SMART ONLINE INC (Form: 10-K, Received: 07/11/2006 15:54:26)

SUBSCRIPTION AGREEMENT

Smart Online, Inc.

2530 Meridian Parkway

2 ^nd Floor

Durham, North Carolina 27713

Attention: Michael Nouri

Gentlemen:

(1) Pursuant to prior understandings and discussions, the undersigned (“Subscriber”) hereby agrees to purchase from Smart Online, a Delaware corporation (the “Company”), for a purchase price of Five Dollars and Fifty Cents ($5.50) per share the number of shares of Common Stock, par value $0.001 per share (“Common Stock”) set forth on the signature page of this Agreement. (The Common Stock is sometimes hereinafter referred to collectively as the “Securities.”) Subscriber hereby acknowledges (i) that this subscription shall not be deemed to have been accepted by the Company until the Company indicates its acceptance by returning to Subscriber an executed copy of this subscription, and (ii) that acceptance by the Company of this subscription is conditioned upon the information and representations of Subscriber hereunder being complete, true and correct as of the date of this subscription and as of the date of closing of sale of the Securities to Subscriber. As a condition to Subscriber’s purchase of the Securities pursuant to this Agreement, Subscriber and the Company will execute and deliver to one another a copy of the Registration Rights Agreement in substantially the form attached hereto as Appendix A (the “Registration Rights Agreement”) and a Dribble Out Agreement in the form attached hereto as Appendix B (the “Dribble Out Agreement”).

(2) Until actual delivery of the purchase price to the Company and acceptance by the Company of the purchase price and this Subscription Agreement, the Company shall have no obligation to Subscriber. The Company may revoke a prior acceptance of this Subscription Agreement at any time prior to delivery to and acceptance by the Company of the purchase price for the Securities.

(3) Subscriber hereby represents and warrants to the Company as follows:

(a) Disclosure . Subscriber has carefully reviewed the Summary Private Placement Memorandum and Draft Registration Statement, including financial information, provided by the Company, including all risk factors, and fully understands all risks associated with investment in the Company, including, without limitation, the risks posed by prior disclosures made by the company to its shareholders and investors in connection with a reorganization and private placement, and the remedies such shareholders have, including the company’s planned rescission offer.

affecting enforcement of creditors’ rights generally, and (ii) general principals of equity, the application of which may deny the Company the right to specific performance, injunctive relief and other equitable remedies.

(c) Experience . Subscriber is experienced in evaluating and investing in private placement transactions of securities of technology companies such as the Company, has such knowledge and experience in financial and business matters that Subscriber is capable of evaluating the merits and risks of Subscriber’s investment in the Securities, is able to bear the economic risk of the investment and is prepared to hold the shares for an indefinite period of time.

(d) Investment . Subscriber is acquiring the Securities for investment for Subscriber’s own account and not with a view to, or for resale in connection with, any distribution thereof, and Subscriber has no present intention of selling or distributing the Securities. Subscriber does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person with respect to any of the Securities other than as set forth in this Agreement. Subscriber understands that the Securities to be purchased by Subscriber have not been registered under the Securities Act of 1933, as amended (the “Act”) by reason of a specific exemption from the registration provisions of the Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.

(e) Reliance Upon Subscriber Representations . Subscriber understands that the Securities are not registered under the Act on the grounds that the sale provided for in this Agreement and the issuance of Securities hereunder is being made in reliance upon an exemption from the registration requirements of the Act pursuant to Section 4(2) thereof as a transaction by an issuer of Securities not involving a public offering or pursuant to Section 4(6) thereof as a transaction by an issuer of securities solely to accredited investors, and is similarly exempt under applicable state securities laws, and that the Company’s reliance on such exemption is predicated on Subscriber’s representations as set forth in this Agreement.

(f) Restricted Securities . Subscriber acknowledges that the Securities have not been registered under the Act or any applicable state securities law and that the Securities may not be sold, assigned, pledged, hypothecated or transferred, unless there exists an effective registration statement therefor under the Act and all applicable state securities laws or the Company has received an opinion of counsel, reasonably acceptable to counsel for the Company, or other reasonable assurances, that such sale, assignment, pledge, hypothecation or transfer is exempt from registration. Subscriber understands that in the absence of an effective registration statement covering the Securities or an exemption therefrom under the Act and all applicable state securities laws, the Securities must be held indefinitely. In particular, Subscriber is aware that the Securities may not be sold pursuant to Rule 144 promulgated under the Act, unless all conditions of Rule 144 are met. Among the conditions for the use of Rule 144 may be the availability of current and adequate information to the public about the Company. Such information is not now available and, except as set forth in the Registration Rights Agreement, the Company has no obligation to make such information available. Notwithstanding the foregoing, no opinion of counsel shall be required by the Company in connection with the transfer of the Securities to an entity that is a direct or indirect wholly-owned subsidiary of Subscriber.

