Table
      of Contents


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**_________________**





**FORM
      10-Q**


**_________________**


**(Mark
      One)**


**x    Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**





**For
      the quarterly period ended March 31, 2007**





**OR**





**o    Transition
      report pursuant to Section 13 of 15(d) of the Securities Exchange Act of
      1934**





**Commission
      File Number: 001-32634**


**_________________**





**SMART
      ONLINE, INC.**


**(Exact
      name of registrant as specified in its charter)**


**_________________**





**Delaware**
            **95-4439334****(State
                or other jurisdiction of**
            **(I.R.S.
                Employer****incorporation
                or organization)**
            **Identification
                No.)**





**2530
                Meridian Parkway, 2nd Floor**
              **Durham,
                North Carolina**
            **27713****(Address
                of principal executive offices)**
            **(Zip
                Code)**








**(919)
      765-5000**


**(Registrant’s
      telephone number, including area code)**


**_________________**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days: Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                Accelerated Filer o
            Accelerated
                Filer o
            Non-accelerated
                Filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in rule
      12b-2 of the Exchange Act). Yes o No x





As
      of May
      1, 2006, there were approximately 17,872,137 shares of the registrant’s common
      stock outstanding.













**Smart
      Online, Inc.**





**INDEX**





**Page
                No.****PART
                I. FINANCIAL INFORMATION****Item
                1.**
            **Financial
                Statements:**ConsolidatedBalance
                Sheets as of March 31, 2007 (unaudited) and December 31, 2006
            3ConsolidatedStatements
                of Operations (unaudited) for the three months ended March 31, 2007
                and
                2006
            4ConsolidatedStatements
                of Cash Flows (unaudited) for the three months ended March 31, 2007
                and
                2006
            5Notes
                to Consolidated Financial Statements (unaudited)
            6**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations**
            16**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**
            26**Item
                4.**
            **Controls
                and Procedures**
            26**Item
                4T.**
            **Controls
                and Procedures**
            26**PART
                II. OTHER INFORMATION****Item
                1.**
            **Legal
                Proceedings**
            27**Item
                1A.**
            **Risk
                Factors**
            38**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**
            38**Item
                6.**
            **Exhibits**
            38**Signatures**
            40











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          2
          -








**PART
      I. FINANCIALINFORMATION**





**ITEM1.
      Financial Statements**





**SMART
      ONLINE, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





**Assets**
            
            **March
                31,**
              **2007**
              **(unaudited)**
            
            **December
                31,**
              **2006**CURRENT
                ASSETS:Cash
                and Cash Equivalents
            
            $
            5,028,289
            
            $
            326,905Restricted
                Cash
            
            
            250,000
            
            
            250,000Accounts
                Receivable, Net
            
            
            284,110
            
            
            247,618Prepaid
                Expenses
            
            
            101,870
            
            
            100,967Deferred
                Financing Costs
            
            
            451,880
            
            
            -Total
                current assets
            
            
            6,116,149
            
            
            925,490PROPERTY
                AND EQUIPMENT, Net
            
            
            164,193
            
            
            180,360INTANGIBLE
                ASSETS, Net
            
            
            3,433,113
            
            
            3,617,477GOODWILL
            
            
            2,696,642
            
            
            2,696,642OTHER
                ASSETS
            
            
            203,083
            
            
            13,040TOTAL
                ASSETS
            
            $
            12,613,180
            
            $
            7,433,009**Liabilities
                and Stockholders’ Equity**CURRENT
                LIABILITIES:Accounts
                Payable
            
            $
            836,220
            
            $
            850,730Accrued
                Registration Rights Penalty
            
            
            244,726
            
            
            465,358Current
                Portion of Notes Payable
            
            
            1,208,674
            
            
            2,839,631Deferred
                Revenue
            
            
            260,077
            
            
            313,774Accrued
                Liabilities
            
            
            342,206
            
            
            301,266Total
                Current Liabilities
            
            
            2,891,903
            
            
            4,770,759LONG-TERM
                LIABILITIES:Long-Term
                Portion of Notes Payable
            
            
            2,652,000
            
            
            825,000Deferred
                Revenue
            
            
            13,400
            
            
            11,252Total
                Long-Term Liabilities
            
            
            2,665,400
            
            
            836,252Total
                Liabilities
            
            
            5,557,303
            
            
            5,607,011COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITY:Common
                stock, $.001 Par Value, 45,000,000 Shares Authorized, Shares Issued
                and
                Outstanding:
              March
                31, 2007 - 17,822,637; December 31, 2006 - 15,379,030
            
            
            17,823
            
            
            15,379Additional
                Paid-in Capital
            
            
            65,697,118
            
            
            59,159,919Accumulated
                Deficit
            
            
            (58,659,064
            )
            
            (57,349,300
            )Total
                Stockholders’ Equity
            
            
            7,055,877
            
            
            1,825,998TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            12,613,180
            
            $
            7,433,009





The
      accompanying notes are an integral part of these financial
      statements.





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          3
          -


**SMART
      ONLINE, INC.**


**CONSOLIDATEDSTATEMENTS
      OF OPERATIONS**


**(unaudited)**





**Three
                Months**
              **Ended**
              **March
                31, 2007**
            
            **Three
                Months**
              **Ended**
              **March
                31, 2006**REVENUES:Integration
                Fees
            
            $
            -
            
            $
            149,743Syndication
                Fees
            
            
            15,000
            
            
            68,915Subscription
                Fees
            
            
            632,982
            
            
            545,674Professional
                Services Fees
            
            
            288,579
            
            
            569,235Other
                Revenue
            
            
            5,825
            
            
            21,896Total
                Revenues
            
            
            942,386
            
            
            1,355,463COST
                OF REVENUES
            
            
            73,826
            
            
            102,103GROSS
                PROFIT
            
            
            868,560
            
            
            1,253,360OPERATING
                EXPENSES:General
                and Administrative
            
            
            1,058,778
            
            
            1,992,526Sales
                and Marketing
            
            
            482,292
            
            
            291,590Research
                and Development
            
            
            619,999
            
            
            429,141Total
                Operating Expenses
            
            
            2,161,069
            
            
            2,713,257LOSS
                FROM CONTINUING OPERATIONS
            
            
            (1,292,509
            )
            
            (1,459,897
            )OTHER
                INCOME (EXPENSE):Interest
                Expense, Net
            
            
            (135,185
            )
            
            (74,461
            )Gain
                on Debt Forgiveness
            
            
            4,600
            
            
            -Writeoff
                of Investment
            
            
            -
            
            
            (25,000
            )Other
                Income
            
            
            113,330
            
            
            -Total
                Other Income (Expense)
            
            
            (17,255
            )
            
            (99,461
            )NET
                LOSS FROM CONTINUING OPERATIONS
            
            
            (1,309,764
            )
            
            (1,559,358
            )DISCONTINUED
                OPERATIONSLoss
                of Operations of Smart CRM, net of tax
            
            
            -
            
            
            (39,564
            )Loss
                on Discontinued Operations
            
            
            -
            
            
            (39,564
            )Net
                loss attributed to common stockholders
            
            $
            (1,309,764
            )
            $
            (1,598,922
            )NET
                LOSS PER SHARE:Continuing
                Operations
              Basic
                and Diluted
            
            $
            (0.08
            )
            $
            (0.10
            )Discontinued
                Operations
              Basic
                and Diluted
            
            
            0.00
            
            
            0.00Net
                Loss Attributed to common stockholders
              Basis
                and Diluted
            
            
            (0.08
            )
            
            (0.11
            )SHARES
                USED IN COMPUTING NET LOSS PER SHARE:Basic
                and Diluted
            
            
            15,772,663
            
            
            14,984,228





The
      accompanying notes are an integral part of these financial
      statements.


-
          4
          -


**SMART
      ONLINE, INC.**


**STATEMENTSOF
      CASH** **FLOWS**


**(unaudited)**




**Three
                Months**
              **Ended**
              **March
                31, 2007**
            
            **Three
                Months**
              **Ended**
              **March
                31, 2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                Loss
            
            $
            (1,309,764
            )
            $
            (1,559,359
            )Adjustments
                to reconcile Net Loss to Net Cash
              used
                in Operating Activities:Depreciation
                and Amortization
            
            
            209,766
            
            
            163,970Amortization
                of Deferred Financing Costs
            
            
            94,141
            
            
            -Bad
                Debt Expense
            
            
            -
            
            
            63,317Stock
                Option Related Compensation Expense
            
            
            156,733
            
            
            257,464Writeoff
                of Investment
            
            
            -
            
            
            25,000Registration
                Rights Penalty
            
            
            (320,632
            )
            
            107,898Gain
                on Debt Forgiveness
            
            
            (4,600
            )
            
            -Changes
                in Assets and Liabilities:Accounts
                Receivable
            
            
            (36,491
            )
            
            (332,170
            )Prepaid
                Expenses
            
            
            (903
            )
            
            62,789Other
                Assets
            
            
            (1,760
            )
            
            429Deferred
                Revenue
            
            
            (51,551
            )
            
            (115,772
            )Accounts
                Payable
            
            
            (10,668
            )
            
            249,651Accrued
                and Other Expenses
            
            
            43,222
            
            
            95,814Cash
                Flow from Discontinued Operations
            
            
            -
            
            
            118,995Net
                Cash used in Operating Activities
            
            
            (1,232,507
            )
            
            (861,974
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of Furniture and Equipment
            
            
            (10,759
            )
            
            (2,833
            )Cash
                Flow from Discontinued Operations
            
            
            -
            
            
            (328,608
            )Cash
                Advances to Smart CRM
            
            
            -
            
            
            (115,221
            )Cash
                Advances from Smart CRM
            
            
            -
            
            
            375,000Net
                Cash provided by (used in) Investing Activities
            
            
            (10,759
            )
            
            (71,662
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Repayments
                on Notes Payable
            
            
            (1,253,957
            )
            
            (532,397
            )Debt
                Borrowings
            
            
            1,450,000
            
            
            -Restricted
                Cash
            
            
            -
            
            
            (299,756
            )Issuance
                of Common Stock
            
            
            5,748,607
            
            
            1,022,100Cash
                Flow from Discontinued Operations
            
            
            -
            
            
            206,860Net
                Cash provided by Financing Activities
            
            
            5,944,650
            
            
            396,807NET
                INCREASE (DECREASE) IN CASH
              AND
                CASH EQUIVALENTS
            
            
            4,701,384
            
            
            (536,829
            )CASH
                AND CASH EQUIVALENTS,
              BEGINNING
                OF PERIOD
            
            
            326,905
            
            
            1,435,350CASH
                AND CASH EQUIVALENTS,
              END
                OF PERIOD
            
            $
            5,028,289
            
            $
            898,521Supplemental
                Disclosures:Cash
                Paid during the Period for Interest:
            
            $
            73,270
            
            $
            112,399Cash
                Paid for Taxes
            
            
            -
            
            
            -





The
      accompanying notes are an integral part of these financial
      statements.


-
          5
          -


**Smart
      Online, Inc.**


**Notesto
      Consolidated Financial Statements -
      Unaudited**






**1. 
      Summary of Business and Significant Accounting Policies**




***Description
      of Business -*** Smart
      Online, Inc. (the “Company”) was incorporated in the State of Delaware in 1993.
      The Company develops and markets Internet-delivered Software-as-a-Service
      (“SaaS”) software applications and data resources to help start and run small
      businesses. The Company’s subscribers access its products through the websites
      of its private label syndication partners, including major companies and
      financial institutions, and its main portal at smallbusiness.smartonline.com .





***Basis
      of Presentation*** -
      The
      accompanying balance sheet as of March 31, 2007 and the statements of operations
      and cash flows for the three months ended March 31, 2007 and 2006 are unaudited.
      These statements should be read in conjunction with the audited financial
      statements and related notes, together with management’s discussion and analysis
      of financial position and results of operations, contained in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2006 filed with
      the
      Securities and Exchange Commission (the “SEC”) on March 30, 2007 (the “2006
      Annual Report”).





The
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States (“U.S. GAAP”). In the opinion of the
      Company’s management, the unaudited statements in this Quarterly Report on Form
      10-Q include all normal and recurring adjustments necessary for the fair
      presentation of the Company’s statement of financial position as of March 31,
      2007, and its results of operations and cash flows for the three months ended
      March 31, 2007 and 2006. The results for the three months ended March 31, 2007
      are not necessarily indicative of the results to be expected for the fiscal
      year
      ending December 31, 2007.




The
      Company continues to incur development expenses to enhance and expand its
      products by focusing on establishing its Internet-delivered SaaS applications
      and data resources. All allocable expenses to establish the technical
      feasibility of the software have been recorded as research expense. The ability
      of the Company to successfully develop and market its products is dependent
      upon
      certain factors, including the timing and success of any new services and
      products, the progress of research and development efforts, results of
      operations, the status of competitive services and products, and the timing
      and
      success of potential strategic alliances or potential opportunities to acquire
      technologies or assets, any of which may require the Company to seek additional
      funding sooner than expected.




***Significant
      Accounting Policies -*** In the
      opinion of the Company’s management, the significant accounting policies used
      for the three months ended March 31, 2007 are consistent with those used for
      the
      years ended December 31, 2006, 2005 and 2004. Accordingly, please refer to
      the
      2006 Annual Report for our significant accounting policies.





***Revenue
      Recognition -*** Effective
      January 1, 2007, a major customer executed a letter of clarification which
      more
      definitively defined the roles and responsibilities of each party. Individual
      Business Owners (“IBOs”) associated with this customer are provided e-commerce,
      domain name and email services. In exchange for marketing these services to
      its
      IBOs, the customer is paid a marketing fee. At the inception of the business
      relationship, it was agreed that the customer would collect the gross service
      fee from the IBO; the customer would retain its marketing fee and remit the
      net
      remaining cash. Because the roles and responsibilities of each party were
      vaguely defined in the past, revenue was recorded only on the net cash received.
      Following the execution of the letter of clarification and in accordance with
      Emerging Issues Task Force (“EITF”) 99-19, this revenue is now recorded as the
      gross amount paid by the IBO and a sales and marketing expense for the marketing
      services rendered by the customer. Ultimately, the effect on net income is
      nil;
      however, subscription revenue and sales and marketing expense are effectively
      and appropriately grossed up. Because the new accounting method was triggered
      by
      a clarification to the existing agreement and not by a change from one accepted
      accounting method to another, the 2006 subscription revenue was not
      retroactively adjusted as would be required by Statement of Financial Accounting
      Standard (“SFAS”) No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3* .
      For the
      three months ended March 31, 2007, this accounting method resulted in
      approximately $261,000 of additional subscription revenue and a corresponding
      charge to sales and marketing expense.


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          6
          -







***Fiscal
      Year -*** The
      Company’s fiscal year ends December 31. References to fiscal 2006, for example,
      refer to the fiscal year ending December 31, 2006.




***Use
      of Estimates -*** The
      preparation of financial statements in conformity with U.S. GAAP requires
      management to make estimates and assumptions in the Company’s financial
      statements and notes thereto. Significant estimates and assumptions made by
      management include the determination of the provision for income taxes, the
      fair
      market value of stock awards issued and the period over which revenue is
      generated. Actual results could differ materially from those
      estimates.





