**SMART
        ONLINE, INC.**
 
 **REVISED
        BOARD COMPENSATION POLICY**
 
 **(effective
        November 17, 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 .
 
 (1) 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.
 
 (2)  f
        such
        director also serves as the Chairman of the Company’s Audit Committee, then such
        director shall be paid a fee of $2,000 per month, due and payable by the
        fifteenth (15 th )
        day of
        each month, in place of the compensation set forth in Section 2.A.(1),
        above.
  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.