(g) Legends .

(i) Each certificate representing the Securities shall, in addition to any legends required elsewhere, bear the following legend as appropriate for stock certificates and warrant agreements:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR TRANSFERRED UNLESS THERE EXISTS AN EFFECTIVE REGISTRATION STATEMENT THEREFOR UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR THE ISSUER HEREOF HAS RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL OF THE ISSUER, THAT SUCH SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR TRANSFER IS EXEMPT FROM REGISTRATION.

(ii) Each certificate representing Securities shall also bear any legend required by any applicable state securities law or by any other agreement to which the holder thereof is a party or by which the holder thereof is bound.

(h) No Public Market . Subscriber understands that no public market now exists for any of the securities issued by the Company and that it is uncertain whether a public market will ever exist for the Securities.

(i) Access to Information . Subscriber has received all information that Subscriber considers necessary or appropriate for deciding whether to purchase Securities. Subscriber has had an opportunity to ask questions and receive answers from the Company’s management regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company and to obtain additional information from the Company (to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Subscriber or to which Subscriber had access.

(j) Accredited Investor . Subscriber recognizes it is important under the Act and state securities law that the Company determine if potential investors are “accredited investors,” as defined in Appendix C attached hereto. Subscriber represents that Subscriber is an “accredited investor” by reason of the following: __________________________________ (indicate number from Appendix C ). Subscriber further represents that Subscriber is a citizen of the state of _______________________. Subscriber is not a resident of any other jurisdiction.

(4) The representations, warranties, understandings, acknowledgments and agreements in this Agreement are true and accurate as of the date hereof, shall be true and accurate as of the date of the acceptance hereof by the Company and shall survive thereafter.

(5) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of Delaware, as such laws are applied by Delaware courts to agreements entered into and to be performed in Delaware, and shall be binding upon Subscriber, the Subscriber’s heirs, estate, legal representatives, successors and assigns and shall inure to the benefit of the Company and its successors and assigns.

(6) Subscriber agrees not to transfer or assign this Agreement, or any of Subscriber’s interest herein, without the express written consent of the Company.

(7) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous representations, warranties, agreements and understandings in connection therewith. This Agreement may be amended only by a writing executed by all parties hereto. This Agreement may be executed in one or more counterparts.

(The remainder of this page is intentionally left blank.)

IN WITNESS WHEREOF, Subscriber has executed this Subscription Agreement this 26th day of August, 2005.

SUBSCRIPTION

181,820	Number of Shares of Common Stock

$1,000,010	Total payment enclosed



______________________________	Atlas Capital SA as Designee of Credit Suisse Zuruich
(Address)	(Name of Subscriber)

SWEC 18	/s/ Moise Dwek /s/ Avy Lugassy
Paradeplatz 8	(Signature)
P.O. Box 500
CH - 8070 Zurich	Credit Suisse Zurich
(Address)
_______________________

Social Security Number

ACCEPTANCE

The foregoing Subscription Agreement is accepted on this the 7th day of September, 2005.

	SMART ONLINE, INC.


	By: /s/ Michael Nouri
	Michael Nouri, President

APPENDIX A

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of August _____, 2005, by and among Smart Online, Inc., a Delaware corporation with its headquarters located at 2530 Meridian Parkway, Durham, North Carolina 27713 (the “Company”), and the undersigned (together with its affiliates and any assignees or transferees of all of its respective rights hereunder, the “Investors”).

WHEREAS:

A. In connection with the Subscription Agreement by and among the parties hereto dated as of the date hereof (the “Subscription Agreement”), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Investors shares of the Company’s common stock (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Subscription Agreement; and

B. To induce the Investors to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws;

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Investors hereby agree as follows:

1. DEFINITIONS.

(a) As used in this Agreement, the following terms shall have the following meanings:

(i) “Investors” means any person who acquires shares of Common Stock of the Company, or any security of the Company pursuant to which the holder has a right to receive shares of Common Stock of the Company upon exercise or conversion of such security, who agrees to become bound by the provisions of this Agreement or a counterpart of this Agreement, and permitted transfers and assignees of Investors in accordance with Section 9 hereof.

