**SMART
      ONLINE, INC.**





**REVISED
      BOARD COMPENSATION POLICY**





**(effective
      August 1, 2006)**





1. Introduction .
      Smart
      Online, Inc. (the “Company”) will compensate non-management directors through
      the payment of Board retainers based on election of the Board in consideration
      of the services provided by such directors and in recognition of their
      responsibilities to the company and potential liabilities associated therewith.
      Management directors are not entitled to receive any directors’ compensation
      outlined in this policy.





2. Board
      Member Fees .
      Each
      non-management member of the Board of Directors not serving as Chairman of
      the
      Board shall be entitled to monetary and equity compensation in following
      amounts:





A. Monetary
      Compensation .
      Each
      such director shall be paid a fee of $1,500 per month, due and payable by the
      fifteenth (15 th )
      day of
      each month.




B. Equity
      Compensation .
      Each
      such director shall, at the sole discretion of the director, be awarded pursuant
      to the Company’s 2004 Equity Compensation Plan either:





(1) Upon
      such
      director’s appointment or election to the Board, a non-statutory stock option
      grant representing 20,000 shares of the Company’s common stock, having an
      exercise price equal to the fair market value of the Company’s common stock on
      the date of grant. In addition, at the time of the annual meeting of the
      Company’s stockholders, each non-management member of the Board who is
      re-elected to the Board, and who has been serving on the Board for at least
      six
      months prior to the date of the annual meeting, shall be granted an additional
      non-statutory stock option, having an exercise price equal to the fair market
      value of the Company’s common stock on the date of grant. All options granted
      under this Section 2.B.(1) shall vest quarterly over a year’s time, provided
      that the optionee is a member of the Board of Directors on the applicable
      vesting date; or




(2) Upon
      such
      director’s appointment or election to the Board, an award of 10,000 shares of
      restricted common stock of the Company, valued at the fair market value of
      the
      Company’s common stock on the date of the award. In addition, at the time of the
      annual meeting of the Company’s stockholders, each non-management member of the
      Board who is re-elected to the Board, and who has been serving on the Board
      for
      at least six months prior to the date of the annual meeting, shall be awarded
      additional shares of restricted common stock of the Company, valued at the
      fair
      market value of the Company’s common stock on the date of the award. The
      contractual restrictions on all restricted stock awards granted under this
      Section 2.B.(2) shall lapse quarterly over a year’s time, provided that the
      person is a member of the Board of Directors on the applicable lapse
      date.




















3. Chairman
      of the Board Fees .
      If a
      non-management member of the Board of Directors serves as Chairman of the Board,
      she or he shall be entitled to monetary and equity compensation in following
      amounts:





A. Monetary
      Compensation .
      Such a
      Chairman of the Board shall be paid a fee of $4,000 per month, due and payable
      by the fifteenth (15 th )
      day of
      each month.





B. Equity
      Compensation .
      Each
      such director shall, at the sole discretion of the director, be awarded pursuant
      to the Company’s 2004 Equity Compensation Plan either:





(1) Upon
      such
      director’s appointment or election to the Board, a non-statutory stock option
      representing 30,000 shares of the Company’s common stock, having an exercise
      price equal to the fair market value of the Company’s common stock on the date
      of grant. In addition, at the time of the annual meeting of the Company’s
      stockholders, each non-management member of the Board who is re-elected to
      the
      Board, and who has been serving on the Board for at least six months prior
      to
      the date of the annual meeting, shall be granted an additional non-statutory
      stock option, having an exercise price equal to the fair market value of the
      Company’s common stock on the date of grant. All options granted under this
      Section 3.B.(1) shall vest quarterly over a year’s time, provided that the
      optionee is a member of the Board of Directors on the applicable vesting date;
      or




(2) Upon
      such
      director’s appointment or election to the Board, an award of 15,000 shares of
      restricted common stock of the Company, valued at the fair market value of
      the
      Company’s common stock on the date of the award. In addition, at the time of the
      annual meeting of the Company’s stockholders, each non-management member of the
      Board who is re-elected to the Board, and who has been serving on the Board
      for
      at least six months prior to the date of the annual meeting, shall be awarded
      additional shares of restricted common stock of the Company, valued at the
      fair
      market value of the Company’s common stock on the date of the award. The
      contractual restrictions on all restricted stock awards granted under this
      Section 3.B.(2) shall lapse quarterly over a year’s time, provided that the
      person is a member of the Board of Directors on the applicable lapse
      date.





4. Reimbursement
      for Expenses .
      Each
      non-management director is eligible for expense reimbursement for reasonable
      travel and lodging expenses incurred in connection with his or her attendance
      at
      Board and committee meetings, in accordance with the same standards applicable
      to members of the Company’s executive management. The Company will ensure all
      such reasonable expenses are processed and paid expeditiously upon submission
      to
      the company with the required forms and receipts.