***Software
      Development Costs*** -
      The
      Company has not capitalized any direct or allocated overhead associated with
      the
      development of software products prior to general release. SFAS No.
      86, *Accounting for the Costs of Software to be Sold, Leased or Otherwise
      Marketed* ,
      requires capitalization of certain software development costs subsequent to
      the
      establishment of technological feasibility. Based on the Company’s product
      development process, technological feasibility is established upon completion
      of
      a working model. Costs related to software development incurred between
      completion of the working model and the point at which the product is ready
      for
      general release have been insignificant.





***Impairment
      of Long Lived Assets*** -
      Long-lived assets and certain identifiable intangibles are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Recoverability of assets
      to
      be held and used is measured by a comparison of the carrying amount of an asset
      to future net cash flows expected to be generated by the asset. If such assets
      are considered to be impaired, the impairment to be recognized is measured
      by
      the amount by which the carrying amount of the assets exceeds the fair value
      of
      the assets. Assets to be disposed of are reported at the lower of the carrying
      amount or fair value less costs to sell.





***Advertising
      Costs*** -
      The
      Company expenses all advertising costs as they are incurred. The amounts charged
      to expense during the first quarter of 2007 and 2006 were $3,574 and $41,920,
      respectively. The 2006 period included $37,915 of barter advertising expenses.
      No such expenses are included in the 2007 period.





***Net
      Loss per Share -*** Basic
      loss per share is computed using the weighted-average number of common shares
      outstanding during the relevant periods. Diluted loss per share is computed
      using the weighted-average number of common and dilutive common equivalent
      shares outstanding during the relevant ****** periods.
      Common equivalent shares consist of redeemable preferred stock, stock options
      and warrants that are computed using the treasury stock method. The Company
      excluded shares issuable upon the exercise of redeemable preferred stock, stock
      options and warrants from the calculation of common equivalent shares as the
      impact was anti-dilutive.





***Stock-Based
      Compensation -*** In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 123 (revised 2004), *Share
      Based Payment* (“SFAS
      No. 123R”), which replaces SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS
      No. 123”), and supersedes Accounting Principles Board (“APB”) Opinion No.
      25, *Accounting for Stock Issued to Employees* (“APB
      No. 25”). SFAS 123R requires all share-based payments, including grants of
      employee stock options, to be recognized in the financial statements based
      on
      their fair values. Under SFAS No. 123R, public companies are required to measure
      the costs of services received in exchange for stock options and similar awards
      based on the grant date fair value of the awards and recognize this cost in
      the
      income statement over the period during which an award recipient is permitted
      to
      provide service in exchange for the award. The pro forma disclosures previously
      permitted under SFAS No. 123 are no longer an alternative to financial statement
      recognition.





The
      Company maintains stock-based compensation arrangements under which employees,
      consultants and directors may be awarded grants of stock options and restricted
      stock. Effective January 1, 2006, the Company adopted SFAS No. 123R using
      the Modified Prospective Approach. Under the Modified Prospective Approach,
      the
      amount of compensation cost recognized includes: (i) compensation cost for
      all share-based payments granted prior to, but not yet vested as of
      January 1, 2006, based on the grant date fair value estimated in accordance
      with the provisions of SFAS No. 123 and (ii) compensation cost for all
      share-based payments that will be granted subsequent to January 1, 2006,
      based on the grant date fair value estimated in accordance with the provisions
      of SFAS No. 123R. Upon adoption, the Company recognizes the stock-based
      compensation of previously granted share-based options and new share based
      options under the straight-line method over the requisite service period. Total
      stock-based compensation expense recognized under SFAS No. 123R was
      approximately $156,733 for the three months ended March 31, 2007.
      No stock-based compensation was capitalized in the consolidated financial
      statements. The fair value of option grants under the Company’s 2004 Equity
      Compensation Plan ****** and
      other
      stock option issuances during the quarters ended March 31, 2007 and 2006 was
      estimated using the Black-Scholes option-pricing model with the following
      weighted-average assumptions:


-
          7
          -








**Three**
              **Months**
              **Ended**
              **March
                31,**
              **2007**
            
            **Three**
              **Months**
              **Ended**
              **March
                31,**
              **2006**Dividend
                yield
            
            
            0.00%
            
            
            0.
                00%Expected
                volatility
            
            
            150%
            
            
            150%Risk
                free interest rate
            
            
            4.56%
            
            
            4.85%Expected
                lives (years)
            
            
            4.6%
            
            
            4.9%








The
      expected term of the options represents the estimated period of time until
      exercise or forfeiture and is based on historical experience of similar awards.
      Expected volatility is based on the historical volatility of our common stock
      over a period of time. The risk free interest rate is based on the published
      yield available on U.S treasury issues with an equivalent term remaining equal
      to the expected life of the option.





Compensation
      expense is recognized only for option grants expected to vest. We estimate
      forfeitures at the date of grant based on historical experience and future
      expectation.





The
      following is a summary of the stock option activity for the three months ended
      March 31, 2007:





**Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**BALANCE,
                December 31, 2006
            
            
            2,360,100
            
            $
            5.33Forfeited
            
            
            4,000
            
            
            6.35Exercised
            
            
            20,000
            
            $
            1.30BALANCE,
                March 31, 2007
            
            
            2,336,100
            
            $
            5.36








**Recently
      Issued Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No.
      157, *Fair
      Value Measurements* (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in U.S. GAAP, and expands disclosures about fair value
      measurements. SFAS No. 157 applies under other accounting pronouncements that
      require or permit fair value measurements, the FASB having previously concluded
      in those accounting pronouncements that fair value is a relevant measurement
      attribute. Accordingly, SFAS No. 157 does not require any new fair value
      measurements. However, for some entities, the application of SFAS No. 157 will
      change current practices. SFAS No. 157 is effective for financial statements
      for
      fiscal years beginning after November 15, 2007. Earlier application is permitted
      provided that the reporting entity has not yet issued financial statements
      for
      that fiscal year. Management believes SFAS No. 157 will have no impact on the
      financial statements of the Company once adopted.


-
          8
          -








In
      February 2007, the FASB issued SFAS No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”). SFAS No. 159 provides companies with an option to measure, at
      specified election dates, many financial instruments and certain other items
      at
      fair value that are not currently measured at fair value. A company that adopts
      SFAS No. 159 will report unrealized gains and losses on items for which the
      fair
      value option has been elected in earnings at each subsequent reporting date.
      SFAS No. 159 also establishes presentation and disclosure requirements designed
      to facilitate comparisons between entities that choose different measurement
      attributes for similar types of assets and liabilities. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007. Management does
      not believe that the adoption of SFAS No. 159 will have a material impact on
      the
      Company’s results of operations or financial condition.





**2.  
      PRESENTATION OF SUBSIDIARIES**





As
      more
      fully detailed in the 2006 Annual Report, the Company completed two acquisitions
      in October 2005. On October 4, 2005, the Company purchased substantially all
      of
      the assets of Computility, Inc. (“Computility”). In consideration for the
      purchased assets, the Company issued the seller 484,213 shares of the Company’s
      common stock and assumed certain liabilities of Computility totaling
      approximately $1.9 million.  The shares were valued at $7.30 per share,
      which was the median trading price on the acquisition date. The total purchase
      price, including liabilities assumed, was approximately $5.8 million including
      approximately $228,000 of acquisition fees.





On
      October 18, 2005, the Company completed its purchase of all of the capital
      stock
      of iMart Incorporated (“iMart”), a Michigan based company providing
      multi-channel electronic commerce systems, pursuant to a Stock Purchase
      Agreement, dated as of October 17, 2005 by and among the Company, iMart and
      the
      shareholders of iMart. The Company issued to iMart’s stockholders 205,767 shares
      of its common stock and agreed to pay iMart’s stockholders approximately
      $3,462,000 in cash installments. This amount was payable in four equal payments
      of $432,866 on the first business day of each of January 2006, April 2006,
      July
      2006 and October 2006. The final installment payment of approximately $1.7
      million was payable in January 2007. As of January 2007, the entire purchase
      price was paid in full. The shares were valued at $8.825 per share, which was
      the median trading price on the acquisition date. The total purchase price
      for
      all of the outstanding iMart shares was approximately $5.3 million including
      approximately $339,000 of acquisition fees.





Upon
      the
      Company’s successful integration of the SFA/CRM application into its
      OneBiz SM platform, management deemed the remaining operations of Smart CRM, Inc. (d/b/a
      Computility) (“Smart CRM”), specifically consulting and network management, to
      be non-strategic to ongoing operations. On September 29, 2006, the Company,
      Smart CRM and Alliance Technologies, Inc. ("Alliance") executed and delivered
      an
      Asset Purchase Agreement pursuant to which Alliance acquired substantially
      all
      of the assets of Smart CRM. In accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      the
      Company has reported the operating results for Smart CRM as discontinued
      operations. For the three months ended March 31, 2006, the revenue and net
      loss
      associated with the discontinued operations were $540,206 and ($39,564),
      respectively. Because the sale had been completed in a period prior to the
      three
      months ended March 31, 2007, that period contains no discontinued
      operations.





**3.** **INDUSTRY
      SEGMENT INFORMATION**





SFAS
      No.
      131, *Disclosures about Segments of an Enterprise and Related
      Information* (“SFAS
      No. 131”), establishes standards for the way in which public companies disclose
      certain information about operating segments in their financial reports.
      Consistent with SFAS No. 131, the Company has defined two reportable segments,
      described below, based on factors such as geography, how the Company manages
      its
      operations and how its chief operating decision maker views
      results.


-
          9
          -








Smart
      Commerce, Inc. (d/b/a iMart) revenue is derived primarily from the development
      and distribution of multi-channel e-commerce systems including domain name
      registration and email solutions, e-commerce solutions, website design and
      website hosting.





Smart
      Online, Inc. generates revenue from the development and distribution of
      internet-delivered SaaS small business applications through a variety of
      subscription, integration and syndication channels.





The
      Company includes costs such as corporate general and administrative expenses
      and
      share-based compensation expenses that are not allocated to specific segments
      in
      the Smart Online segment which includes the parent or corporate
      segment.





The
      following table shows the Company’s financial results by reportable segment for
      the three months ended March 31, 2007:





Smart
              Online,
              Inc.
            
            Smart
              Commerce,
              Inc.
            
            ConsolidatedREVENUES:Syndication
                Fees
            
            
            15,000
            
            
            -
            
            
            15,000Subscription
                Fees
            
            
            13,391
            
            
            619,591
            
            
            632,982Professional
                Services Fees
            
            
            -
            
            
            288,579
            
            
            288,579Other
                Revenues
            
            
            200
            
            
            5,625
            
            
            5,825Total
                Revenues
            
            
            28,591
            
            
            913,795
            
            
            942,386COST
                OF REVENUES
            
            
            13,027
            
            
            60,799
            
            
            73,826OPERATING
                EXPENSES
            
            
            1,463,394
            
            
            697,675
            
            
            2,161,069OPERATING
                INCOME
            
            
            (1,447,830
            )
            
            155,321
            
            
            (1,292,509
            )OTHER
                INCOME (EXPENSE)
            
            
            21,007
            
            
            (38,262
            )
            
            (17,255
            )NET
                INCOME/(LOSS) BEFORE INCOME TAXES
            
            $
            (1,426,823
            )
            $
            117,059
            
            $
            (1,309,764
            )TOTAL
                ASSETS
            
            $
            11,886,023
            
            $
            727,157
            
            $
            12,613,180








-
          10
          -


**4.  
      CURRENT ASSETS**





***Receivables***





The
      Company evaluates the need for an allowance for doubtful accounts based on
      specifically identified amounts that management believes to be uncollectible.
      Management also records an additional allowance based on management’s assessment
      of the general financial conditions affecting its customer base. If actual
      collections experience changes, revisions to the allowance may be required.
      Based on these criteria, management has recorded an allowance for doubtful
      accounts of approximately $65,000 and $65,000 as of March 31, 2007 and December
      31, 2006, respectively.





***Restricted
      Cash***





Under
      the
      terms of a promissory note between Smart Commerce and Fifth Third Bank, $250,000
      on deposit at Fifth Third Bank serves as loan collateral and is restricted.
      Such
      restricted cash is scheduled to be released from the restrictions in three
      equal
      installments of approximately $83,000, on June 30, 2007, December 31, 2007
      and
      June 30, 2008, if the Company meets certain debt covenants regarding operating
      metrics for Smart Commerce.





***Deferred
      Financing Costs***





In
      order
      to secure a modification to a line of credit (see Note 5 - Notes Payable),
      Atlas
      Capital, S.A. (“Atlas”) provided the Company with a modified letter of credit.
      In exchange for the modified letter of credit, the Company issued Atlas a
      warrant to purchase 444,444 shares of common stock at $2.70 per share (see
      Note
      6 - Stockholders’ Equity). The fair value of that warrant using the
      Black-Scholes model was $734,303 as measured at the time the warrant was issued.
      Such amount was recorded as deferred financing costs and will be amortized
      to
      interest expense in the amount of $37,657 per month over the remaining period
      of
      the modified line of credit, which is scheduled to expire in August 2008. At
      March 31, 2007, the deferred financing costs which will be amortized to interest
      expense over the next twelve months, or $451,879, is classified as a current
      asset with the remaining $188,283 classified as non-current and included in
      other assets.





**5.   
      NOTES PAYABLE**





As
      of
      March 31, 2007, the Company had notes payable totaling $3,860,674. The detail
      of
      these notes is as follows:





Note
                Description
            S/T
                Portion
            L/T
                Portion
            TOTAL
            Maturity
            RateAcquisition
                Fee - iMart
            $  
                 209,177
            -
            $   
                209,177
            Oct
                ‘07
            8.0%Acquisition
                Fee - Computility
            99,497
            -
            99,497
            Mar
                ‘07
            8.0%Wachovia
                Credit Line
            -
            2,052,000
            2,052,000
            Aug
                ‘08
            Libor
                + 0.9%Fifth
                Third Loan
            900,000
            600,000
            1,500,000
            Nov
                ‘08
            Prime
                + 1.5%TOTAL
            $
                1,208,674
            $
                2,652,000
            $3,860,674





On
      January 24, 2007, the Company entered into an amendment to its line of credit
      with Wachovia Bank, NA (“Wachovia”). The amendment resulted in an increase in
      the line of credit from $1.3 million to $2.5 million. The pay-off date for
      the
      line of credit was also extended from August 1, 2007 to August 1, 2008. Interest
      accrues on the unpaid principal balance at the LIBOR Market Index Rate plus
      0.9%. The
      line
      of credit is secured by the Company’s deposit account at Wachovia and an
      irrevocable standby letter of credit in the amount of $2,500,000 issued by
      HSBC
      Private Bank (Suisse) S.A. with Atlas as account party. As of March 31, 2007,
      the Company has drawn down approximately $2.1 million on the line of
      credit.