(ii) “Listing Date” the date on which the Common Stock of the Company becomes listed on the OTCBB.

(iii) “OTCBB” the Over-the-Counter Bulletin Board.

(iv) “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the “SEC”).

(v) “Registrable Securities” means (x) all shares of Common Stock sold by the Company pursuant to the Subscription Agreement or pursuant to a warrant issued to Investor at the time of purchase of such shares of common stock; and (z) all shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to the foregoing.

(vi) “Registration Statement” means a registration statement of the Company under the 1933 Act.

(b) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Subscription Agreement.

2. REGISTRATION.

(a) Mandatory Registration . No later than September 30, 2005 (the “Target Filing Date”), the Company shall prepare and file with the SEC a Registration Statement on Form S-1, SB-1 or SB-2 as determined by the Company in its sole discretion (or, if such Forms are not then available, on such form of Registration Statement as is then available) to effect a registration of the Registrable Securities covering the resale of the Registrable Securities. The Company may also include in such Registration Statement in its sole discretion, shares for sale by the Company or the Company may file a separate Registration Statement covering shares to be sold by the Company before, at the same time or after the Company files a Registration Statement covering resale of Registrable Securities by Investors.

(b) Payments by the Company . The Company shall use its best efforts to obtain effectiveness of the Registration Statement as soon as reasonably practicable. If (i) the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not filed by the Target Filing Date, then the Company will make payments to the Investors in such amounts and at such times as shall be determined pursuant to this Section 2(b) as liquidated damages by reason of any such delay in their ability to sell the Registrable Securities (which remedy shall be exclusive of any other remedies available at law or in equity). The Company shall pay to each holder of Registrable Securities an amount (the “Damage Amount”) equal to the product obtained by multiplying (i) the purchase price (the “Purchase Price”) paid for the Registrable Securities by the Investor, by (ii) the Applicable Percentage (as defined below) by (iii) the number of 30-day periods (prorated for partial periods) after the Target Filing Date that the Registration Statement covering the Registrable Securities of the Investor is actually filed; provided, however, that there shall be excluded from such period any delays which are attributable (i) to Investor, or any other Investor who holds Registrable

Securities, with respect to information relating to the Investors, including, without limitation, the plan of distribution or beneficial ownership of securities, or (ii) to the failure of any Investor (or legal counsel to the Investor) to conduct their review of the Registration Statement pursuant to Section 3(h) below in a reasonably prompt manner or (iii) any person or entity named in the Prospectus as an underwriter. The term “Applicable Percentage” means one half of one percent. (For example, if the Registration Statement is filed thirty days after the Target Filing Date, the Company would pay as the Damage Amount $500 for each $100,000 of the Purchase Price. In the sole discretion of the Company, the Company may issue to Investor in lieu of the cash payment described above, a number of shares of Common Stock of the Company equal to the quotient derived by dividing (i) the Damage Amount, by (ii) Purchase Price per share (as defined above).

(c) Eligibility for Form S-3; Conversion to Form S-3 . If the Company meets the registration eligibility and transaction requirements for the use of Form S-3 (or any successor form) for registration of the offer and sale by the Investor and any other Investors of their Registrable Securities before the earlier of the dates stated in clauses (ii) and (iii) in the definition of the Registration Period (as defined in Section 3(a) below), the Company shall file a Registration Statement on Form S-3 (or such successor form) with respect to the Registrable Securities covered by the Registration Statement, filed pursuant to Section 2(a) (and include in such Registration Statement on Form S-3 the information required by Rule 429 under the 1933 Act) or convert the Registration Statement, filed pursuant to Section 2(a) to a Form S-3 pursuant to Rule 429 under the 1933 Act and cause such Registration Statement (or such amendment) to be declared effective as soon as practicable after filing. If the Company becomes eligible to use Form S-3 during the Registration Period, the Company agrees to use reasonable efforts to file all reports required to be filed by the Company with the SEC in a timely manner so as to remain eligible or become eligible, as the case may be, and thereafter to maintain its eligibility, for the use of Form S-3. After such Registration Statement on Form S-3 become effective, subject to Section 3 hereof, the Company shall maintain such Registration Statement in effect until the earlier of clauses (ii) and (iii) in the definition of Registration Period in Section 3(a) hereof.

