Exhibit
      10.8

     

    PROMISSORY
      NOTE

    


    
      	$2,500,000.00 	
              January
                24,
                2007

            


    

    


    Smart
      Online, Inc. 

    2530
      Meridian Parkway, 2nd Floor 

    Durham,
      North Carolina 27713 

    (Hereinafter
      referred to as “Borrower”)

    


    Wachovia
      Bank, National Association 

    Charlotte,
      North Carolina 28202 

    (Hereinafter
      referred to as “Bank”)

    


    


    Borrower
      promises to pay to the order of Bank, in lawful money of the United States
      of
      America, at its office indicated above or wherever else Bank may specify, the
      sum of Two Million, Five Hundred Thousand and No/100 Dollars ($2,500,000.00)
      or
      such sum as may be advanced and outstanding from time to time, with interest
      on
      the unpaid principal balance at the rate and on the terms provided in this
      Promissory Note (including all renewals, extensions or modifications hereof,
      this “Note”).

    


    RENEWAL/MODIFICATION.
      This
      Promissory Note renews, extends and/or modifies that certain Promissory Note
      dated November 14, 2006 (the “Original Promissory Note”), evidencing an original
      principal amount of $1,300,000.00. This Promissory Note is not a
      novation.

    


    LOAN
      AGREEMENT.
      This
      Note is subject to the provisions of that certain Loan Agreement between Bank
      and Borrower dated November 14, 2006, as modified from time to
      time.

    


    USE
      OF PROCEEDS.
      Borrower shall use the proceeds of the loan(s) evidenced by this Note for the
      commercial purposes of Borrower, as follows: for working capital needs of
      Borrower.

    


    SECURITY.
      Borrower has granted Bank a security interest in the collateral described in
      the
      Loan Documents, including, but not limited to, personal property collateral
      described in that certain Security Agreement of even date herewith.

    


    INTEREST
      RATE.
      Interest shall accrue on the unpaid principal balance of this Note from the
      date
      hereof at the LIBOR Market Index Rate plus 0.9%, as that rate may change from
      day to day in accordance with changes in the LIBOR Market Index Rate (“Interest
      Rate”). “LIBOR Market Index Rate”, for any day, means the rate for 1 month U.S.
      dollar deposits as reported on Telerate page 3750 as of 11:00 a.m., London
      time,
      on such day, or if such day is not a London business day, then the immediately
      preceding London business day (or if not so reported, then as determined by
      Bank
      from another recognized source or interbank quotation).

    


    DEFAULT
      RATE.
      In
      addition to all other rights contained in this Note, if a default in the payment
      of Obligations occurs, all outstanding Obligations, other than Obligations
      under
      any swap agreements (as defined in 11 U.S.C. § 101, as in effect from time to
      time) between Borrower and Bank or its affiliates, shall bear interest at the
      Interest Rate plus 3% (“Default Rate”), except if the Note is governed by the
      laws of the State of North Carolina and the original principal amount is less
      than or equal to $300,000.00. The Default Rate shall also apply from demand
      until the Obligations or any judgment thereon is paid in full.

    


    INTEREST
      AND FEE(S) COMPUTATION (ACTUAL/360).
      Interest and fees, if any, shall be computed on the basis of a 360-day year
      for
      the actual number of days in the applicable period (“Actual/360 Computation”).
      The Actual/360 Computation determines the annual effective interest yield by
      taking the stated (nominal) rate for a year’s period and then dividing said rate
      by 360 to determine the daily periodic rate to be applied for each day in the
      applicable period. Application of the Actual/360 Computation produces an
      annualized effective rate exceeding the nominal rate.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    REPAYMENT
      TERMS.
      This
      Note shall be due and payable in consecutive monthly payments of accrued
      interest only, commencing on February 1, 2007, and continuing on the same day
      of
      each month thereafter until fully paid. In any event, this Note shall be due
      and
      payable in full, including all principal and accrued interest, on demand or
      in
      no event later than August 1, 2008. 

    


    LINE
      OF CREDIT.
      Borrower may borrow, repay and reborrow, and, upon the request of Borrower,
      Bank
      shall advance and readvance under this Note from time to time (each an “Advance”
and together the “Advances”), so long as the total principal balance outstanding
      under this Note at any one time does not exceed the principal amount stated
      on
      the face of this Note minus the sum of (i) the amount available to be drawn
      under all letters of credit issued by Bank for the account of Borrower plus
      (ii)
      the amount of unreimbursed drawings under all letters of credit issued by Bank
      for the account of Borrower, subject to the limitations described in any loan
      agreement to which this Note is subject. Bank’s obligation to make Advances
      under this Note shall terminate if a demand for payment is made under this
      Note
      or if a Default (as defined in the other Loan Documents) under any Loan Document
      occurs or in any event, on August 1, 2008, hereof unless renewed or extended
      by
      Bank in writing upon such terms then satisfactory to Bank. As of the date of
      each proposed Advance, Borrower shall be deemed to represent that each
      representation made in the Loan Documents is true as of such date.

    


    If
      Borrower subscribes to Bank’s cash management services and such services are
      applicable to this line of credit, the terms of such service shall control
      the
      manner in which funds are transferred between the applicable demand deposit
      account and the line of credit for credit or debit to the line of
      credit.

    


    APPLICATION
      OF PAYMENTS.
      Monies
      received by Bank from any source for application toward payment of the
      Obligations shall be applied to accrued interest and then to principal. Upon
      the
      occurrence of a default in the payment of the Obligations or a Default (as
      defined in the other Loan Documents) under any other Loan Document, monies
      may
      be applied to the Obligations in any manner or order deemed appropriate by
      Bank.

    


    If
      any
      payment received by Bank under this Note or other Loan Documents is rescinded,
      avoided or for any reason returned by Bank because of any adverse claim or
      threatened action, the returned payment shall remain payable as an obligation
      of
      all persons liable under this Note or other Loan Documents as though such
      payment had not been made.

    


    DEFINITIONS.
      Loan
      Documents.
      The
      term “Loan Documents”, as used in this Note and the other Loan Documents, refers
      to all documents executed in connection with or related to the loan evidenced
      by
      this Note and any prior notes which evidence all or any portion of the loan
      evidenced by this Note, and any letters of credit issued pursuant to any loan
      agreement to which this Note is subject, any applications for such letters
      of
      credit and any other documents executed in connection therewith or related
      thereto, and may include, without limitation, a commitment letter that survives
      closing, a loan agreement, this Note, guaranty agreements, security agreements,
      security instruments, financing statements, mortgage instruments, any renewals
      or modifications, whenever any of the foregoing are executed, but does not
      include swap agreements (as defined in 11 U.S.C. § 101, as in effect from time
      to time). Obligations.
      The
      term “Obligations”, as used in this Note and the other Loan Documents, refers to
      any and all indebtedness and other obligations under this Note, all other
      obligations under any other Loan Document(s), and all obligations under any
      swap
      agreements (as defined in 11 U.S.C. § 101, as in effect from time to time)
      between Borrower and Bank, or its affiliates, whenever executed. Certain
      Other Terms.
      All
      terms that are used but not otherwise defined in any of the Loan Documents
      shall
      have the definitions provided in the Uniform Commercial Code.

