Document:

SMART
ONLINE, INC.

       

    

    
      REVISED
BOARD COMPENSATION POLICY

       

    

    
      (Effective  March
26, 2010)

       

    

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

       

    

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

       

    

    
      A.          Monetary
Compensation.

       

    

    
       
(1)          Each such
director shall be paid a fee of $1,500 per month, due and payable by the
fifteenth (15th) day of
the same month in which services are rendered.

       

    

    
       
(2)          Additional   monetary  compensation  may  be   awarded  at  the
Chairman of the Board's discretion for any director incurring overnight travel
to attend Board meetings or other functions for the benefit of the
Company.

       

    

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

       

    

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

    

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

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

       

    

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

       

    

    
      A.          Monetary
Compensation. Such Chairman of the Board shall be paid a fee of $1,500
per month, due and payable by the fifteenth (15th) day of
the same month in which services are rendered.

       

    

    
      B.           Equity
Compensation.   Such Chairman of the Board shall, at the
sole discretion of the Chairman, be awarded pursuant to the Company's 2004
Equity Compensation Plan either:

       

    

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

       

    

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

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    
       

    

    
      Any
equity compensation grants to a Chairman of the Board under this Section 3(B)
shall be in lieu of, and not in addition to, any equity compensation grants
under Section 3(A).

       

    

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

    

    
      
         

      

      
        3SECOND AMENDMENT TO
REIMBURSEMENT AGREEMENT

    

    THIS
SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT (this “Second Amendment”),
effective as of  January 19, 2010, is made and entered into by and
between Smart Online, Inc., a Delaware corporation (the “Company”), and Atlas
Capital SA, a Swiss business organization (“Atlas”).

    

    WITNESSETH:

    

    WHEREAS,
in connection with that certain Loan Agreement between the Company and Wachovia
Bank, NA (“Wachovia”) dated as
of November 10, 2006 (the “Wachovia Loan
Agreement”), Atlas directed HSBC Private Bank (Suisse) SA, a Swiss
business organization (the “Letter of Credit
Provider”), to issue an irrevocable, direct-pay letter of credit to
Wachovia (the “Wachovia Letter of
Credit”) as security under the Wachovia Loan Agreement;

    

    WHEREAS,
the Company and Atlas entered into a Reimbursement Agreement dated as of
November 10, 2006 (the “Original Reimbursement
Agreement”), pursuant to which the Company agreed to reimburse Atlas in
the event any amount was drawn and paid under the Wachovia Letter of
Credit;

    

    WHEREAS,
the Company  terminated the Wachovia Loan Agreement and indefeasibly
paid in full all obligations thereunder, and Wachovia  released the
Wachovia Letter of Credit;

    

    WHEREAS,
pursuant to a Commercial Note dated as of  February 20, 2008 (as the
same may be amended pursuant to its terms from time to time, the “Paragon Loan
Agreement”) between the Company and Paragon Commercial Bank, a North
Carolina bank (“Paragon”),
Paragon  has made available to the Company a revolving line of credit
in a maximum principal amount of $2,470,000.00 (the “Paragon Revolving
Line”);

    

    WHEREAS,
to induce Paragon to enter into the Paragon Loan Agreement and make the Paragon
Revolving Line available to the Company, and to provide security under the
Paragon Loan Agreement for the payment of the Paragon Revolving Line, the
Company  requested that Atlas direct the Letter of Credit Provider to
issue an irrevocable, direct-pay letter of credit to Paragon;

    

    WHEREAS,
pursuant to the Amendment to the Original Reimbursement Agreement, effective as
of February 20, 2008 (the “First Amendment”),
Atlas agreed  to direct the Letter of Credit Provider to issue an
irrevocable, direct-pay letter of credit to Paragon substantially in the form of
Exhibit A
attached to the First Amendment (as the same may be amended from time to time,
the “Paragon Letter of
Credit”),  subject to the Company and Atlas amending the
Original Reimbursement Agreement to provide for reimbursement by the Company in
the event any amount is drawn and paid under the Paragon Letter of
Credit;

