SMART
ONLINE, INC.


NONQUALIFIED
STOCK OPTION AGREEMENT





THIS  NONQUALFIED
STOCK OPTION AGREEMENT, made and entered into as of the _____ day of ______, by
and between Smart Online, Inc., a Delaware corporation (the “Company”), and ________ (the
“Participant”).





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





WHEREAS,
this Agreement evidences the grant of such option.





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





1.         
 Grant of
Option. The Board hereby grants Participant an option to purchase from
the Company, during the period specified in Section 2 of this Agreement, a total
of ____________ (_____) shares of Common Stock, at the purchase price of
_____________ ($____) per share (the “Purchase Price”), in
accordance with the terms and conditions stated in this Agreement. The Purchase
Price represents the fair market value of the Common Stock on the date of this
Agreement, and under no circumstances shall the Purchase Price be less than such
fair market value on the date of this Agreement. The shares of Common Stock
subject to the option granted hereby are referred to below as the “Shares,” and
the option to purchase such Shares is referred to below as the
“Option”.





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




Incremental Percentage of
                    
                    Cumulative Percentage ofDate Exercisable
                    
                    Option Exercisable
                    
                    Option Exercisable


__________________________________





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








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





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





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





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





(c)         upon
the expiration of ninety (90) days following the Termination of Service of
Participant, provided that (i) in the event of the Participant’s death or
Disability during such ninety (90) day period the Option shall remain
exercisable until the expiration of one (1) year following the Participant’s
death or Disability, and (ii) in the event of a termination for “cause”, the
Option shall expire immediately upon the effective date of such
termination;





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





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





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


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4.       
  Manner of
Exercise of Option.





(a)         The
Option may be exercised only by (i) Participant’s completion, execution and
delivery to the Company of a notice of exercise and, if required by the Company,
an “investment letter” as supplied by the Company confirming Participant’s
representations and warranties in Section 15 of this Agreement, including the
representation that Participant is acquiring the Shares for investment only and
not with a view to the resale or other distribution thereof, and (ii) the
payment to the Company, pursuant to the terms of this Agreement, of an amount
equal to the Purchase Price multiplied by the number of Shares being purchased
as specified in Participant’s notice of exercise. Participant’s notice of
exercise shall be given in the manner specified in Section 10 but any exercise
of the Option shall be effective only when the items required by the preceding
sentence are actually received by the Company. The notice of exercise may be in
the form set forth in Exhibit A attached to
this Agreement. Payment of the aggregate Purchase Price for Shares Participant
has elected to purchase shall be made only in  cash or good check.
Notwithstanding anything to the contrary in this Agreement, the Option may be
exercised only if compliance with all applicable federal and state securities
laws can be effected.





(b)        Subject
to the provisions of Section 3.7 of the Plan, upon any exercise of the Option by
Participant or as soon thereafter as is practicable, the Company shall issue and
deliver to Participant a certificate or certificates evidencing such number of
Shares as Participant has then elected to purchase. Such certificate or
certificates shall be registered in the name of Participant and shall bear the
legend specified in Section 15 of this Agreement and any legend required by any
federal or state securities laws and by the state in which the Company is
incorporated.  All shares that shall be purchased upon the exercise of
the Option shall be fully paid and nonassessable.





5.        
 Definitions;
Authority of Committee.





(a)        
A “Change in Control”
shall be deemed to have occurred on the earliest of the following
dates:





(i)           the
date on which any “person” (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other
than: (i) the Company; (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company; (iii) a corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company; or (iv) the
existing holders of capital stock of the Company as of the effective date hereof
or their respective affiliates, is or becomes the “beneficial owner” (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing more than fifty percent (50%) of the combined voting
power of the Company’s then outstanding securities; or





(ii)          on
the condition that the transaction is consummated, the date the shareholders of
the Company approve a definitive agreement or plan for: (A) a merger, share
exchange, consolidation or reorganization involving the Company and any other
corporation or other entity as a result of which securities representing
more  than fifty percent (50%) of the combined voting power of the
Company or of the surviving or resulting corporation or entity  are
held in the aggregate by persons different than the persons holding those
securities (including their affiliates) immediately prior to such transaction;
or (B) an agreement for the sale or disposition by the Company of all or
substantially all of the Company’s assets.


