Document:

Exhibit 10.46.1

    
      

    

     

    Exhibit
      10.46.1

     

    

      

       

      Securities
        Purchase Agreement

       

      

      

      Smart
        Online, Inc.

      2530
        Meridian Parkway, 2nd
        Floor

      Durham,
        NC 27713

      

      

      The
        undersigned investor (the “Investor”)
        hereby confirms Investor’s agreement with Smart Online, Inc. (the “Company”) as
        follows:

       

      1.    This
        Securities Purchase Agreement is made as of the date set forth below between
        the
        Company and the Investor.

       

      2.    The
        Company has authorized the sale and issuance of up to 2,352,941 shares (the
        “Shares”)
        of the common stock of the Company, $0.001 par value per share (the
“Common
        Stock”),
        and issue warrants, exercisable for a period of three (3) years after the
        date
        hereof, to purchase that number of shares of Common Stock equal to 50% of
        the
        Shares in the form of Exhibit “A” hereto (the “Warrants”)
        to certain investors in a private placement (the “Offering”). 

       

      The
        Company and the Investor agree that the Investor will purchase from the Company
        and the Company will issue and sell to the Investor 1,568,627 Shares at a
        purchase price of $2.55 per Share, for an aggregate purchase price of $4,000,000
        (the “Purchase
        Price”)
        and the Company will issue to the Investor a Warrant to purchase 784,314
        shares
        of Common Stock at an exercise price of $3.00 per share, subject to the Terms
        and Conditions for Purchase of Securities attached hereto as Annex I and
        incorporated herein by reference as if fully set forth herein. Unless otherwise
        requested by the Investor in Exhibit “B”, certificates representing the Shares
        and Warrants purchased by the Investor will be registered in the Investor’s name
        and address as set forth below. 

      

      3.    The
        Investor represents that, except as set forth below, (a) it has had no position,
        office or other material relationship within the past three (3) years with
        the
        Company or its affiliates, (b) neither it, nor any group of which it is a
        member
        or to which it is related, beneficially owns (including the right to acquire
        or
        vote) any securities of the Company, and (c) it has no direct or indirect
        affiliation or association with any National Association of Securities Dealers,
        Inc. (“NASD”)
        member. Exceptions:

       

      
        

      

    

     

    
      
        

      

    

     

    
      
        

      
(If
      no exceptions, write “none.” If left blank, response will be deemed to be
“none.”)

     

     

     

    
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    Please
      confirm that the foregoing correctly sets forth the agreement between us by
      signing in the space provided below for that purpose.

     

    
      
        	 	
                MAGNETAR
                  CAPITAL MASTER FUND, LTD

                By:
                  Magnetar Financial LLC

                Its:
                  Investment Manager

                

                ____________________

                By:
                  Doug Litowitz

                Its:
                  Counsel

                

                Address:        
                  1603
                  Orrington Avenue

                                     
                  Evanston, IL 60201

              

      

    

     

    

     

    AGREED
      AND ACCEPTED:

    

    Smart
      Online, Inc.

    

     

    

     

    By:
      ____________________________

    Name:
      

    Title:
      

    

     

    

     

    Dated
      as of:
      February __, 2007

     

    

     

    

     

    

     

    

     

    [SECURITIES
      PURCHASE AGREEMENT SIGNATURE PAGE]

     

    

    
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    Annex
      I

     

    Terms
      and Conditions for Purchase of Securities

     

    1.    Agreement
      to Sell and Purchase the Securities; Subscription Date.

     

    1.1    Purchase
      and Sale.
      At the Closing (as defined in Section 2), the Company will sell to the Investor,
      and the Investor will purchase from the Company, upon the terms and subject
      to
      the conditions set forth herein, and at the Purchase Price, the number of Shares
      and Warrants described in paragraph 3 of the Securities Purchase Agreement
      attached hereto (collectively with this Annex I and the other exhibits attached
      hereto, this “Agreement,”
      and such Shares and Warrants, the “Securities”)).
      

     

    1.2    Other
      Investors.
      As part of the Offering, the Company proposes to enter into Securities Purchase
      Agreements in the same form as this Agreement with certain other investors
      (the
“Other
      Investors”),
      and the Company expects to complete sales of Securities to them. The Investor
      and the Other Investors are sometimes collectively referred to herein as the
      “Investors,”
      and this Agreement, the Registration Rights Agreement and the Securities
      Purchase Agreements executed by the Other Investors are sometimes collectively
      referred to herein as the “Agreements.”
      The Company may accept executed Agreements from Investors for the purchase
      of
      Securities commencing upon the date on which the Company provides the Investors
      with the proposed purchase price per Share and concluding upon the date (the
      “Subscription
      Date”)
      on which the Company has notified Canaccord Adams, Inc. (in its capacity as
      placement agent for the Securities, the “Placement
      Agent”)
      in writing that it will no longer accept Agreements for the purchase of
      Securities in the Offering, but in no event shall the Subscription Date be
      later
      than February 23, 2007. Each Investor must execute and deliver a Securities
      Purchase Agreement and a Registration Rights Agreement and must complete a
      Stock
      Certificate Questionnaire (in the form attached as Exhibit “A” hereto) and an
      Investor Questionnaire (in the form attached as Exhibit “B” hereto) in order to
      purchase Securities in the Offering. The Company and the Investor agree and
      acknowledge that each Investor individually negotiated the terms of the
      transactions contemplated hereby and are of
      the view that the Investors are not acting as a 

     

    “group”
      for purposes of Section 13(d) under the Securities Exchange Act of 1934
(the
      “Exchange
      Act”).

     

    1.3    Placement
      Agent Fee.
      The Investor acknowledges that the Company intends to pay to the Placement
      Agent
      a fee in respect of the sale of Securities to the Investor from the proceeds
      of
      the Offering. 

     

    2.    Delivery
      of the Securities. The
      completion of the purchase and sale of the Securities (the “Closing”)
      shall occur on a date specified by the Company and the Placement Agent that
      is
      anticipated to be no later than February 23, 2007 (the “Closing
      Date”)
      and of which the Investors will be notified in advance by the Placement Agent.
      Within two business days of the Closing, the Company shall deliver to the
      Investor (1) one or more stock certificates representing the number of Shares
      set forth in paragraph 3 of the Securities Purchase Agreement and (2) one or
      more Warrants as set forth in paragraph 3 of the Securities Purchase Agreement,
      each such certificate to be registered and such Warrant to be issued in the
      name
      of the Investor or, if so indicated on the Stock Certificate Questionnaire,
      in
      the name of a nominee designated by the Investor. In exchange for the delivery
      of the subscription agreements, the Investor shall deliver the Purchase Price
      to
      the Placement Agent by wire transfer of immediately available funds pursuant
      to
      written instructions to be held in escrow pending closing of the Offering.
      On
      the Closing Date, the Company shall cause outside counsel to the Company to
      deliver to the Investors a legal opinion, dated the Closing Date, substantially
      in the form attached hereto as Exhibit “C” and its internal corporate counsel to
      deliver to the Investors a legal opinion, dated the Closing Date, substantially
      in the form attached hereto as Exhibit “D.”

     

    
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    The
      Company’s obligation to issue and sell the Securities to the Investor shall be
      subject to the following conditions, any one or more of which may be waived
      by
      the Company: (a) prior receipt by the Company of an executed copy of this
      Securities Purchase Agreement; (b) completion of purchases and sales of
      Securities under the Agreements with the Other Investors; (c) the accuracy
      of
      the representations and warranties made by the Investor in this Agreement and
      the fulfillment of the obligations of the Investor to be fulfilled by it under
      this Agreement on or prior to the Closing;
      and (d) the absence of any order, writ, injunction, judgment or decree that
      questions the validity of the Agreements or the right of the Company or the
      Investor to enter into such Agreements or to consummate
      the transactions contemplated hereby
      and thereby.

     

    The
      Investor’s obligation to purchase the Securities shall be subject to the
      following conditions, any one or more of which may be waived by the Investor:
      (a) the completion of purchases and sales under the Agreements with the Other
      Investors for an aggregate purchase price along with the Investor of not less
      than Six Million Dollars ($6,000,000); (b) the delivery of the Legal Opinion
      to
      the Investor by counsel to the Company; (c) the accuracy of the representations
      and warranties made by the Company in this Agreement on the Closing Date; (c)
      the execution and delivery by the Company of the Registration Rights Agreement,
      (d) the absence of any order, writ, injunction, judgment or decree that
      questions the validity of the Agreements or the right of the Company or the
      Investor to enter into such Agreements or to consummate the transactions
      contemplated hereby and thereby; and (e) the delivery to the Investor by the
      Secretary or Assistant Secretary of the Company of a certificate stating that
      the conditions specified in this paragraph have been fulfilled.

     

    In
      the event that the Closing does not occur on or before the Closing Date as
      a
      result of the Company’s failure to satisfy any of the conditions set forth above
      (and such condition has not been waived by the Investor), the Company shall
      return any and all funds paid hereunder to the Investor no later than one
      Business Day following the Closing Date and the Investors shall have no further
      obligations hereunder. For purposes of this Agreement, “Business
      Day”
      shall mean any day other than a Saturday, Sunday or other day on which the
      New
      York Stock Exchange is permitted or required by law to close.

     

    3.    Representations,
      Warranties and Covenants of the Company.
      Except as otherwise described in the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2005 (and any amendments thereto filed at least
      two
      (2) Business Days prior to the Closing Date), the Company’s Quarterly Reports on
      Form 10-Q for the quarters ended September 30, 2006, June 30, 2006 and March
      31,
      2006 (and any amendments thereto filed at least two (2) Business Days prior
      to
      the Closing Date), the Company’s Proxy Statement for its 2006 Annual Meeting of
      Shareholders, and any of the Company’s Current Reports on Form 8-K filed since
      November 14, 2006 (and any amendments thereto filed at least two (2) Business
      Days prior to the Closing Date) (all collectively, the “SEC
      Reports”),
      the Company hereby represents and warrants to, and covenants with, the Investor
      as of the date hereof and the Closing Date, as follows:

     

    3.1    Organization.
      The
      Company is duly incorporated and validly existing in good standing under the
      laws of the State of Delaware. The Company has full power and authority to
      own,
      operate and occupy its properties and to conduct its business as presently
      conducted and is registered or qualified to do business and in good standing
      in
      each jurisdiction in which it owns property or transacts business and where
      the
      failure to be so qualified would have a material adverse effect upon the Company
      and its subsidiaries as a whole or the business, financial condition,
      properties, operations or assets of the Company and its subsidiaries as a whole
      or the Company’s ability to perform its obligations under the Agreements in all
      material respects (“Material
      Adverse Effect”),
      and no proceeding has been instituted in any such jurisdiction revoking,
      limiting or curtailing, or seeking to revoke, limit or curtail, such power
      and
      authority or qualification.

     

    
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    3.2    Due
      Authorization. The
      Company has all requisite power and authority to execute, deliver and perform
      its obligations under the Agreements. The execution and delivery of the
      Agreements, and the consummation by the Company of the transactions contemplated
      hereby, have been duly authorized by all necessary corporate action and no
      further action on the part of the Company or its Board of Directors or
      stockholders is required. The Agreements have been validly executed and
      delivered by the Company and constitute legal, valid and binding agreements
      of
      the Company enforceable against the Company in accordance with their terms,
      except to the extent (i) rights to indemnity and contribution may be limited
      by
      state or federal securities laws or the public policy underlying such laws,
      (ii)
      such enforceability may be limited by applicable bankruptcy, insolvency,
      reorganization, moratorium or similar laws affecting creditors’ and contracting
      parties’ rights generally and (iii) such enforceability may be subject to
      general principles of equity (regardless of whether such enforceability is
      considered in a proceeding in equity or at law).