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

     

    WHEREAS,
the Company and Atlas are parties to a Convertible Secured Subordinated Note
Purchase Agreement, dated as of November 14, 2007, as amended through the date
hereof (as so amended, the Note Purchase Agreement”), which entitles the Company
to elect to sell convertible promissory notes described therein (“Convertible
Notes”) to certain investors, including Atlas, the holder of a majority of the
outstanding principal amount of Convertible Notes, subject to certain
conditions, including (a) the condition that no event has occurred or condition
exists which could reasonably be expected to have a Material Adverse Effect (as
defined in the Note Purchase Agreement) on the ability of the Company to perform
its obligations under the Note Purchase Agreement, and (b) the accuracy of the
Company’s representation that no event has occurred that is reasonably likely to
have a Material Adverse Effect on the Company remains true and
correct;

    

    WHEREAS,
the agent (“Agent”) for the holders of Convertible Notes, including
Atlas,  has  advised the Company that the Company’s
obligations to Dennis Michael Nouri and Reza Eric Nouri, former officers of the
Company who have asserted claims for advancement of expenses incurred by them in
connection with their defense of certain criminal and civil actions, may
constitute a Material Adverse Effect under the Note Purchase Agreement, whereby
Atlas may determine that the funding conditions for future purchases of
Convertible Notes have not been satisfied;

    

    WHEREAS,
Agent has further advised the Company that, in light of the
foregoing,   Atlas and other parties to the Note Purchase
Agreement would be willing to waive the foregoing funding conditions under the
Note Purchase Agreement relating to the claims of the Nouris if, and for so
long as, the Nouris do not actively pursue enforcement of the existing judgment
against the Company for such indemnification and advancement claims, or a
settlement agreement reasonably acceptable to the Agent is entered into, and, in
addition, the Reimbursement Agreement were amended to allow Atlas to elect to be
reimbursed for any Letter of Credit drawdowns in either stock, bonds or cash, as
Atlas may elect, in lieu of the Company making such election to pay in either
stock or cash; and

    

    WHEREAS,
the Original Reimbursement Agreement, as previously amended by the First
Amendment, is referred to as the “Reimbursement
Agreement”. All capitalized terms used herein (including in the
Recitals), unless otherwise defined herein, shall have the respective meanings
ascribed thereto in the Reimbursement Agreement;

    

    NOW,
THEREFORE, in consideration of the foregoing premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:

    

    Section
1.          Amendment to Reimbursement
Agreement.

    

    (a)           Section  2.2(c)
of the Reimbursement Agreement is amended and restated in its entirety to read
as follows:

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    

    “(c)           At
the election of Atlas, delivered by written notice to the Company, the Company
shall pay any principal or interest amount due under this Section 2.2 in either
(i) U.S. Dollars, (ii) common stock of the Company, or (iii) convertible
reimbursement notes of the Company substantially in the form of Exhibit A hereto (the
“Reimbursement
Notes”), or any combination of the foregoing. In the event that Atlas
requires the Company to pay in common stock of the Company, such stock shall be
deemed to be valued at  the conversion rate set forth in the
Reimbursement Note.”

    

    (b)           Section
5.1 of the Reimbursement Agreement is amended and restated in its entirety to
read as follows

    

    “Notices. All demands,
notices, approvals, consents, requests and other communications hereunder shall
be in writing and shall be deemed to have been given when the writing is
delivered, if given or delivered by hand, overnight delivery service or
facsimile transmitter (with confirmed receipt), or three (3) Business Days after
being mailed, if mailed by first class, registered or certified mail, postage
prepaid, to the address or telecopy number set forth below:

    

    
      	
              If
      to the Company:

            	
              Smart
      Online, Inc.