-
          11
          -


**6.** **STOCKHOLDERS’
      EQUITY**




***Common
      Stock and Warrants***




In
      a
      transaction that closed on February 21, 2007, the Company sold an aggregate
      of
      2,352,941 shares of its common stock to two new investors (the “Investors”). The
      private placement shares were sold at $2.55 per share pursuant to a Securities
      Purchase Agreement (the “SPA”) between the Company and each of the Investors.
      The aggregate gross proceeds were $6 million and the Company incurred issuance
      costs of approximately $585,000, of which approximately $530,000 have been
      incurred as of March 31, 2007. Under the SPA, the Investors were issued warrants
      for the purchase of an aggregate of 1,176,471 shares of common stock at an
      exercise price of $3.00 per share. These warrants contain a provision for
      cashless exercise and must be exercised by February 21, 2010.





The
      Company and each of the Investors also entered into a Registration Rights
      Agreement (the “Investor RRA”) whereby the Company has an obligation to register
      the shares for resale by the Investors by filing a registration statement within
      30 days of the closing of the private placement, and to have the registration
      statement declared effective 60 days after actual filing, or 90 days after
      actual filing if the SEC reviews the registration statement. If a registration
      statement is not timely filed or declared effective by the date set forth in
      the
      Investor RRA, the Company is obligated to pay a cash penalty of 1% of the
      purchase price on the day after the filing or declaration of effectiveness
      is
      due, and 0.5% of the purchase price per every 30-day period thereafter, to
      be
      prorated for partial periods, until the Company fulfills these obligations.
      Under no circumstances can the aggregate penalty for late registration or
      effectiveness exceed 10% of the aggregate purchase price. Under the terms of
      the
      Investor RRA, the Company cannot offer for sale or sell any securities until
      May
      22, 2007, subject to certain limited exceptions, unless, in the opinion of
      the
      Company’s counsel, such offer or sale does not jeopardize the availability of
      exemptions from the registration and qualification requirements under applicable
      securities laws with respect to this placement. On March 28, 2007, the Company
      entered into an amendment to the Investor RRA with each Investor to extend
      the
      registration filing obligation date by an additional eleven calendar days.
      On
      April 3, 2007, the Company filed the registration statement within the extended
      filing obligation period, thereby avoiding the first potential penalty.





As
      part
      of the commission paid to Canaccord Adams, Inc. (“CA”), the Company’s placement
      agent in the transaction described above, CA was issued a warrant to purchase
      35,000 shares of the Company’s common stock at an exercise price of $2.55 per
      share. This warrant contains a provision for cashless exercise and must be
      exercised by February 21, 2012. CA and the Company also entered into a
      Registration Rights Agreement (the “CA RRA”). Under the CA RRA, the shares
      issuable upon exercise of the warrant must be included on the same registration
      statement the Company is obligated to file under the Investor RRA described
      above, but CA is not entitled to any penalties for late registration or
      effectiveness.





As
      incentive to modify a letter of credit, the Company entered into a
      Stock Purchase Warrant and Agreement (the “Warrant Agreement”) with Atlas on
      January 15, 2007. Under the terms of the Warrant Agreement, Atlas received
      a
      warrant to purchase up to 444,444 shares of the Company’s common stock at $2.70
      per share at the termination of the line of credit or if the Company is in
      default under the terms of the line of credit with Wachovia. If the warrant
      is
      exercised in full, it will result in gross proceeds to the Company of
      approximately $1,200,000.





On
      March
      29, 2007, the Company issued 55,666 shares of its common stock to certain
      investors as registration penalties for its failure to timely file a
      registration statement covering shares owned by those investors as required
      pursuant to registration rights agreements between such investors and the
      Company.





On
      March
      30, 2006, the Company sold 400,000 shares of its common stock to Atlas for
      a
      price of $2.50 per share resulting in gross proceeds of $1,000,000. The Company
      incurred immaterial issuance costs related to this stock sale. As part of this
      sale, Atlas received contractual rights to purchase shares at a lower price
      should the Company enter into a private placement agreement in the future in
      which it sells shares of its common stock for less than $2.50 per
      share.


-
          12
          -





During
      the first quarter of 2006, warrants to purchase 7,500 shares of the Company’s
      common stock expired. In March 2006, there was a cashless exercise of a warrant
      to purchase 10,000 shares of the Company’s common stock, resulting in the
      issuance of 4,800 shares. Also in March 2006, four warrants to purchase a total
      of 17,000 shares of the Company’s common stock were exercised on a cash basis,
      resulting in the issuance of 17,000 shares and gross proceeds of $22,100 to
      the
      Company. The Company incurred immaterial costs related to these
      exercises.





***Stock
      Option Plans***




The
      Company maintains three equity compensation plans. During the first quarter
      of
      2006, the Company issued a total of 251,500 options to employees. Of these
      options, a total of 100,000 were issued to two officers of the Company. A total
      of 201,500 options were granted on January 6, 2006 with a strike price of $9.00
      and the fair market value on the date of grant was also $9.00. The March 21,
      2006 grant to purchase 50,000 shares of common stock was granted to a newly
      appointed officer. The strike price and fair market value on the date of grant
      was $2.50. All options vest over five years and have a ten -year
      life.





The
      following table summarizes information about stock options outstanding at March
      31, 2007:





**Currently
                Exercisable****Exercise**
              **Price**
            **Number
                of**
              **Shares**
              **Outstanding**
            **Average**
              **Remaining**
              **Contractual
                Life**
              **(Years)**
            **Weighted**
              **Average
                Exercise**
              **Price**
            **Number
                of**
              **Shares**
            **Weighted**
              **Average**
              **Exercise**
              **Price**From
                $1.30 to $1.43
            575,000
            1.8
            $
                1.41
            575,000
            $
                1.41From
                $2.50 to $3.50
            512,500
            7.3
            $
                3.39
            344,665
            $
                3.46$5.00
            249,900
            8
            $
                5.00
            169,900
            $
                5.00$7.00
            153,000
            8.5
            $
                7.00
            53,000
            $
                7.00From
                $8.61 to $9.00
            584,500
            8.4
            $
                8.70
            122,900
            $
                8.72From
                $9.60 to $9.82
            261,200
            1.3
            $
                9.82
            160,240
            $
                9.82





***Dividends***





The
      Company has not paid any cash dividends through March 31, 2007.





**7.** **MAJOR
      CUSTOMERS AND CONCENTRATION OF CREDIT RISK**





The
      Company derives a significant portion of its revenues from certain customer
      relationships. The following is a summary of customers that represent greater
      than ten percent of total revenues:





Three
                Months Ended
              March
                31, 2007Revenues
            
            %
                of Total
              RevenuesCustomer
                A
            
            
            Professional
                Services
            
            $
            182,077
            
            
            19
            %Customer
                B
            
            
            Subscription
            
            
            311,984
            
            
            33Others
            
            
            Various
            
            
            448,325
            
            
            48Total
            
            
            
            
            $
            942,386
            
            
            100
            %








-
          13
          -





Three
                Months Ended
              March
                31, 2006Revenues
            
            
            %
                of Total
              RevenuesCustomer
                A
            
            
            Professional
                Services
            
            
            537,760
            
            
            40
            %Customer
                B
            
            
            Subscription
            
            
            521,809
            
            
            38
            %Others
            
            
            Various
            
            
            295,894
            
            
            22
            %Total
            
            
            
            
            $
            1,355,463
            
            
            100.0
            %





As
      of
      March 31, 2007, two customers accounted for 22% and 64% of accounts receivable,
      respectively. As of March 31, 2006, the Company had two customers that accounted
      for 44% and 14% of accounts receivable, respectively.








**8.** **COMMITMENTS
      AND CONTINGENCIES**





In
      August
      2005, the Company entered into a software assignment and development agreement
      with the developer of a customized accounting software application.  In
      connection with this agreement, the developer would be paid up to $512,500
      and
      issued up to 32,395 shares of the Company’s common stock based upon the
      developer attaining certain milestones.  As of March 31, 2007, the Company
      had paid $262,500 and issued 3,473 shares of common stock related to this
      obligation.





On
      January 17, 2006, the SEC temporarily suspended the trading of the Company’s
      securities. In its “Order of Suspension of Trading,” the SEC stated that the
      reason for the suspension was a lack of current and accurate information
      concerning the Company’s securities because of possible manipulative conduct
      occurring in the market for its stock. By its terms, that suspension ended
      on
      January 30, 2006 at 11:59 p.m. EST. Simultaneously with the suspension, the
      SEC
      advised the Company that the SEC was conducting a non-public investigation.
      As
      of March 31, 2007, the SEC has not provided the Company with any communication
      indicating that its investigation has concluded or that the Company or any
      of
      its officers or directors have engaged in any criminal or fraudulent conduct
      with respect to the Company.





**9.** **SUBSEQUENT
      EVENTS**





On
      April
      11, 2007, the Company entered into a stock option agreement with C. James Meese,
      Jr., a member of the Company’s Board of Directors and Chairman of its Audit
      Committee. Mr. Meese was granted an option to purchase up to 20,000 shares
      of
      the Company’s common stock at an exercise price of $2.80 per share. Under the
      terms of the option agreement, this option vests in equal quarterly increments
      on February 16, 2007, May 16, 2007, August 16, 2007, and November 16, 2007
      if
      Mr. Meese is serving as a member of the Company’s Board of Directors on such
      dates. These dates were selected so that all shares will have vested by the
      first anniversary of Mr. Meese’s appointment to the Board. In
      the
      event of a change of control or reorganization of the Company (both as defined
      in the option agreement), the option vests as to all shares on the date of
      such
      event.





On
      April
      18, 2007, the Company entered into restricted stock agreements (the "RSAs")
      pursuant to the Company's 2004 Equity Compensation Plan with three employees
      of
      the Company, including Nicholas A. Sinigaglia, the Company's Chief Financial
      Officer. Under these RSAs, an aggregate of 49,500 shares of the Company's common
      stock was granted, which included 30,000 shares to Mr. Sinigaglia. Under the
      terms of the RSAs, these shares are restricted and cannot be sold prior to
      the
      lapse of the restriction. Assuming these employees remain employed by the
      Company, the restriction is scheduled to lapse as to one-third of the shares
      on
      each of the following dates: the date of the agreement, the first anniversary
      thereof, and the second anniversary thereof. In the event of a change of control
      or reorganization of the Company (both as defined in the RSAs), the restrictions
      lapse as to all shares on the date of such event.


-
          14
          -





On
      April
      27, 2007, the Company entered into Executive Officer Compensation Agreements
      (the "Compensation Agreements") with the following named executive officers:
      Michael Nouri, President and Chief Executive Officer; Tom Furr, Chief Operating
      Officer; and Henry Nouri, Executive Vice President. In January 2007, these
      officers had agreed to a modification of their compensation (the "Modified
      Arrangements"), each reducing his annual base salary to $100,000 in
      consideration for a performance based aggregate quarterly bonus (the "Quarterly
      Bonus"). Under the terms of the Compensation Agreements, each officer agreed
      to
      an increase in his annual base salary, effective the pay period ending April
      30,
      2007, restoring each to his prior annual base salary as follows: Michael Nouri
      ($170,000), Tom Furr ($136,800) and Henry Nouri ($150,000). These officers
      remained entitled to the Quarterly Bonus under the Modified Arrangements earned,
      if any, for the first quarter of fiscal 2007. No Quarterly Bonus was earned
      by
      any of these officers. The Compensation Arrangements also terminate the
      Quarterly Bonus arrangement as of May 1, 2007.





-
          15
          -


**Item2.** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





*The
      following discussion in Management’s Discussion and Analysis of Financial
      Condition as Results of Operations and elsewhere in this report contains
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or the
      Exchange Act. Forward-looking statements consist of, among other things, trend
      analyses, statements regarding future events, future financial performance,
      our
      plan to build our business and the related expenses, our anticipated growth,
      trends in our business, the effect of foreign currency exchange rate and
      interest rate fluctuations on our business, the potential impact of current
      litigation or any future litigation, the potential availability of tax assets
      in
      the future and related matters, and the sufficiency of our capital resources,
      all of which are based on current expectations, estimates, and forecasts, and
      the beliefs and assumptions of our management. Words such as “expects,”
“anticipates,” “projects,” “intends,” “plans,” “estimates,” variations of such
      words, and similar expressions are also intended to identify such
      forward-looking statements. These forward-looking statements are subject to
      risks, uncertainties and assumptions that are difficult to predict. Therefore,
      actual results may differ materially and adversely from those expressed in
      any
      forward-looking statements. Readers are directed to risks and uncertainties
      identified below, under “Risk Factors” and elsewhere in this report, for factors
      that may cause actual results to be different than those expressed in these
      forward-looking statements. Except as required by law, we undertake no
      obligation to revise or update publicly any forward-looking statements for
      any
      reason.*





**Overview**





We
      develop and market Internet-delivered Software-as-a-Services, or SaaS, software
      applications and data resources for small businesses. We reach small businesses
      through syndication arrangements with other companies that private-label our
      software applications through their corporate web sites and our own website,
      smallbusiness.smartonline.com. Our syndication relationships provide a cost
      and
      time effective way to market our products and services to the small business
      sector.




We
      currently operate Smart Online in two segments. Those
      segments are our core operations, or the Smart Online segment, and the
      operations of our wholly-owned subsidiary, or the Smart Commerce segment. The
      Smart Online segment generates revenues from the development and distribution
      of
      internet-delivered SaaS small business applications through a variety of
      subscription, integration and syndication channels. The
      revenue generated by Smart Commerce is generally composed of subscription fees
      and professional services fees related to domain name subscriptions, e-commerce
      or networking consulting or network maintenance agreements. We
      include costs such as corporate general and administrative expenses and
      share-based compensation expenses that are not allocated to specific segments
      in
      the Smart Online segment, which includes the parent or corporate
      segment.





**Sources
      of Revenue**





We
      derive
      revenues from the following sources:





·
            Subscription
                fees - monthly fees charged to customers for access to our SaaS
                applications.·
            Integration
                fees - fees charged to partners to integrate their products into
                our
                syndication platform.·
            Syndication
                fees -





·
            fees
                charged to syndication partners to create a customized private-label
                site.·
            barter
                revenue derived from syndication agreements with media
                companies.·
            Professional
                service fees - fees related to consulting services which complement
                our
                other products and applications.·
            Other
                revenues - revenues generated from non-core activities such as sales
                of
                shrink-wrapped products, OEM contracts and miscellaneous other
                revenues.





-
          16
          -


Our
      current primary focus is to target those established companies that have both
      a
      substantial base of small business customers as well as a recognizable and
      trusted brand name. We are also seeking to establish partnerships with smaller
      companies catering to the small business customer base who we view as more
      ready
      to adopt new technologies. Our goal is to enter into partnerships with these
      established companies whereby they private label our products and offer them
      to
      their base of small business customers. We believe the combination of the
      magnitude of their customer bases and their trusted brand names and recognition
      will help drive our subscription volume.