     

    3.3    No
      Conflict or Default. The
      execution and delivery of the Agreements, the issuance and sale of the
      Securities to be sold by the Company under the Agreements, the fulfillment
      of
      the terms of the Agreements and the consummation of the transactions
      contemplated thereby will not: (A) result in a conflict with or constitute
      a material violation of, or material default (with the passage of time or
      otherwise) under, (i) any bond, debenture, note, loan agreement or other
      evidence of indebtedness, or any material lease,
      or contract to which the Company is a party or by which the Company or their
      respective properties are bound, (ii) the Certificate of Incorporation,
      by-laws or other organizational documents of the Company, as amended, or
      (iii) any law, administrative regulation, or existing order of any court or
      governmental agency, or other authority binding upon the Company or the
      Company’s respective properties; or, (B) result in the creation or
      imposition of any lien, encumbrance, claim, or security interest upon any of
      the
      material assets of the Company or an acceleration of indebtedness pursuant
      to
      any obligation, agreement or condition contained in any material bond,
      debenture, note or any other evidence of indebtedness or any material indenture,
      mortgage, deed of trust or any other agreement or instrument to which the
      Company is a party or by which it is bound or to which any of the property
      or
      assets of the Company is subject. No consent, approval, authorization or other
      order of, or registration, qualification or filing with, any regulatory body,
      administrative agency, or other governmental body is required for the execution
      and delivery of the Agreements by the Company and the valid issuance or sale
      of
      the Securities by the Company pursuant to the Agreements, other than such as
      have been made or obtained, and except for any filings required to be made
      under
      federal or state securities laws.

     

    3.4    Capitalization.
      The
      outstanding capital stock of the Company is as described in the Company’s
      Quarterly Report on Form 10-Q for the three month period ending September 30,
      2006 and the private placement memorandum dated January 29, 2007, as amended
      on
      January 30, 2007 (the “Memorandum”) provided to Investor. The Company has not
      made any material issuances of capital stock since August 21, 2006, other than
      pursuant to the purchase
      of shares under the Company’s employee stock option plan and the exercise
      of outstanding warrants or stock options, in each case as disclosed in the
      Memorandum or the SEC Reports, as well as the issuance of restricted shares
      to
      certain of its directors as part of its director compensation program. The
      Shares to be sold pursuant to the Agreements have been duly authorized, and
      when
      issued and paid for in accordance with the terms of the Agreements, will be
      duly
      and validly issued, fully paid and nonassessable, subject to no lien, claim
      or
      encumbrance (except
      for any such lien, claim or encumbrance created,
      directly or indirectly, by the Investor). The outstanding shares of capital
      stock of the Company have been duly and validly issued and are fully paid and
      nonassessable, have been issued in compliance with the registration requirements
      of federal and state securities laws, and were not issued in violation of any
      preemptive rights or similar rights to subscribe for or purchase securities.
      The
      Company owns one hundred percent of all of the outstanding capital stock of
      each
      of its subsidiaries, free and clear of all liens, claims and encumbrances.
      There
      are not (i) any outstanding preemptive rights, or (ii) any rights, warrants
      or
      options to acquire, or instruments convertible into or exchangeable for, any
      unissued shares of capital stock or other equity 

     

    
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    interest
      in the Company not disclosed in the SEC Reports or Memorandum, or (iii) any
      contract, commitment, agreement, understanding or arrangement of any kind to
      which the Company is a party that would provide for the issuance or sale of
      any
      capital stock of the Company, any such convertible or exchangeable securities
      or
      any such rights, warrants or options not disclosed in the SEC Reports or the
      Memorandum. There are no shareholders agreements, voting agreements or other
      similar agreements with respect to the Common Stock to which the Company is
      a
      party. 

     

    3.5    Legal
      Proceedings. There
      is no material legal or governmental proceeding pending, or to the knowledge
      of
      the Company, threatened, to which the Company is a party or of which the
      business or property of the Company is subject that is required to be disclosed
      and that is not so disclosed in the SEC Reports. Other than the information
      disclosed in the SEC Reports, the Company is not subject to any injunction,
      judgment, decree or order of any court, regulatory body, administrative agency
      or other government body.

     

    3.6    No
      Violations. To
      the knowledge of the Company, it is
      not in violation of its Certificate of Incorporation, bylaws or other
      organizational documents, as amended. To the knowledge of the Company, it is
      not
      in violation of any law, administrative regulation, ordinance or order of any
      court or governmental agency, arbitration panel or authority applicable to
      the
      Company, which violation, individually or in the aggregate, is reasonably likely
      to have a Material Adverse Effect. The Company is not in default (and there
      exists no condition which, with the passage of time or otherwise, would
      constitute a default) in the performance of any bond, debenture, note or any
      other evidence of indebtedness or any indenture, mortgage, deed of trust or
      any
      other material agreement or instrument to which the Company is a party or by
      which the Company is bound, which such default would have a Material Adverse
      Effect upon the Company.

     

    3.7    Governmental
      Permits, Etc. The
      Company has all necessary franchises, licenses, certificates and other
      authorizations from any foreign, federal, state or local government or
      governmental agency, department or body that are currently necessary for the
      operation of the business of the Company as currently conducted, except where
      the failure to currently possess such franchises, licenses, certificates and
      other authorizations is not reasonably likely to have a Material Adverse
      Effect.

     

    3.8    Intellectual
      Property.

     

    (a)    Except
      for matters which are not reasonably likely to have a Material Adverse Effect,
      (i) each of the Company has ownership of, or a license or other legal right
      to
      use, all patents, copyrights, trade secrets, trademarks, customer lists,
      designs, manufacturing or other processes, computer software, systems, data
      compilation, research results or other proprietary rights used in the business
      of the Company (collectively, “Intellectual
      Property”)
      and (ii) all of the Intellectual Property owned by the Company consisting of
      patents, registered trademarks and registered copyrights have been duly
      registered in, filed in or issued by the United States Patent and Trademark
      Office, the United States Register of Copyrights or the corresponding offices
      of
      other jurisdictions and have been maintained and renewed in accordance with
      all
      applicable provisions of law and administrative regulations in the United States
      and/or such other jurisdictions.

     

    (b)    Except
      for matters which are not reasonably likely to have a Material Adverse Effect,
      all material licenses or other material agreements under which (i) the Company
      employs rights in Intellectual Property, or (ii) the Company has granted rights
      to others in Intellectual Property owned or licensed by the Company are in
      full
      force and effect, and there is no default by the Company with respect
      thereto.

     

    
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    (c)    The
      Company believes that it has taken all steps reasonably required in accordance
      with sound business practice and business judgment to establish and preserve
      the
      ownership of the Company’s material Intellectual Property.

     

    (d)    Except
      for matters which are not reasonably likely to have a Material Adverse Effect,
      to the knowledge of the Company, (i) the present business, activities and
      products of the Company do not infringe any intellectual property of any other
      person; (ii) neither the Company is making unauthorized use of any confidential
      information or trade secrets of any person; and (iii) the activities of any
      of
      the employees of the Company, acting on behalf of the Company, do not materially
      violate any agreements or arrangements related to confidential information
      or
      trade secrets of third parties.

     

    (e)    Except
      for matters which are not reasonably likely to have a Material Adverse Effect,
      and except as disclosed in the SEC Reports, no proceedings are pending, or
      to
      the knowledge of the Company, threatened, which challenge the rights of the
      Company to the use the Company’s Intellectual Property.

     

    3.9    Financial
      Statements. The
      financial statements of the Company and the related notes contained in the
      SEC
      Reports present fairly and accurately in all material respects the financial
      position of the Company as of the dates therein indicated, and the results
      of
      its operations, cash flows and the changes in shareholders’ equity for the
      periods therein specified, subject, in the case of unaudited financial
      statements for interim periods, to normal year-end audit adjustments. Such
      financial statements (including the related notes) have been prepared in
      accordance with generally accepted accounting principles applied on a consistent
      basis at the times and throughout the periods therein specified, except that
      unaudited financial statements may not contain all footnotes required by
      generally accepted accounting principles. 

     

    3.10       
      No
      Material Adverse Change.
      Except as disclosed in the SEC Reports or
      in any press releases issued by the Company
      at least two (2) Business Days prior to the Closing Date,
      there has not been (i) an event, circumstance or change that has had or is
      reasonably likely to have a Material Adverse Effect upon the Company, (ii)
      any
      obligation incurred by the Company that is material to the Company,
      (iii) any dividend or distribution of any kind declared, paid or made on
      the capital stock of the Company, or (iv) any loss or damage (whether or not
      insured) to the physical property of the Company which has had a Material
      Adverse Effect.

     

    3.11       
      34
      Act Registration. The
      Company’s Common Stock is registered pursuant to Section 12(b) of the Exchange
      Act and the Company has taken no action intended to, or which to its knowledge
      could have the effect of, terminating the registration of the Common Stock
      under
      the Exchange Act. The principal United States market in which the Company’s
      common stock is quoted for trading is the Over-the-Counter Bulletin
      Board.

     

    3.12       
      No
      Manipulation; Disclosure of Information. The
      Company has not taken and will not take any action designed to or that might
      reasonably be expected to cause or result in an unlawful manipulation of the
      price of the Common Stock to facilitate the sale or resale of the Shares or
      of
      the shares of Common Stock underlying the Warrants. The Company has not
      disclosed any material non-public information to the Investors.

     

    
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    3.13       
      Accountants.
      Sherb & Co., LLP, who expressed their opinion with respect to the
      consolidated financial statements included in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2005 which are to be included in
      the
      Registration Statement (as defined in the Registration Rights Agreement) and
      the
      prospectus which forms a part thereof (the “Prospectus”),
      have advised the Company that they are, and to the knowledge of the Company
      they
      are, independent accountants as required by the Securities Act and the rules
      and
      regulations promulgated thereunder.

     

    3.14       
      Contracts.
      Except for matters which are not reasonably likely to have a Material Adverse
      Effect and those contracts that are substantially or fully performed or expired
      by their terms, the contracts listed as exhibits to or described in the SEC
      Reports that are material to the Company and all amendments thereto, are in
      full
      force and effect on the date hereof, and neither the Company nor, to the
      Company’s knowledge, any other party to such contracts is in breach of or
      default under any of such contracts.

     

    3.15       
      Taxes.
      Except for tax matters which are not reasonably likely to have a Material
      Adverse Effect, each of the Company and each of its Subsidiaries has filed
      all
      necessary federal, state and foreign income and franchise tax returns and has
      paid or accrued all taxes shown as due thereon.

     

    3.16       
      Transfer
      Taxes.
      On the Closing Date, all stock transfer or other taxes (other than income taxes)
      which are required to be paid in connection with the sale and transfer of the
      Securities hereunder will be, or will have been, fully paid or provided for
      by
      the Company and the Company will have complied with all laws imposing such
      taxes.

     

    3.17       
      Investment
      Company.
      The Company is not an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for an investment company, within the
      meaning of the Investment Company Act of 1940, as amended, and will not be
      deemed an “investment company” as a result of the transactions contemplated by
      this Agreement.

     

    3.18       
      Insurance.
      The Company maintains insurance of the types and in the amounts that the Company
      reasonably believes is adequate for its businesses, including, but not limited
      to, insurance covering real and personal property owned or leased by the Company
      against theft, damage, destruction, acts of vandalism and all other risks
      customarily insured against by similarly situated companies, all of which
      insurance is in full force and effect.

     

    3.19       
      Offering
      Prohibitions.
      Neither the Company nor any person acting on its behalf or at its direction
      has
      in the past or will in the future take any action to sell, offer for sale or
      solicit offers to buy any securities of the Company which would bring the offer
      or sale of the Securities as contemplated by this Agreement within the
      provisions of Section 5 of the Securities Act. 