            
	 
      	
              
                4505
      Emperor Boulevard

              

              Suite
      320

            
	 
      	
              Durham,
      North Carolina 27703

            
	 
      	
              Attention:
      Chief Executive Officer

            
	 
      	
              Fax
      No.: (919) 765-5020

            
	 
      	 
      
	
              with
      a copy to counsel:

            	
              Cohen,
      Tauber, Spievack & Wagner P.C.

            
	 
      	
              420
      Lexington Avenue, Suite 2400

            
	 
      	
              New
      York, New York 10170

            
	 
      	
              Attention:
      Adam Stein

            
	 
      	
              Fax
      No.: (212) 586-5095

            
	 
      	 
      
	
              If
      to Atlas:

            	
              Atlas
      Capital SA

            
	 
      	
              116
      Rue Du Rhone

            
	 
      	
              Geneva,
      Switzerland CH-1204

            
	 
      	
              Attention:
      Avy Lugassy

            
	 
      	
              Fax
      No.: +011 41 2278 65855

            

    

    

    The
Company or Atlas may, by notice given hereunder, designate any further or
different addresses or telecopy numbers to which subsequent demands, notices,
approvals, consents, requests or other communications shall be sent or Persons
to whose attention the same shall be directed.”

    

    Section
2.          Effect on the Reimbursement
Agreement. Except as specifically
amended above, the Reimbursement Agreement shall continue to be in full force
and effect and is hereby in all respects ratified and
confirmed.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    

    Section
3.          Controlling Law. This
Second Amendment has been executed, delivered and accepted at, and shall be
deemed to have been made in, the State of Delaware and shall be interpreted in
accordance with the internal laws (as opposed to conflicts of laws provisions)
of the State of Delaware, without regard to principles of conflicts of
laws.

    

    Section
4.          Counterparts. This
Second Amendment may be executed in several counterparts and by facsimile or
other electronic transmission, each of which shall be an original and all of
which together shall constitute but one and the same.

    

    [SIGNATURE
PAGE FOLLOWS]

     

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    IN
WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly
executed and delivered as of the date first above written.

    

    
      
        
          
            
              
                
                  	
                          SMART
      ONLINE, INC.

                        
	 
      	 
      
	
                          By:

                        	      
                          /s/
      Dror Zoreff

                        
	
                          Name:

                        	
                          Dror
      Zoreff

                        
	
                          Title:

                        	
                          Interim
      Chief Executive
Officer

                        

                

              

            

          

        

      

    

    

    
      
        
          
            	
                    ATLAS
      CAPITAL, S.A.

                  
	 
      	 
      
	
                    By:

                  	
                    /s/
      Avy Lugassy

                  
	
                    Name:

                  	
                    Avy
      Lugassy

                  
	
                    Title:

                  	
                    Member
      of the Management

                  

          

        

      

    

    

    [Signature
Page to Second Amendment to Reimbursement Agreement]

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    EXHIBIT
A

    

    FORM
OF REIMBURSEMENT NOTE

    
       

      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      

      THIS
NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
ANY APPLICABLE STATE SECURITIES LAWS.  THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND
UNDER ANY APPLICABLE STATE SECURITIES LAWS.  THE COMPANY, IN ITS SOLE
DISCRETION, SHALL HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT
REQUIRED IN CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN
VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.  THIS LEGEND SHALL
BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.

       

      SMART
ONLINE, INC.

       

      CONVERTIBLE
REIMBURSEMENT AGREEMENT PROMISSORY NOTE

       

      
        	
                $[_______________]

              	
                __________
      __, 20__

              

      

      Durham, NC

       

      FOR VALUE
RECEIVED, Smart Online, Inc., a Delaware corporation (the “Company”)  promises
to pay to Atlas Capital, SA (“Investor”), or its registered
assigns, in lawful money of the United States of America the principal sum of
[__________] Dollars ($[_________]), or such lesser amount as shall equal the
outstanding principal amount hereof, together with interest from the date of
this Note on the unpaid principal balance at a rate equal to 8.00% per annum,
computed on the basis of the actual number of days elapsed and a year of 360
days.  All unpaid principal, together with any then unpaid and accrued
interest and other amounts payable hereunder, shall be due and payable on the
“Maturity Date”, as such term is defined in the Company’s Convertible Secured
Subordinated Promissory Notes issued pursuant to the Convertible Secured
Subordinated Note Purchase Agreement, dated November 14, 2007, as amended,
between the Company and the investors parties thereto.