Subscription
      revenues consist of sales of subscriptions directly to end-users, or to others
      for distribution to end-users, hosting and maintenance fees, and e-commerce
      website design fees. Subscription sales are made either on a subscription or
      on
      a “for fee” basis. Subscriptions, which include access to most of our offerings,
      are payable in advance on a monthly basis and are typically paid via credit
      card
      of the individual end-user or their aggregating entity. We offer new subscribers
      a limited free use period, after which we terminate access for users who fail
      to
      become paid subscribers. We have delayed the termination of access for those
      subscribers as we were not yet able to offer the complete suite of applications
      which we deemed as necessary in order to convince free customers to convert
      to
      paying customers. However, we do not expect to convert a significant number
      of
      these free users into paying subscribers as we focus on forging strategic
      partnerships with other companies that have small business customer bases.
      We
      expect lower net fees from subscribers at the private label syndication websites
      of our partners than from our main portal since our agreements call for us
      to
      share revenue generated from each respective syndication site. In the first
      quarter of 2007, 97% of our subscription revenue was generated by our Smart
      Commerce segment, and the remaining 3% by our Smart Online segment.





When
      appropriate, we charge our partners a fee for private-labeling our website
      in
      their own customized interface (i.e., in the “look and feel” of our partners’
sites). This fee is based on the extent of the modifications required as well
      as
      the revenue sharing ratio that has been negotiated between us and our partner.
      If a fee is charged for the production of the website and the modifications,
      it
      is recorded as syndication revenue.





In
      certain instances, we have integrated products offered by other companies into
      our products or websites. This is a means for the partner to generate additional
      traffic to its own website or revenue for its own product while expanding the
      range of our products and services. Such revenue is recorded as integration
      revenue. Our integration contracts also provide for us to receive a percentage
      of revenue generated by our partner. Such revenues have been
      immaterial.





Both
      syndication and integration fees are recognized on a monthly basis over the
      life
      of the contract, although a significant portion of integration fees is received
      upfront. Our contracts and support contracts are non-cancelable, though
      customers typically have the right to terminate their contracts for cause if
      we
      fail to perform. We generally invoice our paying syndication or integration
      customers in annual or monthly installments and typical payment terms provide
      that our customers pay us within 30 days of invoice. Amounts that have been
      invoiced are recorded as accounts receivable and in deferred revenue or
      revenue depending on whether the revenue recognition criteria have been met.
      In
      general, we collect our billings in advance of the service period. As we have
      shifted our focus toward driving subscription revenue, which we deem to have
      the
      greatest potential for future revenue growth, we have seen a decrease in
      syndication and integration revenue through the first quarter of 2007 and we
      expect this decrease to continue through the remaining fiscal year. In the
      first
      quarter of 2007 and 2006, 100% of our syndication revenue was generated by
      our
      Smart Online segment.





Professional
      service fees are fees generated from consulting services often directly
      associated with other projects which will generate subscription revenue. For
      example, a partner may request that we re-design its website to better
      accommodate our products or to improve its own website traffic. Such fees are
      typically billed on a time and material basis and are recognized as revenue
      when
      these services are performed and the customer is invoiced. In the first quarter
      of 2007 and 2006, 100% of our professional services revenue was generated by
      our
      Smart Commerce segment.





Other
      revenues consist primarily of non-core revenue sources such as traditional
      shrink-wrap software sales and miscellaneous web services. It also includes
      OEM
      revenue generated through sales of our applications bundled with products
      offered by manufacturers such as Dell, Gateway and CompUSA. Revenues from OEM
      arrangements are reported and paid to us on a quarterly basis.


-
          17
          -





**Cost
      of Revenues**





Cost
      of
      revenues is primarily composed of salaries associated with maintaining and
      supporting integration and syndication partners and the cost of external hosting
      facilities associated with maintaining and supporting integration and
      syndication partners. Historically, we do not capitalize any costs associated
      with the development of our products and platform. Statement of Financial
      Accounting Standards, or SFAS, No. 86, *Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
      Marketed* ,
      or SFAS
      No. 86, requires capitalization of certain software development costs subsequent
      to the establishment of technological feasibility. Based on our product
      development process, technological feasibility is established upon completion
      of
      a working model. Costs related to software development incurred between
      completion of the working model and the point at which the product is ready
      for
      general release have been insignificant.





**Operating
      Expenses**





In
      previous years, our efforts have been primarily focused on basic product
      development and integration. In the fourth quarter of 2006, we shifted our
      focus
      toward driving subscription revenue while concentrating our development efforts
      on enhancements and customization of our proprietary platforms. As of March
      31,
      2007, we had 53 employees. Most employees perform multiple
      functions.





*Research
      and Development* .
      Historically, we have not capitalized any costs associated with the development
      of our products and platform. SFAS No. 86 requires capitalization of certain
      software development costs subsequent to the establishment of technological
      feasibility. Because any such costs that would be capitalized following the
      establishment of technological feasibility would immediately be written off
      due
      to uncertain realizability, all such costs have been recorded as research and
      development costs and expensed as incurred. Because of our proprietary, scalable
      and secure multi-user architecture, we are able to provide all customers with
      a
      service based on a single version of our application. As a result, we do not
      have to maintain multiple versions, which enables us to have relatively low
      research and development expenses as compared to traditional enterprise software
      business models. We expect that in the future, research and development expenses
      will increase substantially in absolute dollars but decrease as a percentage
      of
      total revenue as we upgrade and extend our service offerings, develop new
      technologies and transition from development stage to revenue
      generation.





*Marketing
      and Sales* .
      We have
      spent limited funds on marketing, advertising, and public relations. Our
      business model of partnering with established companies with extensive small
      business customer bases allows us to leverage the marketing dollars spent by
      our
      partners rather than requiring us to incur such costs. We do not conduct any
      significant direct marketing or advertising programs. Our sales and marketing
      costs are expected to increase significantly in 2007 due to the addition of
      several sales persons, including a Vice President of Sales and Marketing. As
      we
      begin to grow the number of subscribers to our products, sales and marketing
      expense will increase due to the various percentages of revenue we may be
      required to pay to partners.





*General
      and Administrative* .
      General
      and administrative expenses consist of salaries and related expenses for
      executive, finance and accounting, legal, human resources, and information
      technology personnel, professional fees, and other corporate expenses, including
      facilities costs. We anticipate general and administrative expenses will
      increase as we add personnel and incur additional professional fees and
      insurance costs related to the growth of our business and to our operations
      as a
      public company. Non-recurring general and administrative expenses increased
      significantly in 2006 as a result of the suspension of trading of our securities
      by the Securities and Exchange Commission, or the SEC, the continuing SEC
      action, and the internal investigation of matters relating to that suspension.
      Our expenses related to these matters have continued to decrease to an
      immaterial amount in the fourth quarter of 2006 and first quarter of 2007.
      We
      expect to incur additional material costs in 2007 as we take the necessary
      steps
      to comply with Section 404 of the Sarbanes-Oxley Act of 2002.





*Stock-Based
      Expenses* .
      Our
      operating expenses include stock-based expenses related to options and warrants
      issued to employees and non-employees. These charges have been significant
      and
      are reflected in our historical financial results. Effective January 1, 2006,
      we
      adopted SFAS No. 123 (revised 2004), *Share-Based Payment* ,
      or SFAS
      No. 123R, which has resulted and will continue to result in material costs
      on a
      prospective basis.


-
          18
          -








**Critical
      Accounting Policies and Estimates**





Our
      discussion and analysis of financial condition and results of operations are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosures of contingent assets and liabilities.
“Critical accounting policies and estimates” are defined as those most important
      to the financial statement presentation and that require the most difficult,
      subjective, or complex judgments. We base our estimates on historical experience
      and on various other factors that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Under different assumptions and/or conditions, actual results
      of
      operations may materially differ. We periodically re-evaluate our critical
      accounting policies and estimates, including those related to revenue
      recognition, provision for doubtful accounts and sales returns, expected lives
      of customer relationships, useful lives of intangible assets and property and
      equipment, provision for income taxes, valuation of deferred tax assets and
      liabilities, and contingencies and litigation reserves. Management has
      consistently applied the same critical accounting policies and estimates which
      are fully described in our Annual Report on Form 10-K for the year ended
      December 31, 2006.





Effective
      January 1, 2007, a major customer executed a letter of clarification which
      more
      definitively defined the roles and responsibilities of each party. Individual
      Business Owners, or IBOs, associated with this customer are provided e-commerce,
      domain name and email services. In exchange for marketing these services to
      its
      IBOs, the customer is paid a marketing fee. At the inception of the business
      relationship, it was agreed that the customer would collect the gross service
      fee from the IBO; the customer would retain its marketing fee and remit the
      net
      remaining cash. Because the roles and responsibilities of each party were
      vaguely defined in the past, revenue was recorded only on the net cash received.
      Following the execution of the letter of clarification and in accordance with
      Emerging Issues Task Force, or EITF, 99-19, this revenue is now recorded as
      the
      gross amount paid by the IBO and a sales and marketing expense for the marketing
      services rendered by the customer. Ultimately, the effect on net income is
      nil;
      however, subscription revenue and sales and marketing expense are effectively
      and appropriately grossed up. Because the new accounting method was triggered
      by
      a clarification to the existing agreement and not by a change from one accepted
      accounting method to another, the 2006 subscription revenue was not
      retroactively adjusted as would be required by SFAS No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3* .
      For the
      three months ended March 31, 2007, this accounting method resulted in
      approximately $261,000 of additional subscription revenue and a corresponding
      charge to sales and marketing expense.





-
          19
          -


**Overview
      of Results of Operation for the Quarters Ended March 31, 2007 and
      2006**





**Three
                Months Ended**
              **March
                31, 2007**
            
            **Three
                Months Ended**
              **March
                31, 2006**REVENUES:Integration
                Fees
            
            $
            -
            
            $
            149,743Syndication
                Fees
            
            
            15,000
            
            
            68,915Subscription
                Fees
            
            
            632,982
            
            
            545,674Professional
                Services Fees
            
            
            288,579
            
            
            569,235Other
                Revenue
            
            
            5,825
            
            
            21,896Total
                Revenues
            
            
            942,386
            
            
            1,355,463COST
                OF REVENUES
            
            
            73,826
            
            
            102,103GROSS
                PROFIT
            
            
            868,560
            
            
            1,253,360OPERATING
                EXPENSES:General
                and Administrative
            
            
            1,058,778
            
            
            1,992,526Sales
                and Marketing
            
            
            482,292
            
            
            291,590Research
                and Development
            
            
            619,999
            
            
            429,141Total
                Operating Expenses
            
            
            2,161,069
            
            
            2,713,257LOSS
                FROM CONTINUING OPERATIONS
            
            
            (1,292,509
            )
            
            (1,459,897
            )OTHER
                INCOME (EXPENSE):Interest
                Expense, Net
            
            
            (135,185
            )
            
            (74,461
            )Gain
                on Debt Forgiveness
            
            
            4,600
            
            
            -Writeoff
                of Investment
            
            
            -
            
            
            (25,000
            )Other
                Income
            
            
            113,330
            
            
            -Total
                Other Income (Expense)
            
            
            (17,255
            )
            
            (99,461
            )NET
                LOSS FROM CONTINUING OPERATIONS
            
            
            (1,309,764
            )
            
            (1,559,358
            )DISCONTINUED
                OPERATIONSLoss
                of Operations of Smart CRM, net
              of
                tax
            
            
            -
            
            
            (39,564
            )Loss
                on Discontinued Operations
            
            
            -
            
            
            (39,564
            )NET
                LOSS




Net
                loss attributed to common stockholders
            
            $
            (1,309,764
            )
            $
            (1,598,922
            )NET
                LOSS PER SHARE:Continuing
                Operations
              Basic
                and Diluted
            
            $
            (0.08
            )
            $
            (0.10
            )Discontinued
                Operations
              Basic
                and Diluted
            
            
            0.00
            
            
            0.00Net
                Loss Attributed to common stockholders
              Basis
                and Diluted
            
            
            (0.08
            )
            
            (0.11
            )SHARES
                USED IN COMPUTING NET LOSS PER SHARE:Basic
                and Diluted
            
            
            15,772,663
            
            
            14,984,228





-
          20
          -





The
      following table shows our consolidated statements of operations data expressed
      as a percentage of revenue for the periods indicated:




**Three
                Months**
              **Ended**
              **March
                31,**
              **2007**
            
            **Three
                Months Ended**
              **March
                31,**
              **2006**REVENUES:Integration
                fees
            
            
            0
            %
            
            11
            %Syndication
                fees
            
            
            2
            %
            
            5
            %Subscription
                fees
            
            
            67
            %
            
            40
            %Professional
                services fees
            
            
            30
            %
            
            42
            %Other
                revenues
            
            
            1
            %
            
            2
            %Total
                revenues
            
            
            100
            %
            
            100
            %COST
                OF REVENUES
            
            
            8
            %
            
            8
            %GROSS
                PROFIT
            
            
            92
            %
            
            92
            %OPERATING
                EXPENSES:General
                and administrative
            
            
            112
            %
            
            147
            %Sales
                and marketing
            
            
            51
            %
            
            22
            %Development
            
            
            66
            %
            
            32
            %Total
                operating expenses
            
            
            229
            %
            
            201
            %LOSS
                FROM OPERATIONS
            
            
            (137
            %)
            
            (109
            %)OTHER
                INCOME (EXPENSE):Interest
                income (expense), net
            
            
            (14
            %)
            
            (5
            %)Other
                income
            
            
            12
            %
            
            0
            %Writeoff
                of investment
            
            
            0
            %
            
            (2
            %)Gain
                on debt forgiveness
            
            
            0.00
            %
            
            0
            %DISCONTINUED
                OPERATIONSIncome from discontinued operations
            
            
            0
            %
            
            (3%
            )NET
                INCOME(Loss)
            
            
            (139
            %)
            
            (119
            %)








**Overview
      of Results of Operations of the Three Months Ended March 31,
      2007**





Total
      revenue was $942,000 for the first quarter of 2007 compared to $1,355,000 for
      the first quarter of 2006 representing a decrease of $413,000 or 30%.
      Subscription revenues increased 16% to $633,000 for the first quarter of 2007
      from $546,000 for the first quarter of 2006. Integration revenues decreased
      100%
      to $0 for the first quarter of 2007 as compared to $150,000 for the same period
      in 2006. Revenue from professional services fees decreased to $289,000 for
      the
      first quarter of 2007 from $569,000 for the first quarter of 2006. Approximately
      97% of our consolidated revenue was generated by our Smart Commerce segment
      with
      the remaining 3% being generated by our Smart Online segment.


-
          21
          -





Our
      net
      loss for the three months ended March 31, 2007 was approximately $1.3 million
      as
      compared to a net loss of approximately $1.6 million for the same period in
      the
      preceding year. The net loss for the three months ended March 31, 2007 included
      non-cash charges totaling $390,000, which consisted of $157,000 of non-cash
      compensation expense related to stock options, $210,000 of depreciation and
      amortization expense and $23,000 of registration rights penalties.





