**SUBSCRIPTION
        AGREEMENT**
 
 Smart
        Online, Inc.
 2530
        Meridian Parkway
 2 nd Floor
 Durham,
        North Carolina 27713
 Attention:
        Michael Nouri
 
 Gentlemen:
 
 (1) Pursuant
        to prior understandings and discussions, the undersigned (“Subscriber”) hereby
        agrees to purchase from Smart Online, a Delaware corporation (the “Company”),
        for a purchase price of Five Dollars ($5.00) per share the number of shares
        of
        Common Stock, par value $0.001 per share (“Common Stock”) set forth on the
        signature page of this Agreement. (The Common Stock is sometimes hereinafter
        referred to as the “Securities.”) Subscriber hereby acknowledges (i) that this
        subscription shall not be deemed to have been accepted by the Company until
        the
        Company indicates its acceptance by returning to Subscriber an executed copy
        of
        this subscription, and (ii) that acceptance by the Company of this subscription
        is conditioned upon the information and representations of Subscriber hereunder
        being complete, true and correct as of the date of this subscription and
        as of
        the date of closing of sale of the Securities to Subscriber. As a condition
        to
        Subscriber’s purchase of the Securities pursuant to this Agreement, Subscriber
        and the Company will execute and deliver to one another a copy of the
        Registration Rights Agreement in substantially the form attached hereto as Appendix
        B (the
“Registration Rights Agreement”) and a Dribble Out Agreement in substantially
        the form of Appendix
        C (the
“Dribble Out Agreement”).
 
 (2) Until
        actual delivery of the purchase price to the Company and acceptance by the
        Company of the purchase price and this Subscription Agreement, the Company
        shall
        have no obligation to Subscriber. The Company may revoke a prior acceptance
        of
        this Subscription Agreement at any time prior to delivery to and acceptance
        by
        the Company of the purchase price for the Securities.
 
 (3)  Subscriber
        hereby represents and warrants to the Company as follows:
 
 (a) Disclosure .
        Subscriber has carefully reviewed the Form SB-2 Registration Statement of
        the
        Company on file with the U.S. Securities and Exchange Commission, including
        its
        most recent amendment (available at www.sec.gov), including financial
        information and including all risk factors, and fully understands all risks
        associated with investment in the Company.
 
 (b) Authorization .
        Subscriber has full power and authority to enter into this Agreement. This
        Agreement constitutes Subscriber’s valid and legally binding obligation,
        enforceable in accordance with its terms except as limited by (i) applicable
        bankruptcy, insolvency, receivership, reorganization, moratorium and other
        laws
        of general application affecting enforcement of creditors’ rights generally, and
        (ii) general principals of equity, the application of which may deny the
        Company
        the right to specific performance, injunctive relief and other equitable
        remedies.
  
  
 (c) Experience .
        Subscriber is experienced in evaluating and investing in private placement
        transactions of securities of technology companies such as the Company, has
        such
        knowledge and experience in financial and business matters that Subscriber
        is
        capable of evaluating the merits and risks of Subscriber’s investment in the
        Securities, is able to bear the economic risk of the investment and is prepared
        to hold the shares for an indefinite period of time.
 
 (d) Investment .
        Subscriber is acquiring the Securities for investment for Subscriber’s own
        account and not with a view to, or for resale in connection with, any
        distribution thereof, and Subscriber has no present intention of selling
        or
        distributing the Securities. Subscriber does not have any contract, undertaking,
        agreement or arrangement with any person to sell, transfer or grant
        participation to such person or to any third person with respect to any of
        the
        Securities other than as set forth in this Agreement. Subscriber understands
        that the Securities to be purchased by Subscriber have not been registered
        under
        the Securities Act of 1933, as amended (the “Act”) by reason of a specific
        exemption from the registration provisions of the Act which depends upon,
        among
        other things, the bona fide nature of the investment intent as expressed
        herein.
 
 (e) Reliance
        Upon Subscriber Representations .
        Subscriber understands that the Securities are not registered under the Act
        on
        the grounds that the sale provided for in this Agreement and the issuance
        of
        Securities hereunder is being made in reliance upon an exemption from the
        registration requirements of the Act pursuant to Regulations S pursuant to
        the
        Securities Act, and that the Company’s reliance on such exemption is predicated
        on Subscriber’s representations as set forth in this Agreement.
 
 (f) Regulation
        S .
        Attached as Appendix
        A hereto
        are the defined terms in Regulation S. All defined terms shall have the meanings
        set forth in Appendix
        A and
        Regulation S.
 
 (i) The
        undersigned understands and acknowledges that: (A) the Securities acquired
        pursuant to this Subscription Agreement have not been registered under the
        Securities Act, are being sold in reliance upon an exemption from registration
        afforded by Regulation S; and that such Securities have not been registered
        with
        any state securities commission or authority; (B) pursuant to the requirements
        of Regulation S, the Securities may not be transferred, sold or otherwise
        exchanged unless in compliance with the provisions of Regulation S and/or
        pursuant to registration under the Securities Act, or pursuant to an available
        exemption thereunder; and (C) other than as set forth in this Subscription
        Agreement between the Company and the undersigned, including the Registration
        Rights Agreement, the Company is under no obligation to register the Securities
        under the Securities Act or any state securities law, or to take any action
        to
        make any exemption from any such registration provisions available;
 
 (ii) (A)
        The
        undersigned is not a U.S. person and is not acquiring the Securities for
        the
        account of any U.S. Person; (B) if a corporation, it is not organized or
        incorporated under the laws of the United States; (C) if a corporation, no
        director or executive officer is a national or citizen of the United States;
        and
        (D) is not otherwise deemed to be a “U.S. Person” within the meaning of
        Regulation S:
  2
  (iii) The
        undersigned, if not an individual, was not formed specifically for the purpose
        of acquiring the Securities purchased pursuant to this Subscription
        Agreement;
 
 (iv) The
        undersigned is purchasing the Securities for his or its own account and risk
        and
        not for the account or benefit of a “U.S. Person” as defined in Regulation S and
        no other person has any interest in or participation in the Securities or
        any
        right, option, security interest, pledge or other interest in or to the
        Securities. The undersigned understands, acknowledges and agrees that he
        or it
        must bear the economic risk of his or its investment in the Securities for
        an
        indefinite period of time and that prior to any such offer or sale, the Company
        may require, as a condition to effecting a transfer of the Securities, an
        opinion of counsel, acceptable to the Company, as to the registration or
        exemption therefrom under the Securities Act and any state securities acts,
        if
        applicable;
 
 (v) The
        undersigned will, after the expiration of the Restricted Period, as set forth
        in
        Rule 903(b)(3)(iii)(A) under Regulation S, offer, sell, pledge or otherwise
        transfer the Securities only in accordance with Regulation S, or pursuant
        to an
        available exemption under the Securities Act and, in any case, in accordance
        with applicable state securities laws. The transactions contemplated by this
        Subscription Agreement have neither been pre-arranged with a purchaser who
        is in
        the United States or who is a U.S. Person, nor are they part of a plan or
        scheme
        to evade the registration provisions of the United States federal securities
        laws;
 
 (vi) The
        offer
        leading to the sale evidenced hereby was made in an “offshore transaction.” For
        purposes of Regulation S, the undersigned understands that an “offshore
        transaction” is defined as any offer or sale not made to a person in the United
        States and either (A) at the time the buy order originated, the purchaser
        is
        outside the United States, or the seller or any person acting on his behalf
        reasonably believes that the purchaser is outside the United States; or (B)
        for
        purposes of (1) Rule 903 under Regulation S, the transaction is executed
        in, or
        on or through a physical trading floor of an established foreign exchange
        that
        is located outside of the United States, or (2) Rule 904 under Regulation
        S, the
        transaction is executed in, on or through the facilities of a designated
        offshore securities market, and neither the seller nor any person acting
        on its
        behalf knows that the transaction has been prearranged with a buyer in the
        United States;
 
 (vii) Neither
        the undersigned nor any affiliate of the undersigned nor any person acting
        on
        his or its behalf, has made or is aware of any “directed selling efforts” in the
        United States, which term is defined in Regulation S as any activity undertaken
        for the purpose of, or that could reasonably be expected to have the effect
        of,
        conditioning the market in the United States for any of the Securities being
        purchased hereby;
 
 (viii) The
        undersigned understands that the Company is the seller of the Securities
        and
        that, for purpose of Regulation S, a “distributor” is any underwriter, dealer or
        other person who participates, pursuant to a contractual arrangement, in
        the
        distribution of
  3
  securities
        offered or sold in reliance on Regulation S and that an “affiliate” is any
        partner, officer, director or any person directly or indirectly controlling,
        controlled by or under common control with any person in question. The
        undersigned agrees that he or it will not, during the Restricted Period (as
        defined above), act as a distributor, either directly or through any affiliate,
        nor shall it sell, transfer, hypothecate or otherwise convey the Securities
        other than to a non-U.S. Person other than in compliance with the Securities
        Act
        and any state securities laws, if applicable; and
 
 (ix) The
        undersigned acknowledges that the Securities will bear a legend in substantially
        the following form:
 
 THE
        SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN OFFERED AND SOLD IN
        AN
“OFFSHORE TRANSACTION” IN RELIANCE UPON REGULATION S AS PROMULGATED BY THE
        SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, THE SECURITIES REPRESENTED
        BY
        THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
        (THE
“SECURITIES ACT”) AND MAY NOT BE TRANSFERRED OTHER THAN IN ACCORDANCE WITH
        REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT
        TO
        AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, THE
        AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
        THE SECURITIES REPRESENTED BY THIS CERTIFICATE CANNOT BE THE SUBJECT OF A
        HEDGING TRANSACTION UNLESS SUCH TRANSACTIONS ARE CONDUCTED IN COMPLIANCE
        WITH
        THE SECURITIES ACT.
 
 
 (g) No
        Public Market .
        Subscriber understands that no public market now exists for any of the
        securities issued by the Company and that it is uncertain whether a public
        market will ever exist for the Securities.
 
 (h) Access
        to Information .
        Subscriber has received all information that Subscriber considers necessary
        or
        appropriate for deciding whether to purchase Securities. Subscriber has had
        an
        opportunity to ask questions and receive answers from the Company’s management
        regarding the terms and conditions of the offering of the Securities and
        the
        business, properties, prospects and financial condition of the Company and
        to
        obtain additional information from the Company (to the extent that the Company
        possessed such information or could acquire it without unreasonable effort
        or
        expense) necessary to verify the accuracy of any information furnished to
        Subscriber or to which Subscriber had access.
  (i) Stop
        Transfer Instructions. Subscriber agrees that the Company may issue instructions to its transfer
        agent
        that prohibit transfer in violation of this Agreement or Regulation S.
  4
  (4) The
        representations, warranties, understandings, acknowledgments and agreements
        in
        this Agreement are true and accurate as of the date hereof, shall be true
        and
        accurate as of the date of the acceptance hereof by the Company and shall
        survive thereafter.
 
 (5) This
        Agreement shall be enforced, governed and construed in all respects in
        accordance with the laws of the State of Delaware, as such laws are applied
        by
        Delaware courts to agreements entered into and to be performed in Delaware,
        and
        shall be binding upon Subscriber, the Subscriber’s heirs, estate, legal
        representatives, successors and assigns and shall inure to the benefit of
        the
        Company and its successors and assigns.
 