      

      This Note
is issued pursuant to the Reimbursement Agreement, dated November 10, 2006, as
amended through the date hereof (as so amended, modified or supplemented, the
“Reimbursement
Agreement”) between the Company and the Investor.  Capitalized
terms used herein and not otherwise defined shall have the meanings assigned
thereto in the Reimbursement Agreement.

       

      The
following is a statement of the rights of Investor and the conditions to which
this Note is subject, and to which Investor, by the acceptance of this Note,
agrees:

       

      1.      Definitions.
As used in this Note, the following capitalized terms have the following
meanings:

       

      
        
           

        

        
           

          
            

          

        

        
           

        

         

      

      (a)           “Business Day” shall mean any
day other than a Saturday or Sunday or other day on which the New York Stock
Exchange is permitted or required by law to close.

       

      (b)           the
“Company” includes the
corporation initially executing this Note and any Person which shall succeed to
or assume the obligations of the Company under this Note.

       

      (c)           “Conversion Price”  shall
be calculated by multiplying 120% by the lowest of  (i) the average of the
high and low prices of the Common Stock on the OTC Bulletin Board averaged over
the five (5) trading days prior to the Closing Date of the issuance of such
Note, (ii) if the Common Stock is not traded on the Over-The-Counter
market, the closing price of the Common Stock reported on the Nasdaq
National Market or the principal exchange on which the Common Stock is listed,
averaged over the five (5) trading days prior to the Closing Date of the
issuance of such Note, or (iii) the closing price of the Common Stock on the OTC
Bulletin Board, the Nasdaq National Market or the principal exchange on which
the Common Stock is listed, as applicable, on the trading day immediately
preceding the date such Note is converted (in each case as adjusted for stock
splits, dividends or combinations, recapitalizations or similar
events).

       

      (d)           “Change of Control” shall mean
(i) any consolidation or merger or other transaction  or series of
transactions involving the Company pursuant to which the Company’s stockholders
own less than fifty percent (50%) of the voting securities of the surviving
entity (other than an equity financing) or (ii) the sale of all or substantially
all of the assets of the Company.

       

      (e)           “Event of Default” has the
meaning given in Section 4
hereof.

       

      (f)           “Obligations” shall mean and
include all loans, advances, debts, liabilities and obligations, howsoever
arising, owed by the Company to Investor of every kind and description (whether
or not evidenced by any note or instrument and whether or not for the payment of
money), now existing or hereafter arising under or pursuant to the terms of this
Note and the Reimbursement Agreement, including all interest, fees, charges,
expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable
to and payable by the Company hereunder and thereunder, in each case, whether
direct or indirect, absolute or contingent, due or to become due, and whether or
not arising after the commencement of a proceeding under Title 11 of the
United States Code (11 U. S. C. Section 101 et seq.), as amended from
time to time (including post-petition interest) and whether or not allowed or
allowable as a claim in any such proceeding.

       

      (g)           “Person” shall mean and include
an individual, a partnership, a corporation (including a business trust), a
joint stock company, a limited liability company, an unincorporated association,
a joint venture or other entity or a governmental authority.

       

      (h)           “Reimbursement Agreement” has
the meaning given in the introductory paragraph hereof.

       

      (i)           
“Securities Act” shall
mean the Securities Act of 1933, as amended.

       

      (j)           
“Transaction Documents”
shall mean this Note and the Reimbursement Agreement.