    


    LATE
      CHARGE.
      If any
      payments are not timely made, Borrower shall also pay to Bank a late charge
      equal to 4% of each payment past due for 15 or more days. This late charge
      shall
      not apply to payments due at maturity or by acceleration hereof, unless such
      late payment is in an amount not greater than the highest periodic payment
      due
      hereunder.

    


    Acceptance
      by Bank of any late payment without an accompanying late charge shall not be
      deemed a waiver of Bank’s right to collect such late charge or to collect a late
      charge for any subsequent late payment received.

     

    
      
        
        

      

      
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    ATTORNEYS’
      FEES AMD OTHER COLLECTION COSTS.
      Borrower shall pay all of Bank’s reasonable expenses actually incurred to
      enforce or collect any of the Obligations including, without limitation,
      reasonable arbitration, paralegals’, attorneys’ and experts’ fees and expenses,
      whether incurred without the commencement of a suit, in any trial, arbitration,
      or administrative proceeding, or in any appellate or bankruptcy
      proceeding.

    


    USURY.
      If at
      any time the effective interest rate under this Note would, but for this
      paragraph, exceed the maximum lawful rate, the effective interest rate under
      this Note shall be the maximum lawful rate, and any amount received by Bank
      in
      excess of such rate shall be applied to principal and then to fees and expenses,
      or, if no such amounts are owing, returned to Borrower.

    


    DEMAND
      NOTE.
      This is
      a demand Note and all Obligations hereunder shall become immediately due and
      payable upon demand. In addition, the Obligations hereunder shall automatically
      become immediately due and payable if Borrower or any guarantor or endorser
      of
      this Note commences or has commenced against it a bankruptcy or insolvency
      proceeding.

    


    REMEDIES.
      Upon
      the occurrence of a default in the payment of the Obligations or a Default
      (as
      defined in the other Loan Documents) under any other Loan Document, Bank may
      at
      any time thereafter, take the following actions: Bank
      Lien.
      Foreclose its security interest or lien against Borrower’s deposit accounts and
      investment property without notice. Cumulative.
      Exercise any rights and remedies as provided under the Note and the other Loan
      Documents, or as provided by law or equity.

    


    FINANCIAL
      AND OTHER INFORMATION.
      Borrower shall deliver to Bank such information as Bank may reasonably request
      from time to time, including without limitation, financial statements and
      information pertaining to Borrower’s financial condition. Such information shall
      be true, complete, and accurate.

    


    WAIVERS
      AND AMENDMENTS.
      No
      waivers, amendments or modifications of this Note and other Loan Documents
      shall
      be valid unless in writing and signed by an officer of Bank. No waiver by Bank
      of any Default (as defined in the other Loan Documents) shall operate as a
      waiver of any other Default or the same Default on a future occasion. Neither
      the failure nor any delay on the part of Bank in exercising any right, power,
      or
      remedy under this Note and other Loan Documents shall operate as a waiver
      thereof, nor shall a single or partial exercise thereof preclude any other
      or
      further exercise thereof or the exercise of any other right, power or
      remedy.

    


    Except
      to
      the extent otherwise provided by the Loan Documents or prohibited by law, each
      Borrower and each other person liable under this Note waives presentment,
      protest, notice of dishonor, notice of intention to accelerate maturity, notice
      of acceleration of maturity, notice of sale and all other notices of any kind.
      Further, each agrees that Bank may (i) extend, modify or renew this Note or
      make
      a novation of the loan evidenced by this Note, and/or (ii) grant releases,
      compromises or indulgences with respect to any collateral securing this Note,
      or
      with respect to any Borrower or other person liable under this Note or any
      other
      Loan Documents, all without notice to or consent of each Borrower and other
      such
      person, and without affecting the liability of each Borrower and other such
      person; provided, Bank may not extend, modify or renew this Note or make a
      novation of the loan evidenced by this Note without the consent of the Borrower,
      or if there is more than one Borrower, without the consent of at least one
      Borrower; and further provided, if there is more than one Borrower, Bank may
      not
      enter into a modification of this Note which increases the burdens of a Borrower
      without the consent of that Borrower.

     

    
      
        
        

      

      
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    MISCELLANEOUS
      PROVISIONS.
      Assignment.
      This
      Note and the other Loan Documents shall inure to the benefit of and be binding
      upon the parties and their respective heirs, legal representatives, successors
      and assigns. Bank’s interests in and rights under this Note and the other Loan
      Documents are freely assignable, in whole or in part, by Bank. In addition,
      nothing in this Note or any of the other Loan Documents shall prohibit Bank
      from
      pledging or assigning this Note or any of the other Loan Documents or any
      interest therein to any Federal Reserve Bank. Borrower shall not assign its
      rights and interest hereunder without the prior written consent of Bank, and
      any
      attempt by Borrower to assign without Bank’s prior written consent is null and
      void. Any assignment shall not release Borrower from the Obligations.
Applicable
      Law; Conflict Between Documents.
      This
      Note and, unless otherwise provided in any other Loan Document, the other Loan
      Documents shall be governed by and interpreted under the laws of the state
      named
      in Bank’s address on the first page hereof without regard to that state’s
      conflict of laws principles. If the terms of this Note should conflict with
      the
      terms of any loan agreement or any commitment letter that survives closing,
      the
      terms of this Note shall control. Borrower’s
      Accounts.
      Except
      as prohibited by law, Borrower grants Bank a security interest in all of
      Borrower’s deposit accounts and investment property with Bank and any of its
      affiliates. Swap
      Agreements.
      All
      swap agreements (as defined in 11 U.S.C. § 101, as in effect from time to time),
      if any, between Borrower and Bank or its affiliates are independent agreements
      governed by the written provisions of said swap agreements, which will remain
      in
      full force and effect, unaffected by any repayment, prepayment, acceleration,
      reduction, increase or change in the terms of this Note, except as otherwise
      expressly provided in said written swap agreements, and any payoff statement
      from Bank relating to this Note shall not apply to said swap agreements except
      as otherwise expressly provided in such payoff statement. Jurisdiction.
      Borrower irrevocably agrees to non-exclusive personal jurisdiction in the state
      identified as the Jurisdiction above. Severability.
      If any
      provision of this Note or of the other Loan Documents shall be prohibited or
      invalid under applicable law, such provision shall be ineffective but only
      to
      the extent of such prohibition or invalidity, without invalidating the remainder
      of such provision or the remaining provisions of this Note or other such
      document. Notices.
      Any
      notices to Borrower shall be sufficiently given, if in writing and mailed or
      delivered to the Borrower’s address shown above or such other address as
      provided hereunder, and to Bank, if in writing and mailed or delivered to
      Wachovia Bank, National Association, Mail Code VA7628, P. 0. Box 13327, Roanoke,
      VA 24040 or Wachovia Bank, National Association, Mail Code VA7628, 10 South
      Jefferson Street, Roanoke, VA 24011 or such other address as Bank may specify
      in
      writing from time to time. Notices to Bank must include the mail code. In the
      event that Borrower changes Borrower’s address at any time prior to the date the
      Obligations are paid in full, Borrower agrees to promptly give written notice
      of
      said change of address by registered or certified mail, return receipt
      requested, all charges prepaid. Plural;
      Captions.
      All
      references in the Loan Documents to Borrower, guarantor, person, document or
      other nouns of reference mean both the singular and plural form, as the case
      may
      be, and the term “person” shall mean any individual, person or entity. The
      captions contained in the Loan Documents are inserted for convenience only
      and
      shall not affect the meaning or interpretation of the Loan Documents.
Advances.
      Bank
      may, in its sole discretion, make other advances which shall be deemed to be
      advances under this Note, even though the stated principal amount of this Note
      may be exceeded as a result thereof. Posting
      of Payments.
      All
      payments received during normal banking hours after 2:00 p.m. local time at
      the
      office of Bank first shown above shall be deemed received at the opening of
      the
      next banking day. Joint
      and Several Obligations.
      If
      there is more than one Borrower, each is jointly and severally obligated
      together with all other parties obligated for the Obligations. Fees
      and Taxes.
      Borrower shall promptly pay all documentary, intangible recordation and/or
      similar taxes on this transaction whether assessed at closing or arising from
      time to time. LIMITATION
      ON LIABILITY; WAIVER OF PUNITIVE DAMAGES.
      EACH OF
      THE PARTIES HERETO INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY
      JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY
      BETWEEN OR AMONG THEM THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED WITH
      THIS
      AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN OR
      AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT
      SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT,
      SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES. EACH
      OF
      THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY
      DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY
      SUCH PROCEEDING, CLAIM OR CONTROVERSY, WHETHER THE SAME IS RESOLVED BY
      ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE. Patriot
      Act Notice.
      To help
      fight the funding of terrorism and money laundering activities, Federal law
      requires all financial institutions to obtain, verify, and record information
      that identifies each person who opens an account. For purposes of this section,
      account shall be understood to include loan accounts. Final
      Agreement.
      This
      Note and the other Loan Documents represent the final agreement between the
      parties and may not be contradicted by evidence of prior, contemporaneous or
      subsequent oral agreements of the parties. There are no unwritten oral
      agreements between the parties.