 (6) Subscriber
        agrees not to transfer or assign this Agreement, or any of Subscriber’s interest
        herein, without the express written consent of the Company.
 
 (7) The
        proceeds from sale of the Securities may be used by the Company for any purpose,
        including, without limitation, working capital, acquisition, salary and
        repayment of debt, including debts to officers, directors and
        shareholders.
 
 (8) This
        Agreement constitutes the entire agreement among the parties hereto with
        respect
        to the subject matter hereof and supersedes any and all prior or contemporaneous
        representations, warranties, agreements and understandings in connection
        therewith. This Agreement may be amended only by a writing executed by all
        parties hereto. This Agreement may be executed in one or more
        counterparts.
 
 (The
        remainder of this page is intentionally left blank.)
  5
  IN
        WITNESS WHEREOF, Subscriber has executed this Subscription Agreement
        this 3rd day of January, 2005.
 
 SUBSCRIPTION500,000
              Number
                  of Shares of Common Stock$2,500,000
              Total
                  payment enclosedADDRESS:Walker
                HouseMary
                Street
              THE
                  BLUELINE FUNDP.O.
                Box 908 GT
              (Name
                  of Subscriber)George
                Town, Grand Cayman
              /s/
                  Philippe PouponnotCayman
                Islands
              (Signature)_______________________Incorporation  
                  /s/ Philippe Pouponnot
 
 ACCEPTANCE
 
 The
        foregoing Subscription Agreement is accepted on this the 25th day of
        February, 2005.
 
 SMART
                  ONLINE, INC.By:
                  /s/ Michael NouriMichael
                  Nouri, President
 
 
 
 
 
  6
  
 **APPENDIX
        A**
 
 **RULE
        902 of REGULATION S: DEFINITIONS**
 
 
 As
        used
        in Regulation S, the following terms shall have the meanings indicated.
  a.
              *Debt
                  securities.*"Debt securities" of an issuer is defined to mean any security
                  other than
                  an equity security as defined inRule
                  405,
                  as well as the following:
   1.
              Non-participatory
                  preferred stock, which is defined as non-convertible capital stock,
                  the
                  holders of which are entitled to a preference in payment of dividends
                  and
                  in distribution of assets on liquidation, dissolution, or winding
                  up of
                  the issuer, but are not entitled to participate in residual earnings
                  or
                  assets of the issuer; and
   2.
              Asset-backed
                  securities, which are securities of a type that
                  either:
   i.
              Represent
                  an ownership interest in a pool of discrete assets, or certificates
                  of
                  interest or participation in such assets (including any rights
                  designed to
                  assure servicing, or the receipt or timeliness of receipt by holders of
                  such assets, or certificates of interest or participation in such
                  assets,
                  of amounts payable thereunder), provided that the assets are not
                  generated
                  or originated between the issuer of the security and its affiliates;
                  or
   ii.
              Are
                  secured by one or more assets or certificates of interest or participation
                  in such assets, and the securities, by their terms, provide for
                  payments
                  of principal and interest (if any) in relation to payments or reasonable
                  projections of payments on assets meeting the requirements of paragraph
                  (a)(2)(i) of this section, or certificates of interest or participations
                  in assets meeting such
                  requirements.
   iii.
              For
                  purposes of paragraph (a)(2) of this section, the term "assets"
                  means
                  securities, installment sales, accounts receivable, notes, leases
                  or other
                  contracts, or other assets that by their terms convert into cash
                  over a
                  finite period of time.
   b.
              *Designated
                  offshore securities market.*"Designated offshore securities market"
                  means:
   1.
              The
                  Eurobond market, as regulated by the International Securities Market
                  Association; the Alberta Stock Exchange; the Amsterdam Stock Exchange;
                  the
                  Australian Stock Exchange Limited; the Bermuda Stock Exchange;
                  the Bourse
                  de Bruxelles; the Copenhagen Stock Exchange; the European Association
                  of
                  Securities Dealers Automated Quotation; the Frankfurt Stock Exchange;
                  the
                  Helsinki Stock Exchange; The Stock Exchange of Hong Kong Limited;
                  the
                  Irish
   7
   Stock
        Exchange; the Istanbul Stock Exchange; the Johannesburg Stock Exchange; the
        London Stock Exchange; the Bourse de Luxembourg; the Mexico Stock Exchange;
        the
        Borsa Valori di Milan; the Montreal Stock Exchange; the Oslo Stock Exchange;
        the
        Bourse de Paris; the Stock Exchange of Singapore Ltd.; the Stockholm Stock
        Exchange; the Tokyo Stock Exchange; the Toronto Stock Exchange; the Vancouver
        Stock Exchange; the Warsaw Stock Exchange and the Zurich Stock Exchange;
        and
   2.
              Any
                  foreign securities exchange or non-exchange market designated by
                  the
                  Commission. Attributes to be considered in determining whether
                  to
                  designate an offshore securities market, among others,
                  include:
   i.
              Organization
                  under foreign law;
   ii.
              Association
                  with a generally recognized community of brokers, dealers, banks,
                  or other
                  professional intermediaries with an established operating
                  history;
   iii.
              Oversight
                  by a governmental or self-regulatory
                  body;
   iv.
              Oversight
                  standards set by an existing body of
                  law;
   v.
              Reporting
                  of securities transactions on a regular basis to a governmental
                  or
                  self-regulatory body;
   vi.
              A
                  system for exchange of price quotations through common communications
                  media; and
   vii.
              An
                  organized clearance and settlement
                  system.
   c.
              *Directed
                  selling efforts.*
   1.
              "Directed
                  selling efforts" means any activity undertaken for the purpose
                  of, or that
                  could reasonably be expected to have the effect of, conditioning
                  the
                  market in the United States for any of the securities being offered
                  in
                  reliance on thisRegulation
                  S(Rule 901 through Rule 905, and Preliminary Notes). Such activity
                  includes
                  placing an advertisement in a publication "with a general circulation
                  in
                  the United States" that refers to the offering of securities being
                  made in
                  reliance upon this Regulation S.
   2.
              Publication
                  "with a general circulation in the United
                  States":
   8
   i.
              Is
                  defined as any publication that is printed primarily for distribution
                  in
                  the United States, or has had, during the preceding twelve months,
                  an
                  average circulation in the United States of 15,000 or more copies
                  per
                  issue; and
   ii.
              Will
                  encompass only the U.S. edition of any publication printing a separate
                  U.S. edition if the publication, without considering its U.S. edition,
                  would not constitute a publication with a general circulation in
                  the
                  United States.
   3.
              The
                  following are not "directed selling
                  efforts":
   i.
              Placing
                  an advertisement required to be published under U.S. or foreign
                  law, or
                  under rules or regulations of a U.S. or foreign regulatory or self-
                  regulatory authority, provided the advertisement contains no more
                  information than legally required and includes a statement to the
                  effect
                  that the securities have not been registered under the Act and
                  may not be
                  offered or sold in the United States (or to a U.S. person, if the
                  advertisement relates to an offering under Category 2 or 3 (paragraph
                  (b)(2) or (b)(3)) inRule
                  903)
                  absent registration or an applicable exemption from the registration
                  requirements;
   ii.
              Contact
                  with persons excluded from the definition of "U.S. person" pursuant
                  toparagraph
                  (k)(2)(vi)of
                  this section or persons holding accounts excluded from the definition
                  of
                  "U.S. person" pursuant toparagraph
                  (k)(2)(i)of
                  this section, solely in their capacities as holders of such
                  accounts;
   iii.
              A
                  tombstone advertisement in any publication with a general circulation
                  in
                  the United States, provided:
   A.
              The
                  publication has less than 20% of its circulation, calculated by
                  aggregating the circulation of its U.S. and comparable non-U.S.
                  editions,
                  in the United States;
   B.
              Such
                  advertisement contains a legend to the effect that the securities
                  have not
                  been registered under the Act and may not be offered or sold in
                  the United
                  States (or to a U.S. person, if the advertisement relates to an
                  offering
                  under Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903)
                  absent
                  registration or an applicable exemption from the registration
                  requirements; and
   C.
              Such
                  advertisement contains no more information
                  than:
   1.
              The
                  issuer's name;
   9
   2.
              The
                  amount and title of the securities being
                  sold;
   3.
              A
                  brief indication of the issuer's general type of
                  business;
   4.
              The
                  price of the securities;
   5.
              The
                  yield of the securities, if debt securities with a fixed (non-
                  contingent)
                  interest provision;
   6.
              The
                  name and address of the person placing the advertisement, and whether
                  such
                  person is participating in the
                  distribution;
   7.
              The
                  names of the managing underwriters;
   8.
              The
                  dates, if any, upon which the sales commenced and
                  concluded;
   9.
              Whether
                  the securities are offered or were offered by rights issued to
                  security
                  holders and, if so, the class of securities that are entitled or
                  were
                  entitled to subscribe, the subscription ratio, the record date,
                  the dates
                  (if any) upon which the rights were issued and expired, and the
                  subscription price; and
   10.
              Any
                  legend required by law or any foreign or U.S. regulatory or self-
                  regulatory authority;
   iv.
              Bona
                  fide visits to real estate, plants or other facilities located
                  in the
                  United States and tours thereof conducted for a prospective investor
                  by an
                  issuer, a distributor, any of their respective affiliates or a
                  person
                  acting on behalf of any of the
                  foregoing;
   v.
              Distribution
                  in the United States of a foreign broker-dealer's quotations by
                  a
                  third-party system that distributes such quotations primarily in
                  foreign
                  countries if:
   A.
              Securities
                  transactions cannot be executed between foreign broker-dealers
                  and persons
                  in the United States through the system;
                  and
   B.
              The
                  issuer, distributors, their respective affiliates, persons acting
                  on
                  behalf of any of the foregoing, foreign broker-dealers and other
                  participants in the system do not initiate contacts with U.S. persons
                  or
                  persons within the United States, beyond those contacts exempted
                  underRule
                  15a-6under the Exchange Act; and
   10
   vi.
              Publication
                  by an issuer of a notice in accordance withRule
                  135orRule
                  135c.
   vii.
              Providing
                  any journalist with access to press conferences held outside of
                  the United
                  States, to meetings with the issuer or selling security holder
                  representatives conducted outside the United States, or to written
                  press-related materials released outside the United States, at
                  or in which
                  a present or proposed offering of securities is discussed, if the
                  requirements ofRule
                  135eare satisfied.
   d.
              *Distributor.*"Distributor" means any underwriter, dealer, or other person who
                  participates, pursuant to a contractual arrangement, in the distribution
                  of the securities offered or sold in reliance on thisRegulation
                  S(Rule 901 through Rule 905, and Preliminary
                  Notes).
   e.
              *Domestic
                  issuer/Foreign issuer.*"Domestic issuer" means any issuer other than a "foreign government"
                  or
                  "foreign private issuer" (both as defined inRule
                  405).
                  "Foreign issuer" means any issuer other than a "domestic
                  issuer."
   f.
              *Distribution
                  compliance period.*"Distribution compliance period" means a period that begins when
                  the
                  securities were first offered to persons other than distributors
                  in
                  reliance upon this Regulation S (Rule 901 through Rule 905, and
                  Preliminary Notes) or the date of closing of the offering, whichever
                  is
                  later, and continues until the end of the period of time specified
                  in the
                  relevant provision ofRule
                  903,
                  except that:
   1.
              All
                  offers and sales by a distributor of an unsold allotment or subscription
                  shall be deemed to be made during the distribution compliance
                  period;
   2.
              In
                  a continuous offering, the distribution compliance period shall
                  commence
                  upon completion of the distribution, as determined and certified
                  by the
                  managing underwriter or person performing similar
                  functions;
   3.
              In
                  a continuous offering of non-convertible debt securities offered
                  and sold
                  in identifiable tranches, the distribution compliance period for
                  securities in a tranche shall commence upon completion of the distribution
                  of such tranche, as determined and certified by the managing underwriter
                  or person performing similar functions;
                  and
   4.
              That
                  in a continuous offering of securities to be acquired upon the
                  exercise of
                  warrants, the distribution compliance period shall commence upon
                  completion of the distribution of the warrants, as determined and
                  certified by the managing underwriter or person performing similar
                  functions, if requirements of Rule 903(b)(5) are
                  satisfied.
   11
   g.
              *Offering
                  restrictions.*"Offering restrictions" means:
   1.
              Each
                  distributor agrees in writing:
   i.
              That
                  all offers and sales of the securities prior to the expiration
                  of the
                  distribution compliance period specified in Category 2 or 3 (paragraph
                  (b)(2) or (b)(3)) in Rule 903, as applicable, shall be made only
                  in
                  accordance with the provisions ofRule
                  903orRule
                  904;
                  pursuant to registration of the securities under the Act; or pursuant
                  to
                  an available exemption from the registration requirements of the
                  Act;
                  and
   ii.
              For
                  offers and sales of equity securities of domestic issuers, not
                  to engage
                  in hedging transactions with regard to such securities prior to
                  the
                  expiration of the distribution compliance period specified in Category
                  2
                  or 3 (paragraph (b)(2) or (b)(3)) in Rule 903, as applicable, unless
                  in
                  compliance with the Act; and
   2.
              All
                  offering materials and documents (other than press releases) used
                  in
                  connection with offers and sales of the securities prior to the
                  expiration
                  of the distribution compliance period specified in Category 2 or
                  3
                  (paragraph (b)(2) or (b)(3)) in Rule 903, as applicable, shall
                  include
                  statements to the effect that the securities have not been registered
                  under the Act and may not be offered or sold in the United States
                  or to
                  U.S. persons (other than distributors) unless the securities are
                  registered under the Act, or an exemption from the registration
                  requirements of the Act is available. For offers and sales of equity
                  securities of domestic issuers, such offering materials and documents
                  also
                  must state that hedging transactions involving those securities
                  may not be
                  conducted unless in compliance with the Act. Such statements shall
                  appear:
   i.
              On
                  the cover or inside cover page of any prospectus or offering circular
                  used
                  in connection with the offer or sale of the
                  securities;
   ii.
              In
                  the underwriting section of any prospectus or offering circular
                  used in
                  connection with the offer or sale of the securities;
                  and
   iii.
              In
                  any advertisement made or issued by the issuer, any distributor,
                  any of
                  their respective affiliates, or any person acting on behalf of
                  any of the
                  foregoing. Such statements may appear in summary form on prospectus
                  cover
                  pages and in advertisements.
   h.
              *Offshore
                  transaction.*
   12
   