     

    3.20       
      Related
      Party Transactions. Other
      than described in the SEC Reports, to
      the knowledge of the Company, no transaction
      has occurred between or among the Company or any of its affiliates, officers
      or
      directors or any affiliate or affiliates of any such officer or director that
      with the passage of time are reasonably likely be required to be disclosed
      pursuant to Section 13, 14 or 15(d) of the Exchange Act. 

     

    3.21       
      Books
      and Records.
      The books, records and accounts of the Company accurately and fairly reflect,
      in
      reasonable detail, the transactions in, and dispositions of, the assets of,
      and
      the operations of, the Company. The Company maintains a system of internal
      accounting controls sufficient to provide reasonable assurances that (i)
      transactions are executed in accordance with management’s general or specific
      authorizations, (ii) transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles and to maintain asset accountability, (iii) access to
      assets is permitted only in accordance with management’s general or specific
      authorization and (iv) the recorded accountability for assets is compared with
      the existing assets at reasonable intervals and appropriate action is taken
      with
      respect to any differences.

     

     

    
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    4.    Representations,
      Warranties and Covenants of the Investor.

     

    4.1    Investor
      Knowledge and Status.
      The Investor represents and warrants to, and covenants with, the Company that:
      (i) the Investor is an “accredited investor” as defined in Regulation D under
      the Securities Act, is knowledgeable, sophisticated and experienced in making,
      and is qualified to make decisions with respect to, investments in securities
      presenting an investment decision similar to that involved in the purchase
      of
      the Securities, and has requested, received, reviewed and considered all
      information it deemed relevant in making an informed decision to purchase the
      Securities; (ii) the Investor understands that the Securities are “restricted
      securities” and have not been registered under the Securities Act and is
      acquiring the number of Shares and Warrants set forth in paragraph 3 of the
      Securities Purchase Agreement in the ordinary course of its business and for
      its
      own account for investment only, has no present intention of distributing any
      of
      such Securities and has no arrangement or understanding with any other persons
      regarding the distribution of such Securities (this representation and warranty
      not limiting the Investor’s right to sell Securities pursuant to a Registration
      Statement filed under the Registration Rights Agreement or otherwise, or other
      than with respect to any claim arising out of a breach of this representation
      and warranty, the Investor’s right to indemnification under Section 3 of the
      Registration Rights Agreement); (iii) the Investor will not, directly or
      indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
      any offers to buy, purchase or otherwise acquire or take a pledge of) any of
      the
      Securities except in compliance with the Securities Act, applicable state
      securities laws and the respective rules and regulations promulgated thereunder;
      (iv) the Investor has answered all questions in paragraph 4 of the Securities
      Purchase Agreement and the Investor Questionnaire attached hereto as Exhibit
      B
      for use in preparation of the Registration Statement and the answers thereto
      are
      true and correct as of the date hereof and will be true and correct as of the
      Closing Date; (v) the Investor will notify the Company promptly of any change
      in
      any of such information until such time as the Investor has sold all of its
      Securities or until the Company is no longer required to keep the Registration
      Statement effective; and (vi) the Investor has, in connection with its decision
      to purchase the number of Securities set forth in paragraph 3 of the Securities
      Purchase Agreement, relied upon the representations and warranties of the
      Company contained herein and the information contained in the SEC Reports.
      The
      Investor understands that the issuance of the Securities to the Investor has
      not
      been registered under the Securities Act, or registered or qualified under
      any
      state securities law, in reliance on specific exemptions therefrom, which
      exemptions may depend upon, among other things, the representations made by
      the
      Investor in this Agreement. To the best of the Investor’s knowledge, no person
      (including without limitation the Placement Agent) has been authorized by the
      Company to provide any representation that is inconsistent with or in addition
      to those contained herein or in the SEC Reports, and the Investor acknowledges
      that it has not received or relied on any such representations.

     

    4.2    Transfer
      of Securities.
      The Investor agrees that it will not make any sale, transfer or other
      disposition of the Securities (a “Disposition”)
      other than Dispositions that are made pursuant to the Registration Statement
      in
      compliance with any applicable prospectus delivery requirements or that are
      exempt from registration under the Securities Act. Investor has not taken and
      will not take any action designed to or that might reasonably be expected to
      cause or result in manipulation of the price of the Common Stock to facilitate
      the subscription to, or the sale or resale of the Securities. 

     

    4.3    Power
      and Authority.
      The Investor represents and warrants to the Company that (i) the Investor has
      full right, power, authority and capacity to enter into this Agreement and
      to
      consummate the transactions contemplated hereby and has taken all necessary
      action to authorize the execution, delivery and performance of this Agreement,
      and (ii) this Agreement constitutes a valid and binding obligation of the
      Investor enforceable against the Investor in accordance with its terms, except
      to the extent (i) rights to indemnity and contribution may be limited by state
      or federal securities laws or the public policy underlying such laws, (ii)
      such
      enforceability may be limited by applicable bankruptcy, 

     

    
      	Securities Purchase Agreement	
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    insolvency,
      reorganization, moratorium or similar laws affecting creditors’ and contracting
      parties’ rights generally and (iii) such enforceability may be subject to
      general principles of equity (regardless of whether such enforceability is
      considered in a proceeding in equity or at law). 

     

    4.4    Prohibited
      Transactions.
      During the thirty (30) days prior to the date hereof, no Investor nor any
      Affiliate of any Investor, foreign or domestic, has, directly or indirectly,
      effected or agreed to effect any “short sale” (as defined in Rule 200 under
      Regulation SHO), whether or not against the box, established any “put equivalent
      position” (as defined in Rule 16a-1(h) under the Exchange Act) with respect to
      the Company’s common stock, borrowed or pre-borrowed any shares of the Company’s
      Common Stock, or granted any other right (including, without limitation, any
      put
      or call option) with respect to the Company’s Common Stock or with respect to
      any security that includes, relates to or derived any significant part of its
      value from the Company’s Common Stock or otherwise sought to hedge its position
      in the Shares and Warrants (each, a “Prohibited
      Transaction”).
      

     

    4.5    No
      Investment, Tax or Legal Advice.
      The Investor understands that nothing in the SEC Reports, this Agreement, or
      any
      other materials presented to the Investor in connection with the purchase and
      sale of the Securities constitutes legal, tax or investment advice. The Investor
      has consulted such legal, tax and investment advisors as it, in its sole
      discretion, has deemed necessary or appropriate in connection with its purchase
      of Securities. 

     

    4.6    Confidential
      Information.
      The parties acknowledge and agree that as of the date hereof and as of the
      Closing Date, the Company has not disclosed any material non-public information
      to the Investor.

     

    4.7    Acknowledgments
      Regarding Placement Agent.
      The Investor acknowledges that the Placement Agent has acted solely as placement
      agent for the Company in connection with the Offering of the Securities by
      the
      Company, and that the Placement Agent has made no representation or warranty
      whatsoever with respect to the accuracy or completeness of information, data
      or
      other related disclosure material that has been provided to the Investor. The
      Investor further acknowledges that in making its decision to enter into this
      Agreement and purchase the Securities, it has relied on its own examination
      of
      the Company and the terms of, and consequences of holding, the Securities.
      The
      Investor further acknowledges that the provisions of this Section 4.7 are
      for the benefit of, and may be enforced by, the Placement Agent. Investor has
      not received any general solicitation or advertising regarding the Offering
      and
      Investor has not been furnished with any oral or written representation or
      information in connection with the Offering.

     

    4.8    Additional
      Acknowledgement.
      Investor has thoroughly reviewed and the SEC Reports and the Memorandum (the
      “Disclosure Documents”) prior to making this investment. Investor has been
      granted a reasonable time prior to the date hereof during which we have had
      the
      opportunity to obtain such additional information as Investor deems necessary
      to
      permit Investor to make an informed decision with respect to the purchase of
      the
      Common Stock. After examination of the SEC Reports and other information
      available, Investor is fully aware of the business prospects, financial
      condition, risks associated with investment and the operating history relating
      to the Company, and therefore in subscribing for the purchase of the Securities,
      Investor is not relying upon any information other than information contained
      in
      the Disclosure Documents. The Investor acknowledges that it has independently
      evaluated the merits of the transactions contemplated by this Agreement, that
      it
      has independently determined to enter into the transactions contemplated hereby,
      that it is not relying on any advice from or evaluation by any Other Investor,
      and that it is not acting in concert with any Other Investor in making its
      purchase of the Securities hereunder. The Investor and, to its knowledge, the
      Company acknowledge that the Investors have not taken any actions that would
      deem the Investors to be members of a “group” for purposes of Section 13(d) of
      the Exchange Act.

     

    
      	Securities Purchase Agreement	
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    5.    Survival
      of Representations, Warranties and Agreements. Notwithstanding
      any investigation made by any party to this Agreement or by the Placement Agent,
      all covenants, agreements, representations and warranties made by the Company
      and the Investor herein shall survive the execution of this Agreement, the
      delivery to the Investor of the Securities being purchased and the payment
      therefor, and a party’s reliance on such representations and warranties shall
      not be affected by any investigation made by such party or any information
      developed thereby. 

     

    6.    Legends
      and Restrictions on Transfer. The
      certificate or certificates for the Shares (and any securities issued in respect
      of or exchange for the Shares) shall be subject to a legend or legends
      restricting transfer under the Securities Act and referring to restrictions
      on
      transfer herein, such legend to be substantially as follows:

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE BEEN ISSUED
      AND SOLD IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES
      ACT
      OF 1933 (THE “1933 ACT”), AND APPROPRIATE EXEMPTIONS FROM REGISTRATION UNDER THE
      SECURITIES LAWS OF OTHER APPLICABLE JURISDICTIONS. THE SECURITIES MAY NOT BE
      OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN PURSUANT TO AN EFFECTIVE
      REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM UNDER THE 1933 ACT AND THE
      APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE ISSUER SHALL BE
      ENTITLED TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT WITH
      RESPECT TO COMPLIANCE OF THE PROPOSED SALE OR TRANSFER WITH THE REGISTRATION
      REQUIREMENTS OF THE 1933 ACT OR EXEMPTION THEREFROM. NOTWITHSTANDING THE
      FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH BONA FIDE MARGIN
      TRANSACTIONS.

    

     

    The
      Investor expressly agrees that any sale by the Investor of Shares pursuant
      to
      the Registration Statement shall be sold in a manner described under the caption
      “Plan of Distribution” in such Registration Statement and the Investor will
      deliver a copy of the Prospectus contained in the Registration Statement to
      the
      purchaser or purchasers, directly or through the Investor's broker, in
      connection with such sale, in each case in compliance with the requirements
      of
      the Securities Act and Exchange Act applicable to such sale. The Investor
      further agrees that the Shares shall only be sold while the Registration
      Statement is effective, unless another exemption from registration is available.
      On the basis of compliance by the Investor with the foregoing covenants, upon
      (a) effectiveness of the Registration Statement, (b) following any sale of
      such
      Shares pursuant to Rule 144 (assuming the transferor is not an affiliate of
      the
      Company, (c) if such Shares become eligible for sale under Rule 144(k) (to
      the
      extent that the applicable Investor provides a certification or legal opinion
      to
      the Company to that effect), or (d) if such legend is not required under
      applicable requirements of the Securities Act (including controlling judicial
      interpretations and pronouncements issued by the SEC), the Company shall as
      soon
      as practicable (but not later than five business days after surrender of the
      legended certificates to the Company and notice of such surrender has been
      provided pursuant to Section 8 below) cause certificates evidencing the Shares
      previously issued to be replaced with certificates which do not bear the
      restrictive legends specified above in this Section 7, and all Shares
      subsequently issued shall not bear the restrictive legend specified above in
      this Section 7; provided that the Investor shall notify the Company promptly
      upon completion of the sale of all of its Shares. In the event that the Company
      does not comply with the requirements of the prior sentence within five business
      days after surrender of the legended certificates to the Company, and if on
      or
      after such date the Investor purchases (in an open market transaction or

     

    
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    otherwise)
      shares of Common Stock to deliver in satisfaction of a sale by the Investor
      of
      shares of Common Stock issuable upon such exercise that the Investor anticipated
      receiving from the Company (a “Buy-In”), then the Company shall, within five
      business days after the Investor's request and in the Investor's discretion,
      either (i) pay cash to the Investor in an amount equal to the Investor's total
      purchase price (including brokerage commissions, if any) for the shares of
      Common Stock so purchased (the “Buy-In Price”), at which point the Company's
      obligation to deliver such certificates (and to issue such shares of Common
      Stock) shall terminate, or (ii) promptly honor its obligation to deliver to
      the
      Investor a certificate or certificates representing such shares of Common Stock
      and pay cash to the Investor in an amount equal to the excess (if any) of the
      Buy-In Price over the product of (A) such number of shares of Common Stock,
      times (B) the closing bid price on the date of exercise. The Investor
      acknowledges that the removal of the restrictive legends from certificates
      representing Shares as provided in this Section 6 is predicated upon the
      Company’s reliance on the Investor’s compliance with its covenants in this
      Section 6.