       

      
        
           

        

        
          -2-

          
            

          

        

        
           

        

         

      

      2.      Interest.  Accrued
interest on this Note shall be payable in cash in quarterly installments
commencing on the third month anniversary of the date of issuance of this Note
with the final installment payable on the Maturity Date.

       

      3.      Prepayment.
This Note may  be prepaid in whole or in part at any time and from
time to time without premium or penalty, but with accrued interest to the date
of repayment on the amount repaid.  Each partial repayment of this
Note shall be applied first to accrued interest, then to principal.

       

      4.      Events of
Default. The occurrence of any of the following shall constitute an
“Event of Default” under
this Note and the other Transaction Documents:

       

      (a)           Failure to
Pay.  The Company shall fail to pay (i) when due any
principal or interest payment on the due date hereunder or (ii) any other
payment required under the terms of this Note or any other Transaction Document
on the date due and, with respect to this subclause (ii) only, such payment
shall not have been made within five (5) days of the Company’s receipt of
written notice to the Company of such failure to pay;

       

      (b)           Non-Performance of Affirmative
Covenants.  The Company shall default in the due observance or
performance of any material covenant set forth in the Note or the Reimbursement
Agreement, which default shall continue uncured for 15 days after receipt of
written notice to the Company thereof;

       

      (c)           Voluntary Bankruptcy or Insolvency
Proceedings. The Company shall
(i) apply for or consent to the appointment of a receiver, trustee,
liquidator or custodian of itself or of all or a substantial part of its
property, (ii) be unable, or admit in writing its inability, to pay its
debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated,
(v) become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect or consent to any such relief or to the appointment of or taking
possession of its property by any official in an involuntary case or other
proceeding commenced against it, or (vii) take any action for the purpose
of effecting any of the foregoing;

       

      (d)           Involuntary Bankruptcy or Insolvency
Proceedings. Proceedings for the appointment of a receiver, trustee,
liquidator or custodian of the Company or of all or a substantial part of the
property thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to the Company or the
debts thereof under any bankruptcy, insolvency or other similar law now or
hereafter in effect shall be commenced and an order for relief entered or such
proceeding shall not be dismissed or discharged within 30 days of
commencement;

       

      (e)           Misrepresentations.  Any
of the representations and warranties of the Company in the Reimbursement
Agreement proves to have been false or misleading in any material respect when
made or furnished or deemed made;

       

      
        
           

        

        
          -3-

          
            

          

        

        
           

        

         

      

      (f)           Judgments.  One or
more judgments, decrees or orders (excluding settlement orders) for the payment
of money shall be entered against the Company or any of its subsidiaries
involving in the aggregate a liability of $500,000 or more, and any such
judgment, decree or order shall continue without discharge or stay for a period
of sixty (60) days; or

       

      (g)           
Cross-Defaults.  The
Company or any of its subsidiaries shall default in the performance or
observance of any agreement or instrument relating to any indebtedness, or any
other event shall occur or condition exist, and the effect of such default,
event or condition is to cause or permit the holder or holders of any such
indebtedness to cause indebtedness, in excess of $500,000 individually or in the
aggregate, to become due prior to its stated maturity.

       

      5.      Rights of
Investor upon Default. Upon the occurrence or existence of any Event of
Default (other than an Event of Default described in Sections 4(c) or 4(d)) and at any time
thereafter during the continuance of such Event of Default, Investor may, by
written notice to the Company, declare all outstanding Obligations payable by
the Company hereunder to be immediately due and payable without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived.  Upon the occurrence or existence of any Event of
Default described in Sections 4(c) and 4(d), immediately and without
notice, all outstanding Obligations payable by the Company hereunder shall
automatically become immediately due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived.  In addition to the foregoing remedies, upon the occurrence or
existence of any Event of Default, Investor may exercise any other right power
or remedy granted to it by the Transaction Documents or otherwise permitted to
it by law, either by suit in equity or by action at law, or both.