   1.
              An
                  offer or sale of securities is made in an "offshore transaction"
                  if:
   i.
              The
                  offer is not made to a person in the United States;
                  and
   ii.
              Either:
   A.
              At
                  the time the buy order is originated, the buyer is outside the
                  United
                  States, or the seller and any person acting on its behalf reasonably
                  believe that the buyer is outside the United States;
                  or
   B.
              For
                  purposes of:
   1.
              SectionRule
                  903,
                  the transaction is executed in, on or through a physical trading
                  floor of
                  an established foreign securities exchange that is located outside
                  the
                  United States; or
   2.
              SectionRule
                  904,
                  the transaction is executed in, on or through the facilities of
                  a
                  designated offshore securities market described inparagraph
                  (b)of
                  this section, and neither the seller nor any person acting on its
                  behalf
                  knows that the transaction has been pre-arranged with a buyer in
                  the
                  United States.
   
   2.
              Notwithstanding
                  paragraph (h)(1) of this section, offers and sales of securities
                  specifically targeted at identifiable groups of U.S. citizens abroad,
                  such
                  as members of the U.S. armed forces serving overseas, shall not
                  be deemed
                  to be made in "offshore
                  transactions."
   3.
              Notwithstanding
                  paragraph (h)(1) of this section, offers and sales of securities
                  to
                  persons excluded from the definition of "U.S. person" pursuant
                  toparagraph
                  (k)(2)(vi)of
                  this section or persons holding accounts excluded from the definition
                  of
                  "U.S. person" pursuant toparagraph
                  (k)(2)(i)of
                  this section, solely in their capacities as holders of such accounts,
                  shall be deemed to be made in "offshore
                  transactions."
   i.
              *Reporting
                  issuer.*"Reporting issuer" means an issuer other than an investment company
                  registered or required to register under the 1940 Act
                  that:
   13
   
   1.
              Has
                  a class of securities registered pursuant to Section12(b)or
                  12(g) of the Exchange Act or is required to file reports pursuant
                  to
                  Section 15(d) of the Exchange Act;
                  and
   2.
              Has
                  filed all the material required to be filed pursuant to Section13(a)or15(d)of
                  the Exchange Act for a period of at least twelve months immediately
                  preceding the offer or sale of securities made in reliance upon
                  thisRegulation
                  S(Rule 901 through Rule 905, and Preliminary Notes) (or for such
                  shorter
                  period that the issuer was required to file such
                  material).
   j.
              *Substantial
                  U.S. market interest.*
   1.
              "Substantial
                  U.S. market interest" with respect to a class of an issuer's equity
                  securities means:
   i.
              The
                  securities exchanges and inter-dealer quotation systems in the
                  United
                  States in the aggregate constituted the single largest market for
                  such
                  class of securities in the shorter of the issuer's prior fiscal
                  year or
                  the period since the issuer's incorporation;
                  or
   ii.
              20
                  percent or more of all trading in such class of securities took
                  place in,
                  on or through the facilities of securities exchanges and inter-dealer
                  quotation systems in the United States and less than 55 percent
                  of such
                  trading took place in, on or through the facilities of securities
                  markets
                  of a single foreign country in the shorter of the issuer's prior
                  fiscal
                  year or the period since the issuer's
                  incorporation.
   2.
              "Substantial
                  U.S. market interest" with respect to an issuer's debt securities
                  means:
   i.
              Its
                  debt securities, in the aggregate, are held of record (as that
                  term is
                  defined inRule
                  12g5-1under the Exchange Act and used for purposes of paragraph (j)(2)
                  of this
                  section) by 300 or more U.S.
                  persons;
   ii.
              $1
                  billion or more of: The principal amount outstanding of its debt
                  securities, the greater of liquidation preference or par value
                  of its
                  securities described in Rule 902(a)(1), and the principal amount
                  or
                  principal balance of its securities described in Rule 902(a)(2),
                  in the
                  aggregate, is held of record by U.S. persons;
                  and
   iii.
              20
                  percent or more of: The principal amount outstanding of its debt
                  securities, the greater of liquidation preference or par value
                  of its
                  securities described in Rule 902(a)(1), and the principal amount
                  or
                  principal balance of its securities described in Rule 902(a)(1),
                  in the
                  aggregate, is held of record by U.S.
                  persons.
   14
   
   3.
              Notwithstanding
                  paragraph (j)(2) of this section, substantial U.S. market interest
                  with
                  respect to an issuer's debt securities is calculated without reference
                  to
                  securities that qualify for the exemption provided bySection
                  3(a)(3)of
                  the Act.
   k.
              *U.S.
                  person.*
   1.
              "U.S.
                  person" means:
   i.
              Any
                  natural person resident in the United
                  States;
   ii.
              Any
                  partnership or corporation organized or incorporated under the
                  laws of the
                  United States;
   iii.
              Any
                  estate of which any executor or administrator is a U.S.
                  person;
   iv.
              Any
                  trust of which any trustee is a U.S.
                  person;
   v.
              Any
                  agency or branch of a foreign entity located in the United
                  States;
   vi.
              Any
                  non-discretionary account or similar account (other than an estate
                  or
                  trust) held by a dealer or other fiduciary for the benefit or account
                  of a
                  U.S. person;
   vii.
              Any
                  discretionary account or similar account (other than an estate
                  or trust)
                  held by a dealer or other fiduciary organized, incorporated, or
                  (if an
                  individual) resident in the United States;
                  and
   viii.
              Any
                  partnership or corporation if:
   A.
              Organized
                  or incorporated under the laws of any foreign jurisdiction;
                  and
   B.
              Formed
                  by a U.S. person principally for the purpose of investing in securities
                  not registered under the Act, unless it is organized or incorporated,
                  and
                  owned, by accredited investors (as defined inRule
                  501(a))
                  who are not natural persons, estates or
                  trusts.
   2.
              The
                  following are not "U.S. persons":
   i.
              Any
                  discretionary account or similar account (other than an estate
                  or trust)
                  held for the benefit or account of a non-U.S. person by a dealer
                  or other
                  professional fiduciary organized, incorporated, or (if an individual)
                  resident in the United States;
   15
   
   ii.
              Any
                  estate of which any professional fiduciary acting as executor or
                  administrator is a U.S. person if:
   A.
              An
                  executor or administrator of the estate who is not a U.S. person
                  has sole
                  or shared investment discretion with respect to the assets of the
                  estate;
                  and
   B.
              The
                  estate is governed by foreign law;
   iii.
              Any
                  trust of which any professional fiduciary acting as trustee is
                  a U.S.
                  person, if a trustee who is not a U.S. person has sole or shared
                  investment discretion with respect to the trust assets, and no
                  beneficiary
                  of the trust (and no settlor if the trust is revocable) is a U.S.
                  person;
   iv.
              An
                  employee benefit plan established and administered in accordance
                  with the
                  law of a country other than the United States and customary practices
                  and
                  documentation of such country;
   v.
              Any
                  agency or branch of a U.S. person located outside the United States
                  if:
   A.
              The
                  agency or branch operates for valid business reasons;
                  and
   B.
              The
                  agency or branch is engaged in the business of insurance or banking
                  and is
                  subject to substantive insurance or banking regulation, respectively,
                  in
                  the jurisdiction where located; and
   vi.
              The
                  International Monetary Fund, the International Bank for Reconstruction
                  and
                  Development, the Inter-American Development Bank, the Asian Development
                  Bank, the African Development Bank, the United Nations, and their
                  agencies, affiliates and pension plans, and any other similar
                  international organizations, their agencies, affiliates and pension
                  plans.
   l.
              *United
                  States.*"United States" means the United States of America, its territories
                  and
                  possessions, any State of the United States, and the District of
                  Columbia.
   
  
  16
  
 **APPENDIX
        B**
 
 **REGISTRATION
        RIGHTS AGREEMENT**
 
 
 REGISTRATION
        RIGHTS AGREEMENT (this “Agreement”), dated as of March 1, 2005, by and among
        Smart Online, Inc., a Delaware corporation with its headquarters located
        at 2530
        Meridian Parkway, Durham, North Carolina 27713 (the “Company”), and the
        undersigned (together with its affiliates and any assignees or transferees
        of
        all of its respective rights hereunder, the “Investors”).
 