**Comparison
      of the Results of Operations for the Three Months Ended March 31, 2007and March
      31, 2006**





**Revenue** **.** Total
      revenue was $942,000 for the first quarter of 2007 compared to $1,355,000 for
      the first quarter of 2006 representing a decrease of $413,000 or 30%. This
      is
      primarily attributable to a decrease in professional services fees of $280,000,
      or 49%, at our Smart Commerce segment in which the first quarter of 2006
      contained approximately $450,000 of one-time professional services fees related
      to a perpetual license. Subscription revenue increased by approximately $87,000
      as the result of our use of gross revenue reporting related to one of our
      customers as compared to net revenue reporting in the corresponding period
      of
      2006. In addition, at Smart Online, integration revenue decreased $150,000,
      or
      100%, as all integration revenue was recognized by the end of 2006.





Subscription
      revenues increased 16% to $633,000 for the first quarter of 2007 from $546,000
      for the first quarter of 2006. This increase was due to approximately $261,000
      of additional revenue recorded in the three months ended March 31, 2007 due
      to
      our adoption of gross revenue reporting. As discussed above, certain
      subscription revenue that was recorded net for the three months ended March
      31,
      2006 was recorded gross for the three months ended March 31, 2007. Because
      the
      new accounting method was triggered by a clarification to the existing agreement
      and not by a change from one accepted accounting method to another, the 2006
      subscription revenue was not retroactively adjusted as would be required by
      SFAS
      No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* Therefore, subscription revenue for the three-months ended March 31, 2007 is
      not
      recorded in the same manner as subscription revenue for the three months ended
      March 31, 2006. ****** Had
      revenue from this customer been recognized net (making it comparable to the
      three months ended March 31, 2006), subscription revenue for the three months
      ended March 31, 2007 would have been approximately $372,000 as compared to
      approximately $546,000 in the same period of 2006. The decrease of approximately
      $174,000, or 32%, is related to the decrease in volume related to the 2006
      restructuring of a major customer. In addition, there was an immaterial increase
      in subscription revenue from Smart Online’s sale of online subscriptions to
      OneBiz.





Revenue
      from professional services fees, all of which are derived from our Smart
      Commerce segment, decreased to $289,000 for the first quarter of 2007 from
      $569,000 for the first quarter of 2006. Of this decrease, $280,000 or 49% is
      attributable to the fact that the first quarter of 2006 contained approximately
      $450,000 of one-time revenue related to a perpetual license. This decrease
      was
      offset by approximately $170,000 of new revenue related to services being
      rendered to new customers.





Integration
      revenues decreased 100% to $0 for the first quarter of 2007 as compared to
      $150,000 for the same period in 2006. The 2007 and 2006 periods also included
      $0
      and $5,000 of revenue derived from barter transactions, respectively. All
      integration contract revenue was recognized by the end of 2006 and no new
      integration agreements have been entered at this time. As we have shifted our
      focus to growing subscription revenue, we have not sought any new or additional
      integration partners.





Syndication
      revenue decreased 78% to $15,000 for the first quarter of 2007 as compared
      to
      $69,000 for the same period in 2006. In the past, we have sought and received
      syndication fees as part of out contracts with partners to set up private label
      websites. Currently, as part of our efforts to increase the number of
      subscribers to our services through these partnerships, we are no longer seeking
      contracts which include such revenue and are focusing on increasing subscription
      revenue. The $15,000 recognized syndication in the first quarter of 2007 relates
      to a monthly hosting fee in the amount of $5,000 from one syndication
      partner.


-
          22
          -





Other
      revenue decreased 73% to $6,000 for the first quarter of 2007 from $22,000
      for
      the first quarter of 2006. This decrease is primarily due to an OEM contract
      which expired at year end 2006. This contract had a minimum 2006 royalty of
      $36,000, in which $9,000 was recognized in the first quarter of 2006. No such
      minimum royalty was recognized in the first quarter of 2007.





**Cost
      of Revenues**





Cost
      of
      revenues decreased $28,000, or 28%, to $74,000 in the first quarter of 2007,
      down from $102,000 in the first quarter 2006, primarily as a result of personnel
      reductions at our Smart Commerce segment resulting in a decrease in cost of
      revenues of approximately $23,000. In addition, monthly external hosting fees
      at
      Smart Online decreased in the amount of $10,000 as a new service provider was
      engaged in the first quarter of 2007.





**Operating
      Expenses**





Operating
      expenses decreased $552,000, or 20%, to $2,161,000 for the first quarter of
      2007
      from $2,713,000 during the first quarter of 2006. This decrease was primarily
      due to a decrease in legal and professional fees for the first quarter of 2007
      compared to the same period of 2006, in which we experienced increased legal
      fees because of the SEC investigation as well as our own internal investigation.
      This decrease was offset by (1) recording additional sales and marketing expense
      as a result of our adoption of gross revenue reporting by the Smart Commerce
      segment, and (2) additional programming, database management, quality assurance,
      and project management resources in the development function to support the
      enhancement and customization of our OneBiz SM product.




*General
      and Administrative* -
      General
      and administrative expenses decreased by $933,000, or 47%, to $1,059,000
      for the first quarter of 2007 from $1,993,000 in the same quarter of 2006.
      This
      decrease was primarily due to a reduction of $475,000 in legal fees as the
      first
      quarter of 2006 included legal expense related to the SEC matter and our own
      internal investigation. Compensation expense required by SFAS No. 123R decreased
      $101,000 from the prior period as there were minimal options granted from the
      first quarter of 2006 through the end of the first quarter of 2007, and the
      number of cancellations exceeded the grants. In addition, wage expense at Smart
      Online decreased $63,000 from the prior period as certain officers agreed to
      have their
      salaries reduced for a limited period, registration right penalties decreased
      $85,000 as certain stockholders settled in the first quarter of 2007 , and the
      amount of interest associated with the iMart purchase price agreement decreased
      in the amount of $58,000 as the purchase price was paid in full during the
      first
      quarter of 2007. In the first quarter of 2006, general and administrative
      expenses also included $51,000 for market research on our securities and $23,000
      for recruiting our current Chief Financial Officer, and we did not have similar
      expenses in the first quarter of 2007.





We
      are
      currently disputing our insurance carrier’s refusal to cover certain legal
      expenses related to the SEC matter. We contend that these legal expenses should
      be reimbursed by our insurance carrier. Because the outcome of this dispute
      is
      unclear, we have expensed all legal costs incurred and we will account for
      any
      insurance reimbursement, should there be any, in the period such amounts are
      reimbursed.





*Sales
      and Marketing* -
      Sales
      and marketing expense increased to $482,000 in the first quarter of 2007 from
      $292,000 in the first quarter 2006, an increase of $190,000, or 65%. ****** As
      detailed in the revenue section, due to our adoption of gross revenue reporting,
      for the three months ended March 31, 2007, we recorded approximately $261,000
      of
      additional revenue and an equivalent increase in sales and marketing expense.
      This increase was offset by several decreases in sales and marketing expense
      in
      the Smart Online segment, including (1) a $39,000 reduction in advertising
      expense, (2) a $25,000 decrease in revenue share expense, as we paid our
      partners a fee in the first quarter of 2006 for a syndication contract and
      had
      no similar expense in the first quarter of 2007, and (3) a $4,000 decrease
      in
      management consulting expenses.





Generally,
      we expect we will have to increase sales and marketing expenses before we can
      substantially increase our revenue from sales of subscriptions. We have
      increased investment in marketing and sales by increasing the number of direct
      sales personnel and increasing penetration within our existing customer base,
      expanding our domestic selling and marketing activities, building brand
      awareness and participating in additional marketing programs, and we are
      planning to continue to increase these investments.


-
          23
          -








*Research
      and Development* -
      Research and development expense increased to $620,000 in the first quarter
      of
      2007 from $429,000 in the first quarter of 2006, an increase of approximately
      $191,000 or 44%. This increase is due to several factors in the Smart Online
      segment, including increases of (1) $111,000 in consulting expense for our
      accounting application, (2) $17,000 for wages for additional staffing, and
      (3)
      $4,000 for travel expenses as developers traveled to Michigan in connection
      with
      our continuing integration of these operations. Also, the Smart Commerce segment
      incurred approximately $57,000 of additional wages with the hiring of new
      development personnel to implement new partnership signings. We expect
      development expenses to increase during the last three quarters of 2007 as
      a
      result of anticipated hiring of additional development personnel for both the
      Smart Online and Smart Commerce segments to enhance and customize our
      platforms.





**Other
      Income (Expense)**





We
      incurred net interest expense of $135,000 during the first quarter of 2007
      and
      $74,000 of net interest expense during the first quarter of 2006. Interest
      expense increased as a direct result of the notes payable related to the iMart
      and Computility acquisitions, including notes related to non-compete agreements.
      Additionally, interest expense of approximately $27,000 was incurred during
      the
      first quarter of 2007 on our revolving line of credit with Wachovia Bank, NA,
      or
      Wachovia. First quarter 2007 interest income totaling $27,000 was from interest
      earned on money market account deposits compared to $2,000 earned for the same
      period in 2006. The 2007 interest income increase was attributable to the
      interest earned on the cash proceeds of the February 2007 private placement
      described in this report under Item 2, Unregistered Sales of Equity Securities
      and Use of Proceeds.





We
      realized a gain of $5,000 during the first quarter of 2007 from negotiated
      and
      contractual releases of outstanding liabilities. There was no similar gain
      from
      debt forgiveness in the first quarter of 2006.





One
      of
      the assets purchased as part of the iMart acquisition was a $25,000 investment
      in a privately held company that was a customer of iMart’s. Management
      determined that it is likely that such investment is currently worthless, so
      the
      entire $25,000 investment had been written off in the first quarter of 2006.
      Also in the first quarter of 2006, we reserved for 100% of the approximately
      $65,000 of the accounts receivable due from that customer.





**Provision
      for Income Taxes**





We
      have
      not recorded a provision for income tax expense because we have been generating
      net losses. Furthermore, we have not recorded an income tax benefit for the
      first quarter of 2007 or fiscal 2006 ****** primarily
      due to continued substantial uncertainty regarding our ability to realize our
      deferred tax assets. Based upon available objective evidence, there has been
      sufficient uncertainty regarding the ability to realize our deferred tax assets,
      which warrants a full valuation allowance in our financial statements. We have
      approximately $35,000,000 in net operating loss carryforwards, which may be
      utilized to offset future taxable income.





**Liquidity
      and Capital Resources**





At
      March
      31, 2007, our principal sources of liquidity were unrestricted cash and cash
      equivalents totaling $5,278,000 and accounts receivable and other receivables
      of
      $284,000. As of May 11, 2007, our principal sources of liquidity were cash
      and
      cash equivalents totaling approximately $4,493,000 and accounts receivable
      of
      approximately $250,000. ****** However,
      $250,000 of our cash is restricted under the loan agreement with Fifth Third
      Bank. Such restricted cash is scheduled to be released from the restrictions
      in
      three equal installments of approximately $83,000, on June 30, 2007, December
      31, 2007 and June 30, 2008, if we meet certain debt covenants regarding
      operating metrics for Smart Commerce. As of March 31, 2007, we have drawn
      approximately $2.1 million of our $2.5 million line of credit, leaving
      approximately $400,000 available for our operations.





At
      March
      31, 2007, we had working capital of approximately $3.3 million.


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          24
          -





**Cash
      Flow from Operations** .
      Cash
      flows used in operations for the three months ended March 31, 2007 totaled
      $1.2
      million, up from $0.9 million for the three months ended March 31, 2006. This
      increase was primarily due to increased pay down of accounts payable as well
      as
      the loss of cash flow from discontinued operations.





**Cash
      Flow from Financing Activity** .
      For the
      three months ended March 31, 2007, we generated a total of $5.9 million net
      cash
      from our financing activities. This net cash was generated through both equity
      and debt financing, as described below.





*Equity
      Financing* .
      In a
      transaction that closed on February 21, 2007, we sold an aggregate of 2,352,941
      shares of our common stock to two new investors, or the Investors. The private
      placement shares were sold at $2.55 per share pursuant to a Securities Purchase
      Agreement, or the SPA, between us and each of the Investors. The aggregate
      gross
      proceeds were $6 million, and we incurred issuance costs of approximately
      $585,000, of which approximately $530,000 have been incurred as of March 31,
      2007. Under the SPA, the Investors were issued warrants for the purchase of
      an
      aggregate of 1,176,471 shares of common stock at an exercise price of $3.00
      per
      share. These warrants contain a provision for cashless exercise and must be
      exercised by February 21, 2010.





*Debt
      Financing.* On
      November 9, 2006, Smart Commerce entered into a loan agreement with Fifth Third
      Bank. Under the terms of this agreement, Smart Commerce borrowed $1.8 million
      to
      be repaid in 24 monthly installments of $75,000 plus interest beginning in
      December 2006. The interest rate is prime plus 1.5% as periodically determined
      by Fifth Third Bank. The loan is secured by all of the assets of Smart Commerce,
      including a cash security account of $250,000 and all of Smart Commerce's
      intellectual property. Such restricted cash is scheduled to be released from
      the
      restrictions in three equal installments of approximately $83,000, on June
      30,
      2007, December 31, 2007 and June 30, 2008, if certain debt covenants regarding
      operating metrics for Smart Commerce are met. As of May 11, 2007, our
      outstanding principal balance on this debt was approximately
      $1,275,000.





On
      November 14, 2006, we entered into a revolving credit arrangement with Wachovia,
      or the Line of Credit, for $1.3 million which can be used for general working
      capital. Any advances made on the Line of Credit were to be paid off no later
      than August 1, 2007, with monthly payments of accrued interest on any
      outstanding balance commencing on December 1, 2006. Interest accrues on the
      unpaid principal balance at the LIBOR Market Index Rate plus 0.9%. On January
      24, 2007, we entered into an amendment to the Line of Credit. The amendment
      resulted in an increase in the Line of Credit from $1.3 million to $2.5 million.
      The pay-off date was also extended from August 1, 2007 to August 1, 2008. The
      Line of Credit is secured by our deposit account at Wachovia and an irrevocable
      standby letter of credit in the amount of $2,500,000 issued by HSBC Private
      Bank
      (Suisse) S.A. with Atlas as account party, or the Letter of Credit. Atlas and
      we
      have separately agreed that in the event of a default by us in the repayment
      of
      the Line of Credit that results in the Letter of Credit being drawn, we shall
      reimburse Atlas any sums that Atlas is required to pay. At our sole discretion,
      these payments may be made in cash or by issuing shares of our common stock
      at a
      set per share price of $2.50. As of May 11, 2007, we have drawn down
      approximately $2.1 million on the Line of Credit.





We
      have
      not yet achieved positive cash flows from operations, and our main sources
      of
      funds for our operations have been the sale of securities in private placements
      and the Wachovia line of credit. We must continue to rely on these sources
      until
      we are able to generate sufficient revenue to fund our operations. We believe
      that anticipated cash flows from operations, funds available from our existing
      line of credit, together with cash on hand, will provide sufficient funds to
      finance our operations at least for the next 12 months. Changes in our operating
      plans, lower than anticipated sales, increased expenses, or other events may
      cause us to need to seek additional equity or debt financing in future periods.
      There can be no guarantee that financing will be available on acceptable terms
      or at all. Additional equity financing could be dilutive to the holders of
      our
      common stock, and additional debt financing, if available, could impose greater
      cash payment obligations and more covenants and operating restrictions. We
      have
      no current plans to seek any such additional financing.