     

    
      
        
        

      

      
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    ARBITRATION.
      Upon
      demand of any party hereto, whether made before or after institution of any
      judicial proceeding, any claim or controversy arising out of or relating to
      the
      Loan Documents between parties hereto (a “Dispute”) shall be resolved by binding
      arbitration conducted under and governed by the Commercial Financial Disputes
      Arbitration Rules (the “Arbitration Rules”) of the American Arbitration
      Association (the “AAA”) and the Federal Arbitration Act. Disputes may include,
      without limitation, tort claims, counterclaims, a dispute as to whether a matter
      is subject to arbitration, or claims arising from documents executed in the
      future, but shall specifically exclude claims brought as or converted to class
      actions. A judgment upon the award may be entered in any court having
      jurisdiction. Notwithstanding the foregoing, this arbitration provision does
      not
      apply to disputes under or related to swap agreements. Special
      Rules.
      All
      arbitration hearings shall be conducted in the city named in the address of
      Bank
      first stated above. A hearing shall begin within 90 days of demand for
      arbitration and all hearings shall conclude within 120 days of demand for
      arbitration. These time limitations may not be extended unless a party shows
      cause for extension and then for no more than a total of 60 days. The expedited
      procedures sat forth in Rule 51 et
      seq.
      of the
      Arbitration Rules shall be applicable to claims of less than $1,000,000.00.
      Arbitrators shall be licensed attorneys selected from the Commercial Financial
      Dispute Arbitration Panel of the AAA. The parties do not waive applicable
      Federal or state substantive law except as provided herein. Preservation
      and Limitation of Remedies.
      Notwithstanding the preceding binding arbitration provisions, the parties agree
      to preserve, without diminution, certain remedies that any party may exercise
      before or after an arbitration proceeding is brought. The parties shall have
      the
      right to proceed in any court of proper jurisdiction or by self-help to exercise
      or prosecute the following remedies, as applicable: (i) all rights to foreclose
      against any real or personal property or other security by exercising a power
      of
      sale or under applicable law by judicial foreclosure including a proceeding
      to
      confirm the sale; (ii) all rights of self-help including peaceful occupation
      of
      real property and collection of rents, set-off, and peaceful possession of
      personal property; (iii) obtaining provisional or ancillary remedies including
      injunctive relief, sequestration, garnishment, attachment, appointment of
      receiver and filing an involuntary bankruptcy proceeding; and (iv) when
      applicable, a judgment by confession of judgment. Any claim or controversy
      with
      regard to any party’s entitlement to such remedies is a Dispute. Waiver
      of Jury Trial.
      THE
      PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
      IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A
      DISPUTE AS TO WHICH BINDING ARBITRATION HAS BEEN DEMANDED.

    


    IN
      WITNESS WHEREOF,
      Borrower, on the day and year first above written, has caused this Note to
      be
      duly executed under seal.

     

    
      	 	 	 	 
	 	Smart
              Online,
              Inc.	 
	 
 	 
 	 
 	 
	 	By:  	/s/
              Nicholas A.
              Sinigaglia	(SEAL) 
	 	
              
Nicholas
              A. Sinigaglia, Chief Financial Officer	 


    

     

    Tracking#:
      201318

    CAT-Deal
      #794013 Facility ID 588018

     

    
      
        
        

      

      
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    MODIFICATION
      NUMBER ONE

    TO
      LOAN AGREEMENT

    


    Smart
      Online, Inc. 

    2530
      Meridian Parkway, 2nd Floor 

    Durham,
      North Carolina 27713 

    (Hereinafter
      referred to as “Borrower”)

    


    Wachovia
      Bank, National Association 

    Charlotte,
      North Carolina 28202 

    (Hereinafter
      referred to as “Bank”)

    


    THIS
      AGREEMENT
      is
      entered into as of January 24, 2007 by and between Bank and
      Borrower.

    


    RECITALS

    


    Bank
      is
      the holder of a Promissory Note executed and delivered by Borrower, dated of
      even date herewith, in the original principal amount of $2,500,000.00 (the
      “Note”); and certain other loan documents, including without limitation, a Loan
      Agreement, dated November 14, 2006 (the “Loan Agreement”);

    


    Borrower
      and Bank have agreed to modify the terms of the Loan Agreement.

    


    In
      consideration of Bank’s continued extension of credit and the agreements
      contained herein, the parties agree as follows:

    


    AGREEMENT

    


    ACKNOWLEDGMENT
      OF BALANCE,
      Borrower acknowledges that the most recent Commercial Loan Invoice sent to
      Borrower with respect to the Obligations under the Note is correct.

    


    MODIFICATIONS.

