1086467--3/13/2009--DRUGSTORE_COM

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{product, market, service}

{system, service, information}

{acquisition, growth, future}

{product, liability, claim}

{operation, natural, condition}

{customer, product, revenue}

{cost, regulation, environmental}

{operation, international, foreign}

{cost, operation, labor}

{regulation, government, change}

{condition, economic, financial}

{cost, contract, operation}

{stock, price, share}

{property, intellectual, protect}

{provision, law, control}

{stock, price, operating}

{control, financial, internal}

{regulation, change, law}

{tax, income, asset}

We have a history of generating significant losses, and may not be able to sustain profitability. Our revenue growth and profitability depends on the continued growth of demand for the products we offer. If the recent global economic crisis has a disproportionate impact on our business or that of our significant partners and suppliers, our business and results of operations would be harmed. We may be unable to obtain the additional capital we need in the future to support our growth. Our stock price is likely to continue to fluctuate, which could result in substantial losses for stockholders. Our common stock could be delisted from the NASDAQ Global Market if our stock price continues to trade below $1.00 per share. We face significant competition from both traditional and online retailers. Our relationship with Rite Aid involves many risks and restricts our ability to promote, contract with, or operate traditional retail stores. We are expanding into international markets, causing our business to be increasingly susceptible to international business risks and challenges that could affect our profitability. If our marketing efforts are not effective at attracting and retaining customers at an acceptable cost, we will be unable to achieve consistent profitability. Our network and communications systems are vulnerable to system interruption and damage, which could harm our operations and reputation. All of our fulfillment operations and inventory are located in our distribution facilities, and any significant disruption of these centers operations would hurt our ability to make timely delivery of our products. If we are unable to optimize management of our distribution centers, we may be unable to meet customer demand. We need to manage changing and expanding operations. The seasonality of our business places increased strain on our operations. We are dependent on a limited number of fulfillment and distribution partners. If we are unable to obtain shipments of product from our vendors and deliver merchandise to our customers in a timely and cost-effective manner, our business and results of operations would be harmed. We have significant inventory risk. Our vendor relationships subject us to a number of risks. Any errors in filling or packaging the prescription drugs or contact lenses we dispense may expose us to liability and negative publicity. Security breaches could damage our reputation, expose us to liability, or otherwise harm our business. If we fail to maintain or enhance our strategic relationships to help promote our website and expand our product offerings, our development could be hindered. We may be unable to increase the migration of consumers of health, beauty, vision, and pharmacy products from brick-and-mortar stores to our online solution, which would harm our revenues and prevent us from becoming profitable. Expanding the breadth and depth of our product and service offerings is expensive and difficult, and we may receive no benefit from our expansion. We face uncertainty related to pharmaceutical costs and pricing, which could affect our revenues and profitability. If we are unable to obtain insurance reimbursement coverage for our customers, our ability to sell pharmacy products online could decrease, which would harm our revenues. Our future growth strategy may depend in part on our ability to acquire complementary or strategic businesses. Any such acquisitions could result in dilution, operating difficulties, difficulties in integrating acquired businesses, and other harmful consequences. Our business could suffer if we are unsuccessful in integrating and maintaining strategic partnerships. Governmental regulation of our business could require significant expenditures, and failure to comply with regulations could result in civil and criminal penalties. Increasing concern about privacy, spam, and the use and security of customer information could restrict our marketing efforts and harm our business. Restrictions imposed by, and costs of complying with, governmental regulation of the Internet and data transmission over the Internet could harm our business. We may be unable to protect our intellectual property, and we may be found to infringe proprietary rights of others, which could harm our business, brand, and reputation. If people or property are harmed by the products we sell, product liability claims could damage our business and reputation. If we do not respond to rapid technological changes, our services could become obsolete and our business would be seriously harmed. We are subject to a number of risks related to payments we accept. If we are required to collect sales and use taxes on the products we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales may decrease. Certain stockholders own a significant amount of our common stock, which could discourage an acquisition of drugstore.com or make removal of incumbent management more difficult.

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1086467--3/13/2009--DRUGSTORE_COM_INC