    

    7.    Registration
      of Shares; Public Statements. 

     

    7.1    In
      connection with the purchase and sale of the Shares by the Investors
      contemplated hereby, the Company has entered into a Registration Rights
      Agreement with each Investor providing for the filing by the Company of a
      Registration Statement on Form S-1 to enable the resale of the Shares by the
      Investors from time to time.
      

     

    7.2    The
      Company agrees to disclose on a Current Report on Form 8-K the existence of
      the
      Offering and the material terms, thereof, including pricing, within four (4)
      Business Days after the Closing. The Company will not issue any public
      statement, press release or any other public disclosure listing the Investor
      as
      one of the purchasers of the Shares without the Investor’s prior review of the
      statement and prior consent thereto, except as may be required by applicable
      law
      or rules of any exchange on which the Company’s securities are
      listed.

     

    8.    Notices.
      All
      notices, requests, consents and other communications hereunder shall be in
      writing, shall be delivered (A) if within the United States, by first-class
      registered or certified airmail, or nationally recognized overnight express
      courier, postage prepaid, or by facsimile, or (B) if from outside the United
      States, by International Federal Express (or comparable service) or facsimile,
      and shall be deemed given (i) if delivered by first-class registered or
      certified mail domestic, upon the Business Day received, (ii) if delivered
      by
      nationally recognized overnight carrier, one (1) Business Day after timely
      delivery to such carrier, (iii) if delivered by International Federal Express
      (or comparable service), two (2) Business Days after timely delivery to such
      carrier, (iv) if delivered by facsimile, upon electric confirmation of receipt
      and shall be addressed as follows, or to such other address or addresses as
      may
      have been furnished in writing by a party to another party pursuant to this
      paragraph: 

     

    9. 

     

    (a)        
      if
      to the Company, to:

     

    Smart
      Online, Inc

    2530
      Meridian Parkway, 2nd
      Floor

    Durham,
      NC 27713

    Attention: James
      Gayton, Corporate Counsel

    Telephone: 
      (919) 765-5000

     

    
      	Securities Purchase Agreement	
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    with
      a copy to:.

    Smith,
      Anderson, Blount, Dorsett, 

    Mitchell
      & Jernigan, LLP

    2500
      Wachovia Capitol Center

    Raleigh,
      North Carolina 27602-2611

    Attention:
      Margaret N. Rosenfeld

    Telephone: (919)
      821-6714

    

    (b)        
      if
      to the Investor, at its address on the signature page to the Securities Purchase
      Agreement.

     

    10.       
      Amendments;
      Waiver. This
      Agreement may not be modified or amended except pursuant to an instrument in
      writing signed by the Company and the Investor. Any waiver of a provision of
      this Agreement must be in writing and executed by the party against whom
      enforcement of such waiver is sought.

     

    11.       
      Headings.
      The
      headings of the various sections of this Agreement have been inserted for
      convenience of reference only and shall not be deemed to be part of this
      Agreement. 

     

    12.       
      Entire
      Agreement; Severability. This
      Agreement sets forth the entire agreement and understanding of the parties
      relating to the subject matter hereof and supersedes all prior and
      contemporaneous agreements, negotiations and understandings between the parties,
      both oral and written relating to the subject matter hereof. If any provision
      contained in this Agreement is determined to be invalid, illegal or
      unenforceable in any respect, the validity, legality and enforceability of
      the
      remaining provisions contained herein shall not in any way be affected or
      impaired thereby. 

     

    13.       
      Governing
      Law. This
      Agreement shall be governed by, and construed in accordance with, the internal
      laws of the State of Delaware,
      without giving effect to the principles of conflicts of law. 

     

    14.       
      Counterparts.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      constitute an original, but all of which, when taken together, shall constitute
      but one instrument, and shall become effective when one or more counterparts
      have been signed by each party hereto and delivered to the other
      parties.

     

    
      	Securities Purchase Agreement	
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    Exhibit
      A

     

    STOCK
      CERTIFICATE QUESTIONNAIRE

     

    Please
      provide us with the following information:

     

    

    
      	
              1.    
                The
                exact name in which your

                    
                 Shares are to be registered (this is

                    
                 the name that will appear on your

                    
                 stock certificate(s)). You may

                     
                use a nominee name if appropriate:

               

            	 
	
              2. 
                If
                a nominee name is listed in

                   response
                to item 1 above, the

                  
                relationship between the Investor

                  
                and such nominee:

               

            	 
	
              3.  The
                mailing address of the 

                  
                registered holder listed in

                  
                response to item 1 above:

               

            	 
	
              4.  
                The
                Social Security Number or

                  
                Tax Identification Number of the

                  
                registered holder listed in the

                  
                response to item 1 above:

               

            	 

    

    

    

    
      
        
          
          

        

        
          A-1

          
            

          

        

        
          
          

        

      

    

    

    

     

    Exhibit
      B

     

    INVESTOR
      QUESTIONNAIRE

     

    (All
      information will be treated confidentially)

     

    To:
       Smart
      Online, Inc. 

     

    The
      undersigned hereby acknowledges the following:

     

    This
      Investor Questionnaire (“Questionnaire”)
      must be completed by each potential investor in connection with the offer and
      sale of the shares of the common stock, par value $0.001 per share (the
“Shares”),
      of Smart Online, Inc. (the “Company”)
      and of certain warrants to purchase shares of common stock, par value $0.001
      per
      share, of the Company (the “Warrants,” and together with the Shares, the
“Securities”).
      The Securities are being offered and sold by the Company without registration
      under the Securities Act of 1933, as amended (the “Securities
      Act”),
      and the securities laws of certain states, in reliance on the exemptions
      contained in Section 4 of the Securities Act and on Regulation D promulgated
      thereunder and in reliance on similar exemptions under applicable state laws.
      The Company must determine that a potential investor meets certain suitability
      requirements before offering or selling Securities to such investor. The purpose
      of this Questionnaire is to assure the Company that each investor will meet
      the
      applicable suitability requirements. The information supplied by the undersigned
      will be used in determining whether the undersigned meets such criteria, and
      reliance upon the private offering exemption from registration is based in
      part
      on the information herein supplied.

     

    This
      Questionnaire does not constitute an offer to sell or a solicitation of an
      offer
      to buy any security. The undersigned’s answers will be kept strictly
      confidential. However, by signing this Questionnaire the undersigned will be
      authorizing the Company to provide a completed copy of this Questionnaire to
      such parties as the Company deems appropriate in order to ensure that the offer
      and sale of the Securities will not result in a violation of the Securities
      Act
      or the securities laws of any state and that the undersigned otherwise satisfies
      the suitability standards applicable to purchasers of the Securities. All
      potential investors must answer all applicable questions and complete, date
      and
      sign this Questionnaire. The undersigned shall print or type its responses
      and
      attach additional sheets of paper if necessary to complete its answers to any
      item.

     

    A.    Background
      Information

     

    
      
        	Name:	
              

      

    

    
      
         

        
          	
                  Business
                    Address:

                	 
	 	
                  
                  

                  (Number
                    and Street)

                

        

         

      

    

    
      	 	 	 
	
              (City)

            	
              (State)

            	
              (Zip
                Code)

            

     

    
      
        	Telephone Number: (  
                      )	 

      

    

     

    
      	
              Residence
                Address:

            	 
	 	
              
              

              (Number and Street)

            

    

     

    
      	 	 	 
	
              (City)

            	
              (State)

            	
              (Zip
                Code)

            

    

     

    
      	Telephone Number:
              (        )	 

    

    If
      an individual:

     

    
      	
              Age:______

               

            	
              Citizenship:__________

               

            	
              Where
                registered to vote:_________

               

            

    

    

    
      
        
          
          

        

        
          B-1

          
            

          

        

        
          
          

        

      

    

    

    

     

    If
      a corporation, partnership, limited liability company, trust or other
      entity:

     

    Type
      of
      entity:_____________________________________________________________________________

     

    State
      of
      formation:______________                         
Date
      of formation:__________________________________

     

    Social
      Security or Taxpayer Identification
      No.______________________________________________________

     

    Send
      all correspondence to (check one):   ____ Residence
      Address                                        
____
      Business Address

     

    B.    Status
      as Accredited Investor

     

    The
      undersigned is an “accredited investor” as such term is defined in Regulation D
      under the Securities Act, because at the time of the sale of the Securities
      the
      undersigned falls within one or more of the following categories (Please initial
      one or more, as applicable):

     

    _____ (1)    a
      bank as defined in Section 3(a)(2) of the Securities Act, or a savings and
      loan
      association or other institution as defined in Section 3(a)(5)(A) of the
      Securities Act whether acting in its individual or fiduciary capacity; a broker
      or dealer registered pursuant to Section 15 of the Securities Exchange Act
      of
      1934; an insurance company as defined in Section 2(13) of the Securities Act;
      an
      investment company registered under the Investment Company Act of 1940 or a
      business development company as defined in Section 2(a)(48) of that act; a
      Small
      Business Investment Company licensed by the U.S. Small Business Administration
      under Section 301(c) or (d) of the Small Business Investment Act of 1958; a
      plan
      established and maintained by a state, its political subdivisions, or any agency
      or instrumentality of a state or its political subdivisions for the benefit
      of
      its employees, if such plan has total assets in excess of $5,000,000; an
      employee benefit plan within the meaning of the Employee Retirement Income
      Security Act of 1974 if the investment decision is made by a plan fiduciary,
      as
      defined in Section 3(21) of such act, which is either a bank, savings and loan
      association, insurance company, or registered investment adviser, or if the
      employee benefit plan has total assets in excess of $5,000,000 or, if a
      self-directed plan, with the investment decisions made solely by persons that
      are accredited investors;1 

     

    _____ (2)    a
      private business development company as defined in Section 202(a)(22) of the
      Investment Advisers Act of 1940;

     

    _____ (3)    an
      organization described in Section 501(c)(3) of the Internal Revenue Code of
      1986, corporation, Massachusetts or similar business trust, or partnership,
      not
      formed for the specific purpose of acquiring the Securities offered, with total
      assets in excess of $5,000,000;

     

    _____ (4)    a
      natural person whose individual net worth, or joint net worth with that person’s
      spouse, at the time of such person’s purchase of the Securities exceeds
      $1,000,000;

     

    _____ (5)    a
      natural person who had an individual income in excess of $200,000 in each of
      the
      two most recent years or joint income with that person’s spouse in excess of
      $300,000 in each of those years and has a reasonable expectation of reaching
      the
      same income level in the current year;

     

    ___________________

    
      1 As
        used
        in this Questionnaire, the term “net worth” means the
        excess of total assets over total liabilities. In computing net worth for
        the
        purpose of subsection (4), the principal residence of the investor must be
        valued at cost, including cost of improvements, or at recently appraised
        value
        by a professional appraiser. In determining income, the investor should add
        to
        the investor’s adjusted gross income any amounts attributable to tax exempt
        income received, losses claimed as a limited partner in any limited partnership,
        deductions claimed for depreciation, contributions to an IRA or KEOGH retirement
        plan, alimony payments, and any amount by which income from long-term capital
        gains has been reduced in arriving at adjusted gross income.