    


    The
      section entitled AVAILABILITY of the Loan Agreement is hereby deleted and the
      following is substituted in its place and stead:

    


    AVAILABILITY.
      With
      respect to the line of credit Promissory Note in the amount of $2,500,000.00,
      dated January 24 , 2007, notwithstanding anything to the contrary contained
      herein, the aggregate outstanding principal balance of Advances (as defined
      in
      the Note), plus the sum of (i) the aggregate amount available to be drawn under
      all letters of credit issued by Bank for the account of Borrower plus (ii)
      the
      aggregate amount of unreimbursed drawings under all letters of credit issued
      by
      Bank for the account of Borrower at any one time shall not exceed
      $2,500,000.00.

    


    ACKNOWLEDGMENTS
      AND REPRESENTATIONS.
      Borrower acknowledges and represents that the Note and other Loan Documents,
      as
      amended hereby, are in full force and effect without any defense, counterclaim,
      right or claim of set-off; that, after giving effect to this Agreement, no
      default or event that with the passage of time or giving of notice would
      constitute a default under the Loan Documents has occurred, all representations
      and warranties contained in the Loan Documents are true and correct as of this
      date, all necessary action to authorize the execution and delivery of this
      Agreement has been taken; and this Agreement is a modification of an existing
      obligation and is not a novation.

    


    COLLATERAL.
      Borrower acknowledges and confirms that there have been no changes in the
      ownership of any collateral pledged to secure the Obligations (the “Collateral”)
      since the Collateral was originally pledged; Borrower acknowledges and confirms
      that the Bank has existing, valid first priority security interests and liens
      in
      the Collateral; and that such security interests and liens shall secure
      Borrower’s Obligations, including any modification of the Note or Loan
      Agreement, if any, and all future modifications, extensions, renewals and/or
      replacements of the Loan Documents.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    MISCELLANEOUS.
      This
      Agreement shall be construed in accordance with and governed by the laws of
      the
      applicable state as originally provided in the Loan Documents, without reference
      to that state’s conflicts of law principles. This Agreement and the other Loan
      Documents constitute the sole agreement of the parties with respect to the
      subject matter thereof and supersede all oral negotiations and prior writings
      with respect to the subject matter thereof. No amendment of this Agreement,
      and
      no waiver of any one or more of the provisions hereof shall be effective unless
      set forth in writing and signed by the parties hereto. The illegality,
      unenforceability or inconsistency of any provision of this Agreement shall
      not
      in any way affect or impair the legality, enforceability or consistency of
      the
      remaining provisions of this Agreement or the other Loan Documents. This
      Agreement and the other Loan Documents are intended to be consistent. However,
      in the event of any inconsistencies among this Agreement and any of the Loan
      Documents, the terms of this Agreement, and then the Note, shall control. This
      Agreement may be executed in any number of counterparts and by the different
      parties on separate counterparts. Each such counterpart shall be deemed an
      original, but all such counterparts shall together constitute one and the same
      agreement. Terms used in this Agreement which are capitalized and not otherwise
      defined herein shall have the meanings ascribed to such terms in the Note.
      LIMITATION
      ON LIABILITY; WAIVER OP PUNITIVE DAMAGES.
      EACH OF
      THE PARTIES HERETO, INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY
      JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY
      BETWEEN OR AMONG THEM THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED WITH
      THIS
      AGREEMENT. THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN OR
      AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT
      SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT,
      SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES. EACH
      OF
      THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY
      DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY
      SUCH PROCEEDING, CLAIM OR CONTROVERSY, WHETHER THE SAME IS RESOLVED BY
      ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE. Final
      Agreement.
      This
      Agreement and the other Loan Documents represent the final agreement between
      the
      parties and may not be contradicted by evidence of prior, contemporaneous or
      subsequent oral agreements of the parties. There are no unwritten oral
      agreements between the parties.

    


    ARBITRATION.
      Upon
      demand of any party hereto, whether made before or after institution of any
      judicial proceeding, any claim or controversy arising out of or relating to
      the
      Loan Documents between parties hereto (a “Dispute”) shall be resolved by binding
      arbitration conducted under and governed by the Commercial Financial Disputes
      Arbitration Rules (the “Arbitration Rules”) of the American Arbitration
      Association (the “AAA”) and the Federal Arbitration Act. Disputes may include,
      without limitation, tort claims, counterclaims, a dispute as to whether a matter
      is subject to arbitration, or claims arising from documents executed in the
      future, but shall specifically exclude claims brought as or converted to class
      actions. A judgment upon the award may be entered in any court having
      jurisdiction. Notwithstanding the foregoing, this arbitration provision does
      not
      apply to disputes under or related to swap agreements. Special
      Rules.
      All
      arbitration hearings shall be conducted in the city named in the address of
      Bank
      first stated above. A hearing shall begin within 90 days of demand for
      arbitration and all hearings shall conclude within 120 days of demand for
      arbitration. These time limitations may not be extended unless a party shows
      cause for extension and then for no more than a total of 60 days. The expedited
      procedures set forth in Rule 51 et
      seq.
      of the
      Arbitration Rules shall be applicable to claims of less than $1,000,000.00.
      Arbitrators shall be licensed attorneys selected from the Commercial Financial
      Dispute Arbitration Panel of the AAA. The parties do not waive applicable
      Federal or state substantive law except as provided herein. Preservation
      and Limitation of Remedies.
      Notwithstanding the preceding binding arbitration provisions, the parties agree
      to preserve, without diminution, certain remedies that any party may exercise
      before or after an arbitration proceeding is brought. The parties shall have
      the
      right to proceed in any court of proper jurisdiction or by self-help to exercise
      or prosecute the following remedies, as applicable: (i) all rights to foreclose
      against any real or personal property or other security by exercising a power
      of
      sale or under applicable law by judicial foreclosure including a proceeding
      to
      confirm the sale; (ii) all rights of self-help including peaceful occupation
      of
      real property and collection of rents, set-off, and peaceful possession of
      personal property; (iii) obtaining provisional or ancillary remedies including
      injunctive relief, sequestration, garnishment, attachment, appointment of
      receiver and filing an involuntary bankruptcy proceeding; and (iv) when
      applicable, a judgment by confession of judgment. Any claim or controversy
      with
      regard to any party’s entitlement to such remedies is a Dispute. Waiver
      of Jury Trial.
      THE
      PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
      IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A
      DISPUTE AS TO WHICH BINDING ARBITRATION HAS BEEN DEMANDED.

     

    
      
        
        

      

      
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    IN
      WITNESS WHEREOF,
      the
      undersigned have duly signed and sealed this Agreement the day and year first
      above written.

     

    
      	 	 	 	 
	 	Smart
              Online,
              Inc.	 
	 
 	 
 	 
 	 
	 	By:  	/s/
              Nicholas A.
              Sinigaglia	(SEAL) 
	 	
              
Nicholas
              A. Sinigaglia, Chief Financial Officer	 


    

     

    
      	 	 	 	 
	 	Wachovia
              Bank,
              National Association	 
	 
 	 
 	 
 	 
	 	By:  	/s/
              Kevin
              Harewood	(SEAL) 
	 	
              
Kevin
              Harewood, Vice President	 


    

    


    Tracking
      #: 201318

    CAT
      -
      Deal # 794013 Facility ID 588018

     

    
      
        
        

      

      
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    SECURITY
      AGREEMENT

    


    January
      24, 2007 

    


    Smart
      Online, Inc. 