       

      6.      Conversion.

       

      (a)           Optional Conversion. At the
Maturity Date, the Investor shall have the option to convert the entire
principal amount of this Note then outstanding into Common Stock. The number of
shares of Common Stock that this Note may be converted into shall be determined
by dividing the principal amount then outstanding by the Conversion Price at the
time of conversion.  If the Investor elects to convert this Note at
maturity, it shall provide the Company with written notice of its election at
least one (1) day prior to the Maturity Date. Upon conversion, the Investor
shall deliver to the Company the original of this Note (or a notice to the
effect that the original Note has been lost, stolen or destroyed and an
agreement reasonably acceptable to the Company whereby the holder agrees to
indemnify the Company from any loss incurred by it in connection with this
Note). However, upon such conversion of this Note, this Note shall be deemed
converted and of no further force and effect, whether or not the Note is
delivered for cancellation as set forth in the preceding sentence. If there
shall occur a Change of Control, the Company shall give written notice to the
Investor at least five (5) days prior to any closing thereof and the Investor’s
election to convert this Note shall be conditional upon the consummation
thereof.

       

      (b)           Mechanics of Optional
Conversion.  As soon as practicable following surrender by the
Investor of the original of its Note, the Company shall issue and deliver to
Investor a certificate or certificates for the shares of Common Stock into which
the Note has been converted (bearing such legends as may be required or
advisable in the opinion of counsel to the Company).  Such conversion
shall be deemed to have been made immediately prior to the close of business on
the Maturity Date, and the Investor shall be treated for all purposes as the
record holder or holders of such Common Stock on such date.

       

      
        
           

        

        
          -4-

          
            

          

        

        
           

        

         

      

      (c)           Fractional Shares; Interest; Effect
of Conversion. No fractional shares shall be issued upon conversion of
this Note.  In lieu of the Company issuing any fractional shares to
Investor upon the conversion of this Note, the Company shall pay to Investor an
amount equal to the product obtained by multiplying the Conversion Price by the
fraction of a share not issued pursuant to the previous
sentence.  Upon conversion of this Note in full and the payment of any
amounts specified in this Section 6(c), the Company
shall be forever released from all its obligations and liabilities under this
Note.

       

      7.      Successors and
Assigns.  Subject to the
restrictions on transfer described in Sections 9 and 10 below, the rights and
obligations of the Company and Investor shall be binding upon and benefit the
successors, assigns, heirs, administrators and transferees of the
parties.

       

      8.      Waiver and
Amendment.  Any provision of
this Note may be amended, waived or modified upon the written consent of the
Company and the Investor.

       

      9.      Transfer of this
Note or Securities Issuable on Conversion Hereof.  With respect to
any offer, sale or other disposition of this Note or securities into which such
Note may be converted, Investor will give written notice to the Company prior
thereto, describing briefly the manner thereof, together with (unless waived by
the Company) a written opinion of Investor’s counsel, or other evidence if
reasonably satisfactory to the Company, to the effect that such offer, sale or
other distribution may be effected without registration or qualification (under
any federal or state law then in effect). Upon receiving such written notice and
reasonably satisfactory opinion, if so requested, or other evidence, the
Company, as promptly as practicable, shall notify Investor that Investor may
sell or otherwise dispose of this Note or such securities, all in accordance
with the terms of the notice delivered to the Company.  If a
determination has been made pursuant to this Section 9 that the
opinion of counsel for Investor, or other evidence, is not reasonably
satisfactory to the Company, the Company shall so notify Investor promptly after
such determination has been made.  Each Note thus transferred and each
certificate representing the securities thus transferred shall bear a legend as
to the applicable restrictions on transferability in order to ensure compliance
with the Securities Act, unless in the opinion of counsel for the Company such
legend is not required in order to ensure compliance with the Securities
Act.  The Company may issue stop transfer instructions to its transfer
agent in connection with such restrictions.  Subject to the foregoing,
transfers of this Note shall be registered upon registration books maintained
for such purpose by or on behalf of the Company.  Prior to
presentation of this Note for registration of transfer, the Company shall treat
the registered holder hereof as the owner and  holder of this Note for
the purpose of receiving all payments of principal and interest hereon and for
all other purposes whatsoever, whether or not this Note shall be overdue and the
Company shall not be affected by notice to the
contrary.  Notwithstanding anything in this Section 9 to the contrary,
no opinion of counsel shall be required with respect to any transfer
by  Investor to its officers, directors, partners, members or other
affiliates.