 WHEREAS:
 
 A. In
        connection with the Subscription Agreement by and among the parties hereto
        dated
        as of the date hereof (the “Subscription Agreement”), the Company has agreed,
        upon the terms and subject to the conditions contained therein, to issue
        and
        sell to the Investors shares of the Company’s common stock (the “Common Stock”),
        upon the terms and subject to the limitations and conditions set forth in
        such
        Subscription Agreement; and
 
 B. To
        induce
        the Investors to execute and deliver the Subscription Agreement, the Company
        has
        agreed to provide certain registration rights under the Securities Act of
        1933,
        as amended, and the rules and regulations thereunder, or any similar successor
        statute (collectively, the “1933 Act”), and applicable state securities
        laws;
 
 NOW,
        THEREFORE, in consideration of the premises and the mutual covenants contained
        herein and other good and valuable consideration, the receipt and sufficiency
        of
        which are hereby acknowledged, the Company and each of the Investors hereby
        agree as follows:
 
 1. DEFINITIONS.
 
 (a) As
        used
        in this Agreement, the following terms shall have the following
        meanings:
 
 (i) “Investors”
        means any person who acquires shares of Common Stock of the Company, or any
        security of the Company pursuant to which the holder has a right to receive
        shares of Common Stock of the Company upon exercise or conversion of such
        security, who agrees to become bound by the provisions of this Agreement
        or a
        counterpart of this Agreement, and permitted transfers and assignees of
        Investors in accordance with Section 9 hereof.
 
 (ii) “Listing
        Date” the date on which the Common Stock of the Company becomes listed on the
        OTCBB.
 
 (iii) “OTCBB”
        the Over-the-Counter Bulletin Board.
  17
  
 (iv) “register,”
        “registered,” and “registration” refer to a registration effected by preparing
        and filing a Registration Statement or Statements in compliance with the
        1933
        Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing
        for offering securities on a continuous basis (“Rule 415”), and the declaration
        or ordering of effectiveness of such Registration Statement by the United
        States
        Securities and Exchange Commission (the “SEC”).
 
 (v) “Registrable
        Securities” means (x) all shares of Common Stock sold by the Company pursuant to
        the Subscription Agreement or pursuant to a warrant issued to Investor at
        the
        time of purchase of such shares of common stock; and (z) all shares of capital
        stock issued or issuable as a dividend on or in exchange for or otherwise
        with
        respect to the foregoing.
 
 (vi) “Registration
        Statement” means a registration statement of the Company under the 1933
        Act.
 
 (b) Capitalized
        terms used herein and not otherwise defined herein shall have the respective
        meanings set forth in the Subscription Agreement.
 
 2. REGISTRATION.
 
 (a) Mandatory
        Registration .
        No
        later than September 30, 2005 (the “Target Filing Date”), the Company shall
        prepare and file with the SEC a Registration Statement on Form S-1, SB-1
        or SB-2
        as determined by the Company in its sole discretion (or, if such Forms are
        not
        then available, on such form of Registration Statement as is then available)
        to
        effect a registration of the Registrable Securities covering the resale of
        the
        Registrable Securities. The Company may also include in such Registration
        Statement in its sole discretion, shares for sale by the Company or the Company
        may file a separate Registration Statement covering shares to be sold by
        the
        Company before, at the same time or after the Company files a Registration
        Statement covering resale of Registrable Securities by Investors.
 
 (b) Payments
        by the Company .
        The
        Company shall use its best efforts to obtain effectiveness of the Registration
        Statement as soon as reasonably practicable. If (i) the Registration Statement
        covering the Registrable Securities required to be filed by the Company pursuant
        to Section 2(a) hereof is not filed by the Target Filing Date, then the Company
        will make payments to the Investors in such amounts and at such times as
        shall
        be determined pursuant to this Section 2(b) as liquidated damages by reason
        of
        any such delay in their ability to sell the Registrable Securities (which
        remedy
        shall be exclusive of any other remedies available at law or in equity).
        The
        Company shall pay to each holder of Registrable Securities an amount (the
        “Damage Amount”) equal to the product obtained by multiplying (i) the purchase
        price (the “Purchase Price”) paid for the Registrable Securities by the
        Investor, by (ii) the Applicable Percentage (as defined below) by (iii) the
        number of 30-day periods (prorated for partial periods) after the Target
        Filing
        Date that the Registration Statement covering the Registrable Securities
        of the
        Investor is actually filed; provided, however, that there shall be excluded
        from
        such period any delays which are attributable (i) to Investor, or any other
        Investor who holds Registrable
  18
  Securities,
        with respect to information relating to the Investors, including, without
        limitation, the plan of distribution or beneficial ownership of securities,
        or
        (ii) to the failure of any Investor (or legal counsel to the Investor) to
        conduct their review of the Registration Statement pursuant to Section 3(h)
        below in a reasonably prompt manner or (iii) any person or entity named in
        the
        Prospectus as an underwriter. The term “Applicable Percentage” means one half of
        one percent. (For example, if the Registration Statement is filed thirty
        days
        after the Target Filing Date, the Company would pay as the Damage Amount
        $500
        for each $100,000 of the Purchase Price. In the sole discretion of the Company,
        the Company may issue to Investor in lieu of the cash payment described above,
        a
        number of shares of Common Stock of the Company equal to the quotient derived
        by
        dividing (i) the Damage Amount, by (ii) Purchase Price per share (as defined
        above).
  (c) Eligibility
        for Form S-3; Conversion to Form S-3 .
        If the
        Company meets the registration eligibility and transaction requirements for
        the
        use of Form S-3 (or any successor form) for registration of the offer and
        sale
        by the Investor and any other Investors of their Registrable Securities before
        the earlier of the dates stated in clauses (ii) and (iii) in the definition
        of
        the Registration Period (as defined in Section 3(a) below), the Company shall
        file a Registration Statement on Form S-3 (or such successor form) with respect
        to the Registrable Securities covered by the Registration Statement, filed
        pursuant to Section 2(a) (and include in such Registration Statement on Form
        S-3
        the information required by Rule 429 under the 1933 Act) or convert the
        Registration Statement, filed pursuant to Section 2(a) to a Form S-3 pursuant
        to
        Rule 429 under the 1933 Act and cause such Registration Statement (or such
        amendment) to be declared effective as soon as practicable after filing.
        If the
        Company becomes eligible to use Form S-3 during the Registration Period,
        the
        Company agrees to use reasonable efforts to file all reports required to
        be
        filed by the Company with the SEC in a timely manner so as to remain eligible
        or
        become eligible, as the case may be, and thereafter to maintain its eligibility,
        for the use of Form S-3. After such Registration Statement on Form S-3 become
        effective, subject to Section 3 hereof, the Company shall maintain such
        Registration Statement in effect until the earlier of clauses (ii) and (iii)
        in
        the definition of Registration Period in Section 3(a) hereof.
 
 3. OBLIGATIONS
        OF THE COMPANY.
 
 In
        connection with the registration of the Registrable Securities, the Company
        shall have the following obligations:
 
 (a) The
        Company shall prepare promptly, and use reasonable efforts to file with the
        SEC
        not later than the Target Filing Date, a Registration Statement with respect
        to
        the number of Registrable Securities provided in Section 2(a), and thereafter
        use its best efforts to cause such Registration Statement relating to
        Registrable Securities to become effective as soon as possible after such
        filing, and use reasonable efforts to keep the Registration Statement effective
        pursuant to Rule 415 at all times until such date as is the earlier of (i)
        270
        days after the effective date of the Registration Statement; (ii) the date
        on
        which all of the Registrable Securities have been sold by Investor and (iii)
        the
        date on which the Registrable Securities of Investor (in the opinion of counsel
        to the Company) may be immediately sold to the public without registration
        or
        restriction (including without limitation as to volume by Investor) under
        the
        1933 Act (the “Registration Period”), which Registration Statement (including
        any
  19
  amendments
        or supplements thereto and prospectuses contained therein) shall not contain
        any
        untrue statement of a material fact or omit to state a material fact required
        to
        be stated therein, or necessary to make the statements therein not misleading.
        The right of other Investors to have the Registration Statement remain in
        effect
        shall not confer any rights on Investor.
 
 (b) The
        Company shall prepare and file with the SEC such amendments (including
        post-effective amendments) and supplements to the Registration Statements
        and
        the prospectus used in connection with the Registration Statement as may
        be
        necessary to keep the Registration Statement effective at all times during
        the
        Registration Period, and, during such period, comply with the provisions
        of the
        1933 Act with respect to the disposition of all Registrable Securities of
        the
        Company covered by the Registration Statement until such time as all of such
        Registrable Securities have been disposed of in accordance with the intended
        methods of disposition by the Investor as set forth in the Registration
        Statement.
 
 (c) If
        requested, the Company shall furnish to one legal counsel for all Investors
        whose Registrable Securities are included in a Registration Statement (i)
        promptly (but in no event more than two (2) business days) after the same
        is
        prepared and publicly distributed, filed with the SEC, or received by the
        Company, one copy of each Registration Statement and any amendment thereto,
        each
        preliminary prospectus and prospectus and each amendment or supplement thereto,
        and, in the case of the Registration Statement referred to in Section 2(a),
        each
        letter written by or on behalf of the Company to the SEC or the staff of
        the
        SEC, and each item of correspondence from the SEC or the staff of the SEC,
        in
        each case relating to such Registration Statement (other than any portion
        of any
        thereof which contains information for which the Company has sought confidential
        treatment), and (ii) promptly (but in no event more than two (2) business
        days)
        after the Registration Statement is declared effective by the SEC, such number
        of copies of a prospectus, including a preliminary prospectus, and all
        amendments and supplements thereto and such other documents as Investor may
        reasonably request in order to facilitate the disposition of the Registrable
        Securities owned by Investor. The Company will immediately notify one legal
        counsel representing all Investors where Registrable Securities are included
        in
        a Registration Statement by facsimile of the effectiveness of each Registration
        Statement or any post-effective amendment. The Company will promptly respond
        to
        any and all comments received from the SEC (which comments shall promptly
        be
        made available to one legal counsel representing all Investors whose
        Registration Securities are included in a Registration Statement upon request),
        with a view towards causing the Registration Statement or any amendment thereto
        to be declared effective by the SEC as soon as reasonably practicable, and
        (ii)
        promptly file an acceleration request as soon as reasonably practicable (but
        in
        no event more than two (2) business days) following the resolution or clearance
        of all SEC comments. If applicable, following notification by the SEC that
        any
        such Registration Statement or any amendment thereto will not be subject
        to
        review, the Company shall promptly file with the SEC a final prospectus as
        soon
        as reasonably practicable (but in no event more than two (2) business days)
        following receipt by the Company from the SEC of an order declaring the
        Registration Statement effective.
 
