Common Stock for at least one year, (ii) counting the shares surrendered as
being sold upon the date the unlegended Certificates would be delivered to the
Investor (or the Trading Day immediately following if such date is not a Trading
Day), the Investor will not have sold more than the greater of (a) one percent
(1%) of the total number of outstanding shares of Common Stock or (b) the
average weekly trading volume of the Common Stock for the preceding four weeks
during the three months ending upon such delivery date (or the Trading Day
immediately  following if such date is not a Trading Day), and (iii) the
Investor has complied with the manner of sale and notice requirements of Rule
144 under the Securities Act.

     Any advice, notice or instructions to the Transfer Agent required or
permitted to be given hereunder may be transmitted via facsimile to the Transfer
Agent's facsimile number of ()--.

     2.   MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK

          In connection with any Closing pursuant to which the Investor acquires
Common Stock under the Agreement, the Transfer Agent shall deliver certificates
representing Common Stock (with or without the Legend, as appropriate) as
promptly as practicable, but in no event later than three business days, after
such Closing.

     3.   FEES OF TRANSFER AGENT; INDEMNIFICATION

          The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these Irrevocable Instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.

     4.   THIRD PARTY BENEFICIARY

          The Company and the Transfer Agent acknowledge and agree that the
Investor is an express third party beneficiary of these Irrevocable Instructions
and shall be entitled to rely upon, and enforce, the provisions hereof.

                                       ADVANCED AERODYNAMICS &
                                       STRUCTURES, INC.

                                       By:_________________________________
                                            Name:
                                            Chairman and Chief Executive Officer
AGREED:
NAME OF TRANSFER AGENT

                                       35
<PAGE>

                                 SCHEDULE 13.2
                                 -------------

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FINDERS                                    CASH FINDERS FEE (1)          WARRANTS ISSUABLE
                                                                         UPON SIGNING OF
                                                                         PRIVATE EQUITY LINE OF
                                                                         CREDIT AGREEMENT (2)
---------------------------------------------------------------------------------------------------
<S>                                <C>                                   <C>
Libra Finance,S.A.                         $164,000.00 (41%)             125,000
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
---------------------------------------------------------------------------------------------------
Talbiya B. Investments Ltd.                        -0-                   125,000
Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
---------------------------------------------------------------------------------------------------
Alon Enterprises Ltd.                      $236,000.00 (59%)                 -0-
Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
---------------------------------------------------------------------------------------------------
TOTALS                                     $   400,000                   250,000
---------------------------------------------------------------------------------------------------
</TABLE>

(1)  Total finder's fee represents 2% of the Commitment Amount.

(2)  The per common share purchase price shall be $3.15.

                                       36

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