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          25
          -





**Item
      3.**  **QUANTITATIVE
      AND QUALITATIVE**


**DISCLOSURES
      ABOUT MARKET RISK**




***Foreign
      currency exchange risk***





For
      the
      three months ended March 31, 2007 and 2006, all of our contracts and
      transactions were U.S. dollar denominated. As a result, our results of
      operations and cash flows are not subject to fluctuations due to changes in
      foreign currency exchange rates.





***Interest
      rate sensitivity***





We
      had
      unrestricted cash and cash equivalents totaling $327,000, $1,435,000, and
      $173,000 at December 31, 2006, 2005, and 2004, respectively. At March 31,
      2007, our unrestricted cash was $5,028,000. These amounts were invested
      primarily in demand deposit accounts and money market funds. The cash and cash
      equivalents are held for working capital purposes. We do not enter into
      investments for trading or speculative purposes. Due to the short-term nature
      of
      these investments, we believe that we do not have any material exposure to
      changes in the fair value of our investment portfolio as a result of changes
      in
      interest rates. Declines in interest rates, however, will reduce future
      investment income.





Two
      debt
      instruments have variable interest rates: one is prime + 1.5% and the other
      is
      LIBOR + .9% (See Note 5 - “Notes Payable,” to the Consolidated Financial
      Statements). At March 31, 2007, the outstanding principal balance on these
      loans
      was $1,500,000 and $2,052,000, respectively. Due to the relatively short term
      of
      these debt instruments combined with the relative stability of interest rates,
      we do not expect interest rate or market volatility will have a material effect
      on our cash flows.





**Item4.
      CONTROLS AND PROCEDURES**





Not
      applicable.





**Item4T.** **** **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**




As
      required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation
      was carried out under the supervision and with the participation of our
      management, including our Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of our disclosure controls and procedures (as defined
      in
      Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
      covered by this Quarterly Report. As defined in Rule 13a-15(e) and 15d-15(e)
      under the Exchange Act, the term disclosure controls and procedures means
      controls and other procedures of an issuer that are designed to ensure that
      information required to be disclosed by the issuer in the reports that it files
      or submits under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the SEC’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the issuer's management, including its principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure.





Based
      on
      their evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that, as of the end of the period covered by this Quarterly Report,
      our disclosure controls and procedures were not effective because of the
      significant deficiencies that we are in the process of remediating. These
      significant deficiencies and the related changes to our controls were described
      under Item 9A of Part II of our Annual Report on Form 10-K for the fiscal year
      ending December 31, 2005, and updated in the 2006 Annual Report . ******





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          26
          -


**Changes
      to Internal Control Over Financial Reporting**





There
      have been no changes
      in our internal control over financial reporting that occurred during the first
      quarter of fiscal 2007 that have materially affected, or are reasonably likely
      to materially affect, our internal control over financial
      reporting.





**PARTII. 
OTHER
      INFORMATION**





**Item1.** **** **LEGAL
      PROCEEDINGS**





During
      the three months ended March 31, 2007, there were no material developments
      in
      the legal proceedings previously reported in our 2006 Annual Report. Please
      refer to Part I, Item 3 of our 2006 Annual Report for additional
      information.





**Item1A.
      RISK FACTORS**





The
      following is a description of what we consider our key challenges and
      risks.





We
      operate in a dynamic and rapidly changing business environment that involves
      substantial risk and uncertainty and these risks may change over time. The
      following discussion addresses some of the risks and uncertainties that could
      cause, or contribute to causing, actual results to differ materially from
      expectations. In evaluating our business, you should pay particular attention
      to
      the descriptions of risks and uncertainties described below and in other
      sections of this document and our other filings. These risks and uncertainties
      are not the only ones we face. Additional risks and uncertainties not presently
      known to us, that we currently deem immaterial, or that are similar to those
      faced by other companies in our industry or business in general may also affect
      our business. If any of the risks described below actually occurs, our business,
      financial condition, or results of operations could be materially and adversely
      affected.




We
      have
      organized these factors into the following categories below:





·
            Our
                Financial Condition





·
            Our
                Products and Operations




·
            Our
                Market, Customers and Partners





·
            Our
                Officers, Directors, Employees and
                Stockholders




·
            Regulatory
                Matters that Affect Our Business





·
            Matters
                Related to the Market For Our
                Securities





**Risks
      Associated with Our Financial Condition**





**(1)**  **We
      have had recurring losses from operations since inception, and have deficiencies
      in working capital and equity capital. If we do not rectify these deficiencies
      through additional financing or growth, we may have to cease operations and
      liquidate our business.**





Through
      March 31, 2007, we have lost an aggregate of approximately $58.7 million since
      inception on August 10, 1993. During the quarters ended March 31, 2007 and
      2006,
      we incurred a net loss of approximately $1.3 million and $1.6 million,
      respectively. At March 31, 2007, we had a $3.3 million of working capital.
      Our
      working capital, including our line of credit and recent financing transaction
      for $6 million, is not sufficient to fund our operations beyond July 2008,
      unless we substantially increase our revenue, limit expenses or raise
      substantial additional financing. Factors such as the commercial success of
      our
      existing services and products, the timing and success of any new services
      and
      products, the progress of our research and development efforts, our results
      of
      operations, the status of competitive services and products, the timing and
      success of potential strategic alliances or potential opportunities to acquire
      technologies or assets, and the suspension of trading of shares of our common
      stock by the SEC, and the resulting drop in share price, trading volume and
      liquidity, may require us to seek additional funding sooner than we expect.
      If
      we fail to raise sufficient financing, we will not be able to implement our
      business plan, we may have to liquidate our business.


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          27
          -








**(2)**  **Any
      issuance of shares of our common stock in the future could have a dilutive
      effect on your investment.**





We
      may
      issue shares of our common stock in the future for a variety of reasons. For
      example, under the terms of the stock purchase warrant and agreement we recently
      entered into with Atlas, it may elect to purchase up to 444,444 shares of our
      common stock at $2.70 per share upon termination of, or if we are in breach
      under the terms of, our line of credit with Wachovia. In connection with our
      recent private financing, we issued warrants to the investors to purchase an
      additional 1,176,471 shares of our common stock at $3.00 per share and a warrant
      to our placement agent in that transaction to purchase 35,000 shares of our
      common stock at $2.55 per share. In addition, we may raise funds in the future
      by issuing additional shares of common stock or other securities.




If
      we
      raise additional funds through the issuance of equity securities or debt
      convertible into equity securities, the percentage of stock ownership by our
      existing stockholders would be reduced. In addition, such securities could
      have
      rights, preferences, and privileges senior to those of our current stockholders,
      which could substantially decrease the value of our securities owned by them.
      Depending on the share price we are able to obtain, we may have to sell a
      significant number of shares in order to raise the necessary amount of capital.
      You may experience dilution in the value of your shares as a result.





**(3)**  **In
      the future, we may enter into certain debt financing transactions with third
      parties that could adversely affect our financial health.**





We
      currently have a secured loan arrangement from Fifth Third Bank. Under the
      terms
      of this agreement, Smart Commerce borrowed $1.8 million to be repaid in 24
      monthly installments of $75,000 plus interest beginning in December 2006. The
      interest rate is prime plus 1.5% as periodically determined by Fifth Third
      Bank.
      The loan is secured by all of the assets of Smart Commerce and all of Smart
      Commerce’s intellectual property. The loan is guaranteed by us and such guaranty
      is secured by all the common stock of Smart Commerce.





We
      also
      have a revolving line of credit from Wachovia. This line of credit is $2.5
      million, and as of May 1, 2007, we have drawn down approximately $2.1 million.
      Any advances made on the line of credit must be repaid no later than August
      1,
      2008, with monthly payments of accrued interest only commencing on December
      1,
      2006 on any outstanding balance. The interest shall accrue on the unpaid
      principal balance at the LIBOR Market Index Rate plus 0.9%. The line of credit
      is secured by our deposit account at Wachovia and an irrevocable standby letter
      of credit in the amount of $2.5 million issued by HSBC Private Bank (Suisse)
      S.A. with Atlas as account party.





We
      are
      evaluating various equity and debt financing options and in the future may
      incur
      indebtedness that could adversely affect our financial health. For example,
      indebtedness could:




·
            increase
                our vulnerability to general adverse economic and industry
                conditions;





·
            require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our debt, thereby reducing the availability of our cash
                flow
                to fund working capital, capital expenditures and other general corporate
                purposes;





·
            limit
                our flexibility in planning for, or reacting to, changes in our business
                and the industry in which we
                operate;





·
            result
                in the loss of a significant amount of our assets or the assets of
                our
                subsidiary if we are unable to meet the obligations of these
                arrangements;





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          -







·
            place
                us at a competitive disadvantage compared to our competitors that
                have
                less indebtedness or better access to capital by, for example, limiting
                our ability to enter into new markets;
                and





·
            limit
                our ability to borrow additional funds in the
                future.




**Risks
      Associated with Our Products and Operations**





**(4)**  **Our
      business is dependent upon the development and market acceptance of our
      applications, including the acceptance of using some of our applications to
      conduct business. Our business models and operating plans have changed as a
      result of forces beyond our control. Consequently, we have not yet demonstrated
      that we have a successful business model or operating
      plan.**





We
      continually revise our business models and operating plans as a result of
      changes in our market, the expectations of customers and the behavior of
      competitors. Today, we anticipate that our future financial performance and
      revenue growth will depend, in large part, upon our Internet-based SaaS business
      model and the results of our sales efforts to reach agreements with syndication
      partners with small business customer bases, but this business model may become
      ineffective due to forces beyond our control that we do not currently
      anticipate. We recently entered into agreements with four new syndication
      partners, but we have not yet derived any revenue under these agreements.
      Consequently, we have not yet demonstrated that we have a successful business
      model or operating plan. Our evolving business model makes our business
      operations and prospects difficult to evaluate. There can be no assurance that
      our revised business model will allow us to capture significant future market
      potential. Investors in our securities should consider all the risks and
      uncertainties that are commonly encountered by companies in this stage of
      operations under our current business model, particularly companies, such as
      ours, that are in emerging and rapidly evolving markets.





Our
      future financial performance and revenue growth will depend, in part, upon
      the
      successful development, integration, introduction, and customer acceptance
      of
      our software applications. Thereafter, other new products, either developed
      or
      acquired, and enhanced versions of our existing applications will be critically
      important to our business. Our business could be harmed if we fail to deliver
      timely enhancements to our current and future solutions that our customers
      desire. We also must continually modify and enhance our services and products
      to
      keep pace with market demands regarding hardware and software platforms,
      database technology, information security, and electronic commerce technical
      standards. There can be no assurance that we will be able to successfully
      develop new services or products, or to introduce in a timely manner and gain
      acceptance of our new services or products in the marketplace.





Our
      business could be harmed if we fail to achieve the improved performance that
      customers want with respect to our current and future product offerings. We
      cannot assure you that our products will achieve widespread market penetration
      or that we will derive significant revenues from the sale of our applications.




Certain
      of our services involve the storage and transmission of customers’ personal and
      proprietary information (such as credit card, employee, purchasing, supplier,
      and other financial and accounting data). If customers determine that our
      services do not provide adequate security for the dissemination of information
      over the Internet or corporate extranets, or are otherwise inadequate for
      Internet or extranet use, or if, for any other reason, customers fail to accept
      our products for use, our business will be harmed. Our failure to prevent
      security breaches, or well-publicized security breaches affecting the Internet
      in general, could significantly harm our business, operating results, and
      financial condition.





**(5)**  **We
      may consider strategic divestiture, acquisition or investment opportunities
      in
      the future.**





We
      face
      risks associated with any such opportunity. From time to time we evaluate
      strategic opportunities available to us for product, technology or business
      acquisitions, investments and divestitures. In the future, we may divest
      ourselves of products or technologies that are not within our continually
      evolving business strategy or acquire other products or technologies. We may
      not
      realize the anticipated benefits of any such current or future opportunity
      to
      the extent that we anticipate, or at all. We may have to issue debt or equity
      securities to pay for future acquisitions or investments, the issuance of which
      could be dilutive to our existing stockholders. If any opportunity is not
      perceived as improving our earnings per share, our stock price may decline.
      In
      addition, we may incur non-cash amortization charges from acquisitions, which
      could harm our operating results. Any completed acquisitions or divestitures
      would also require significant integration or separation efforts, diverting
      our
      attention from our business operations and strategy. We have limited acquisition
      experience, and therefore our ability as an organization to integrate any
      acquired companies into our business is unproven. Acquisitions and investments
      involve numerous risks, including:


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          29
          -







·
            difficulties
                in integrating operations, technologies, services and
                personnel;





·
            diversion
                of financial and managerial resources from existing
                operations;




·
            reduction
                of available cash;





·
            risk
                of entering new markets;




·
            potential
                write-offs of acquired assets;





·
            potential
                loss of key employees;




·
            inability
                to generate sufficient revenue to offset acquisition or investment
                costs;
                and





·
            delays
                in customer purchases due to
                uncertainty.




If
      we
      fail to properly evaluate and execute acquisitions, divestitures or investments,
      our business and prospects may be seriously harmed.





**(6)**  **We
      entered into a debt financing transaction in order to make certain installment
      payments under our agreement in the iMart acquisition. Failure to comply with
      the provisions of this loan agreement could have a material adverse effect
      on
      us.**





When
      we
      purchased iMart in October 2005, we committed to make installment payments
      of
      approximately $3,462,000 and non-competition payments to two key employees
      of
      $780,000. Prior to the loan agreement described below, the cash flow we received
      from the business we purchased from iMart has been insufficient to cover any
      of
      the installment payments we have been required to make, and we have had to
      fund
      the difference. We recently amended the lock box agreement related to the
      acquisition, terminating the iMart shareholders’ security interest in the
      amounts in the lock box account, and agreed to pay the installment payments
      and
      noncompetition payments in three non-equal installments by February 2007, which
      have been paid in full.





In
      order
      to make these payments, we entered into a loan agreement with Fifth Third Bank
      in order to finance a portion of the payments to the iMart shareholders. Under
      the terms of this agreement, Smart Commerce borrowed $1.8 million to be repaid
      in 24 monthly installments of $75,000 plus interest. The interest rate is prime
      plus 1.5% as periodically determined by Fifth Third Bank. Currently and at
      closing, the prime rate was 8.25%. The loan is secured by all of the assets
      of
      Smart Commerce, including a security account of $250,000 and all of Smart
      Commerce’s intellectual property. The loan is guaranteed by us and such guaranty
      is secured by all the common stock of Smart Commerce. If an event of default
      occurs and remains uncured, then the lender could foreclose on the assets
      securing the loan. If that were to occur, it would have a substantial adverse
      effect on our business. Making the payments on the loan used to finance part
      of
      these payments may drain our financial resources or cause other material harm
      to
      our business if the lender forecloses on the secured assets.