 (d) The
        Company shall use reasonable efforts to (i) register and qualify the Registrable
        Securities covered by the Registration Statement under such other securities
        or
“blue sky” laws of such jurisdictions in the United States as the Investors who
        hold a majority of the
  20
  Registrable
        Securities being offered by the Registration Statement reasonably request
        or
        qualify for an exemption for resale afforded companies listed in a Standard
        & Poor’s corporate handbook or similar publications, (ii) prepare and file
        in those jurisdictions such amendments (including post-effective amendments)
        and
        supplements to such registrations and qualifications as may be necessary
        to
        maintain the effectiveness thereof during the Registration Period, (iii)
        take
        such other actions as may be reasonably necessary to maintain such registrations
        and qualifications in effect during the Registration Period, and (iv) take
        all
        other actions reasonably necessary or advisable to qualify the Registrable
        Securities for sale in such jurisdictions; provided, however, that the Company
        shall not be required in connection therewith or as a condition thereto to
        (i)
        qualify to do business in any jurisdiction where it would not otherwise be
        required to qualify but for this Section 3(d), (ii) subject itself to general
        taxation in any such jurisdiction, (iii) file a general consent to service
        of
        process in any such jurisdiction, (iv) provide any undertakings that cause
        the
        Company undue expense or burden, (v) make any change in its charter or bylaws,
        or (vi) spend more than $10,000 in filing fees and legal fees and expenses
        for
        such “blue sky” compliance.
 
 (e) If
        the
        Company has not selected an underwriter for the offering, and in the event
        Investors who hold a majority of the Registrable Securities being offered
        by the
        Registration Statement select underwriters for the offering, the Company
        shall
        enter into and perform its obligations under an underwriting agreement, in
        usual
        and customary form, including, without limitation, customary indemnification
        and
        contribution obligations, with the underwriters of such offering.
 
 (f) As
        promptly as practicable after becoming aware of such event, the Company shall
        notify each Investor of the happening of any event, of which the Company
        has
        knowledge, as a result of which the prospectus included in any Registration
        Statement, as then in effect, includes an untrue statement of a material
        fact or
        omission to state a material fact required to be stated therein or necessary
        to
        make the statements therein not misleading, and use its best efforts promptly
        to
        prepare a supplement or amendment to any Registration Statement to correct
        such
        untrue statement or omission, and deliver such number of copies of such
        supplement or amendment to each Investor as such Investor may reasonably
        request; provided that, for not more than sixty (60) consecutive trading
        days
        (or a total of not more than ninety (90) trading days in any twelve (12)
        month
        period), the Company may delay the disclosure of material non-public information
        concerning the Company (as well as prospectus or Registration Statement
        updating) the disclosure of which at the time is not, in the good faith opinion
        of the Company, in the best interests of the Company (an “Allowed Delay”);
        provided, further, that the Company shall promptly (i) notify the Investors
        in
        writing of the existence of material non-public information giving rise to
        an
        Allowed Delay and (ii) advise the Investors in writing to cease all sales
        under
        such Registration Statement until the end of the Allowed Delay. Upon expiration
        of the Allowed Delay, the Company shall again be bound by the first sentence
        of
        this Section 3(f) with respect to the information giving rise
        thereto.
 
 (g) The
        Company shall use its reasonable best efforts to prevent the issuance of
        any
        stop order or other suspension of effectiveness of any Registration Statement,
        and, if such an order is issued, to obtain the withdrawal of such order within
        a
        reasonable time and to notify each Investor who holds Registrable Securities
        being sold (or, in the event of an underwritten offering, the managing
        underwriters) of the issuance of such order and the resolution
        thereof.
  21
  
 (h) The
        Company shall permit a single firm of legal counsel designated by Investors
        who
        own a majority of the Registrable Securities offered under the Registration
        Statement to review such Registration Statement and all amendments and
        supplements thereto (as well as all requests for acceleration or effectiveness
        thereof) a reasonable period of time prior to their filing with the SEC.
        The
        role of such legal counsel to the Investors shall be to confirm that the
        sections of such Registration Statement covering information with respect
        to the
        Investors, the Investor’s beneficial ownership of securities of the Company and
        the Investors intended method of disposition of Registrable Securities shall
        conform to the information provided to the Company by each of the Investors,
        subject to review and approval by the Company and its legal counsel. Such
        legal
        counsel for the Investors shall not have the right to require changes to
        the
        description of the Company, its business or other matters not related to
        selling
        stockholders.
 
 (i) The
        Company shall make generally available to its security holders as soon as
        practicable, but not later than ninety (90) days after the close of the period
        covered thereby, an earnings statement (in form complying with the provisions
        of
        Rule 158 under the 1933 Act) covering a twelve-month period beginning not
        later
        than the first day of the Company’s fiscal quarter next following the effective
        date of the Registration Statement.
 
 (j) Until
        the
        Registration Statement ceases to be effective, the Company shall make available
        for inspection following reasonable prior written notice by (i) any underwriter
        participating in any disposition pursuant to a Registration Statement, (ii)
        one
        firm of attorneys or other agents retained by the Investors who own a majority
        of the Registrable Securities, and (iii) one firm of attorneys retained by
        all
        such underwriters (collectively, the “Inspectors”) all pertinent financial and
        other records, and pertinent corporate documents and properties of the Company
        (collectively, the “Records”), as shall be reasonably deemed necessary by each
        Inspector to enable each Inspector to exercise its due diligence responsibility,
        and cause the Company’s officers, directors and employees to supply all
        information which any Inspector may reasonably request for purposes of such
        due
        diligence; provided, however, that each Inspector shall hold in confidence
        and
        shall not make any disclosure (except to an Investor) of any Record or other
        information which the Company determines in good faith to be confidential,
        and
        of which determination the Inspectors are so notified, unless (a) the release
        of
        such Records is ordered pursuant to a subpoena or other order from a court
        or
        government body of competent jurisdiction, or (b) the information in such
        Records has been made generally available to the public other than by disclosure
        in violation of this or any other agreement. The Company shall not be required
        to allow such inspection more than once per calendar year. Following such
        due
        diligence review, Investor may require the Company to withdraw the Registrable
        Securities of such Investor from the Registration Statement, if the Company
        does
        not make changes to the Registration Statement requested by such
        Investor.
 
 (k) The
        Company shall not be required to disclose any confidential information in
        such
        Records to any Inspector or to any Investor pursuant to this Agreement until
        and
        unless such Inspector and Investor shall have entered into confidentiality
        agreements (in
  22
  form
        and
        substance satisfactory to the Company) with the Company with respect thereto.
        Each Investor agrees that it shall, upon learning that disclosure of such
        Records or other information is sought in or by a court or governmental body
        of
        competent jurisdiction or through other means, give prompt notice to the
        Company
        and allow the Company, at its expense, to undertake appropriate action to
        prevent disclosure of, or to obtain a protective order for, the Records deemed
        confidential. Nothing herein (or in any other confidentiality agreement between
        the Company and any Investor) shall be deemed to limit the Investor’s ability to
        sell Registrable Securities in a manner which is otherwise consistent with
        applicable laws and regulations.
 
 (l) The
        Company shall (i) cause all the Registrable Securities covered by the
        Registration Statement to be listed on each national securities exchange,
        if
        any, on which securities of the same class or series issued by the Company
        are
        then listed, if any, if the listing of such Registrable Securities is then
        permitted under the rules of such exchange, or (ii) to the extent the securities
        of the same class or series are not then listed on a national securities
        exchange, to use reasonable efforts to arrange for at least two market makers
        to
        register with the National Association of Securities Dealers, Inc. (“NASD”) as
        such with respect to such Registrable Securities.
 
 (m) The
        Company shall provide a transfer agent and registrar, which may be a single
        entity, for the Registrable Securities not later than the effective date
        of the
        Registration Statement.
 
 (n) At
        the
        request of the holders of a majority of the Registrable Securities offered
        pursuant to the Registration Statement, the Company shall prepare and file
        with
        the SEC such amendments (including post-effective amendments) and supplements
        to
        a Registration Statement and any prospectus used in connection with the
        Registration Statement as may be necessary in order to change the plan of
        distribution set forth in such Registration Statement.
 
 (o) The
        Company shall take all other reasonable actions necessary to expedite and
        facilitate disposition by the Investors of Registrable Securities pursuant
        to a
        Registration Statement.
 
 4. OBLIGATIONS
        OF THE INVESTORS.
 
 In
        connection with the registration of the Registrable Securities, the Investors
        shall have the following obligations:
 
 (a) It
        shall
        be a condition precedent to the obligations of the Company to complete the
        registration pursuant to this Agreement with respect to the Registrable
        Securities of a particular Investor that such Investor shall furnish to the
        Company such information regarding itself, the Registrable Securities held
        by it
        and the intended method of disposition of the Registrable Securities held
        by it
        as shall be reasonably required to effect the registration of such Registrable
        Securities and shall execute such documents in connection with such registration
        as the Company may reasonably request. At least five (5) business days prior
        to
        the first anticipated filing date of the Registration Statement, the Company
        shall notify each Investor of the information the Company requires from each
        such Investor.
  23
  
 (b) Each
        Investor, by such Investor’s acceptance of the Registrable Securities, agrees to
        cooperate with the Company as reasonably requested by the Company in connection
        with the preparation and filing of the Registration Statements hereunder,
        unless
        such Investor has notified the Company in writing of such Investor’s election to
        exclude all of such Investor’s Registrable Securities from the Registration
        Statements.
 
 (c) In
        the
        event the Company or Investors holding a majority of the Registrable Securities
        being registered determine to engage the services of an underwriter, each
        Investor agrees to enter into and perform such Investor’s obligations under an
        underwriting agreement, in usual and customary form, including, without
        limitation, customary indemnification and contribution obligations, with
        the
        managing underwriter of such offering and take such other actions as are
        reasonably required in order to expedite or facilitate the disposition of
        the
        Registrable Securities, unless such Investor has notified the Company in
        writing
        of such Investor’s election to exclude all of such Investor’s Registrable
        Securities from such Registration Statement.
 
 (d) Each
        Investor agrees that, upon receipt of any notice from the Company of the
        happening of any event of the kind described in Section 3(f) or 3(g), such
        Investor will immediately discontinue disposition of Registrable Securities
        pursuant to the Registration Statement covering such Registrable Securities
        until such Investor’s receipt of the copies of the supplemented or amended
        prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the
        Company, such Investor shall deliver to the Company (at the expense of the
        Company) or destroy (and deliver to the Company a certificate of destruction)
        all copies in such Investor’s possession, of the prospectus covering such
        Registrable Securities current at the time of receipt of such notice.
 
 (e) No
        Investor may participate in any underwritten registration hereunder unless
        such
        Investor if requested by the Company (i) agrees to sell such Investor’s
        Registrable Securities on the basis provided in any underwriting arrangements
        in
        usual and customary form entered into by the Company, (ii) completes and
        executes all questionnaires, powers of attorney, indemnities, underwriting
        agreements and other documents reasonably required under the terms of such
        underwriting arrangements, and (iii) agrees to pay its pro rata share of
        all
        underwriting discounts and commissions and any expenses in excess of those
        payable by the Company pursuant to Section 5 below. Notwithstanding the
        foregoing, there is no obligation on the part of the Company or any underwriter
        to include Registrable Securities of Investor in the securities to be purchased
        or sold by the underwriter.
 
 5. EXPENSES
        OF REGISTRATION.
 
 All
        reasonable expenses, other than underwriting discounts and commissions, incurred
        in connection with registrations, filings or qualifications pursuant to Sections
        2 and 3, including, without limitation, all registration, listing and
        qualification fees, printers and accounting fees, the fees and disbursements
        of
        counsel for the Company, and the reasonable fees and disbursements of one
        counsel selected by the Investors holding a majority of the Registrable
        Securities shall be borne by the Company, provided the Company shall not
        be
        required to pay legal fees and disbursements of such legal counsel in excess
        of
        $15,000.
  24
   6. INDEMNIFICATION.
 