    

    

    
      
        
          
          

        

        
          B-2

          
            

          

        

        
          
          

        

      

    

    

    

     

    _____ (6)    a
      trust, with total assets in excess of $5,000,000, not formed for the specific
      purpose of acquiring the Securities offered, whose purchase is directed by
      a
      sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D;
      and

     

    _____ (7)    an
      entity in which all of the equity owners are accredited investors (as defined
      above).

     

    C.    Representations

     

    The
      undersigned hereby represents and warrants to the Company as
      follows:

     

    1.    Any
      purchase of the Securities would be solely for the account of the undersigned
      and not for the account of any other person or with a view to any resale,
      fractionalization, division, or distribution thereof.

     

    2.    The
      information contained herein is complete and accurate and may be relied upon
      by
      the Company, and the undersigned will notify the Company immediately of any
      material change in any of such information occurring prior to the closing,
      if
      any, with respect to the purchase of Securities by the undersigned or any
      co-purchaser.

     

    3.    There
      are no suits, pending litigation, or claims against the undersigned that could
      materially affect the net worth of the undersigned as reported in this
      Questionnaire.

     

    4    The
      undersigned acknowledges that there may occasionally be times when the Company,
      based on the advice of its counsel, determines that it must suspend the use
      of
      the Prospectus forming a part of the Registration Statement (as such terms
      are
      defined in the Securities Purchase Agreement to which this Questionnaire is
      attached) until such time as an amendment to the Registration Statement has
      been
      filed by the Company and declared effective by the Securities and Exchange
      Commission or until the Company has amended or supplemented such Prospectus.
      The
      undersigned is aware that, in such event, the Securities will not be subject
      to
      ready liquidation, and that any Securities purchased by the undersigned would
      have to be held during such suspension. The overall commitment of the
      undersigned to investments which are not readily marketable is not excessive
      in
      view of the undersigned’s net worth and financial circumstances, and any
      purchase of the Securities will not cause such commitment to become excessive.
      The undersigned is able to bear the economic risk of an investment in the
      Securities.

     

    5.    The
      undersigned has carefully considered the potential risks relating to the Company
      and a purchase of the Securities and fully understands that the Securities
      are
      speculative investments which involve a high degree of risk of loss of the
      undersigned’s entire investment. Among others, the undersigned has carefully
      considered each of the risks described in the Company’s Annual Report on Form
      10-K for the year ended December 31, 2005 and the SEC Reports referenced in
      the
      Securities Purchase Agreement.

     

    6.    The
      following is a list of all states and other jurisdictions in which blue sky
      or
      similar clearance will be required in connection with the undersigned’s purchase
      of the Securities: 

     

    ___________________________________________

     

    ___________________________________________

     

    ___________________________________________

     

    The
      undersigned agrees to notify the Company in writing of any additional states
      or
      other jurisdictions in which blue sky or similar clearance will be required
      in
      connection with the undersigned’s purchase of the Securities.

     

    

    
      
        
          
          

        

        
          B-3

          
            

          

        

        
          
          

        

      

    

    

    IN
      WITNESS WHEREOF, the undersigned has executed this Questionnaire on February
      ___, 2007, and declares under oath that it is truthful and correct.

     

     

    
      	 	
              _______________________________

              By:
                ___________________________

              Its:
                ____________________________

              

              ____________________

              By:
                

              Its:
                

            

    

    

    

    
       

    
      
        	 	 
	
                ACCEPTED
                  ON BEHALF OF THE COMPANY:

              	 
	 	 
	SMART ONLINE, INC.	Shares Purchased:  __________
                
	 	 
	BY:_________________________________ 	Warrants Purchased:  __________
	
                Name:

              	 
	
                Title:

              	Dollar Amount Invested: $________
	 	 
	 	 
	
                Date:
                  February ___, 2007

              	 
	 	 

      

    

     

    

    

    

     

    

     

    

     

    

    

    
      
        
          
          

        

        
          B-4

          
            

          

        

        
          
          

        

      

    

    

    

    Exhibit
      C

     

    FORM
      OF OUTSIDE COUNSEL LEGAL OPINION

     

    

     

     

    February
      [__], 2007

     

    

    To: The
      Investors in Common Stock of Smart Online, Inc. Identified on Schedule 1
      hereto

     

    Ladies
      and Gentlemen:

     

    We
      have
      acted as legal counsel for Smart Online, Inc., a Delaware corporation (the
      “Company”),
      in
      connection with the issuance of 2,352,941
      shares
      (the “Shares”)
      of the
      Company’s Common Stock, $0.001 par value per share, pursuant to those certain
      Securities Purchase Agreements, dated as of February [__] 2007, including the
      annex and exhibits thereto (collectively, the “Agreement”),
      between the Company and the investors identified on Schedule 1 hereto (the
      “Investors”).
      This
      opinion is being delivered to you pursuant to Section 2 of the Agreement.
      Capitalized terms used herein are as defined in the Agreement unless otherwise
      specifically provided herein.

     

    The
      phrases “to our knowledge” and “known to us” mean the conscious awareness by
      lawyers in the “primary lawyer group” of factual matters such lawyers recognize
      as being relevant to the opinion or confirmation so qualified, without
      independent investigation. “Primary lawyer group” means any lawyer in this firm
      (i) who signs this opinion letter, (ii) who is actively involved in negotiating
      or documenting the transaction or (iii) solely as to information relevant to
      a
      particular opinion or factual confirmation issue, who is primarily responsible
      for providing the response concerning the particular opinion or
      issue.

    

    In
      connection with our opinions expressed below, we have assumed the authenticity
      of all records, documents, and instruments submitted to us as originals, the
      genuineness of all signatures (other than the signatures of the Company), the
      legal capacity of natural persons and the conformity to the originals of all
      records, documents and instruments submitted to us as copies. We have based
      our
      opinion only upon our review of the following records, documents and
      instruments, as well as a certificate of officers of the Company (the
“Officers’
      Certificate”)
      relating to factual matters (collectively, the “Documents”)
      and,
      in our judgment, such Documents constitute all records, documents and
      instruments that are necessary or appropriate to enable us to render the
      opinions expressed below:

    

    
      	 	
              (a)

            	
              the
                Agreement, including the annex and exhibits
                thereto;

            

    

    

    
      	 	
              (b)

            	
              the
                Registration Rights Agreement between the Company and the Investors,
                dated
                the date hereof (the “Registration
                Rights Agreement,”
                together with the Agreement, the “Transaction
                Agreements”);

            

    

    

    
      
        
          
          

        

        
          C-1

          
            

          

        

        
          
          

        

      

    

    

    

    
      	 	
              (c)

            	
              the
                Company’s Amended and Restated Certificate of Incorporation (the
                “Certificate
                of Incorporation”);

            

    

    

    
      	 	
              (d)

            	
              the
                Company’s Amended and Restated Bylaws (“Bylaws”);

            

    

    

    

    
      	 	
              (e)

            	
              Certificate
                of Good Standing of the Company, issued by the Secretary of State
                of
                Delaware, dated February 5, 2007;

            

    

    

    
      	 	
              (f)

            	
              Certificate
                of Authorization of the Company issued by the Secretary of State
                of North
                Carolina, dated February 6, 2007;

            

    

    

    
      	 	
              (g)

            	
              resolutions
                of the Board of Directors of the Company adopted at a meeting held
                on
                February 21, 2007. 

            

    

    

    The
      opinion expressed in Paragraph 1 below as to the incorporation, valid existence,
      and good standing of the Company under the laws of the State of Delaware is
      based solely on the Certificate of Good Standing of the Company identified
      in
      (e) above. The opinion expressed in Paragraph 8 below is based solely on the
      Officers’ Certificate. As to questions of fact bearing upon the other opinions
      set forth below, we have relied with your consent solely upon (1) our review
      of
      the Documents and (2) discussions with and information provided by management
      of
      the Company. We have not reviewed the files and records of the Company generally
      and have relied on the Company to provide us with the Documents for review.
      

    

    Based
      upon and subject to the matters set forth above and to the additional
      limitations and qualifications set forth below, we are of the opinion
      that:

    

    1.    The
      Company has been duly incorporated and is a validly existing corporation in
      good
      standing under the laws of the State of Delaware with
      the
      corporate power to conduct any lawful business activity. The Company has the
      corporate power to execute, deliver and perform the Agreement including, without
      limitation, the issuance and sale of the Shares.

    

    2.    Each
      of
      the Agreement and the Registration Rights Agreement has been duly authorized
      by
      all requisite corporate action, executed and delivered by the Company. Each
      of
      the Agreement and the Registration Rights Agreement constitutes the valid and
      binding obligations of the Company, enforceable in accordance with their
      respective terms.

    

    3.    The
      Shares have been duly authorized and, upon issuance, delivery and payment
      therefor as described in the Agreement, will be validly issued, fully paid
      and
      nonassessable.

    

    4.    As
      of the
      date hereof, the authorized capital stock of the Company consists of
      __________________. 

    

    5.    The
      execution, delivery and performance of the Transaction Agreements and the
      issuance and sale of the Shares in accordance with the Agreement will not:
      (a)
      violate or conflict with, or result in a breach of or default under, the
      Certificate of
      Incorporation or
      Bylaws
      of the Company, or (b) violate any applicable federal or state law, rule,
      regulation law or
      order
      known to us of any court or other agency of government.

    

    
      
        
          
          

        

        
          C-2

          
            

          

        

        
          
          

        

      

    

    

    

    

    6.    To
      our
      knowledge, no consent, approval, authorization or order of, and no notice to
      or
      filing with, any governmental agency or body or any court is required to be
      obtained or made by the Company for the issue and sale of the Shares pursuant
      to
      the Agreement, except such as have been obtained or made and such as may be
      required under certain state and federal securities laws.

    

    7.    The
      offer, sale, issuance and delivery of the Shares to the Investors, in the manner
      contemplated by the Agreement, are exempt from the registration requirements
      of
      the Securities Act, it being understood that no opinion is expressed as to
      any
      subsequent resale of such shares.

    

    8.    We
      are
      not representing the Company in any pending litigation in which it is a named
      defendant, or in any litigation that is overtly threatened in writing against
      it
      by a potential claimant, that challenges the validity or enforceability of,
      or
      seeks to enjoin the performance of, the Agreement. 

    

     

    The
      foregoing opinions are subject to the following limitations and
      qualifications:

    

    (a)    The
      foregoing opinions are subject to the effects of (i) bankruptcy, insolvency,
      reorganization, fraudulent conveyance, receivership, moratorium and other
      similar laws affecting the rights and remedies of creditors generally, now
      or
      hereafter in effect, (ii) general principles of equity whether applied by a
      court of law or equity, and (iii) applicable laws and court decisions, now
      or
      hereafter in effect, that may limit or restrict the enforceability or
      availability of certain terms, provisions, rights or remedies contained in
      the
      Transaction Agreements.

    

    (b)    We
      have
      assumed that the parties (other than the Company) to the Transaction Agreements
      have the requisite power and authority to enter into the Transaction Agreements;
      that the Transaction Agreements have been duly authorized, executed and
      delivered by each such party; and that the Transaction Agreements to which
      each
      is a party constitute the legal, valid and binding obligations of each such
      party, enforceable against each such party in accordance with their respective
      terms.