**(7)**  **We
      rely on third-party software that may be difficult to repair should errors
      or
      failures occur. Such an error or failure, or the process undertaken by us to
      correct such an error or failure, could disrupt our services and harm our
      business.**





We
      rely
      on software licensed from third parties in order to offer our services. We
      use
      key systems software from commercial vendors. The software we use may not
      continue to be available on commercially reasonable terms, or at all, or
      upgrades may not be available when we need them. We currently do not have
      support contracts or upgrade subscriptions with some of our key vendors. We
      are
      not currently aware of any immediate issues, but any loss of the right to use
      any of this software could result in delays in providing our services until
      equivalent technology is either developed by us, or, if available, is
      identified, obtained and integrated, which could harm our business. Any errors
      or defects in, or unavailability of, third-party software could result in errors
      or a failure of our services, which could harm our business.


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          30
          -







We
      also
      use key systems software from leading open source communities that are free
      and
      available in the public domain. Our products will use additional public domain
      software, if needed for successful implementation and deployment. We currently
      do not have support contracts for the open source software that we use. We
      rely
      on our own research and development personnel and the open source community
      to
      discover and fix any errors and bugs that may exist in the software we use.
      As a
      result, if there are errors in such software of which we are unaware or are
      unable to repair in a timely manner, there could be a disruption in our services
      if certain critical defects are discovered in the software at a future
      date.





**Risks
      Associated with Our Markets, Customers and Partners**





**(8)**  **The
      structure of our subscription model makes it difficult to predict the rate
      of
      customer subscription renewals or the impact non-renewals will have on our
      revenue or operating results.**





Our
      small
      business customers do not sign long-term contracts. Our customers have no
      obligation to renew their subscriptions for our services after the expiration
      of
      their initial subscription period and, in fact, customers have often elected
      not
      to do so. In addition, our customers may renew for a lower-priced edition of
      our
      services or for fewer users. Many of our customers utilize our services without
      charge. These factors make it difficult to accurately predict customer renewal
      rates. Our customers’ renewal rates may decline or fluctuate as a result of a
      number of factors, including when we begin charging for our services, their
      dissatisfaction with our services and their capability to continue their
      operations and spending levels. Most of our subscribers are in our Smart
      Commerce segment. Although the number of subscribers to our Smart Online segment
      has remained relatively constant since September 2006, we have experienced
      a
      decline in the number of subscribers to our Smart Commerce segment. This decline
      is primarily attributable to the restructuring of a major customer and was
      anticipated when we learned of the restructuring. If our customers do not renew
      their subscriptions for our services, or we are not able to increase the number
      of subscribers, our revenue may decline and our business will
      suffer.





**(9)**  **We
      depend on corporate partners to market our products through their web sites
      under relatively short-term agreements in order to increase subscription fees
      and grow revenue. Failure of our partners’ marketing efforts or termination of
      these agreements could harm our business.**





Subscription
      fees represented approximately 67 %
      of
      total revenues in the first quarter of 2007 compared to 40 %
      of
      total revenues in the first quarter of 2006. With the launch of our new
      applications and the acquisition of iMart, subscription fees represent a
      significant percentage of our total revenues and our future financial
      performance and revenue growth depends, in large part, upon the growth in
      customer demand for our outsourced services delivery models. We depend on our
      syndication partners and referral relationships to offer our products and
      services to a larger customer base than we can reach through direct sales or
      other marketing efforts. Although we recently entered into agreements with
      four
      new syndication partners and a marketing referral agreement, we have not yet
      derived any revenue under these agreements. Our success depends in part on
      the
      ultimate success of our syndication partners and referral partners and their
      ability to market our products and services successfully. Our partners are
      not
      obligated to provide potential customers to us. In addition, some of these
      third
      parties have entered, and may continue to enter into, strategic relationships
      with our competitors. Further, many of our strategic partners have multiple
      strategic relationships, and they may not regard us as significant for their
      businesses. Our strategic partners may terminate their respective relationships
      with us, pursue other partnerships or relationships, or attempt to develop
      or
      acquire products or services that compete with our products or services. Our
      strategic partners also may interfere with our ability to enter into other
      desirable strategic relationships. If we are unable to maintain our existing
      strategic relationships or enter into additional strategic relationships, we
      will have to devote substantially more resources to the distribution, sales,
      and
      marketing of our products and services.





**(10)**  **Our
      future growth is substantially dependent on customer demand for our subscription
      services delivery models. Failure to increase this revenue could harm our
      business.**


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          31
          -





We
      have
      invested significantly in infrastructure, operations, and strategic
      relationships to support our SaaS delivery model, which represents a significant
      departure from the delivery strategies that other software vendors and we have
      traditionally employed. To maintain positive margins for our small business
      services, our revenues will need to continue to grow more rapidly than the
      cost
      of such revenues. There can be no assurance that we will be able to maintain
      positive gross margins in our subscription services delivery models in future
      periods. If our subscription services business does not grow sufficiently,
      we
      could fail to meet expectations for our results of operations, which could
      harm
      our business.




Any
      delays in implementation may prevent us from recognizing subscription revenue
      for periods of time, even when we have already incurred costs relating to the
      implementation of our subscription services. Additionally, subscribers can
      cancel their subscriptions to our services at any time and, as a result, we
      may
      recognize substantially less revenue than we expect. If large numbers of
      customers cancel or otherwise seek to terminate subscription agreements more
      quickly than we expect, our operating results could be substantially harmed.
      To
      become successful, we must cause subscribers who do not pay fees to begin paying
      fees and increase the length of time subscribers pay subscription fees.





**(11)**  **There
      are risks associated with international operations, which may become a bigger
      part of our business in the future.**





We
      currently do not generate revenue from international operations. Although we
      have recently signed an agreement with a company to market our products and
      services in a foreign country, this agreement has not yet generated any revenue
      for us. We are currently evaluating whether and how to expand into additional
      international markets. If we continue to develop our international operations,
      these operations will be subject to risks associated with operating abroad.
      These international operations are subject to a number of difficulties and
      special costs, including:




·
            costs
                of customization and localization of products for foreign
                countries;





·
            laws
                and business practices favoring local
                competitors;





·
            uncertain
                regulation of electronic commerce;





·
            compliance
                with multiple, conflicting, and changing governmental laws and
                regulations;




·
            longer
                sales cycles; greater difficulty in collecting accounts
                receivable;





·
            import
                and export restrictions and
                tariffs;




·
            potentially
                weaker protection for our intellectual property than in the United
                States,
                and practical difficulties in enforcing such rights
                abroad;





·
            difficulties
                staffing and managing foreign
                operations;




·
            multiple
                conflicting tax laws and regulations;
                and





·
            political
                and economic instability.







Our
      international operations may also face foreign currency-related risks. To date,
      all of our revenues have been denominated in United States Dollars, but an
      increasing portion of our revenues may be denominated in foreign currencies.
      We
      do not engage in foreign exchange hedging activities, and therefore our
      international revenues and expenses may be subject to the risks of foreign
      currency fluctuations.




We
      must
      also customize our services and products for international markets. This process
      is much more complex than merely translating languages. For example, our ability
      to expand into international markets will depend on our ability to develop
      and
      support services and products that incorporate the tax laws, accounting
      practices, and currencies of particular countries. Since a large part of our
      value proposition to customers is tied to developing products with the peculiar
      needs of small businesses in mind, any variation in business practice from
      one
      country to another may substantially decrease the value of our products in
      that
      country unless we identify the important differences and customize our product
      to address the differences.


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          32
          -







Our
      international operations may also increase our exposure to international laws
      and regulations. If we cannot comply with domestic or foreign laws and
      regulations, which are often complex and subject to variation and unexpected
      changes, we could incur unexpected costs and potential litigation. For example,
      the governments of foreign countries might attempt to regulate our services
      and
      products or levy sales or other taxes relating to our activities. In addition,
      foreign countries may impose tariffs, duties, price controls or other
      restrictions on foreign currencies or trade barriers, any of which could make
      it
      more difficult for us to conduct our business in international markets.





**Risks
      Associated with Our Officers, Directors, Employees and
      Stockholders**





**(12)**  **Our
      executive management team is critical to the execution of our business plan
      and
      the loss of their services could severely impact negatively on our
      business.**





Our
      success depends significantly on the continued services of our executive
      management personnel. Losing any of our officers could seriously harm our
      business. Competition for executives is intense. If we had to replace any of
      our
      officers, we would not be able to replace the significant amount of knowledge
      that they have about our operations. All of our executive team work at the
      same
      location, which could make us vulnerable to loss of our entire management team
      in the event of a natural or other disaster. We do not maintain key man
      insurance policies on any of our employees.








**(13)**  **Officers,
      directors and principal stockholders control us. This might lead them to make
      decisions that do not benefit the interests of minority
      stockholders.**





Our
      officers, directors and principal stockholders beneficially own or control
      approximately 59% of our outstanding common stock. As a result, these persons,
      acting together, will have the ability to control substantially all matters
      submitted to our stockholders for approval (including the election and removal
      of directors and any merger, consolidation or sale of all or substantially
      all
      of our assets) and to control our management and affairs. Accordingly, this
      concentration of ownership may have the effect of delaying, deferring or
      preventing a change in control of us, impeding a merger, consolidation, takeover
      or other business combination involving us or discouraging a potential acquiror
      from making a tender offer or otherwise attempting to obtain control of us,
      which in turn could materially and adversely affect the market price of our
      common stock.





**Regulatory
      Risks**





**(14)**  **Compliance
      with new regulations governing public company corporate governance and reporting
      is uncertain and expensive.**





As
      a
      public company, we have incurred and will incur significant legal, accounting
      and other expenses that we did not incur as a private company. We will incur
      costs associated with our public company reporting requirements. We also
      anticipate that we will incur costs associated with recently adopted corporate
      governance requirements, including requirements under the Sarbanes-Oxley Act
      of
      2002, or Sarbanes-Oxley, as well as new rules implemented by the SEC and the
      NASD. We expect these rules and regulations to increase our legal and financial
      compliance costs and to make some activities more time consuming and costly.
      Any
      unanticipated difficulties in preparing for and implementing these reforms
      could
      result in material delays in complying with these new laws and regulations
      or
      significantly increase our costs. Our ability to fully comply with these new
      laws and regulations is also uncertain. Our failure to prepare timely for and
      implement the reforms required by these new laws and regulations could
      significantly harm our business, operating results, and financial condition.
      We
      also expect that these new rules and regulations may make it more difficult
      and
      more expensive for us to obtain director and officer liability insurance and
      we
      may be required to accept reduced policy limits and coverage or incur
      substantially higher costs to obtain the same or similar coverage. In the past,
      we have incurred substantial additional professional fees and expenses
      associated with the SEC’s suspension of trading of our securities in January
      2006 and with the internal investigation authorized by our Board of Directors
      in
      March 2006. Although our insurance carrier has paid a portion of these fees,
      not
      all such fees and expenses will be covered by our insurance.


-
          33
          -





**(15)**  **Remediation
      of deficiencies in our internal control over financial reporting is uncertain
      and may be expensive.**





By
      the
      end of fiscal 2007, we are required to comply with Sarbanes-Oxley requirements
      involving management’s assessment of our internal control over financial
      reporting and our independent accountant’s audit of that assessment is required
      for fiscal 2008. In March 2006, we retained a new Chief Financial Officer.
      His
      review of our internal control over financial reporting to date and the final
      findings of our Audit Committee investigation have identified several
      deficiencies in our internal control over financial reporting. While we have
      made some progress on this remediation effort, we continue to work on addressing
      all the issues raised in these findings. Although we believe our on-going review
      and testing of our internal control over financial reporting will enable us
      to
      be compliant with these requirements, we have identified some deficiencies
      and
      may identify others that we may not be able to remediate and test by the end
      of
      fiscal 2007.





If
      we
      cannot assess our internal controls over financial reporting as effective,
      it
      may affect our management’s assessment of our internal control environment as it
      will be disclosed in our Annual Report on Form 10-K for fiscal year 2007 and
      our
      stock price could decline.





**(16)**  **The
      SEC suspension of trading of our securities has damaged our business, and it
      could damage our business in the future.**





The
      suspension of trading by the SEC has harmed our business in many ways, and
      may
      cause further harm in the future. Prior to our re-entry onto the Over the
      Counter Bulletin Board, or the OTC-BB, for quotation, our ability to raise
      financing on favorable terms to us and our existing stockholders suffered due
      to
      the lack of liquidity of our stock, the questions raised by the SEC’s action,
      and the resulting drop in the price of our common stock. As a result, we did
      not
      raise sufficient financing to make the sales and marketing investments we felt
      were needed in 2006 to substantially increase revenue. Legal and other fees
      related to the SEC’s action also reduced our cash flow which jeopardized our
      ability to make the installment payments required by the agreements to acquire
      iMart. We recently completed a private placement financing for $6 million;
      however we make no assurance that we will not continue to experience additional
      harm as a result of the SEC matter. The time spent by our management team and
      directors dealing with issues related to the SEC action also detracted from
      the
      time they spent on our operations, including strategy development and
      implementation. Finally, an important part of our business plan is to enter
      into
      private label syndication agreements with large companies. The SEC’s action and
      related matters have caused us to be a less attractive partner for large
      companies and to lose important opportunities. The SEC’s action and related
      matters may cause other problems in our operations.





**Risks
      Associated with the Market for Our Securities**





**(17)**  **If
      securities analysts do not publish research or reports about our business or
      if
      they downgrade our stock, the price of our stock could decline.**





The
      trading market for our common stock relies in part on the research and reports
      that industry or financial analysts publish about us or our business. Because
      our stock is currently quoted on the OTC-BB rather than traded on a national
      exchange, analysts may not be interested in conducting research or publishing
      reports on us. If we do not succeed in attracting analysts to report about
      our
      company, most investors will not know about us even if we are successful in
      implementing our business plan. We do not control these analysts. There are
      many
      large, well established publicly traded companies active in our industry and
      market, which may mean it will be less likely that we receive widespread analyst
      coverage. Furthermore, if one or more of the analysts who do cover us downgrade
      our stock, our stock price would likely decline rapidly. If one or more of
      these
      analysts cease coverage of our company, we could lose visibility in the market,
      which in turn could cause our stock price to decline.


-
          34
          -





**(18)**  **Our
      revenues and operating results may fluctuate in future periods and we may fail
      to meet expectations of investors and public market analysts, which could cause
      the price of our common stock to decline.**





Our
      revenues and operating results may fluctuate significantly from quarter to
      quarter. If quarterly revenues or operating results fall below the expectations
      of investors or public market analysts, the price of our common stock could
      decline substantially. Factors that might cause quarterly fluctuations in our
      operating results include:




·
            the
                evolving demand for our services and
                software;





·
            spending
                decisions by our customers and prospective
                customers;




·
            our
                ability to manage expenses;





·
            the
                timing of product releases;




·
            changes
                in our pricing policies or those of our
                competitors;





·
            the
                timing of execution of contracts;




·
            changes
                in the mix of our services and software
                offerings;





·
            the
                mix of sales channels through which our services and software are
                sold;




·
            costs
                of developing product enhancements;





·
            global
                economic and political conditions;




·
            our
                ability to retain and increase sales to existing customers, attract
                new
                customers and satisfy our customers’
                requirements;





·
            subscription
                renewal rates for our service;




·
            the
                rate of expansion and effectiveness of our sales
                force;





·
            the
                length of the sales cycle for our
                service;




·
            new
                product and service introductions by our
                competitors;





·
            technical
                difficulties or interruptions in our
                service;




·
            regulatory
                compliance costs;





·
            integration
                of acquisitions; and




·
            extraordinary
                expenses such as litigation or other dispute-related settlement
                payments.




