**SMART
      ONLINE, INC.**


**INCENTIVE
      STOCK OPTION AGREEMENT**







THIS
      INCENTIVE STOCK OPTION AGREEMENT, made and entered into as of the _____ day
      of
      __________, 20___, by and between Smart Online, Inc., a Delaware corporation
      (the “ **Company** ”),
      and
      ______________ (the “ **Participant** ”).





WHEREAS,
      the committee appointed under the Smart Online, Inc. Equity Compensation Plan
      (the “ **Committee** ”)
      granted Participant an option to purchase shares of the Company’s Common Stock,
      $0.001 par value per share (the “ **Common
      Stock** ”),
      pursuant to the Smart Online, Inc. 2004 Equity Compensation Plan (the
“ **Plan** ”)
      (capitalized terms used herein shall have the meanings set out in the Plan
      unless otherwise specified in this Agreement); and





WHEREAS,
      this Agreement evidences the grant of such option.





NOW,
      THEREFORE, in consideration of the foregoing, of the mutual promises set forth
      below and of other good and valuable consideration, the receipt and sufficiency
      of which are hereby acknowledged, the parties hereto, intending to be legally
      bound, agree as follows:





1. Grant
      of Option .
      The
      Committee hereby grants Participant an option to purchase from the Company,
      during the period specified in Section 2 of this Agreement, a total of
      ______________ (______) shares of Stock, at the purchase price of ______________
      ($_______) per share (the “ **Purchase
      Price** ”),
      in
      accordance with the terms and conditions stated in this Agreement. The shares
      of
      Stock subject to the option granted hereby are referred to below as the
“Shares,” and the option to purchase such Shares is referred to below as the
“Option”.





2. Vesting
      and Exercise of Option .
      The
      Option shall vest and become exercisable in increments in accordance with the
      schedule set forth below, provided that the Option shall vest and become
      exercisable with respect to an increment as specified only if Participant is
      employed with the Company on the specified date for such increment:




_____________________________________.





The
      schedule set forth above is cumulative, so that Shares as to which the Option
      has become vested and exercisable on and after a date indicated by the schedule
      may be purchased pursuant to exercise of the Option at any subsequent date
      prior
      to termination of the Option. The Option may be exercised at any time and from
      time to time to purchase up to the number of Shares as to which it is then
      vested and exercisable.








2





Notwithstanding
      the foregoing, the Option shall vest and become exercisable, to the extent
      not
      already vested and exercisable, upon a Change of Control or a Corporate
      Reorganization, if the Company shall send Participant prior written notice
      of
      the effectiveness of such event and the last day on which Participant may
      exercise the Option. Participant may, upon compliance with all of the terms
      of
      this Agreement and the Plan, purchase any or all of the Shares with respect
      to
      which the Option is vested and exercisable on or prior to the last day specified
      in such notice, and, to the extent the Option is not exercised, it shall
      terminate at 5:00 P.M., eastern standard time, on the last day specified in
      such
      notice. The last day specified in the notice shall not be less than twenty
      (20)
      days after the date of the notice.





3. Termination
      of Option .
      The
      Option shall remain exercisable as specified in Section 2 above until the
      earliest to occur of the dates specified below, upon which date the Option
      shall
      terminate:





(a) the
      date
      all of the Shares are purchased pursuant to the terms of this Agreement;





(b) in
      the
      event of Participant’s death or disability prior to Termination of Service of
      Participant, the Option shall remain exercisable until one year following the
      Participant’s death or disability;





(c) upon
      the
      expiration of ninety (90) days following the Termination of Service of
      Participant, provided that in the event of the Participant’s death or Disability
      during such ninety (90) day period the Option shall remain exercisable until
      the
      expiration of one (1) year following the Participant’s death or
      Disability;





(d) at
      5:00
      P.M., eastern standard time, on the last date specified in the notice described
      in Section 2 above, in the event of a Change of Control or Corporate
      Reorganization **,** except
      to the extent that the Option is assumed by the surviving entity or an affiliate
      thereof in connection with such Change in Control or Corporate Reorganization;
      or





(e) the
      ten
      year anniversary of the Grant Date at 5:00 P.M., eastern standard
      time.