    

    (c)    The
      opinions set forth herein are limited to matters governed by the General
      Corporation Law of the State of Delaware, laws of the State of North Carolina
      (as to paragraph 6) and United States federal laws (as to paragraphs 5 and
      7),
      and no opinion is expressed herein as to the laws of any other jurisdiction,
      except to the extent set forth in paragraph 6. We express no opinion as to
      the
      enforceability of provisions of the Agreement concerning choice of forum or
      consent to the jurisdiction of courts, venue of actions or means of service
      of
      process. We express no opinion as to compliance by the Company with federal
      and
      state anti-fraud laws relating to the issuance and sale of securities. For
      purposes of our opinions, we have disregarded the choice of law provision in
      the
      Transaction Agreements and, instead, have assumed that the Transaction
      Agreements are governed exclusively by the internal, substantive laws and
      judicial interpretations of the State of North Carolina. We express no opinion
      concerning any matter respecting or affected by any laws other than the laws
      that a lawyer in North Carolina exercising customary professional diligence
      would reasonably recognize as being directly applicable to the Company, the
      transactions contemplated by Transaction Agreements or both.

    

    
      
        
          
          

        

        
          C-3

          
            

          

        

        
          
          

        

      

    

    

    

    

    (d)    With
      respect to the opinions expressed in paragraph 7, we bring to your attention
      that the availability of an exemption from the registration requirements of
      the
      Securities Act is dependent upon the existence of facts upon which the exemption
      being claimed is conditioned. In determining the availability of an exemption
      from registration for purposes of this opinion, we have assumed and relied
      upon
      without independent investigation: (i) the accuracy and completeness of the
      information provided by the Company to you in connection with such offer and
      sale and that such information did not include any misstatement of any material
      fact or omit to state any material fact whose omission would be misleading;
      (ii)
      the accuracy and completeness of the representations and warranties made by
      you
      in the Transaction Agreements; (iii) the consummation of the transactions in
      accordance with the Transaction Agreements; (iv) that the offer and sale of
      the
      Shares is not integrated with any other securities offering of the Company;
      (v)
the
      Placement Agent’s compliance with applicable securities laws and regulations
      (including, without limitation, the requirements of Regulation D under the
      Securities Act); (vi)
      that the
      Company will timely file a Form D with the Securities and Exchange Commission
      and applicable state securities commissions and pay all required filing fees;
      and (vii) that no party to the Transaction Agreements will take or omit to
      take
      any action which would cause such offer or sale not to constitute an exempted
      transaction under the Securities Act.

    

    (e)    We
      express no opinion as to the enforceability of the provisions of the Transaction
      Agreements (i) purporting to require a party thereto to pay or reimburse
      attorneys’ fees incurred by another party which provisions may be limited by
      applicable statutes and decisions relating to the collection and award of
      attorneys’ fees, or (ii) requiring waivers or amendments to be made only in
      writing.

    

    (f)    With
      respect to the opinions expressed in paragraph 6 relating to state securities
      laws, we have examined the latest compilations that are available to us of
      the
      applicable securities, or “blue sky,” laws of California, Illinois,
      Massachusetts, New York, and North Carolina only, which are the states in which
      the Shares, to our knowledge, are being offered and sold on the Closing Date,
      and, in certain instances, the regulations issued thereunder, but we have not
      obtained special rulings of the securities commissions or other administrative
      bodies or officials charged with the administration of said laws, nor have
      we
      obtained opinions of local counsel. The interpretation and enforcement of such
      securities laws are subject to broad discretionary powers in the securities
      commissions or other administrative bodies or officials of many jurisdictions
      authorizing them, among other things, to withdraw the exempt status accorded
      to
      particular classes of, and certain transactions in, securities and to impose
      special requirements with respect to sale of any securities. We have advised
      the
      Company to take such actions as were, in our opinion, reasonably necessary,
      if
      any, to secure an exemption from such laws and regulations for such offer,
      issuance and sale.

    

    (g)    We
      have
      assumed with your permission that the actions of the Company and its officers,
      directors and shareholders with respect to the Transaction Agreements and the
      transactions contemplated thereby comply with the applicable provisions and
      standards of Section 144 of the Delaware General Corporation Law. 

    

    
      
        
          
          

        

        
          C-4

          
            

          

        

        
          
          

        

      

    

    

    

    

    In
      addition, we draw to your attention that under various reports and guidelines
      published by committees of the American Bar Association and the North Carolina
      Bar Association, and by the TriBar Opinion Committee, certain assumptions,
      qualifications and exceptions are implicit in opinions of lawyers.

    

    This
      opinion is furnished to the Investors solely for their benefit in connection
      with the purchase of the Shares, and may not be relied upon by any other person
      or for any other purpose without our prior written consent in each instance.
      

    

    We
      bring
      to your attention the fact that our legal opinions are expressions of
      professional judgment and are not a guarantee of a result.

    

    Our
      opinion is as of the date hereof, and we do not undertake to advise you of
      matters that might come to our attention subsequent to the date hereof that
      may
      affect our legal opinions expressed herein.

    

    
      	 	
              Very
                truly yours,

            
	 	 
	 	 
	 	 
	 	
              SMITH,
                ANDERSON, BLOUNT, DORSETT,

            
	 	
              MITCHELL
                & JERNIGAN, L.L.P.

            

    

    

    

    

    

    

    
      
        
          
          

        

        
          C-5

          
            

          

        

        
          
          

        

      

    

    

    Schedule
      1

    

    Investors

    

    Herald
      Investments Management Ltd.

    Magnetar
      Capital Master Fund, Ltd.

    

    

    
      
        
          
          

        

        
          C-6

          
            

          

        

        
          
          

        

      

    

    

    Exhibit
      D

     

    FORM
      OF INTERNAL CORPORATE COUNSEL LEGAL OPINION

     

    

     

     

    February
      [__], 2007

     

    

    To: The
      Investors in Common Stock of Smart Online, Inc. Identified on Schedule 1
      hereto

     

    Ladies
      and Gentlemen:

     

    I
      am the
      corporate legal counsel for Smart Online, Inc., a Delaware corporation (the
      “Company”)
      and am
      delivering this opinion to you in connection with the issuance of 2,352,941
      shares
      (the “Shares”)
      of the
      Company’s Common Stock, $0.001 par value per share, pursuant to Section 2 of
      those certain Securities Purchase Agreements, dated as of February [__] 2007,
      including the annex and exhibits thereto (collectively, the “Agreement”),
      between the Company and the investors identified on Schedule 1 hereto (the
      “Investors”).
      Capitalized terms used herein are as defined in the Agreement unless otherwise
      specifically provided herein.

     

    Based
      upon and subject to the matters set forth above and to the additional
      limitations and qualifications set forth below, I am of the opinion that
      the
      execution, delivery and performance of the Transaction Agreements and the
      issuance and sale of the Shares in accordance with the Agreement will
      not violate
      or conflict with, or constitute a default under any material agreement or
      instrument (limited, with your consent, to agreements filed with the Securities
      and Exchange Commission under the Securities Exchange Act of 1934, as amended,
      and applicable rules and regulations) to which the Company is a party (the
      “Material
      Contracts”).

    

    The
      foregoing opinion is subject to the following limitations and
      qualifications:

    

    (a)    The
      foregoing opinion is subject to the effects of (i) bankruptcy, insolvency,
      reorganization, fraudulent conveyance, receivership, moratorium and other
      similar laws affecting the rights and remedies of creditors generally, now
      or
      hereafter in effect, (ii) general principles of equity whether applied by a
      court of law or equity, and (iii) applicable laws and court decisions, now
      or
      hereafter in effect, that may limit or restrict the enforceability or
      availability of certain terms, provisions, rights or remedies contained in
      the
      Transaction Agreements, but which, in my opinion (subject to the other
      qualifications and exceptions stated elsewhere in this opinion), should not
      make
      them inadequate for the practical realization of the material benefits intended
      to be afforded to the parties thereby.

    

    (b)    The
      Material Contracts are governed by various state laws. In rendering this
      opinion, I have assumed that all the Material Contracts are governed by the
      laws
      of the State of Washington. I express no opinion concerning any matter
      respecting or affected by any laws other than the laws that a lawyer in
      Washington exercising customary professional diligence would reasonably
      recognize as being directly applicable to the Company, the transactions
      contemplated by Transaction Agreements or both.

    

    
      
        
          
          

        

        
          D-1

          
            

          

        

        
          
          

        

      

    

    

    

    

    This
      opinion is furnished to the Investors solely for their benefit in connection
      with the purchase of the Shares, and may not be relied upon by any other person
      or for any other purpose without my prior written consent in each instance.
      

    

    I
      bring
      to your attention the fact that this legal opinion is an expression of
      professional judgment and is not a guarantee of a result.

    

    This
      opinion is as of the date hereof, and I do not undertake to advise you of
      matters that might come to my attention subsequent to the date hereof that
      may
      affect my legal opinion expressed herein.

    

    
      	 	
              Very
                truly yours,

            
	 	 
	 	 
	 	 
	 	
              James
                W. Gayton

            
	 	
              Corporate
                Counsel

            

    

    

    

    
      
        
          
          

        

        
          D-2

          
            

          

        

        
          
          

        

      

    

    

    

    Schedule
      1

    

    Investors

    

    Herald
      Investments Management Ltd.

    Magnetar
      Capital Master Fund, Ltd.

    

     

     

     

     

     

    D-3Exhibit
      10.46.2

    Registration
      Rights Agreement

     

    This
      Registration Rights Agreement (the “Agreement”)
      is made as of the date set forth below between Smart Online, Inc., a Delaware
      corporation (the “Company”),
      and the purchasers of its Common Stock (as defined below) pursuant to a
      Securities Purchase Agreement dated as of the date hereof (each in “Investor”
      and, collectively, the “Investors”).
      Capitalized terms used and not defined herein shall have the respective meanings
      ascribed to them in the Securities Purchase Agreement.

     

    RECITALS

     

    WHEREAS,
      the Company has sold to up to 2,352,941 shares (the “Shares”)
      of its common stock, $0.001 par value per share, (the “Common
      Stock”),
      to certain investors in a private placement (the “Offering”);
      and 

     

    WHEREAS,
      the execution and delivery of this Agreement by the Company is a condition
      to
      the completion of the Offering.