In
      addition, due to a slowdown in the general economy and general uncertainty
      of
      the current geopolitical environment, an existing or potential customer may
      reassess or reduce its planned technology and Internet-related investments
      and
      defer purchasing decisions. Further delays or reductions in business spending
      for technology could have a material adverse effect on our revenues and
      operating results.


-
          35
          -








**(19)**  **Our
      stock price is likely to be highly volatile and may decline.**





The
      trading prices of the securities of technology companies have been highly
      volatile. Accordingly, the trading price of our common stock has been and is
      likely to continue to be subject to wide fluctuations. Further, our common
      stock
      has a limited trading history. Factors affecting the trading price of our common
      stock include:





·
            variations
                in our actual and anticipated operating
                results;





·
            the
                volatility inherent in stock prices within the emerging sector in
                which we
                conduct business;




·
            announcements
                of technological innovations, new services or service enhancements,
                strategic alliances or significant agreements by us or by our
                competitors;





·
            recruitment
                or departure of key personnel;




·
            changes
                in the estimates of our operating results or changes in recommendations
                by
                any securities analysts that elect to follow our common
                stock;





·
            market
                conditions in our industry, the industries of our customers and the
                economy as a whole; and




·
            the
                volume of trading in our common stock, including sales of substantial
                amounts of common stock issued upon the exercise of outstanding options
                and warrants.





In
      addition, the stock market from time to time has experienced extreme price
      and
      volume fluctuations that have affected the trading prices of many emerging
      growth companies. Such fluctuations have often been unrelated or
      disproportionate to the operating performance of these companies. These broad
      trading fluctuations could adversely affect the trading price of our common
      stock.





Further,
      securities class action litigation has often been brought against companies
      that
      experience periods of volatility in the market prices of their securities.
      Securities class action litigation could result in substantial costs and a
      diversion of our management’s attention and resources. If such a suit is brought
      against us, we may determine, like many defendants in such lawsuits, that it
      is
      in our best interests to settle such a lawsuit, even if we believe that the
      plaintiffs’ claims have no merit, to avoid the cost and distraction of continued
      litigation. Any liability we incur in connection with any potential lawsuit
      could materially harm our business and financial position and, even if we defend
      ourselves successfully, there is a risk that management’s distraction in dealing
      with this type of lawsuit could harm our results.





**(20)**  **Shares
      eligible for public sale could adversely affect our stock price.**





Certain
      holders of shares of our common stock signed agreements that prohibit resales
      of
      our common stock. If substantial numbers of shares are resold as lock-up periods
      expire, the market price of our common stock is likely to decrease
      substantially.





At
      May 1,
      2007, 17,872,137 shares of our common stock were issued and outstanding and
      3,928,715 shares may be issued pursuant to the exercise of warrants and options.
      During May 2005, we registered on Form S-8 5,000,000 shares of our common stock
      for issuance to our officers, directors and consultants under our 2004 Equity
      Compensation Plan, of which at May 1, 2007, 101,000 shares were outstanding
      and
      1,677,200 shares are subject to outstanding stock options of the 5,000,000
      shares reserved for issuance under such plan. The remaining outstanding shares
      of our common stock are restricted and may be sold in the public market only
      if
      they qualify for an exemption from registration under Rules 144 or 701
      promulgated under the Securities Act.





We
      entered into agreements that limit the number of shares that may be sold during
      specific time periods, or Dribble Out Agreements, with all of the investors
      who
      purchased shares of our stock from us in private placements during 2005 and
      2006, a total of approximately 2,497,000 shares. Under these Dribble Out
      Agreements, sales of shares are limited to 25% during a rolling 30-day period.
      Such limitations terminate six months after the effective date of the
      registration statement registering these shares.


-
          36
          -








Our
      stock
      is very thinly traded. The average daily trading volume for our common stock
      between November 2006 and April 2007 was approximately 15,000 shares per day.
      The number of shares that could be sold during this period was restrained by
      Dribble Out Agreements and other contractual limitations imposed on some of
      our
      shares, while there was no similar contractual restraint on the number of buyers
      of our common stock. This means that market supply may increase more than market
      demand for our shares when lock-up and dribble-out periods expire. Many
      companies experience a decrease in the market price of their shares when such
      events occur.





We
      cannot
      predict if future sales of our common stock, or the availability of our common
      stock held for sale, will materially and adversely affect the market price
      for
      our common stock or our ability to raise capital by offering equity securities.
      Our stock price may decline if the resale of shares under Rule 144, in addition
      to the resale of registered shares, at any time in the future exceeds the market
      demand for our stock.





Future
      sales of substantial amounts of our shares in the public market could adversely
      affect market prices prevailing from time to time and could impair our ability
      to raise capital through the sale of our equity securities.





**(21)**  **Our
      securities may be subject to “penny stock” rules, which could adversely affect
      our stock price and make it more difficult for you to resell our stock.**





The
      SEC
      has adopted rules that regulate broker-dealer practices in connection with
      transactions in penny stocks. Penny stocks are generally equity securities
      with
      a price of less than $5.00 per share (other than securities registered on
      certain national securities exchanges or quotation systems, provided that
      reports with respect to transactions in such securities are provided by the
      exchange or quotation system pursuant to an effective transaction reporting
      plan
      approved by the SEC).





The
      penny
      stock rules require a broker-dealer, prior to a transaction in a penny stock
      not
      otherwise exempt from those rules, to deliver a standardized risk disclosure
      document prescribed by the SEC, which:




·
            contains
                a description of the nature and level of risk in the market for penny
                stocks in both public offerings and secondary
                trading;




·
            contains
                a description of the broker’s or dealer’s duties to the customer and of
                the rights and remedies available to the customer with respect to
                a
                violation of such duties or other
                requirements;




·
            contains
                a brief, clear, narrative description of a dealer market, including
“bid”
                and “ask” prices for penny stocks and the significance of the spread
                between the bid and ask price;




·
            contains
                a toll-free telephone number for inquiries on disciplinary
                actions;




·
            defines
                significant terms in the disclosure document or in the conduct of
                trading
                penny stocks; and





·
            contains
                such other information and is in such form (including language, type,
                size, and format) as the SEC
                requires.




The
      broker-dealer also must provide the customer, prior to effecting any transaction
      in a penny stock, with:




·
            bid
                and ask quotations for the penny
                stock;





·
            the
                compensation of the broker-dealer and its salesperson in the
                transaction;





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          37
          -





·
            the
                number of shares to which such bid and ask prices apply, or other
                comparable information relating to the depth and liquidity of the
                market
                for such stock; and





·
            monthly
                account statements showing the market value of each penny stock held
                in
                the customer’s account.




In
      addition, the penny stock rules require that, prior to a transaction in a penny
      stock not otherwise exempt from those rules, the broker-dealer must make a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser’s written acknowledgment of the receipt
      of a risk disclosure statement, a written agreement related to transactions
      involving penny stocks, and a signed and dated copy of a written suitability
      statement. These disclosure requirements could have the effect of reducing
      the
      trading activity in the secondary market for our stock because it will be
      subject to these penny stock rules. Therefore, stockholders may have difficulty
      selling those securities.





**Item
      2.** **** **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





In
      a
      transaction that closed on February 21, 2007, we sold an aggregate of 2,352,941
      shares of our common stock to two new investors, or the Investors. The private
      placement shares were sold at $2.55 per share pursuant to a Securities Purchase
      Agreement, or the SPA, between us and the Investors. The amount raised in the
      private placement was $6 million. Under the SPA, the Investors were issued
      warrants for the purchase of an aggregate of 1,176,471 shares of common stock
      at
      an exercise price of $3.00 per share. These warrants contain a provision for
      cashless exercise and must be exercised by February 21, 2010.





The
      securities sold in this transaction were sold in reliance upon the exception
      afforded by Rule 506 of Regulation D and Section 4(2) of the Securities Act
      of
      1933, as amended. The sale was made to accredited investors (as such term is
      defined in Rule 501(a) of Regulation D) that were acquiring our shares for
      investment purposes only.





Proceeds
      from this transaction are expected to be used primarily to pay for ongoing
      operations and current liabilities, to satisfy outstanding debt, to pay fees
      owed to our placement agent in this placement, and to pay audit and professional
      fees related to SEC filings.





As
      incentive to modify a letter of credit issued in connection with our revolving
      line of credit with Wachovia from $1.3 million to $2.5 million, we entered
      into
      a Stock Purchase Warrant and Agreement, or the Warrant Agreement, with Atlas
      on
      January 15, 2007. Under the terms of the Warrant Agreement, Atlas received
      a
      warrant to purchase up to 444,444 shares of our common stock at $2.70 per share
      at the termination of the line of credit or if we are in default under the
      terms
      of the line of credit with Wachovia. If the warrant is exercised in full, it
      will result in gross proceeds to us of approximately $1,200,000.





The
      warrant granted under this transaction was granted in reliance upon the
      exemption afforded by Rule 506 of Regulation D and Section 4(2) of the
      Securities Act of 1933, as amended. The issuance was to an accredited investor
      (as such term is defined in Rule 501(a) of Regulation D) that acquired the
      warrant and shares to be issued upon conversion of the warrant for investment
      purposes only.





For
      a
      more complete description of these sales, please see our Current Reports on
      Form
      8-K, filed on January 19, 2007 and February 27, 2007.





**Item6.** **** **EXHIBITS**




The
      following exhibits have been or are being filed herewith and are numbered in
      accordance with Item 601 of Regulation S-K:


-
          38
          -





Exhibit
                No.
            Description10.1
            Stock
                Purchase Warrant and Agreement, dated January 15, 2007, by and between
                Smart Online, Inc. and Atlas Capital, SA(incorporated herein by reference to Exhibit 10.44 to our Registration
                Statement on Form S-1, as filed with the SEC on April 3,
                2007)10.2
            Smart
                Online, Inc. Revised Board Compensation Policy, effective February
                2, 2007(incorporated
                herein by reference to Exhibit 10.45 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.3
            Form
                of Securities Purchase Agreement, Registration Rights Agreement,
                and
                Warrant to Purchase Common Stock of Smart Online, Inc., dated February
                21,
                2007, by and between Smart Online, Inc. and each of Magnetar Capital
                Master Fund, Ltd. and Herald Investment Management Limited on behalf
                of
                Herald Investment Trust PLC(incorporated
                herein by reference to Exhibit 10.46 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.4
            Warrant
                to Purchase Common Stock of Smart Online, Inc., and Registration
                Rights
                Agreement, dated February 27, 2007, by and between Smart Online,
                Inc. and
                Canaccord Adams Inc.(incorporated
                herein by reference to Exhibit 10.47 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.5
            Form
                of Registration Rights Agreement, of various dates, by and between
                Smart
                Online, Inc. and certain parties in connection with the sale of shares
                by
                Dennis Michael Nouri(incorporated
                herein by reference to Exhibit 10.48 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.6
            Form
                of Restricted Stock Agreement under Smart Online, Inc.’s 2004 Equity
                Compensation Plan10.7
            Form
                of Incentive Stock Option Agreement under Smart Online, Inc.’s 2004 Equity
                Compensation Plan10.8
            Form
                of Non-Qualified Stock Option Agreement under Smart Online, Inc.’s 2004
                Equity Compensation Plan31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted
                Pursuant
                to Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted
                Pursuant
                to Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit
                is
                being furnished pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002
                and shall not, except to the extent required by that Act, be deemed
                to be
                incorporated by reference into any document or filed herewith for
                the
                purposes of liability under the Securities Exchange Act of 1934,
                as
                amended, or the Securities Act of 1933, as amended, as the case may
                be.32.2
            Certification
                of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350,
                as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                This
                exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 and shall not, except to the extent required by that
                Act, be
                deemed to be incorporated by reference into any document or filed
                herewith
                for the purposes of liability under the Securities Exchange Act of
                1934,
                as amended, or the Securities Act of 1933, as amended, as the case
                may
                be.





-
          39
          -


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





Dated:
      May 15, 2007








**Smart
                Online, Inc.**/s/ Michael NouriMichael
                Nouri**Principal Executive Officer****Smart
                Online, Inc.**/s/ Nicholas Sinigaglia******Nicholas Sinigaglia****Principal Financial Officer and****Principal Accounting Officer**




-
          40
          -


**SMART
      ONLINE, INC.**


**EXHIBIT
      INDEX**








Exhibit
                No.
            Description10.1
            Stock
                Purchase Warrant and Agreement, dated January 15, 2007, by and between
                Smart Online, Inc. and Atlas Capital, SA(incorporated herein by reference to Exhibit 10.44 to our Registration
                Statement on Form S-1, as filed with the SEC on April 3,
                2007)10.2
            Smart
                Online, Inc. Revised Board Compensation Policy, effective February
                2, 2007(incorporated
                herein by reference to Exhibit 10.45 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.3
            Form
                of Securities Purchase Agreement, Registration Rights Agreement,
                and
                Warrant to Purchase Common Stock of Smart Online, Inc., dated February
                21,
                2007, by and between Smart Online, Inc. and each of Magnetar Capital
                Master Fund, Ltd. and Herald Investment Management Limited on behalf
                of
                Herald Investment Trust PLC(incorporated
                herein by reference to Exhibit 10.46 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.4
            Warrant
                to Purchase Common Stock of Smart Online, Inc., and Registration
                Rights
                Agreement, dated February 27, 2007, by and between Smart Online,
                Inc. and
                Canaccord Adams Inc.(incorporated
                herein by reference to Exhibit 10.47 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.5
            Form
                of Registration Rights Agreement, of various dates, by and between
                Smart
                Online, Inc. and certain parties in connection with the sale of shares
                by
                Dennis Michael Nouri(incorporated
                herein by reference to Exhibit 10.48 to our Registration Statement
                on Form
                S-1, as filed with the SEC on April 3, 2007)10.6
            Form
                of Restricted Stock Agreement under Smart Online, Inc.’s 2004 Equity
                Compensation Plan10.7
            Form
                of Incentive Stock Option Agreement under Smart Online, Inc.’s 2004 Equity
                Compensation Plan10.8
            Form
                of Non-Qualified Stock Option Agreement under Smart Online, Inc.’s 2004
                Equity Compensation Plan31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted
                Pursuant
                to Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted
                Pursuant
                to Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit
                is
                being furnished pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002
                and shall not, except to the extent required by that Act, be deemed
                to be
                incorporated by reference into any document or filed herewith for
                the
                purposes of liability under the Securities Exchange Act of 1934,
                as
                amended, or the Securities Act of 1933, as amended, as the case may
                be.32.2
            Certification
                of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350,
                as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                This
                exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 and shall not, except to the extent required by that
                Act, be
                deemed to be incorporated by reference into any document or filed
                herewith
                for the purposes of liability under the Securities Exchange Act of
                1934,
                as amended, or the Securities Act of 1933, as amended, as the case
                may
                be.








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