 In
        the
        event any Registrable Securities are included in a Registration Statement
        under
        this Agreement:
 
 (a) To
        the
        extent permitted by law, the Company will indemnify, hold harmless and defend
        (i) each Investor who holds such Registrable Securities, (ii) the directors,
        officers, partners, employees, agents and each person who controls any Investor
        within the meaning of the 1933 Act or the Securities Exchange Act of 1934,
        as
        amended (the “1934 Act”), if any, (iii) any underwriter (as defined in the 1933
        Act) for the Investors, and (iv) the directors, officers, partners, employees
        and each person who controls any such underwriter within the meaning of the
        1933
        Act or the 1934 Act, if any (each, an “Indemnified Person”), against any joint
        or several losses, claims, damages, liabilities or expenses (collectively,
        together with actions, proceedings or inquiries by any regulatory or
        self-regulatory organization, whether commenced or threatened, in respect
        thereof, “Claims”) to which any of them may become subject insofar as such
        Claims arise out of or are based upon: (i) any untrue statement of a material
        fact in a Registration Statement or the omission to state therein a material
        fact required to be stated or necessary to make the statements therein not
        misleading; (ii) any untrue statement of a material fact contained in any
        preliminary prospectus if used prior to the effective date of such Registration
        Statement, or contained in the final prospectus (as amended or supplemented,
        if
        the Company files any amendment thereof or supplement thereto with the SEC)
        or
        the omission to state therein any material fact necessary to make the statements
        made therein, in light of the circumstances under which the statements therein
        were made, not misleading; or (iii) any violation by the Company of the 1933
        Act, the 1934 Act, any other law, including, without limitation, any state
        securities law, or any rule or regulation thereunder relating to the offer
        or
        sale of the Registrable Securities (the matters in the foregoing clauses
        (i)
        through (iii) being, collectively, “Violations”). Subject to the restrictions
        set forth in Section 6(c) with respect to the number of legal counsel, the
        Company shall reimburse the Indemnified Person, promptly as such expenses
        are
        incurred and are due and payable, for any reasonable legal fees or other
        reasonable expenses incurred by them in connection with investigating or
        defending any such Claim. Notwithstanding anything to the contrary contained
        herein, the indemnification agreement contained in this Section 6(a): (i)
        shall
        not apply to a Claim arising out of or based upon a Violation which occurs
        in
        reliance upon and in conformity with information furnished in writing to
        the
        Company by any Indemnified Person or underwriter for such Indemnified Person,
        or
        any of their legal counsel, expressly for use in connection with the preparation
        of such Registration Statement or any such amendment thereof or supplement
        thereto; (ii) shall not apply to amounts paid in settlement of any Claim
        if such
        settlement is effected without the prior written consent of the Company,
        which
        consent shall not be unreasonably withheld; and (iii) with respect to any
        preliminary prospectus, shall not inure to the benefit of any Indemnified
        Person
        if the untrue statement or omission of material fact contained in the
        preliminary prospectus was corrected on a timely basis in the prospectus,
        as
        then amended or supplemented. Such indemnity shall remain in full force and
        effect regardless of any investigation made by or on behalf of the Indemnified
        Person and shall survive the transfer of the Registrable Securities by the
        Investors pursuant to Section 9.
  25
  (b) In
        connection with any Registration Statement in which an Investor is
        participating, each such Investor agrees severally and not jointly to indemnify,
        hold harmless and defend, to the same extent and in the same manner set forth
        in
        Section 6(a), the Company, each of its directors, each of its officers who
        signs
        the Registration Statement, each person, if any, who controls the Company
        within
        the meaning of the 1933 Act or the 1934 Act, any underwriter and any other
        shareholder selling securities pursuant to the Registration Statement or
        any of
        its directors or officers or any person who controls such shareholder or
        underwriter within the meaning of the 1933 Act or the 1934 Act (collectively
        and
        together with an Indemnified Person, an “Indemnified Party”), against any Claim
        to which any of them may become subject, under the 1933 Act, the 1934 Act
        or
        otherwise, insofar as such Claim arises out of or is based upon any Violation
        by
        such Investor, in each case to the extent (and only to the extent) that such
        Violation occurs in reliance upon and in conformity with written information
        furnished to the Company by such Investor, or its legal counsel, expressly
        for
        use in connection with such Registration Statement; and subject to Section
        6(c)
        such Investor will reimburse any legal or other expenses (promptly as such
        expenses are incurred and are due and payable) reasonably incurred by them
        in
        connection with investigating or defending any such Claim; provided, however,
        that the indemnity agreement contained in this Section 6(b) shall not apply
        to
        amounts paid in settlement of any Claim if such settlement is effected without
        the prior written consent of such Investor, which consent shall not be
        unreasonably withheld; provided, further, however, that the Investor shall
        be
        liable under this Agreement (including this Section 6(b) and Section 7) for
        only
        that amount as does not exceed the net proceeds to such Investor as a result
        of
        the sale of Registrable Securities pursuant to such Registration Statement.
        Such
        indemnity shall remain in full force and effect regardless of any investigation
        made by or on behalf of such Indemnified Party and shall survive the transfer
        of
        the Registrable Securities by the Investors pursuant to Section 9.
        Notwithstanding anything to the contrary contained herein, the indemnification
        agreement contained in this Section 6(b) with respect to any preliminary
        prospectus shall not inure to the benefit of any Indemnified Party if the
        untrue
        statement or omission of material fact contained in the preliminary prospectus
        was corrected on a timely basis in the prospectus, as then amended or
        supplemented.
 
 (c) Promptly
        after receipt by an Indemnified Person or Indemnified Party under this Section
        6
        of notice of the commencement of any action (including any governmental action),
        such Indemnified Person or Indemnified Party shall, if a Claim in respect
        thereof is to be made against any indemnifying party under this Section 6,
        deliver to the indemnifying party a written notice of the commencement thereof,
        and the indemnifying party shall have the right to participate in, and, to
        the
        extent the indemnifying party so desires, jointly with any other indemnifying
        party similarly noticed, to assume control of the defense thereof with counsel
        mutually satisfactory to the indemnifying party and the Indemnified Person
        or
        the Indemnified Party, as the case may be; provided, however, that an
        Indemnified Person or Indemnified Party shall have the right to retain its
        own
        counsel with the fees and expenses to be paid by the indemnifying party,
        if, in
        the reasonable opinion of counsel retained by the indemnifying party, the
        representation by such counsel of the Indemnified Person or Indemnified Party
        and the indemnifying party would be inappropriate due to actual or potential
        differing interests between
  26
  such
        Indemnified Person or Indemnified Party and any other party represented by
        such
        counsel in such proceeding. The indemnifying party shall pay for only one
        separate legal counsel for the Indemnified Persons or the Indemnified Parties,
        as applicable, and such legal counsel shall be selected by Investors holding
        a
        majority of the Registrable Securities included in the Registration Statement
        to
        which the Claim relates (with the approval of a majority-in-interest of the
        Investors), if the Investors are entitled to indemnification hereunder, or
        the
        Company, if the Company is entitled to indemnification hereunder, as applicable.
        The failure to deliver written notice to the indemnifying party within a
        reasonable time of the commencement of any such action shall not relieve
        such
        indemnifying party of any liability to the Indemnified Person or Indemnified
        Party under this Section 6, except to the extent that the indemnifying party
        is
        actually prejudiced in its ability to defend such action. The indemnification
        required by this Section 6 shall be made by periodic payments of the amount
        thereof during the course of the investigation or defense, as such expense,
        loss, damage or liability is incurred and is due and payable.
 
 7. CONTRIBUTION.
 
 To
        the
        extent any indemnification by an indemnifying party is prohibited or limited
        by
        law, the indemnifying party agrees to make the maximum contribution with
        respect
        to any amounts for which it would otherwise be liable under Section 6 to
        the
        fullest extent permitted by law; provided, however, that (i) no contribution
        shall be made under circumstances where the maker would not have been liable
        for
        indemnification under the fault standards set forth in Section 6, (ii) no
        seller
        of Registrable Securities guilty of fraudulent misrepresentation (within
        the
        meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
        from
        any seller of Registrable Securities who was not guilty of such fraudulent
        misrepresentation, and (iii) contribution (together with any indemnification
        or
        other obligations under this Agreement) by any seller of Registrable Securities
        shall be limited in amount to the net amount of proceeds received by such
        seller
        from the sale of such Registrable Securities.
 
 8. REPORTS
        UNDER THE 1934 ACT.
 
 With
        a
        view to making available to the Investors the benefits of Rule 144 promulgated
        under the 1933 Act or any other similar rule or regulation of the SEC that
        may
        at any time permit the investors to sell securities of the Company to the
        public
        without registration (“Rule 144”), the Company agrees to use its best efforts
        to:
 
 (a) make
        and
        keep public information available, as those terms are understood and defined
        in
        Rule 144;
 
 (b) file
        with
        the SEC in a timely manner all reports and other documents required of the
        Company under the 1933 Act and the 1934 Act so long as the Company remains
        subject to such requirements and the filing of such reports and other documents
        is required for the applicable provisions of Rule 144; and
 
 (c) furnish
        to each Investor so long as such Investor owns Registrable Securities, promptly
        upon request, (i) a written statement by the Company that it has complied
  27
  with
        the
        reporting requirements of Rule 144, the 1933 Act and the 1934 Act and (ii)
        such
        other information as may be reasonably requested to permit the Investors
        to sell
        such securities pursuant to Rule 144 without registration.
 
 9. ASSIGNMENT
        OF REGISTRATION RIGHTS.
 
 The
        rights under this Agreement shall be automatically assignable by the Investors
        to any transferee of all or any portion of Registrable Securities if: (i)
        the
        Investor agrees in writing with the transferee or assignee to assign such
        rights, and a copy of such agreement is furnished to the Company within a
        reasonable time after such assignment, (ii) the Company is, within a reasonable
        time after such transfer or assignment, furnished with written notice of
        (a) the
        name and address of such transferee or assignee, and (b) the securities with
        respect to which such registration rights are being transferred or assigned,
        (iii) following such transfer or assignment, the further disposition of such
        securities by the transferee or assignee is restricted under the 1933 Act
        and
        applicable state securities laws, (iv) at or before the time the Company
        receives the written notice contemplated by clause (ii) of this sentence,
        the
        transferee or assignee agrees in writing with the Company to be bound by
        all of
        the provisions contained herein, (v) such transfer shall have been made in
        accordance with the applicable requirements of the Subscription Agreement,
        and
        (vi) such transferee shall not be a “U.S. Person” as that term defined in
        Regulation S promulgated under the 1933 Act.
 
 10. AMENDMENT
        OF REGISTRATION RIGHTS.
 
 Provisions
        of this Agreement may be amended and the observance thereof may be waived
        (either generally or in a particular instance and either retroactively or
        prospectively), only with written consent of the Company and Investors who
        hold
        a majority of the Registrable Securities, except that any person or entity
        who
        acquires Registrable Securities may become a part to this Agreement by the
        Company and such person or entity signing a counterpart of this Agreement.
        Any
        amendment or waiver effected in accordance with this Section 10 shall be
        binding
        upon each Investor and the Company. In the event the Company becomes a
        subsidiary of any company whose Common Stock is publicly traded (“Holding
        Company”), and the Investor receives shares of Common Stock of such Holding
        Company, all obligations of the Company under this Agreement shall terminate
        upon such Holding Company assuming this Agreement, which may be done without
        the
        consent or approval of Investor.
 