    2530
      Meridian Parkway, 2nd Floor 

    Durham,
      North Carolina 27713 

    (Hereinafter
      referred to as “Debtor”)

    


    Wachovia
      Bank, National Association 

    Charlotte,
      North Carolina 28202 

    (Hereinafter
      referred to as “Bank”)

    


    This
      Security Agreement amends and restates that certain Security Agreement dated
      November 16, 2006.

    


    For
      value
      received and to secure payment and performance of any and all obligations of
      Debtor (also referred to herein as “Borrower”) to Bank however created, arising
      or evidenced, whether direct or indirect, absolute or contingent, now existing
      or hereafter arising or acquired, including swap agreements (as defined in
      11
      U.S.C. § 101, as in effect from time to time), future advances, and all costs
      and expenses incurred by Bank to obtain, preserve, perfect and enforce the
      security interest granted herein and to maintain, preserve and collect the
      property subject to the security interest (collectively, “Obligations”), Debtor
      hereby grants to Bank a continuing security interest in and lien upon, and
      for
      security purposes assigns and transfers to Bank until all of the Obligations
      are
      repaid in full, the following described property, whether now owned or hereafter
      acquired, and any additions, replacements, accessions, or substitutions thereof
      and all cash and non-cash proceeds and products thereof (collectively,
“Collateral”):

    


    Debtor’s
      deposit account with Bank and affiliates of Bank, including deposit account
      number 2000033033877 (“Assigned Deposits”).

    


    Irrevocable
      Standby Letter of Credit #G-007125 in the amount of $2,500,000.00 issued by
      HSBC
      Private Bank (Suisse) SA.

    


    Debtor
      hereby represents and agrees that:

    


    OWNERSHIP.
      Debtor
      owns the Collateral. The Collateral is free and clear of all liens, security
      interests, and claims except those previously reported in writing to and
      approved by Bank, and Debtor will keep the Collateral free and clear from all
      liens, security interests and claims, other than those granted to or approved
      by
      Bank. Until all of the Obligations are repaid in full, Bank shall have the
      entire right and interest in and to the Assigned Deposits. By executing this
      Security Agreement, Debtor has divested itself of all control over the Assigned
      Deposits and Bank is entitled to and does possess sole dominion and control
      over
      the Assigned Deposits and is entitled to receive the benefits accruing with
      respect thereto. Debtor surrenders all authority or right to withdraw, collect,
      receive the benefits of, or otherwise assign or encumber the Assigned Deposits,
      and authorizes Bank (and each affiliate and branch office of Bank or such
      affiliate) to treat Bank as the sole and exclusive owner of the Assigned
      Deposits. Upon the maturity of the Assigned Deposits, other than Assigned
      Deposits at Bank that automatically roll over at maturity, Bank shall reinvest
      the Assigned Deposits in an investment of Bank’s choice. Bank shall have no
      liability to Debtor for any loss incurred in connection with or arising out
      of
      any such reinvestment except for loss resulting from Bank’s gross negligence or
      willful misconduct. The assignment evidenced by this Security Agreement is
      a
      continuing one and is irrevocable so long as any of the Obligations are
      outstanding or the Bank shall have any obligations under the Loan Documents
      and
      shall terminate only upon payment or other satisfaction in full of all
      Obligations or Bank’s acknowledgment in writing that this Security Agreement has
      been terminated. Upon termination of this Security Agreement, and to the extent
      the Assigned Deposits have not been applied in satisfaction of the Obligations,
      Bank shall reassign the Assigned
      Deposits to Debtor and return any passbooks, certificates, and other documents
      in Bank’s possession at Debtor’s request.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    NAME
      AND OFFICES; JURISDICTION OF ORGANIZATION.
      The
      name and address of Debtor appearing at the beginning of this Agreement are
      Debtor’s exact legal name and the address of its chief executive office. There
      has been no change in the name of Debtor, or the name under which Debtor
      conducts business, within the five years preceding the date hereof except as
      previously reported in writing to Bank. Debtor has not moved its chief executive
      office within the five years preceding the date hereof except as previously
      reported in writing to Bank. Debtor is organized under the laws of the State
      of
      Delaware and has not changed the jurisdiction of its organization within the
      five years preceding the date hereof except as previously reported in writing
      to
      Bank.

    


    TITLE/TAXES.
      Debtor
      has good and marketable title to the Collateral and will warrant and defend
      same
      against all claims. Debtor will not transfer, sell, or lease Collateral (except
      as permitted herein). Debtor agrees to pay promptly all taxes and assessments
      upon or for the use of Collateral and on this Security Agreement. At its option,
      Bank may discharge taxes, liens, security interests or other encumbrances at
      any
      time levied or placed on Collateral. Debtor agrees to reimburse Bank, on demand,
      for any such payment made by Bank. Any amounts so paid shall be added to the
      Obligations.

    


    WAIVERS.
      Debtor
      agrees not to assert against Bank as a defense (legal or equitable), as a
      set-off, as a counterclaim, or otherwise, any claims Debtor may have against
      any
      seller or lessor that provided personal property or services relating to any
      part of the Collateral or against any other party liable to Bank for all or
      any
      part of the Obligations. Debtor waives all exemptions and homestead rights
      with
      regard to the Collateral. Debtor waives any and all rights to any bond or
      security which might be required by applicable law prior to the exercise of
      any
      of Bank’s remedies against any Collateral. All rights of Bank and security
      interests hereunder, and all obligations of Debtor hereunder, shall be absolute
      and unconditional, not discharged or impaired irrespective of (and regardless
      of
      whether Debtor receives any notice of): (i) any lack of validity or
      enforceability of any Loan Document; (ii) any change in the time, manner or
      place of payment or performance, or in any term, of all or any of the
      Obligations or the Loan Documents or any other amendment or waiver of or any
      consent to any departure from any Loan Document; or (iii) any exchange,
      insufficiency, unenforceability, enforcement, release, impairment or
      non-perfection of any collateral, or any release of or modifications to or
      insufficiency, unenforceability or enforcement of the obligations of any
      guarantor or other obligor. To the extent permitted by law. Debtor hereby waives
      any rights under any valuation, stay, appraisement, extension or redemption
      laws
      now existing or which may hereafter exist and which, but for this provision,
      might be applicable to any sale or disposition of the Collateral by Bank; and
      any other circumstance which might otherwise constitute a defense available
      to,
      or a discharge of any party with respect to the Obligations.

    


    NOTIFICATIONS;
      LOCATION OF COLLATERAL.
      Debtor
      will notify Bank in writing at least 30 days prior to any change in: (i)
      Debtor’s chief place of business and/or residence; (ii) Debtor’s name or
      identity; (iii) Debtor’s corporate/organizational structure; or (iv) the
      jurisdiction in which Debtor is organized. In addition, Debtor shall promptly
      notify Bank of any claims or alleged claims of any other person or entity to
      the
      Collateral or the institution of any litigation, arbitration, governmental
      investigation or administrative proceedings against or affecting the Collateral.
      Debtor will keep Collateral at the location(s) previously provided to Bank
      until
      such time as Bank provides written advance consent to a change of location.
      Debtor will bear the cost of preparing and filing any documents necessary to
      protect Bank’s liens.