     

    NOW,
      THEREFORE, the parties hereto agree as follows: 

     

    1.    Registration
      Procedures and Expenses.
      The Company shall: 

     

    (a)    subject
      to receipt of necessary information from the Investors, prepare and file with
      the Securities and Exchange Commission (“SEC”),
      within thirty (30) calendar days after the Closing Date (the “Required
      Filing Date”),
      a Registration Statement on Form S-1 to enable the resale of the Shares by
      the
      Investors from time to time;

     

    (b)    use
      its best efforts, subject to receipt of necessary information from the
      Investors, to cause the Registration Statement to become effective as soon
      as
      practicable, but in no event later than sixty (60) days after the actual filing
      date of the Registration Statement with the SEC (the “Actual
      Filing Date”)
      or ninety (90) days after the Actual Filing Date if the Registration Statement
      is reviewed by the SEC (the “Required
      Effective Date”).
      If the Registration Statement (i) has not been filed by the Required Filing
      Date
      or (ii) has not been declared effective by the SEC on or before the Required
      Effective Date, then the Company shall on the first business day after the
      Required Filing Date if not filed or the Required Effective Date if not declared
      effective, as the case may be, make
      a payment to the Investor as compensation for such delay an amount equal to
      one
      percent (1%) of the Purchase Price paid for the Shares purchased by the
      Investor,
      and on each 30th
      day anniversary thereafter make a payment to the Investor as compensation for
      such delay an amount equal to one-half percent (0.5%) of the Purchase Price
      paid
      for the Shares purchased by the Investor (collectively, the “Late
      Registration Payments”),
      until the Registration Statement is filed or declared effective by the SEC.
      Notwithstanding the foregoing, in no event shall the total of all Late
      Registration Payments exceed in the aggregate ten percent (10%) of such Purchase
      Price. Late Registration Payments, if any, will be prorated on a daily basis
      and
      will be paid to Investor by wire transfer or check within five (5) Business
      Days
      after the date that each payment is due; 

     

    (c)    use
      its commercially reasonable best efforts to prepare and file with the SEC such
      amendments and supplements to the Registration Statement and the Prospectus
      as
      may be necessary to keep the Registration Statement current and effective for
      a
      period ending on the earlier of (i) the date as all of the Investor’s Shares
      shall have been sold, (ii) the date on which the Investor may sell Shares
      pursuant to paragraph (k) of Rule 144 under the Securities Act or any successor
      rule (“Rule
      144”)
      or (iii) such time as all Shares purchased by such Investor in this Offering
      have been sold pursuant to a registration statement or Rule 144, and to notify
      each Investor promptly upon the Registration Statement and each post-effective
      amendment thereto, being declared effective by the SEC; 

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    (d)    furnish
      to the Investor such number of copies (in paper or electronic version) of the
      Registration Statement and
      the Prospectus (including
      supplemental prospectuses), as the Investor may reasonably request, in order
      to
      facilitate the public sale or other disposition of all or any of the Shares
      by
      the Investor; 

     

    (e)    file
      documents required of the Company for normal blue sky clearance in states
      specified in writing by the Investor; provided, however, that the Company shall
      not be required to qualify to do business or consent to service of process
      in
      any jurisdiction in which it is not now so qualified or has not so consented;
      

     

    (f)    bear
      all expenses (other than underwriting discounts and commissions, if any) in
      connection with the procedures in paragraph (a) through (e) of this Section
      1
      and the registration of the Shares pursuant to the Registration Statement;
      

     

    (g)    advise
      the Investors, promptly after it shall receive notice or obtain knowledge of
      the
      issuance of any stop order by the SEC delaying or suspending the effectiveness
      of the Registration Statement or of the initiation of any proceeding for that
      purpose; and it will promptly use its commercially reasonable efforts to prevent
      the issuance of any stop order or to obtain its withdrawal at the earliest
      possible moment if such stop order should be issued; and

     

    (h)    with
      a view to making available to the Investor the benefits of Rule 144 or other
      rule that may permit the Investor to sell Shares without registration, the
      Company agrees to use its commercially reasonable efforts to: (i) make and
      keep
      public information available, as those terms are understood and defined in
      Rule
      144, until the earlier of (A) such date as all of the Investor’s Shares may be
      resold pursuant to Rule 144(k) or (B) such date as all of the Investor’s Shares
      shall have been sold; (ii) file with the SEC in a timely manner all reports
      and
      other documents required of the Company under the Securities Act and under
      the
      Exchange Act; and (iii) furnish to the Investor upon request a written statement
      that the Company has complied with the reporting requirements of the Securities
      Act and the Exchange Act, a copy (in paper or electronic version) of the
      Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form
      10-Q, and (C) such other information as may be reasonably requested that permits
      the selling of any such Shares without registration.

     

    It
      shall be a condition precedent to the obligations of the Company to take any
      action pursuant to this Section 1 that the Investor shall furnish to the Company
      such information and representations regarding Investor, the Shares to be sold
      by Investor, and the intended method of disposition of such securities as shall
      be required to effect the registration of the Shares and/or sale under Rule
      144.

     

    The
      Company understands that the Investor disclaims being an underwriter, but
      acknowledges that a determination by the SEC that the Investor is deemed an
      underwriter shall not relieve the Company of any obligations it has hereunder.
      The Company and the Investor agree and acknowledge that each Investor
      individually negotiated the terms of the transactions contemplated hereby and
      are of
      the view that the Investors are not acting as a “group” for purposes of Section
      13(d) under the Exchange Act.

     

    2.    Transfer
      of Shares After Registration; Suspension. 

     

    (a)    The
      Investor agrees that it will not effect any disposition or other transfer of
      the
      Shares or its right to purchase the Shares that would constitute a sale within
      the meaning of the Securities Act other than transactions exempt from the
      registration requirements of the Securities Act, as contemplated in the
      Registration Statement and as described below, and that it will promptly notify
      the Company of any material changes in the information set forth in the
      Registration Statement regarding the Investor or its plan of distribution.
      

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    (b)    Except
      in the event that paragraph (c) below applies, the Company shall: (i) if deemed
      necessary by the Company, prepare and file from time to time with the SEC a
      post-effective amendment to the Registration Statement or a supplement to the
      related Prospectus or a supplement or amendment to any document incorporated
      therein by reference or file any other required document so that such
      Registration Statement will not contain an 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, and so that, as thereafter delivered
      to purchasers of the Shares being sold thereunder, such Prospectus will not
      contain an 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,
      in
      light of the circumstances under which they were made, not misleading; (ii)
      provide the Investor with either copies of any documents filed pursuant to
      Section 2(b)(i) or access to such documents electronically; and (iii) upon
      request, inform each Investor who so requests that the Company has complied
      with
      its obligations in Section 2(b)(i) (or that, if the Company has filed a
      post-effective amendment to the Registration Statement which has not yet been
      declared effective, the Company will notify the Investor to that effect, will
      use its best efforts to secure the effectiveness of such post-effective
      amendment as promptly as possible and will promptly notify the Investor pursuant
      to Section 2(b)(i) hereof when the amendment has become effective).

     

    (c)    Subject
      to paragraph (d) below, in the event: (i) of any request by the SEC or any
      other
      federal or state governmental authority during the period of effectiveness
      of
      the Registration Statement for amendments or supplements to the Registration
      Statement or related Prospectus or for additional information; (ii) of the
      issuance by the SEC or any other federal or state governmental authority of
      any
      stop order suspending the effectiveness of the Registration Statement or the
      initiation of any proceedings for that purpose; (iii) of the receipt by the
      Company of any notification with respect to the suspension of the qualification
      or exemption from qualification of any of the Shares for sale in any
      jurisdiction or the initiation of any proceeding for such purpose; or (iv)
      of
      any event or circumstance which necessitates the making of any material changes
      in the Registration Statement or Prospectus, or any document incorporated or
      deemed to be incorporated therein by reference, so that, in the case of the
      Registration Statement, it will 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, and that in the case of the
      Prospectus, it will 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, in the light of the circumstances under which they were
      made, not misleading; then the Company shall promptly deliver a certificate
      in
      writing or electronically to the Investor (the “Suspension
      Notice”)
      to the effect of the foregoing and, upon receipt of such Suspension Notice,
      the
      Investor will refrain from selling any Shares pursuant to the Registration
      Statement (a “Suspension”)
      until the Investors are advised in writing by the Company that the current
      Prospectus may be used, and has received copies of any additional or
      supplemental filings that are incorporated or deemed incorporated by reference
      in any such Prospectus. Notwithstanding the foregoing, the right of the Company
      to implement a Suspension shall be limited to two such Suspensions in any
      twelve-month period, each of which may not exceed 45 days. In the event of
      any
      Suspension, the Company will use its reasonable best efforts to cause the use
      of
      the Prospectus so suspended to be resumed as soon as reasonably practicable
      after delivery of a Suspension Notice to the Investors. In addition to and
      without limiting any other remedies (including, without limitation, at law
      or at
      equity) available to the Investor, the Investor shall be entitled to specific
      performance in the event that the Company fails to comply with the provisions
      of
      this Section 2(c). The Investor covenants that from the date hereof it will
      maintain in confidence the receipt and content of any Suspension Notice provided
      in accordance with this paragraph (c) in accordance with and subject to Section
      4.6 of Annex I to the Securities Purchase Agreement.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (d)    If
      a Suspension is not then in effect, the Investor may sell Shares under the
      Registration Statement, provided that it complies with any applicable prospectus
      delivery requirements. Upon receipt of a request therefor, the Company will
      provide an adequate number of current Prospectuses to the Investor and to any
      other parties requiring such Prospectuses. 

     

    (e)    The
      Company agrees that it shall, upon the Registration Statement being declared
      effective, deliver to its transfer agent an opinion letter of counsel, opining
      that the transfer agent shall issue certificates representing such Shares
      without restrictive legend, provided that the Investor undertakes that the
      Shares will be sold only pursuant to the Prospectus contained in an effective
      Registration Statement. Upon receipt of such opinion, the Company shall cause
      the transfer agent to confirm, for the benefit of the Investor, that no further
      opinion of counsel is required at the time of transfer in order to issue such
      Shares without restrictive legend.

     

    The
      Company shall cause
      its transfer agent to issue
      a certificate without any restrictive legend to a purchaser of any Shares from
      the Investor at Investor’s expense and upon request of Investor, if (a) the sale
      of such Shares is registered under the Registration Statement (including
      registration pursuant to Rule 415 under the Securities Act); (b) the holder
      has
      provided the Company with an opinion of counsel, in form, substance and scope
      customary for opinions of counsel in comparable transactions, to the effect
      that
      a public sale or transfer of such Shares may be made without registration under
      the Securities Act; or (c) such Shares are sold in compliance with Rule 144
      under the Securities Act. In addition, the Company shall, at the Investors
      expense and upon request of the Investor, remove the restrictive legend from
      any
      Shares held by the Investor following the expiration of the holding period
      required by Rule 144(k) under the Securities Act (or any successor rule).

    

    3.    Indemnification.
      For
      the purpose of this Section 3:

     

    (a)    the
      term “Selling
      Shareholder”
      shall mean the Investor and each person, if any, who controls the Investor
      within the meaning of Section 15 of the Securities Act or Section 20 of the
      Exchange Act; 

     

    (b)    the
      term “Registration
      Statement”
      shall mean the final Prospectus, supplement or amendment thereto (or deemed
      to
      be a part thereof) referred to in Section 1; and 

     

    (c)    the
      term “untrue
      statement”
      shall mean any material untrue statement, or any material omission of a
      statement of a material fact required to be made therein or necessary to make
      the statements therein, in the light of the circumstances under which they
      were
      made, not materially misleading.

     

    (d)    (i)    The
      Company agrees to indemnify and hold harmless each Selling Shareholder from
      and
      against any losses, or damages to which such Selling Shareholder may incur
      (under the Securities Act or otherwise) insofar as such losses or damages arise
      out of (i) any untrue statement of a material fact contained in the Registration
      Statement, or (ii) any inaccuracy in the representations of the Company
      contained in this Agreement. The Company will reimburse such Selling Shareholder
      for any reasonable legal expense incurred or any out of pocket expenses
      reasonably incurred in defending any such claim or action; provided, however,
      that the Company shall not be liable in any such case to the extent that such
      loss or damage arises out of, or is based upon, an untrue statement made in
      such
      Registration Statement in reliance upon and in conformity with written
      information furnished to the Company by or on behalf of such Selling Shareholder
      for use in preparation of the Registration Statement, or any inaccuracy in
      representations made by such Selling Shareholder in the Investor Questionnaire
      or the failure of such Selling Shareholder to comply with its covenants and
      agreements contained in Sections in this Agreement or contained in the
      Securities Purchase Agreement or any statement or omission in any Prospectus
      that is corrected in any subsequent Prospectus that was delivered to the Selling
      Shareholder prior to the pertinent sale or sales by the Selling Shareholder.
      The
      obligation to indemnify shall be limited to the net amount of the proceeds
      received by the Company from the Investor as a result of the
      Offering.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    (ii)       
      The
      Investor agrees to indemnify and hold harmless the Company (and each person,
      if
      any, who controls the Company within the meaning of Section 15 of the Securities
      Act, each officer of the Company who signs the Registration Statement and each
      director of the Company) from and against any losses or damage to which the
      Company (or any such officer, director or controlling person) may become subject
      (under the Securities Act or otherwise), insofar as such loss or damage (or
      actions or proceedings in respect thereof) arise out of, or are based upon,
      (i)
      any failure to comply with the covenants and agreements contained in this
      Agreement or of the Securities Purchase Agreement or (ii) any untrue statement
      of a material fact contained in the Registration Statement if, and only if,
      such
      untrue statement was made in reliance upon and in conformity with written
      information furnished by or on behalf of the Investor specifically for use
      in
      preparation of the Registration Statement. The Investor will reimburse the
      Company (or such officer, director or controlling person), as the case may
      be,
      for any reasonable legal expense or other actual accountable out-of-pocket
      expenses reasonably incurred in defending any such claim, action or proceeding.
      The obligation to indemnify shall be limited to the net amount of the proceeds
      received by the Investor from the sale of the Shares pursuant to the
      Registration Statement.