 11. MISCELLANEOUS.
 
 (a) A
        person
        or entity is deemed to be a holder of Registrable Securities whenever such
        person or entity owns of record such Registrable Securities. If the Company
        receives conflicting instructions, notices or elections from two or more
        persons
        or entities with respect to the same Registrable Securities, the Company
        shall
        act upon the basis of instructions, notice or election received from the
        registered owner of such Registrable Securities.
 
 (b) Any
        notices required or permitted to be given under the terms hereof shall be
        sent
        by certified or registered mail (return receipt requested) or delivered
        personally or by courier (including a recognized overnight delivery service)
        or
        by facsimile and shall be effective
  28
  five
        days
        after being placed in the mail, if mailed by regular United States mail,
        or upon
        receipt, if delivered personally or by courier (including a recognized overnight
        delivery service) or by facsimile, in each case addressed to a party. The
        addresses for such communications shall be:
 
 If
        to the
        Company:
 
 Michael
        Nouri
 Smart
        Online, Inc.
 Post
        Office Box 12794
 Research
        Triangle Park, NC 27709-2794
 Telephone:
        (919) 765-5000
 E-mail:
        dnouri@us.smartonline.com
 
 With
        copies to:
 
 Daniels
        Daniels & Verdonik, P.A.
 Post
        Office Drawer 12218
 Research
        Triangle Park, NC 27709-2218
 Telephone:
        (919) 544-5444
 Facsimile:
        (919) 544-5920
 Email:
        jverdonik@d2vlaw.com
 
 If
        to an
        Investor:
 
 to
        the
        address set forth immediately below such Investor’s name on the signature pages
        to the Subscription Agreement, or on the address set forth immediately below
        such Investor’s name on the agreement entered into pursuant to Section 9 of this
        Agreement.
 
 (c) Failure
        of any party to exercise any right or remedy under this Agreement or otherwise,
        or delay by a party in exercising such right or remedy, shall not operate
        as a
        waiver thereof.
 
 (d) THIS
        AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
        THE
        LAWS OF THE STATE OF NORTH CAROLINA APPLICABLE TO AGREEMENTS MADE AND TO
        BE
        PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF
        CONFLICT OF LAWS.
 
 (e) In
        the
        event that any provision of this Agreement is invalid or unenforceable under
        any
        applicable statute or rule of law, then such provision shall be deemed
        inoperative to the extent that it may conflict therewith and shall be deemed
        modified to conform with such statute or rule of law. Any provision hereof
        which
        may prove invalid or unenforceable under any law shall not affect the validity
        or enforceability of any other provision hereof.
  29
  
 (f) This
        Agreement constitutes the entire agreement among the parties hereto with
        respect
        to the subject matter hereof and thereof. There are no restrictions, promises,
        warranties or undertakings, other than those set forth or referred to herein
        and
        therein. This Agreement supersede all prior agreements and understandings
        among
        the parties hereto with respect to the subject matter hereof and
        thereof.
 
 (g) Subject
        to the requirements of Section 9 hereof, this Agreement shall be binding
        upon
        and inure to the benefit of the parties and their successors and
        assigns.
 
 (h) The
        headings in this Agreement are for convenience of reference only and shall
        not
        form part of, or affect the interpretation of, this Agreement.
 
 (i) This
        Agreement may be executed in two or more counterparts, each of which shall
        be
        deemed an original but all of which shall constitute one and the same agreement
        and shall become effective when counterparts have been signed by each party
        and
        delivered to the other party. This Agreement, once executed by a party, may
        be
        delivered to the other party hereto by facsimile transmission of a copy of
        this
        Agreement bearing the signature of the party so delivering this
        Agreement.
 
 (j) Each
        party shall do and perform, or cause to be done and performed, all such further
        acts and things, and shall execute and deliver all such other agreements,
        certificates, instruments and documents, as the other party may reasonably
        request in order to carry out the intent and accomplish the purposes of this
        Agreement and the consummation of the transactions contemplated
        hereby.
 
 (k) Except
        as
        otherwise provided herein, all consents and other determinations to be made
        by
        the Investors pursuant to this Agreement shall be made by Investors holding
        a
        majority of the Registrable Securities, determined as if the all options,
        warrants and convertible securities then outstanding have been issued and/or
        converted into Registrable Securities.
 
 (l) The
        Company and each Investor acknowledges that a breach by it of its obligations
        hereunder will cause irreparable harm by vitiating the intent and purpose
        of the
        transactions contemplated hereby. Accordingly, the parties acknowledge that
        the
        remedy at law for breach of its obligations under this Agreement will be
        inadequate and agrees, in the event of a breach or threatened breach of any
        of
        the provisions under this Agreement, that the other parties shall be entitled,
        in addition to all other available remedies in law or in equity, and in addition
        to the penalties assessable herein, to an injunction or injunctions restraining,
        preventing or curing any breach of this Agreement and to enforce specifically
        the terms and provisions hereof, without the necessity of showing economic
        loss
        and without any bond or other security being required.
 
 (m) The
        language used in this Agreement will be deemed to be the language chosen
        by the
        parties to express their mutual intent, and no rules of strict construction
        will
        be applied against any party.
  30
  (n) No
        Investor may bring any legal or other action or proceeding for breach of
        this
        Agreement or arising out of any matter related to this Agreement, unless
        the
        Investors who own a majority of the Registrable Securities consent to the
        bringing of such action. Any claim may be settled by the Company and the
        Investors who own a majority of the Registrable Securities.
 
  [The
        Remainder of this Page is Blank.]
 
  31
  IN
        WITNESS WHEREOF, the Company and the undersigned Investors have caused this
        Agreement to be duly executed as of the date on the first page of this
        Agreement.
 
 
 SMART
        ONLINE, INC.
 
 By:
        /s/  Michael Nouri
 Name:
        Michael D. Nouri
 Title:  
        CEO
 
 
 
 INVESTOR:
 The
        Blueline Fund
 
 
 By: 
        /s/ Philippe Pouponot
 Name: 
        Philippe Pouponnot
 Title: 
        Delegate
 Address: 
        Walker House, Mary Street
 George
        Town, Grand Cayman
 Telephone: 
        + 41 22 737 4050
 Facsimile: 
        +  41 22 737 4055
 Email: _______________________________
 CR: 
100045
        Incorporation Number  /s/
        Philippe Pouponnot
 Initial
        Number of Registrable Securities: 500,000 units  /s/ Philippe
        Pouponnot
 
 
 
 
  32
  WARRANT
          PURCHASE AND DRIBBLE OUT AGREEMENT
 
 AGREEMENT
          dates as of January 3, 2005 between Smart Online, Inc., Delaware corporation
          (the "Company"), and THE BLUELINE FUND located in the Cayman Islands
          (Subscriber").
 
 WHEREAS,
          Subscriber has purchased 500,000 shares of Common Stock (the "Purchased
          Shares")
          from the Company and the Company desires Subscriber to agree to limit its
          sales
          of the Purchased Shares in return for issuance of a warrant (the "Warrant")
          to
          purchase 50,000 additional shares ("Warrant Shares") of Common Stock of
          the
          Company for an exercise price of $5.00 per share, which Warrant terminates
          on
          January 1, 2007. The Purchased Shares, the Warrant and the Warrant Shares
          are
          hereinafter individually and collectively referred to as the "Securities").
 
 NOW,
          THEREFORE, the parties hereby agree as follows:
 
 (1) Warrant
          Issuance .
          The
          Company shall issue to Subscriber the Warrant in exchange for the agreement
          of
          Subscriber to the provisions of this Agreement without further payment
          by
          Subscriber. Such issuance shall occur at the same time as the Purchased
          shares
          are issued to Subscriber.
 
 (2) Registration
          of Warrant Shares .
          The
          Warrant Shares shall be registered by the Company at the same time as the
          Purchased Shares pursuant to the terms of the Registration Rights Agreement
          between the Company and Shareholder with respect to the Purchased Shares.
 
 (3) "Dribble-Out"
          Agreement .
 
 (a) Subscriber
          hereby agrees that, except as permitted under subsection (c) of this Section
          (3), during the Dribble Out Period, as defined herein, Subscriber will
          not:
 
 (i) Sell
          any
          of the Securities or other securities of the Company or Holding Company
          received
          on account of ownership of the Securities (the "Dribble-Out Securities").
 
 (ii) Transfer,
          assign or otherwise dispose of any of the Dribble-Out Securities.
 
 (iii) Pledge,
          hypothecate or otherwise create a lien on any of the Lock-Up Securities.
 
 (iv) Loan
          to
          any person or entity any shares or other securities of the Company or Holding
          Company.
 
 (v) Sell
          short any shares or other securities of the Company or Holding Company.
 
  33
  
 (vi) Acquire
          a
          put option or grant a call option with respect to any shares or other securities
          of the Company or Holding Company.
 
 (vii) Enter
          into any agreement concerning any of the foregoing transactions, or otherwise
          facilitate any other person conducting any of the foregoing transactions.
 
 (b) For
          purposes of this Section (3), Holding Company shall mean any company whose
          stock
          is publicly traded (i) with which the Company merges or consolidates or
          (ii) of
          which the Company or its successor becomes a subsidiary. For purposes of
          this
          Section (3), the Dribble Out Period shall mean the period beginning on
          the date
          of this Agreement and ending six (6) months after the effective date of
          the
          first registration statement of the Company that registers for resale the
          Dribble-Out Securities (the "Effective Date"). Notwithstanding the foregoing,
          after the Effective Date Subscriber may sell (if permitted under Regulation
          S or
          a registration statement), during any rolling thirty-day period during
          the
          Dribble Out Period, up to 25% of the Dribble-Out Securities owned by Subscriber
          on the Effective Date. The Board of Directors of the Company or Holding
          Company
          may terminate the Dribble Out Period or allow Subscriber to take a prohibited
          action prior to termination of the Dribble Out Period with respect to some
          or
          all of the Dribble-Out Securities owned by the Subscriber, if the Board
          provides
          all other Subscribers of the Company or Holding Company who have the same
          Dribble Out Period with the same termination or waiver at the same time
          and to
          the same extent as for Subscriber.
 
 (c) Notwithstanding
          the foregoing, provided the transferee first signs an agreement on substantially
          the terms set forth herein and reasonably acceptable to the Company or
          Holding
          Company, Subscriber may transfer securities of the Company or Holding Company
          without payment or other consideration: (i) if Subscriber is an individual,
          to
          any family member, (ii) if Subscriber is a corporation, to any direct or
          indirect parent or subsidiary or any shareholder of Subscriber, (iii) if
          Subscriber is a partnership, to any partner of Subscriber, (iv) if Subscriber
          is
          a limited liability company, to any member of Subscriber, and (v) if Subscriber
          is a trust, to any beneficiary of such trust.
 
 (d) Subscriber
          further agrees that before and after termination of the Dribble Out Period,
          Subscriber will comply with all securities laws, rules and regulations
          when
          purchasing or reselling securities of the Company or Holding Company, including,
          without limitation, those prohibiting sales and purchases of securities
          while in
          possession of material nonpublic information.
 