3





Upon
      its
      termination, the Option shall have no further force or effect and Participant
      shall have no further rights under the Option or to any Shares which have not
      been purchased pursuant to prior exercise of the Option.





4. Manner
      of Exercise of Option .





(a) The
      Option may be exercised only by (i) Participant’s completion, execution and
      delivery to the Company of a notice of exercise and, if required by the Company,
      an “ **investment
      letter** ”
as
      supplied by the Company confirming Participant’s representations and warranties
      in Section 17 of this Agreement, including the representation that Participant
      is acquiring the Shares for investment only and not with a view to the resale
      or
      other distribution thereof, and (ii) the payment to the Company, pursuant to
      the
      terms of this Agreement, of an amount equal to the Purchase Price multiplied
      by
      the number of Shares being purchased as specified in Participant’s notice of
      exercise. Participant’s notice of exercise shall be given in the manner
      specified in Section 12 but any exercise of the Option shall be effective only
      when the items required by the preceding sentence are actually received by
      the
      Company. The notice of exercise and the “ **investment
      letter** ”
may
      be
      in the form set forth in Exhibit
      A attached
      to this Agreement. Payment of the aggregate Purchase Price for Shares
      Participant has elected to purchase shall be made by cash or good check.
      Notwithstanding anything to the contrary in this Agreement, the Option may
      be
      exercised only if compliance with all applicable federal and state securities
      laws can be effected.





(b) Subject
      to the provisions of Section 3.7 of the Plan, upon any exercise of the Option
      by
      Participant or as soon thereafter as is practicable, the Company shall issue
      and
      deliver to Participant a certificate or certificates evi-dencing such number
      of
      Shares as Participant has then elected to purchase. Such certificate or
      certificates shall be registered in the name of Participant and shall bear
      the
      legend specified in Section 16 of this Agreement and any legend required by
      any
      federal or state securities laws and by the state in which the Company is
      incorporated.





5. Definitions;
      Authority of Committee .





(a) A
      “ **Change
      in Control** ”
shall
      be deemed to have occurred if, after the class of stock then subject to this
      Agreement becomes publicly traded, (i) the direct or indirect beneficial
      ownership (within the meaning of Section 13(d) of the Act and Regulation 13D
      thereunder) of fifty percent (50%) or more of the class of securities then
      subject to this Agreement is acquired or becomes held by any person or group
      of
      persons (within the meaning of Section 13(d)(3) of the Act), but excluding
      the
      Company and any employee benefit plan sponsored or maintained by the Company,
      or
      (ii) assets or earning power constituting more than fifty percent (50%) of
      the
      assets or earning power of the Company and its subsidiaries (taken as a whole)
      is sold, mortgaged, leased or otherwise transferred, in one or more transactions
      not in the ordinary course of the Company’s business, to any such person or
      group of persons; provided, however, that a Change in Control shall not be
      deemed to have occurred upon an investment by one or more venture capital funds,
      Small Business Investment Companies (as defined in the Small Business Investment
      Act of 1958, as amended) or similar financial investors. For the purposes of
      this Agreement, the class of stock then subject to this Agreement shall be
      deemed to be “publicly traded” if such stock is listed or admitted to unlisted
      trading privileges on a national securities exchange or as to which sales or
      bid
      and offer quotations are reported in the automated system operated by the
      National Association of Securities Dealers, Inc.





4








(b)  A
      “ **Corporate
      Reorganization** ”
means
      the happening of any one (1) of the following events: (i) the dissolution or
      liquidation of the Company; (ii) a capital reorganization, merger or
      consolidation involving the Company, unless (A) the transaction involves only
      the Company and one or more of the Company’s parent corporation and wholly-owned
      (excluding interests held by employees, officers and directors) subsidiaries;
      or
      (B) the shareholders who had the power to elect a majority of the board of
      directors of the Company immediately prior to the transaction have the power
      to
      elect a majority of the board of directors of the surviving entity immediately
      following the transaction; (iii) the sale of all or substantially all of the
      assets of the Company to another corporation, person or business entity; or
      (iv)
      an acquisition of Company stock, unless the shareholders who had the power
      to
      elect a majority of the board of directors of the Company immediately prior
      to
      the acquisition have the power to elect a majority of the board of directors
      of
      the Company immediately following the transaction; provided, however, that
      a
      Corporate Reorganization shall not be deemed to have occurred upon an investment
      by one or more venture capital funds, Small Business Investment Companies (as
      defined in the Small Business Investment Act of 1958, as amended) or similar
      financial investors.