     

    (iii)      
      Promptly
      after receipt by any indemnified person of a notice of a claim or the beginning
      of any action in respect of which indemnity is to be sought against an
      indemnifying person pursuant to this Section 3, such indemnified person shall
      notify the indemnifying person in writing of such claim or of the commencement
      of such action, but the omission to so notify the indemnifying party will not
      relieve it from any liability which it may have to any indemnified party under
      this Section 3 (except to the extent that such omission materially and adversely
      affects the indemnifying party’s ability to defend such action) or from any
      liability otherwise than under this Section 3. Subject to the provisions
      hereinafter stated, in case any such action shall be brought against an
      indemnified person, the indemnifying person shall be entitled to participate
      therein, and, to the extent that it shall elect by written notice delivered
      to
      the indemnified party promptly after receiving the aforesaid notice from such
      indemnified party, shall be entitled to assume the defense thereof, with counsel
      reasonably satisfactory to such indemnified person. After notice from the
      indemnifying person to such indemnified person of its election to assume the
      defense thereof (unless it has failed to assume the defense thereof and appoint
      counsel reasonably satisfactory to the indemnified party), such indemnifying
      person shall not be liable to such indemnified person for any legal expenses
      subsequently incurred by such indemnified person in connection with the defense
      thereof; provided, however, that if there exists or shall exist a conflict
      of
      interest that would make it inappropriate, in the reasonable opinion of counsel
      to the indemnified person, for the same counsel to represent both the
      indemnified person and such indemnifying person or any affiliate or associate
      thereof, the indemnified person shall be entitled to retain its own counsel
      at
      the expense of such indemnifying person; provided, however, that no indemnifying
      person shall be responsible for the fees and expenses of more than one separate
      counsel (together with appropriate local counsel) for all indemnified parties.
      In no event shall any indemnifying person be liable in respect of any amounts
      paid in settlement of any action unless the indemnifying person shall have
      approved the terms of such settlement; provided that such consent shall not
      be
      unreasonably withheld. No indemnifying person shall, without the prior written
      consent of the indemnified person, effect any settlement of any pending or
      threatened proceeding in respect of which any indemnified person is or could
      reasonably have been a party and indemnification could have been sought
      hereunder by such indemnified person, unless such settlement includes an
      unconditional release of such indemnified person from all liability on claims
      that are the subject matter of such proceeding.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (iv)    If
      the indemnification provided for in this Section 3 is unavailable to or
      insufficient to hold harmless an indemnified party under paragraphs 3(d)(i)
      or
      3(d)(ii) above in respect of any loss or damage (or actions or proceedings
      in
      respect thereof) referred to therein, then each indemnifying party shall
      contribute to the amount paid or payable by such indemnified party as a result
      of such loss or damage (or actions in respect thereof) in such proportion as
      is
      appropriate to reflect the relative fault of the Company on the one hand and
      the
      Investor on the other in connection with the statements or omissions or other
      matters which resulted in such loss or damage (or actions in respect thereof),
      as well as any other relevant equitable considerations. The relative fault
      shall
      be determined by reference to, among other things, in the case of an untrue
      statement, whether the untrue statement relates to information supplied by
      the
      Company on the one hand or the Investor on the other and the parties’ relative
      intent, knowledge, access to information and opportunity to correct or prevent
      such untrue statement. The Company and the Investor agree that it would not
      be
      just and equitable if contribution pursuant to this subsection (d) were
      determined by pro rata allocation (even if the Investors were treated as one
      entity for such purpose) or by any other method of allocation which does not
      take into account the equitable considerations referred to above in this
      subsection (d). The amount paid or payable by an indemnified party as a result
      of the loss or damage (or actions in respect thereof) referred to above in
      this
      subsection (d) shall be deemed to include any reasonable legal fees incurred
      by
      such indemnified party in connection with defending any such action or claim.
      Notwithstanding the provisions of this subsection (d), the Investor shall not
      be
      required to contribute any amount in excess of the amount by which the gross
      amount received by the Investor from the sale of the Shares to which such loss
      relates exceeds the amount of any damages which the Investor has otherwise
      been
      required to pay by reason of such untrue statement. No person guilty of
      fraudulent misrepresentation (within the meaning of Section 11(f) of the
      Securities Act) shall be entitled to contribution from any person who was not
      guilty of such fraudulent misrepresentation. The Investors’ obligations in this
      subsection to contribute are several in proportion to their sales of Shares
      to
      which such loss relates and not joint.

     

    (e)    The
      parties to this Agreement hereby acknowledge that they are sophisticated
      business persons who were represented by counsel during the negotiations
      regarding the provisions hereof including, without limitation, the provisions
      of
      this Section 3, and are fully informed regarding said provisions. They further
      acknowledge that the provisions of this Section 3 fairly allocate the risks
      in
      light of the ability of the parties to investigate the Company and its business
      in order to assure that adequate disclosure is made in the Registration
      Statement as required by the Securities Act and the Exchange Act.

     

    4.    Termination
      of Conditions and Obligations. The
      conditions precedent imposed by Section 4 of the Securities Purchase Agreement
      or this Agreement upon the transferability of the Shares shall cease and
      terminate as to any particular number of the Shares when such Shares shall
      have
      been effectively registered under the Securities Act and sold or otherwise
      disposed of in accordance with the intended method of disposition set forth
      in
      the Registration Statement covering such Shares or at such time as an opinion
      of
      counsel satisfactory to the Company shall have been rendered to the effect
      that
      such conditions are not necessary in order to comply with the Securities Act.
      

     

    5.    Information
      Available. So
      long as the Registration Statement is effective covering the resale of Shares
      owned by the Investor, the Company will furnish (or, to the extent such
      information is available electronically through the Company’s filings with the
      SEC, the Company will make available) to the Investor: 

     

    (a)    as
      soon as practicable after it is available, one copy of (i) its Annual Report
      to
      Shareholders (which Annual Report shall contain financial statements audited
      in
      accordance with generally accepted accounting principles by a national firm
      of
      certified public accountants) and (ii) if not included in substance in the
      Annual Report to Shareholders, its Annual Report on Form 10-K (the foregoing,
      in
      each case, excluding exhibits); and,

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    (b)    upon
      the reasonable request of the Investor, an adequate number of copies of the
      Prospectuses to supply to any other party requiring such Prospectuses either
      in
      printed or electronic form.

     

    6.    Limits
      on Additional Issuances.
      Except for the issuance of stock options under the Company’s stock option plan,
      the issuance of warrants to purchase the Company’s common stock, or the issuance
      of common stock under
      the Company’s employee stock purchase plan or upon
      exercise of outstanding options and warrants and the offering contemplated
      hereby, the Company will not, for a period of three (3) months following the
      Closing Date, offer for sale or sell any securities unless, in the opinion
      of
      the Company’s counsel, such offer or sale does not jeopardize the availability
      of exemptions from the registration and qualification requirements under
      applicable securities laws with respect to the Offering. The foregoing shall
      not
      apply to securities issued in connection with any acquisition, including by
      way
      of merger, or purchase of stock or all or substantially all of the assets of
      any
      third party. The foregoing provisions shall not prevent the Company from filing
      a “shelf” registration statement pursuant to Rule 415 under the Securities Act,
      but the foregoing provisions shall apply to any sale of securities
      thereunder.

     

    7.    Notices.
      All
      notices, requests, consents and other communications hereunder shall be in
      writing, shall be delivered (A) if within the United States, by first-class
      registered or certified airmail, or nationally recognized overnight express
      courier, postage prepaid, or by facsimile, or (B) if from outside the United
      States, by International Federal Express (or comparable service) or facsimile,
      and shall be deemed given (i) if delivered by first-class registered or
      certified mail domestic, upon the Business Day received, (ii) if delivered
      by
      nationally recognized overnight carrier, one (1) Business Day after timely
      delivery to such carrier, (iii) if delivered by International Federal Express
      (or comparable service), two (2) Business Days after timely delivery to such
      carrier, (iv) if delivered by facsimile, upon electric confirmation of receipt
      and shall be addressed as follows, or to such other address or addresses as
      may
      have been furnished in writing by a party to another party pursuant to this
      paragraph: 

     

    (a)        
      if
      to the Company, to:

     

    Smart
      Online, Inc

    2530
      Meridian Parkway, 2nd
      Floor

    Durham,
      NC 27713

    Attention: James
      Gayton, Corporate Counsel

    Telephone: 
      (919) 765-5000

    

    with
      a copy to:.

    Smith,
      Anderson, Blount, Dorsett, 

    Mitchell
      & Jernigan, LLP

    2500
      Wachovia Capitol Center

    Raleigh,
      North Carolina 27602-2611

    Attention:
      Margaret N. Rosenfeld

    Telephone: (919)
      821-6714

    

    (b)       
      if
      to the Investor, at its address on the signature page to the Stock Purchase
      Agreement.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    8.    Amendments;
      Waiver. This
      Agreement may not be modified or amended except pursuant to an instrument in
      writing signed by the Company and the Investor. Any waiver of a provision of
      this Agreement must be in writing and executed by the party against whom
      enforcement of such waiver is sought.

     

    9.    Headings.
      The
      headings of the various sections of this Agreement have been inserted for
      convenience of reference only and shall not be deemed to be part of this
      Agreement. 

     

    10.       
      Entire
      Agreement; Severability. This
      Agreement sets forth the entire agreement and understanding of the parties
      relating to the subject matter hereof and supersedes all prior and
      contemporaneous agreements, negotiations and understandings between the parties,
      both oral and written relating to the subject matter hereof. If any provision
      contained in this Agreement is determined to be invalid, illegal or
      unenforceable in any respect, the validity, legality and enforceability of
      the
      remaining provisions contained herein shall not in any way be affected or
      impaired thereby. 

     

    11.       
      Governing
      Law. This
      Agreement shall be governed by, and construed in accordance with, the internal
      laws of the State of Delaware,
      without giving effect to the principles of conflicts of law. 

     

    12.       
      Counterparts.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      constitute an original, but all of which, when taken together, shall constitute
      but one instrument, and shall become effective when one or more counterparts
      have been signed by each party hereto and delivered to the other
      parties.

     

    

     

    

     

    [Remainder
      of Page Intentionally Left Blank]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    Please
      confirm that the foregoing correctly sets forth the agreement between us by
      signing in the space provided below for that purpose.

     

    

    
      	 	
              ____________________________

              By:
                _________________________

              Its:
                _________________________

              

              ____________________

              By:
                

              Its:
                

              

               

              

               

              Address:  ___________________

                            
                ___________________

            

    

     

    

     

    AGREED
      AND ACCEPTED:

    

    SMART
      ONLINE, INC.

     

    

     

    By:
      ____________________________

    Name:

    Title:
      

    

    

    Dated
      as of:
      February
      __, 2007

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