    


    COLLATERAL
      CONDITION AND LAWFUL USE.
      Debtor
      represents that the Collateral is in good repair and condition and that Debtor
      shall use reasonable care to prevent Collateral from being damaged or
      depreciating, normal wear and tear excepted. Debtor shall immediately notify
      Bank of any material loss or damage to Collateral. Debtor shall not permit
      any
      item of Collateral to become a fixture to real estate or an accession to other
      personal property unless such property is also Collateral hereunder. Debtor
      represents it is in compliance in all respects with all laws, rules and
      regulations applicable to the Collateral and its properties, operations,
      business, and finances.

     

    
      
        
        

      

      
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    RISK
      OF LOSS AND INSURANCE.
      Debtor
      shall bear all risk of loss with respect to the Collateral. The injury to or
      loss of Collateral, either partial or total, shall not release Debtor from
      payment or other performance hereof. Debtor agrees to obtain and keep in force
      property insurance on the Collateral with a Lender’s Loss Payable Endorsement in
      favor of Bank and commercial general liability insurance naming Bank as
      Additional Insured and such other insurance as Bank may require from time to
      time. Such insurance is to be in form and amounts satisfactory to Bank and
      issued by reputable insurance carriers satisfactory to Bank with a Best
      Insurance Report Key Rating of at least “A-”. All such policies shall provide to
      Bank a minimum of 30 days written notice of cancellation. Debtor shall furnish
      to Bank such policies, or other evidence of such policies satisfactory to Bank.
      If Debtor fails to obtain or maintain in force such insurance or fails to
      furnish such evidence, Bank is authorized, but not obligated, to purchase any
      or
      all insurance or “Single Interest Insurance” protecting such interest as Bank
      deems appropriate against such risks and for such coverage and for such amounts,
      including either the loan amount or value of the Collateral, all at its
      discretion, and at Debtor’s expense. In such event, Debtor agrees to reimburse
      Bank for the cost of such insurance and Bank may add such cost to the
      Obligations. Debtor shall bear the risk of loss to the extent of any deficiency
      in the effective insurance coverage with respect to loss or damage to any of
      the
      Collateral. Debtor hereby assigns to Bank the proceeds of all property insurance
      covering the Collateral up to the amount of the Obligations and directs any
      insurer to make payments directly to Bank. Debtor hereby appoints Bank its
      attorney-in-fact, which appointment shall be irrevocable and coupled with an
      interest for so long as Obligations are unpaid, to file proof of loss and/or
      any
      other forms required to collect from any insurer any amount due from any damage
      or destruction of Collateral, to agree to and bind Debtor as to the amount
      of
      said recovery, to designate payee(s) of such recovery, to grant releases to
      insurer, to grant subrogation rights to any insurer, and to endorse any
      settlement check or draft. Debtor agrees not to exercise any of the foregoing
      powers granted to Bank without Bank’s prior written consent.

    


    FINANCING
      STATEMENTS, CERTIFICATES OF TITLE, POWER OF ATTORNEY.
      No
      financing statement (other than any filed or approved by Bank) covering any
      Collateral is on file in any public filing office. Debtor authorizes the filing
      of one or more financing statements covering the Collateral in form satisfactory
      to Bank, and without Debtor’s signature where authorized by law, agrees to
      deliver certificates of title on which Bank’s lien has been indicated covering
      any Collateral subject to a certificate of title statute, and will pay all
      costs
      and expenses of filing or applying for the same or of filing this Security
      Agreement in all public filing offices, where filing is deemed by Bank to be
      desirable. Debtor hereby constitutes and appoints Bank the true and lawful
      attorney of Debtor with full power of substitution to take any and all
      appropriate action and to execute any and all documents, instruments or
      applications that may be necessary or desirable to accomplish the purpose and
      carry out the terms of this Security Agreement, including, without limitation,
      to ask, demand, collect, receive, receipt for, sue for, compound and give
      acquaintance for any and all amounts which may be or become due and payable
      under the Assigned Deposits; to execute any and all withdrawal requests,
      receipts or other orders for the payment of money drawn on the Assigned Deposits
      and to endorse the name of Bank on all instruments given in payment or in
      partial payment therefor. The foregoing power of attorney is coupled with an
      interest and shall be irrevocable until all of the Obligations have been paid
      in
      full. Neither Bank nor anyone acting on its behalf shall be liable for acts,
      omissions, errors in judgment, or mistakes in fact in such capacity as
      attorney-in-fact. Debtor ratifies all acts of Bank as attorney-in-fact. Debtor
      agrees to take such other actions, at Debtor’s expense, as might be requested
      for the perfection, continuation and assignment, in whole or in part, of the
      security interests granted herein and to assure and preserve Bank’s intended
      priority position. If certificates, passbooks, or other documentation or
      evidence is/are issued or outstanding as to any of the Collateral, Debtor will
      cause the security interests of Bank to be properly protected, including
      perfection by notation thereon or delivery thereof to Bank.

    


    LANDLORD/MORTGAGEE
      WAIVERS.
      Debtor
      shall cause each mortgagee of real property owned by Debtor and each landlord
      of
      real property leased by Debtor to execute and deliver instruments satisfactory
      in form and substance to Bank by which such mortgagee or landlord subordinates
      its rights, if any, in the Collateral.

    


    INSTRUMENTS,
      CHATTEL PAPER, DOCUMENTS.
      Any
      Collateral that is, or is evidenced by, instruments, chattel paper or negotiable
      documents will be properly assigned to and the originals of any such Collateral
      in tangible form deposited with and held by Bank, unless Bank shall hereafter
      otherwise direct or consent in writing. Bank may, without notice, before or
      after maturity of the Obligations, exercise any or all rights of collection,
      conversion, or exchange and other similar rights, privileges and options
      pertaining to such Collateral, but shall have no duty to do so.

    


    WITHDRAWAL
      OF ASSIGNED DEPOSITS.
      Debtor
      shall not be permitted to withdraw funds from or exercise any authority of
      any
      kind with respect to the Assigned Deposits specifically identified above by
      account number. Bank shall have the exclusive authority to withdraw, or direct
      the withdrawal of, funds from said specifically identified Assigned Deposits.
      So
      long as this Agreement remains in effect, the Assigned Deposits will be titled
      as directed by Bank.

     

    
      
        
        

      

      
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    COLLATERAL
      DUTIES.
      Bank
      shall have no custodial or ministerial duties to perform with respect to
      Collateral pledged except as set forth herein; and by way of explanation and
      not
      by way of limitation, Bank shall incur no liability for any of the following:
      (i) loss or depreciation of Collateral (unless caused by its willful misconduct
      or gross negligence), (ii) failure to present any paper for payment or protest,
      to protest or give notice of nonpayment, or any other notice with respect to
      any
      paper or Collateral. Bank’s sole duty with respect to the custody, safekeeping
      and physical preservation of any certificate, passbook, or other documentation
      evidencing the Assigned Deposits in its possession shall be to deal with it
      in
      the same manner as it deals with similar property for its own account. Neither
      Bank, nor any of its employees or agents shall be liable for failure to demand,
      collect, or realize upon any of the Assigned Deposits or for any delay in doing
      so.