(c)  “ **Termination
      of Service** ”
shall
      have the meaning defined in the Plan.




(d)  All
      determinations made by the Committee with respect to the interpretation,
      construction and application of any provision of this Agreement shall be final,
      conclusive and binding on the parties.





6.  Default
      Treatment .





(a)  The
      Option shall be construed so that it is in compliance with the requirements
      of
      section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). If
      for any reason the Option does not meet the requirements of section 422 of
      the
      Code and the regulations thereunder, then the Option or any portion of the
      Option, as necessary, shall be deemed a Nonqualified Stock Option granted under
      the Plan.





(b)  If
      the
      aggregate Fair Market Value, determined on the date of grant, of the stock
      to
      which this Option and any other incentive stock options are exercisable for
      the
      first time by Participant during any calendar year under the Plan or any other
      stock option plan of the Company exceeds $100,000 (or such other amount as
      the
      Code may specify), the Option shall be deemed a Nonqualified Stock Option
      granted under the Plan to the extent of such excess.





5











7. Rights
      Prior to Exercise .
      Participant will have no rights as a shareholder with respect to the Shares
      except to the extent that Participant has exercised the Option and has been
      issued and received delivery of a certificate or certificates evidencing the
      Shares so purchased.





8. Sale
      or Other Disposition by Majority Interest .
      Participant hereby irrevocably appoints the Company and its President, or either
      of them, as Participant’s agents and attor-neys-in-fact, with full power of
      substitution for and in Partic-ipant’s name, to sell, exchange, transfer or
      otherwise dispose of all or a portion of Participant’s Shares and to do any and
      all things and to execute any and all documents and instruments (including,
      without limitation, any stock transfer powers) in connection therewith, such
      powers of attorney not to become operable until such time as the holder or
      holders of a majority of the issued and outstanding shares of Stock of the
      Company sell, exchange, transfer or otherwise dispose of, or contract to sell,
      exchange, transfer or otherwise dispose of, all or a majority of the issued
      and
      outstanding shares of Stock of the Company. Any sale, exchange, transfer or
      other disposition of all or a portion of Participant’s Shares pursuant to the
      foregoing powers of attorney shall be made upon substantially the same terms
      and
      conditions (including sale price per share) applicable to a sale, exchange,
      transfer or other disposition of shares of Stock of the Company owned by the
      holder or holders of a majority of the issued and outstanding shares of Stock
      of
      the Company. For purposes of determining the sale price per share of the Shares
      under this Section 8, there shall be excluded the consideration (if any) paid
      or
      payable to the holder or holders of a majority of the issued and outstanding
      shares of Common Stock of the Company in connection with any employment,
      consulting, noncompetition or similar agreements which such holder or holders
      may enter into in connection with or subsequent to such sale, transfer, exchange
      or other disposition. The foregoing power of attorney shall not impose or be
      deemed to impose any fiduciary duty or any other duty (except as set forth
      in
      this Section 8) or obligation on either the Company or its President, shall
      be
      irrevocable and coupled with an interest and shall not terminate by operation
      of
      law, whether by the death, bankruptcy or adjudication of incompetence or
      insanity of Participant or the occurrence of any other event.





9. Engagement
      of Participant .
      Nothing
      in this Agreement shall be construed as constituting a commitment, guarantee,
      agreement or understanding of any kind or nature that the Company shall continue
      to employ Participant, nor shall this Agreement affect in any way the right
      of
      the Company to terminate the employment of Participant at any time and for
      any
      reason. By Participant’s execution of this Agreement, Partici-pant acknowledges
      and agrees that Participant’s employment is “at will.” No change of
      Participant’s duties as an employee of the Company shall result in, or be deemed
      to be, a modification of any of the terms of this Agreement.