 (e) The
          Dribble-Out Securities of Subscriber shall have a legend in form and substance
          acceptable to the Company and Holding Company referring to the restrictions
          of
          this Agreement and the Company or Holding Company may instruct the transfer
          agent of the Company or Holding Company to stop any transfer of any securities
          in violation of this Agreement and may take any other action required to
          avoid
          violation of this Agreement, including, without limitation, obtaining an
          injunction.
 
 (f) The
          provisions of this Section (3) shall continue in effect after the Dribble-
          Out
          Securities are registered pursuant to the Registration Rights Agreement.
 
  34
  
 (4) Subscriber
          hereby represents and warrants to the Company as follows:
 
 (a) Disclosure .
          Subscriber has carefully reviewed the Form SB-2 Registration Statement
          of the
          Company on file with the U.S. Securities and Exchange Commission, including
          its
          most recent amendment (available at www.sec.gov), including financial
          information and including all risk factors, and fully understands all risks
          associated with investment in the Company.
 
 (b) Authorization .
          Subscriber has full power and authority to enter into this Agreement. This
          Agreement constitutes Subscriber's valid and legally binding obligation,
          enforceable in accordance with its terms except as limited by (i) applicable
          bankruptcy, insolvency, receivership, reorganization, moratorium and other
          laws
          of general application affecting enforcement of creditors' rights generally,
          and
          (ii) general principals of equity, the, application of which may deny the
          Company the right to specific performance, injunctive relief and other
          equitable
          remedies.
 
 (c) Experience .
          Subscriber is experienced in evaluating and investing in private placement
          transactions of securities of technology companies such as the Company,
          has such
          knowledge and experience in financial and business matters that Subscriber
          is
          capable of evaluating the merits and risks of Subscriber's investment in
          the
          Securities, is able to bear the economic risk of the investment and is
          prepared
          to hold the shares for an indefinite period of time.
 
 (d) Investment .
          Subscriber is acquiring the Securities for investment for Subscriber's
          own
          account and not with a view to, or for resale in connection with, any
          distribution 'thereof, and Subscriber has no present intention of selling
          or
          distributing the Securities. Subscriber does not have any contract, undertaking,
          agreement or arrangement with any person to sell, transfer or grant
          participation to such person or to any third person with respect to any
          of the
          Securities other than as set forth in this Agreement. Subscriber understands
          that the Securities to be purchased by Subscriber have not been registered
          under
          the Securities Act of 1933, as amended (the "Act") by reason of a specific
          exemption from the registration provisions of the Act which depends upon,
          among
          other things, the bona fide nature of the investment intent as expressed
          herein.
 
 (e) Reliance
          Upon Subscriber Representations .
          Subscriber understands that the Securities are not registered under the
          Act on
          the grounds that the sale provided for in this Agreement and the issuance
          of
          Securities hereunder is being made in reliance upon an exemption from the
          registration requirements of the Act pursuant to Regulations S pursuant
          to the
          Securities Act, and that the Company's reliance on such exemption is predicated
          on Subscriber's representations as set forth in this Agreement.
 
 (f) Regulation
          S .
          Attached as Appendix A hereto are the defined terms in Regulation S. All
          defined
          terms shall have the meanings set forth in Appendix A and Regulation S.
 
 (i) The
          undersigned understands and acknowledges that: (A) the Securities acquired
          pursuant to this Subscription Agreement have not been registered under
          the
          Securities Act, are being sold in reliance upon an exemption from registration
          afforded by Regulation S; and that such Securities have not been registered
          with
          any state securities commission or authority; (B) pursuant to the requirements
          of Regulation S, the Securities may not be transferred, sold or otherwise
          exchanged unless in compliance with the provisions of Regulation S and/or
          pursuant to registration under the Securities Act, or pursuant to an available
          exemption thereunder; and (C) other than as set forth in this Subscription
          Agreement between the Company and the undersigned, including the Registration
          Rights Agreement, the Company is under no obligation to register the Securities
          under the Securities Act or any state securities law, or to take any action
          to
          make any exemption from any such registration provisions available;
 
 (ii) (A)
          The
          undersigned is not a US. person and is not acquiring the Securities for
          the
          account of any U S . Person; (B) if a corporation, it is not organized
          or
          incorporated under the laws of the United States; (C) if a corporation,
          no
          director or executive officer is a national or citizen of the United States;
          and
          (D) is not otherwise deemed to be a "US. Person" within the meaning of
          Regulation S:
 
 (iii) The
          undersigned, if not an individual, was not formed specifically for the
          purpose
          of acquiring the Securities purchased pursuant to this Subscription Agreement;
 
 (iv)  The
          undersigned is purchasing the Securities for his or its own account and
          risk and
          not for the account or benefit of a "U.S. Person" as defined in Regulation
          S and
          no other person has any interest in or participation in the Securities
          or any
          right, option, security interest, pledge or other interest in or to the
          Securities. The undersigned understands, acknowledges and agrees that he
          or it
          must bear the economic risk of his or its investment in the Securities
          for an
          indefinite period of time and that prior to any such offer or sale, the
          Company
          may require, as a condition to effecting a transfer of the Securities,
          an
          opinion of counsel, acceptable to the Company, as to the registration or
          exemption therefrom under the Securities Act and any state securities acts,
          if
          applicable;
 
 (v) The
          undersigned will, after the expiration of the Restricted Period, as set
          forth in
          Rule 903(b)(3)(iii)(A) under Regulation S, offer, sell, pledge or otherwise
          transfer the Securities only in accordance with Regulation S, or pursuant
          to an
          available exemption under the Securities Act and, in any case, in accordance
          with applicable state securities laws. The transactions contemplated by
          this
          Subscription Agreement have neither been pre-arranged with a purchaser
          who is in
          the United States or who is a US. Person, nor are they part of a plan or
          scheme
          to evade the registration provisions of the United States federal securities
          laws;
 
 (vi) The
          offer
          leading to the sale evidenced hereby was made in an "offshore transaction."
          For
          purposes of Regulation S, the undersigned understands that an "offshore
          transaction" is defined as any offer or sale not made to a person in the
          United
          States and either (A) at the time the buy order originated, the purchaser
          is
          outside the United States, or the seller or any person acting on his behalf
          reasonably believes that the purchaser is outside the United States; or
          (B) for
          purposes of (1) Rule 903 under Regulation S, the transaction is executed
          in, or
          on or through a physical trading floor of an established foreign exchange
          that
          is located outside of the United States, or (2) Rule 904 under Regulation
          S, the
          transaction is executed in, on or through the facilities of a designated
          offshore securities market, and neither the seller nor any person acting
          on its
          behalf knows that the transaction has been prearranged with a buyer in
          the
          United States;
  
 35
 
 (vii) Neither
          the undersigned nor any affiliate of the undersigned nor any person acting
          on
          his or its behalf, has made or is aware of any "directed selling efforts"
          in the
          United States, which term is defined in Regulation S as any activity undertaken
          for the purpose of, or that could reasonably be expected to have the effect
          of,
          conditioning the market in the United States for any of the Securities
          being
          purchased hereby;
 
 (viii) The
          undersigned understands that the Company is the seller of the Securities
          and
          that, for purpose of Regulation S, a "distributor" is any underwriter,
          dealer or
          other person who participates, pursuant to a contractual arrangement, in
          the
          distribution of securities offered or sold in reliance on Regulation S
          and that
          an "affiliate" is any partner, officer, director or any person directly
          or
          indirectly controlling, controlled by or under common control with any
          person in
          question. The undersigned agrees that he or it will not, during the Restricted
          Period (as defined above), act as a distributor, either directly or through
          any
          affiliate, nor shall it sell, transfer, hypothecate or otherwise convey
          the
          Securities other than to a non-U.S. Person other than in compliance with
          the
          Securities Act and any state securities laws, if applicable; and
 
 (ix) The
          undersigned acknowledges that the Securities will bear a legend in substantially
          the following form:
 
 THE
          SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN OFFERED AND SOLD IN
          AN
          "OFFSHORE TRANSACTION" IN RELIANCE UPON REGULATION S AS PROMULGATED BY
          THE
          SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, THE SECURITIES REPRESENTED
          BY
          THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
          (THE
          "SECURITIES ACT") AND MAY NOT BE TRANSFERRED OTHER THAN IN ACCORDANCE WITH
          REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT
          TO
          AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, THE
          AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
          THE SECURITIES REPRESENTED BY THIS CERTIFICATE CANNOT BE THE SUBJECT OF
          A
          HEDGING TRANSACTION UNLESS SUCH TRANSACTIONS ARE CONDUCTED IN COMPLIANCE
          WITH
          THE SECURITIES ACT.
 
 (g) No
          Public
          Market. Subscriber understands that no public market now exists for any
          of the
          securities issued by the Company and that it is uncertain whether a public
          market will ever exist for the Securities.
 
 36
 
 (h) Access
          to Information .
          Subscriber has received all information that Subscriber considers necessary
          or
          appropriate for deciding whether to purchase Securities. Subscriber has
          had an
          opportunity to ask questions and receive answers from the Company's management
          regarding the terms and conditions of the offering of the Securities and
          the
          business, properties, prospects and financial condition of the Company
          and to
          obtain additional information from the Company (to the extent that the
          Company
          possessed such information or could acquire it without unreasonable effort
          or
          expense) necessary to verify the accuracy of any information furnished
          to
          Subscriber or to which Subscriber had access.
 
 (i) Stop
          Transfer Instructions .
          Subscriber agrees that the Company may issue instructions to its transfer
          agent
          that prohibit transfer in violation of this Agreement or Regulation S.
 
 (5) The
          representations, warranties, understandings, acknowledgments and agreements
          in
          this Agreement are true and accurate as of the date hereof, shall be true
          and
          accurate as of the date of the acceptance hereof by the Company and shall
          survive thereafter.
 
 (6) This
          Agreement shall be enforced, governed and construed in all respects in
          accordance with the laws of the State of Delaware, as such laws are applied
          by
          Delaware courts to agreements entered into and to be performed in Delaware,
          and
          shall be binding upon Subscriber, the Subscriber's heirs, estate, legal
          representatives, successors and assigns and shall inure to the benefit
          of the
          Company and its successors and assigns.
 
 (7) Subscriber
          agrees not to transfer or assign this Agreement, or any of Subscriber's
          interest
          herein, without the express written consent of the Company.
 
 (8) This
          Agreement constitutes the entire agreement among the parties hereto with
          respect
          to the subject matter hereof and supersedes any and all prior or contemporaneous
          representations, warranties, agreements and understandings in connection
          therewith. This Agreement may be amended only by a writing executed by
          all
          parties hereto. This Agreement may be executed in one or more counterparts.
 
 (The
          remainder of this page is intentionally left blank.)
 
  37
  
 IN
          WITNESS WHEREOF, the parties have executed this Agreement as of the date
          first
          written above.
 
 
 
 SMART
                    ONLINE, INC.
                THE
                    BLUELINE FUNDBy: 
                    /s/ Michael Nouri    2/25/05
                By:
                    /s/ Philippe PouponnotMichael
                    Nouri, President
                Name:
                    Philippe PoupnottTitle: 
                    DelegateWalker
                    House, Mary StreetP.
                    0. Box 908GTGeorge
                    Town Grand CaymanCayman
                    Islands
 
  38