    


    TRANSFER
      OF COLLATERAL.
      Bank
      may assign its rights in Collateral or any part thereof to any assignee who
      shall thereupon become vested with all the powers and rights herein given to
      Bank with respect to the property so transferred and delivered, and Bank shall
      thereafter be forever relieved and fully discharged from any liability with
      respect to such property so transferred, but with respect to any property not
      so
      transferred, Bank shall retain all rights and powers hereby given.

    


    INSPECTION,
      BOOKS AND RECORDS.
      Debtor
      will at all times keep accurate and complete records covering each item of
      Collateral, including the proceeds therefrom. Bank, or any of its agents, shall
      have the right, at intervals to be determined by Bank and without hindrance
      or
      delay, at Debtor’s expense, to inspect, audit, and examine the Collateral during
      normal business hours and to make copies of and extracts from the books,
      records, journals, orders, receipts, correspondence and other data relating
      to
      Collateral, Debtor’s business or any other transaction between the parties
      hereto. Debtor will at its expense furnish Bank copies thereof upon request.
      For
      the further security of Bank, it is agreed that Bank has and is hereby granted
      a
      security interest in all books and records of Debtor pertaining to the
      Collateral.

    


    COMPLIANCE
      WITH LAW.
      Debtor
      will comply with all federal, state and local laws and regulations, applicable
      to it, including without limitation, laws and regulations relating to the
      environment, labor or economic sanctions, in the creation, use, operation,
      manufacture and storage of the Collateral and the conduct of its
      business.

    


    REGULATION
      U.
      None of
      the proceeds of the credit secured hereby shall be used directly or indirectly
      for the purpose of purchasing or carrying any margin stock in violation of
      any
      of the provisions of Regulation U of the Board of Governors of the Federal
      Reserve System (“Regulation U”), or for the purpose of reducing or retiring any
      indebtedness which was originally incurred to purchase or carry margin stock
      or
      for any other purchase which might render the Loan a “Purpose Credit” within the
      meaning of Regulation U.

    


    CROSS
      COLLATERALIZATION LIMITATION.
      As to
      any other existing or future consumer purpose loan made by Bank to Debtor,
      within the meaning of the Federal Consumer Credit Protection Act, Bank expressly
      waives any security interest granted herein in Collateral that Debtor uses
      as a
      principal dwelling and household goods.

    


    ATTORNEYS’
      FEES AND OTHER COSTS OF COLLECTION.
      Debtor
      shall pay all of Bank’s reasonable expenses actually incurred in enforcing this
      Security Agreement and in preserving and liquidating Collateral, including
      but
      not limited to, reasonable arbitration, paralegals’, attorneys’ and experts’
fees and expenses, whether incurred with or without the commencement of a suit,
      trial, arbitration, or administrative proceeding, or in any appellate or
      bankruptcy proceeding.

    


    DEFAULT.
      If any
      of the following occurs, a default (“Default”) under this Security Agreement
      shall exist: Loan
      Document Default.
      A
      default under any Loan Document. Collateral
      Loss or Destruction.
      Any
      loss, theft, substantial damage, or destruction of Collateral not fully covered
      by insurance, or as to which insurance proceeds are not remitted to Bank within
      30 days of the loss. Collateral
      Sale, Lease or Encumbrance.
      Any
      sale, lease, or encumbrance of any Collateral not specifically permitted herein
      without prior written consent of Bank. Levy,
      Seizure or Attachment.
      The
      making of any levy, seizure, or attachment on or of Collateral which is not
      removed within 10 days. Unauthorized
      Collection of Collateral.
      Any
      attempt to collect, cash in or otherwise recover deposits that are Collateral.
      Unauthorized
      Termination.
      Any
      attempt to terminate, revoke, rescind, modify, or violate the terms of this
      Security Agreement without the prior written consent of Bank.

     

    
      
        
        

      

      
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    REMEDIES
      ON DEFAULT (INCLUDING POWER OF SALE).
      If a
      Default occurs Bank shall have all the rights and remedies of a secured party
      under the Uniform Commercial Code. Without limitation thereto, Bank shall have
      the following rights and remedies: (i) to take immediate possession of
      Collateral, without notice or resort to legal process, and for such purpose,
      to
      enter upon any premises on which Collateral or any part thereof may be situated
      and to remove the same therefrom, or, at its option, to render Collateral
      unusable or dispose of said Collateral on Debtor’s premises; (ii) to require
      Debtor to assemble the Collateral and make it available to Bank at a place
      to be
      designated by Bank; (iii) to exercise its or its affiliate’s right of set-off or
      Bank lien as to any monies of Debtor deposited in deposit accounts and
      investment accounts of any nature maintained by Debtor with Bank or affiliates
      of Bank, without advance notice, regardless of whether such accounts are general
      or special; (iv) to dispose of Collateral, as a unit or in parcels, separately
      or with any real property interests also securing the Obligations, in any county
      or place to be selected by Bank, at either private or public sale (at which
      public sale Bank may be the purchaser) with or without having the Collateral
      physically present at said sale; (v) to apply toward and set-off against and
      apply to the then unpaid balance of the Obligations the Assigned Deposits
      (accelerated to maturity if necessary), even if effecting such set-off results
      in a loss or reduction of interest or the imposition of a penalty applicable
      to
      the early withdrawal of time deposits; (vi) to receive any interest or payments
      in respect of the Assigned Deposits and apply such amounts and the Assigned
      Deposits to the Obligations in such manner as Bank, in its sole discretion,
      may
      determine.

    


    Any
      notice of sale, disposition or other action by Bank required by law and sent
      to
      Debtor at Debtor’s address shown above, or at such other address of Debtor as
      may from time to time be shown on the records of Bank, at least 5 days prior
      to
      such action, shall constitute reasonable notice to Debtor. Notice shall be
      deemed given or sent when mailed postage prepaid to Debtor’s address as provided
      herein. Bank shall be entitled to apply the proceeds of any sale or other
      disposition of the Collateral, and the payments received by Bank with respect
      to
      any of the Collateral, to Obligations in such order and manner as Bank may
      determine. Collateral that is subject to rapid declines in value and is
      customarily sold in recognized markets may be disposed of by Bank in a
      recognized market for such collateral without providing notice of sale. Debtor
      waives any and all requirements that the Bank sell or dispose of all or any
      part
      of the Collateral at any particular time, regardless of whether Debtor has
      requested such sale or disposition.

    


    REMEDIES
      ARE CUMULATIVE.
      No
      failure on the part of Bank to exercise, and no delay in exercising, any right,
      power or remedy hereunder shall operate as a waiver thereof, nor shall any
      single or partial exercise by Bank or any right, power or remedy hereunder
      preclude any other or further exercise thereof or the exercise of any right,
      power or remedy. The remedies herein provided are cumulative and are not
      exclusive of any remedies provided by law, in equity, or in other Loan
      Documents.