       

      10.           Assignment by the
Company.  Neither this Note
nor any of the rights, interests or obligations hereunder may be assigned, by
operation of law or otherwise, in whole or in part, by the Company without the
prior written consent of the Investor.

       

      
        
           

        

        
          -5-

          
            

          

        

        
           

        

         

      

      11.           Notices.  All notices,
requests, demands, consents, instructions or other communications required or
permitted hereunder shall in writing and faxed, mailed or delivered to each
party at the respective addresses of the parties as set forth in the
Reimbursement Agreement, or at such other address or facsimile number as the
Company shall have furnished to Investor in writing.  All such notices
and communications will be deemed effectively given the earlier of (i) when
received, (ii) when delivered personally, (iii) one Business Day after
being delivered by facsimile (with receipt of appropriate confirmation),
(iv) one Business Day after being deposited with an overnight courier
service of recognized standing or (v) two days after being deposited in the
U.S. mail, first class with postage prepaid.

       

      12.           Pari Passu
Notes.  Investor
acknowledges and agrees that the payment of all or any portion of the
outstanding principal amount of this Note and all interest hereon shall be pari passu in right of
payment and in all other respects to the other Notes issued pursuant to the
Reimbursement Agreement or pursuant to the terms of such Notes.

       

      13.           Usury. In the event any interest is
paid on this Note which is deemed to be in excess of the then legal maximum
rate, then that portion of the interest payment representing an amount in excess
of the then legal maximum rate shall be deemed a payment of principal and
applied against the principal of this Note.

       

      14.           Waivers. The Company hereby waives
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor and all other notices or demands relative to this
instrument.

       

      15.           Remedies
Cumulative. The remedies of Investor as provided herein and in
the  Reimbursement Agreement and in any other documents governing
repayment hereof shall be cumulative and concurrent and may be pursued singly,
successively, or together, at the sole discretion of Investor to the extent
provided herein and in the  Reimbursement Agreement and may be
exercised as often as occasion therefore shall arise.  No act or
omission of the Investor, including specifically, but without limitation, any
failure to exercise any right, remedy or recourse, shall be effective as a
waiver of any right of the Investor hereunder, unless set forth in a written
document executed by the Investor, and then only to the extent specifically
recited therein. A waiver or release with reference to one event shall not be
construed as continuing, as a bar to, or as a waiver or release of any
subsequent right, remedy or recourse as to any subsequent event.

       

      16.           No Rights of a
Stockholder. Nothing contained in this Note shall be construed as
conferring upon the Investor or any other Person the right to vote or consent or
to receive notice as an stockholder in respect of meetings of stockholders for
the election of directors of the Company or any other matters or any rights
whatsoever as a stockholder of the Company prior to the time that this Note is
converted pursuant to Section
6.

       

      17.           Governing
Law.  This Note and all
actions arising out of or in connection with this Note shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the conflicts of law provisions of the State of Delaware, or of any other
state.

       

       (Signature Page
Follows)

      

      
        
           

        

        
          -6-

          
            

          

        

        
           

        

      

       

      The
Company has caused this Convertible Reimbursement Agreement Promissory Note to
be issued as of the date first written above.

      

       

      
        	 	      
                SMART
      ONLINE, INC.

                a
      Delaware corporation

                 

                By:
      ___________________________

                 

                Name:
      _________________________

                 

                Title:
      __________________________

              

      

       

      
        
           

        

        
          -7-

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