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(b)        [RESERVED]





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




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





6.         
Rights Prior to
Exercise. Participant will have no rights as a shareholder with respect
to the Shares except to the extent that Participant has exercised the Option and
has been issued and received delivery of a certificate or certificates
evidencing the Shares so purchased.





7.        
 Engagement of
Participant. Nothing in this Agreement shall be construed as constituting
a commitment, guarantee, agreement or understanding of any kind or nature that
the Company shall continue to employ Participant, nor shall this Agreement
affect in any way the right of the Company to terminate the employment of
Participant at any time and for any reason. By Participant’s execution of this
Agreement, Participant acknowledges and agrees that Participant’s employment is
“at will.” No change of Participant’s duties as an employee of the Company shall
result in, or be deemed to be, a modification of any of the terms of this
Agreement.





8.         
Burden and Benefit;
Company. This Agreement shall be binding upon, and shall inure to the
benefit of, the Company and Participant, and their respective heirs, personal
and legal representatives, successors and assigns. As used in this Section 10,
the term the “Company”
shall also include any corporation which is the parent or a subsidiary of the
Company or any corporation or entity which is an affiliate of the Company by
virtue of common (although not identical) ownership, and for which Participant
is providing services in any form during Participant’s employment with the
Company or any such other corporation or entity. Participant hereby consents to
the enforcement of any and all of the provisions of this Agreement by or for the
benefit of the Company and any such other corporation or entity.





9.        
 Entire
Agreement. This Agreement and the Plan under which it is issued contain
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements or understandings, oral or written,
with respect to the subject matter herein. Participant accepts the Option in
full satisfaction of any and all obligations of the Company to grant stock
options to Participant as of the date hereof.





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


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11.    
   Governing Law. This
Agreement shall be construed and enforced in accordance with the laws of the
state in which the Company is incorporated, without reference to its conflicts
of laws rules or the principles of the choice of law.





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





13.       
 Terms and
Conditions of Plan. The terms and conditions included in the Plan, the
receipt of a copy of which Participant hereby acknowledges by execution of this
Agreement, are incorporated by reference herein, and to the extent that any
conflict may exist between any term or provision of this Agreement and any term
or provision of the Plan, such term or provision of the Plan shall
control.





14.        
Stock Legend.
If required, all certificates for Shares issued by the Company to Participant or
Participant’s successors and assigns or to any other person becoming a signatory
to this Agreement shall be endorsed with legends in substantially the following
form, and any transfer agent of the Company may be instructed to require
compliance with all legends on such certificates:





The
shares represented by this Certificate have not been registered under the
Securities Act of 1933, as amended (the “Act”), or any state securities law.
Accordingly, the shares represented by this Certificate may not be sold, offered
for sale, transferred, pledged or hypothecated without an effective registration
statement for such shares under the Act or applicable state securities law or an
opinion of counsel satisfactory to the Company that registration is not required
under the Act or any applicable state securities law.





15.    
    Covenants and
Representations and Covenants of Participant. Participant represents,
warrants, covenants and agrees with the Company as follows:





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





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


5





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





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





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





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





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





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


6





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





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





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





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





SMART
      ONLINE, INC.By:Print
      Name:PARTICIPANT:Print
      Name:


7





EXHIBIT
A





Board of
Directors


Smart
Online, Inc.


4505
Emperor Blvd., Suite 320


Durham,
NC 27703





Re: Exercise of Nonqualified
Stock Option





Pursuant
to the terms and conditions of that certain Nonqualified Stock Option Agreement
dated as of _______________, 2010 (the “Agreement”) between ___________________
and Smart Online, Inc. (the “Company”), I desire to
purchase ____________ Shares of the Common Stock of the Company and hereby
tender payment in full for such Shares in accordance with the terms of the
Agreement.





I hereby
reaffirm that the representations and warranties made in Section 15 of the
Agreement are true and correct on the date hereof as if made on the date
hereof.





Very
      truly yours,Print
      Name:Date:


8