    


    INDEMNIFICATION.
      Debtor
      shall protect, indemnify and save harmless Bank from and against all losses,
      liabilities, obligations, claims, damages, penalties, fines, causes of action,
      costs and expenses (including, without limitation, reasonable attorneys’ fees
      and expenses) (collectively, “Damages”) imposed upon, incurred by or asserted or
      assessed against Bank on account of or in connection with (i) the Loan Documents
      or any failure or alleged failure of Debtor to comply with any of the terms
      of,
      or the inaccuracy or breach of any representation in, the Loan Documents, (ii)
      the Collateral or any claim of loss or damage to the Collateral or any injury
      or
      claim of injury to, or death of, any person or property that may be occasioned
      by any cause whatsoever pertaining to the Collateral or the use, occupancy
      or
      operation thereof, (iii) any failure or alleged failure of Debtor to comply
      with
      any law, rule or regulation applicable to it or to the Collateral or the use,
      occupancy or operation of the Collateral (including, without limitation, the
      failure to pay any taxes, fees or other charges), (iv) any Damages whatsoever
      by
      reason of any alleged action, obligation or undertaking of Bank relating in
      any
      way to or any matter contemplated by the Loan Documents, or (v) any claim for
      brokerage fees or such other commissions relating to the Collateral or any
      other
      Obligations; provided that such indemnity shall be effective only to the extent
      of any Damages that may be sustained by Bank in excess of any net proceeds
      received by it from any insurance of Debtor (other than self-insurance) with
      respect to such Damages. Nothing contained herein shall require Debtor to
      indemnify Bank for any Damages resulting from Bank’s gross negligence or its
      willful misconduct. The indemnity provided for herein shall survive payment
      of
      the Obligations and shall extend to the officers, directors, employees and
      duly
      authorized agents of Bank. In the event Bank incurs any Damages arising out
      of
      or in any way relating to the transaction contemplated by the Loan Documents
      (including any of the matters referred to in this section), the amounts of
      such
      Damages shall be added to the Obligations, shall bear interest, to the extent
      permitted by law, at the interest rate borne by the Obligations from the date
      incurred until paid and shall be payable on demand.

     

    
      
        
        

      

      
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    MISCELLANEOUS.
      (i)
Amendments
      and Waivers.
      No
      waiver, amendment or modification of any provision of this Security Agreement
      shall be valid unless in writing and signed by Debtor and an officer of Bank.
      No
      waiver by Bank of any Default shall operate as a waiver of any other Default
      or
      of the same Default on a future occasion. (ii) Assignment.
      All
      rights of Bank hereunder are freely assignable, in whole or in part, and shall
      inure to the benefit of and be enforceable by Bank, its successors, assigns
      and
      affiliates. Debtor shall not assign its rights and interest hereunder without
      the prior written consent of Bank, and any attempt by Debtor to assign without
      Bank’s prior written consent is null and void. Any assignment shall not release
      Debtor from the Obligations. This Security Agreement shall be binding upon
      Debtor, and the heirs, personal representatives, successors, and assigns of
      Debtor. (iii) Applicable
      Law; Conflict Between Documents.
      This
      Security Agreement shall be governed by and construed under the law of the
      jurisdiction named in the address of the Bank shown on the first page hereof
      without regard to that Jurisdiction’s conflict of laws principles, except to the
      extent that the UCC requires the application of the law of a different
      jurisdiction. If any terms of this Security Agreement conflict with the terms
      of
      any commitment letter or loan proposal, the terms of this Security Agreement
      shall control. (iv) Jurisdiction.
      Debtor
      irrevocably agrees to non-exclusive personal jurisdiction in the state
      identified as the Jurisdiction above. (v) Severability.
      If any
      provision of this Security Agreement shall be prohibited by or invalid under
      applicable law, such provision shall be ineffective but only to the extent
      of
      such prohibition or invalidity, without invalidating the remainder of such
      provision or the remaining provisions of this Security Agreement. (vi)
Notices.
      Any
      notices to Debtor shall be sufficiently given, if in writing and mailed or
      delivered to the address of Debtor shown above or such other address as provided
      hereunder; and to Bank, if in writing and mailed or delivered to Wachovia Bank,
      National Association, Mail Code VA7628, P. O. Box 13327, Roanoke, VA 24040
      or
      Wachovia Bank, National Association, Mail Code VA7628, 10 South Jefferson
      Street, Roanoke, VA 24011 or such other address as Bank may specify in writing
      from time to time. Notices to Bank must include the mail code. In the event
      that
      Debtor changes Debtor’s mailing address at any time prior to the date the
      Obligations are paid in full, Debtor agrees to promptly give written notice
      of
      said change of address by registered or certified mail, return receipt
      requested, all charges prepaid. (vii) Captions.
      The
      captions contained herein are inserted for convenience only and shall not affect
      the meaning or interpretation of this Security Agreement or any provision
      hereof. The use of the plural shall also mean the singular, and vice versa.
      (viii) Joint
      and Several Liability.
      If more
      than one party has signed this Security Agreement, such parties are jointly
      and
      severally obligated hereunder. (ix) Binding
      Contract.
      Debtor
      by execution and Bank by acceptance of this Security Agreement, agree that
      each
      party is bound by all terms and provisions of this Security Agreement. (xii)
      Final
      Agreement.
      This
      Agreement and the other Loan Documents represent the final agreement between
      the
      parties and may not be contradicted by evidence of prior, contemporaneous or
      subsequent oral agreements of the parties. There are no unwritten oral
      agreements between the parties.

    


    DEFINITIONS.
      Loan
      Documents.
      The
      term “Loan Documents” refers to all documents, including this Agreement, whether
      now or hereafter existing, executed in connection with or related to the
      Obligations, and may include, without limitation and whether executed by Debtor
      or others, commitment letters that survive closing, loan agreements, promissory
      notes, guaranty agreements, deposit or other similar agreements, other security
      agreements, letters of credit and applications for letters of credit, security
      instruments, financing statements, mortgage instruments, any renewals or
      modifications, whenever any of the foregoing are executed, but does not include
      swap agreements (as defined in 11 U.S.C. § 101, as in effect from time to time).
UCC.
“UCC”
      means the Uniform Commercial Code as presently and hereafter enacted in the
      Jurisdiction. Terms
      defined in the UCC.
      Any
      term used in this Agreement and in any financing statement filed in connection
      herewith which is defined in the UCC and not otherwise defined in this Agreement
      or any other Loan Document has the meaning given to the term in the
      UCC.

    


    IN
      WITNESS WHEREOF,
      Debtor,
      on the day and year first written above, has caused this Security Agreement
      to
      be duly executed under seal.

     

    
      	 	 	 	 
	 	Smart
              Online,
              Inc.	 
	 
 	 
 	 
 	 
	 	By:  	/s/
              Nicholas A.
              Sinigaglia	(SEAL) 
	 	
              
Nicholas
              A. Sinigaglia, Chief Financial Officer	 


    

     

    Tracking:
      201318

    CAT-Deal
      #794013 Facility ID 588018

     

    
      
        
        

      

      
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