10. Burden
      and Benefit; Company .
      This
      Agreement shall be binding upon, and shall inure to the benefit of, the Company
      and Participant, and their respective heirs, personal and legal representatives,
      successors and assigns. As used in this Section 10, the term the “ **Company** ”
shall
      also include any corporation which is the parent or a subsidiary of the Company
      or any corporation or entity which is an affiliate of the Company by virtue
      of





6





common
      (although not identical) owner-ship, and for which Participant is providing
      services in any form during Participant’s employment with the Company or any
      such other corporation or entity. Participant hereby consents to the enforcement
      of any and all of the provisions of this Agreement by or for the benefit of
      the
      Company and any such other corpo-ration or entity.





11. Entire
      Agreement .
      This
      Agreement and the Plan under which it is issued contain the entire agreement
      between the parties with respect to the subject matter hereof and supersedes
      all
      prior agreements or understandings, oral or written, with respect to the subject
      matter herein. Participant accepts the Option in full satisfaction of any and
      all obligations of the Company to grant stock options to Participant as of
      the
      date hereof.





12. Notices .
      Any and
      all notices under this Agreement shall be in writing, and sent by hand delivery
      or by certified or registered mail (return receipt requested and first-class
      postage prepaid), in the case of the Company, to its principal executive offices
      to the attention of the President, and, in the case of Participant, to
      Participant’s address as shown on the Company’s records.




13. Governing
      Law .
      This
      Agreement shall be construed and enforced in accordance with the laws of the
      state in which the Company is incorporated, without reference to its conflicts
      of laws rules or the principles of the choice of law.





14. Modifications .
      No
      change or modification of this Agreement shall be valid unless the same is
      in
      writing and signed by the parties hereto.





15. Terms
      and Conditions of Plan .
      The
      terms and conditions included in the Plan, the receipt of a copy of which
      Participant hereby acknowledges by execution of this Agreement, are
      incorpo-rated by reference herein, and to the extent that any conflict may
      exist
      between any term or provision of this Agreement and any term or provision of
      the
      Plan, such term or provision of the Plan shall control.





17. Covenants
      and Representations and Covenants of Participant .





Participant
      represents, warrants, covenants and agrees with the Company as follows:





(a) The
      Option is being received for Participant’s own account without the participation
      of any other person, with the intent of holding the Option and the Shares
      issuable pursuant thereto for investment and without the intent of
      participating, directly or indirectly, in a distribution of the Shares and
      not
      with a view to, or for resale in connection with, any distribution of the Shares
      or any portion thereof.





(b) Participant
      is not acquiring the Option or any Shares based upon any representation, oral
      or
      written, by any person with respect to the future value of, or income from,
      the
      Shares, but rather upon an independent examination and judgment as to the
      prospects of the Company.





7











(c) Participant
      has had the opportunity to ask questions of and receive answers from the Company
      and its executive officers and to obtain all information necessary for
      Participant to make an informed decision with respect to the investment in
      the
      Company represented by the Option and any Shares issued upon its
      exercise.





(d) Participant
      is able to bear the economic risk of any investment in the Shares, including
      the
      risk of a complete loss of the investment, and Participant acknowledges that
      Participant must continue to bear the economic risk of any investment in Shares
      received upon exercise of the Option for an indefinite period.





(e) Participant
      understands and agrees that the Shares subject to the Option may be issued
      and
      sold to Participant without registration under any state or federal laws
      relating to the registration of securities and in that event will be issued
      and
      sold in reliance on exemptions from registration under appropriate state and
      federal laws.





(f) Shares
      issued to Participant upon exercise of the Option will not be offered for sale,
      sold or transferred by Participant other than pursuant to: (i) an effective
      registration under applicable state securities laws or in a transaction which
      is
      otherwise in compliance with those laws; (ii) an effective registration under
      the Securities Act of 1933, or a transaction otherwise in compliance with such
      Act; and (iii) evidence satisfactory to the Company of compliance with all
      applicable state and federal securities laws. The Company shall be entitled
      to
      rely upon an opinion of counsel satisfactory to it with respect to compliance
      with the foregoing laws.





(g) The
      Company will be under no obligation to register the Shares issuable pursuant
      to
      the Option or to comply with any exemption available for sale of the Shares
      by
      Participant without registration, and the Company is under no obligation to
      act
      in any manner so as to make Rule 144 promulgated under the Securities Act of
      1933 available with respect to any sale of the Shares by
      Participant.





(h) Participant
      has not relied upon the Company with respect to any tax consequences related
      to
      the grant or exercise of this Option, or the disposition of Shares purchased
      pursuant to its exercise. Participant acknowledges that, as a result of the
      grant and/or exercise of the Option, Participant may incur a substantial tax
      liability. Participant assumes full responsibility for all such consequences
      and
      the filing of all tax returns and elections Participant may be required or
      find
      desirable to file in connection therewith. In the event any valuation of the
      Option or Shares purchased pursuant to its exercise must be made under federal
      or state tax laws and such valuation affects any return or election of the
      Company, Participant agrees that the Company may determine such value and that
      Participant will observe any determination so made by the Company in all returns
      and elections filed by Participant. In the event the Company is required by
      applicable law to collect any withholding, payroll or similar taxes by reason
      of
      the grant or any exercise of the Option, Participant agrees that the Company
      may
      withhold such taxes from any monetary amounts otherwise payable by the Company
      to Participant and that, if such amounts are insufficient to cover the taxes
      required to be collected by the Company, Participant will pay to the Company
      such additional amounts as are required.





8











(i) The
      agreements, representations, warranties and covenants made by Participant herein
      with respect to the Option shall also extend to and apply to all of the Shares
      issued to Participant from time to time pursuant to exercise of the Option.
      Acceptance by Participant of any certificate representing Shares shall
      constitute a confirmation by Participant that all such agreements,
      representations, warranties and covenants made herein shall be true and correct
      at that time.





(j) In
      the
      event any underwriter of securities of the Company requests Participant to
      sign
      any agreement restricting resale of the Shares in connection with any public
      offering by the Company, Participant agrees to sign such agreement, provided
      the
      officers of the Company have signed an agreement no less restrictive. The
      Company may instruct its transfer agent not to transfer the Shares if requested
      by an underwriter as described above.





(k) Participant
      hereby agrees to comply with any plan, policy or other document of the Company
      approved by the Board of Directors of the Company to ensure compliance with
      securities laws, rules and regulations both during the term of employment of
      Participant and for one (1) year thereafter. The Company may impose
      stop-transfer restrictions with respect to Shares acquired upon exercise of
      the
      Options to enforce this provision.





(The
      remainder of this page is intentionally left blank.)











9





IN
      WITNESS WHEREOF, the parties hereto have caused this Award Agreement to be
      executed effective as of the day and year first above written.








**SMART
      ONLINE, INC.**










By:_____________________________________


Print
      Name:











**PARTICIPANT:**











By:_____________________________________


Print
      Name:











10





**EXHIBIT
      A**











Attention:
      Equity Compensation Plan Committee


Smart
      Online, Inc.


Post
      Office Box 12794


Research
      Triangle Park, North Carolina 27709-2794





Re:  Exercise
      of Incentive Stock Option





Dear
      Committee Members:





Pursuant
      to the terms and conditions of that certain Incentive Stock Option Agreement
      dated as of _______________, 20_____ (the “ **Agreement** ”)
      between


_________________________
      and Smart Online, Inc. (the “ **Company** ”),
      I
      desire to purchase ____________ Shares of the Stock of the Company and hereby
      tender payment in full for such Shares in accordance with the terms of the
      Agreement.





I
      hereby
      reaffirm that the representations and warranties made in Section 17 of the
      Agreement are true and correct on the date hereof as if made on the date
      hereof.








Very
      truly yours,







Print
      Name:





Date:
      __________________________