3. OBLIGATIONS OF THE COMPANY.

In connection with the registration of the Registrable Securities, the Company shall have the following obligations:

(a) The Company shall prepare promptly, and use reasonable efforts to file with the SEC not later than the Target Filing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter use its best efforts to cause such Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing, and use reasonable efforts to keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) 270 days after the effective date of the Registration Statement; (ii) the date on which all of the Registrable Securities have been sold by Investor and (iii) the date on which the Registrable Securities of Investor (in the opinion of counsel to the Company) may be immediately sold to the public without registration or restriction (including without limitation as to volume by Investor) under the 1933 Act (the “Registration Period”), which Registration Statement (including any

amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading. The right of other Investors to have the Registration Statement remain in effect shall not confer any rights on Investor.

(b) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investor as set forth in the Registration Statement.

(c) If requested, the Company shall furnish to one legal counsel for all Investors whose Registrable Securities are included in a Registration Statement (i) promptly (but in no event more than two (2) business days) after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of each Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, and, in the case of the Registration Statement referred to in Section 2(a), each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii) promptly (but in no event more than two (2) business days) after the Registration Statement is declared effective by the SEC, such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by Investor. The Company will immediately notify one legal counsel representing all Investors where Registrable Securities are included in a Registration Statement by facsimile of the effectiveness of each Registration Statement or any post-effective amendment. The Company will promptly respond to any and all comments received from the SEC (which comments shall promptly be made available to one legal counsel representing all Investors whose Registration Securities are included in a Registration Statement upon request), with a view towards causing the Registration Statement or any amendment thereto to be declared effective by the SEC as soon as reasonably practicable, and (ii) promptly file an acceleration request as soon as reasonably practicable (but in no event more than two (2) business days) following the resolution or clearance of all SEC comments. If applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review, the Company shall promptly file with the SEC a final prospectus as soon as reasonably practicable (but in no event more than two (2) business days) following receipt by the Company from the SEC of an order declaring the Registration Statement effective.

(d) The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or “blue sky” laws of such jurisdictions in the United States as the Investors who hold a majority of the

Registrable Securities being offered by the Registration Statement reasonably request or qualify for an exemption for resale afforded companies listed in a Standard & Poor’s corporate handbook or similar publications, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be reasonably necessary to maintain such registrations and qualifications in effect during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) subject itself to general taxation in any such jurisdiction, (iii) file a general consent to service of process in any such jurisdiction, (iv) provide any undertakings that cause the Company undue expense or burden, (v) make any change in its charter or bylaws, or (vi) spend more than $10,000 in filing fees and legal fees and expenses for such “blue sky” compliance.

(e) If the Company has not selected an underwriter for the offering, and in the event Investors who hold a majority of the Registrable Securities being offered by the Registration Statement select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering.

(f) As promptly as practicable after becoming aware of such event, the Company shall notify each Investor of the happening of any event, of which the Company has knowledge, as a result of which the prospectus included in any Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and use its best efforts promptly to prepare a supplement or amendment to any Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; provided that, for not more than sixty (60) consecutive trading days (or a total of not more than ninety (90) trading days in any twelve (12) month period), the Company may delay the disclosure of material non-public information concerning the Company (as well as prospectus or Registration Statement updating) the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company (an “Allowed Delay”); provided, further, that the Company shall promptly (i) notify the Investors in writing of the existence of material non-public information giving rise to an Allowed Delay and (ii) advise the Investors in writing to cease all sales under such Registration Statement until the end of the Allowed Delay. Upon expiration of the Allowed Delay, the Company shall again be bound by the first sentence of this Section 3(f) with respect to the information giving rise thereto.

(g) The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order within a reasonable time and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof.

(h) The Company shall permit a single firm of legal counsel designated by Investors who own a majority of the Registrable Securities offered under the Registration Statement to review such Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC. The role of such legal counsel to the Investors shall be to confirm that the sections of such Registration Statement covering information with respect to the Investors, the Investor’s beneficial ownership of securities of the Company and the Investors intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Investors, subject to review and approval by the Company and its legal counsel. Such legal counsel for the Investors shall not have the right to require changes to the description of the Company, its business or other matters not related to selling stockholders.

(i) The Company shall make generally available to its security holders as soon as practicable, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company’s fiscal quarter next following the effective date of the Registration Statement.

(j) Until the Registration Statement ceases to be effective, the Company shall make available for inspection following reasonable prior written notice by (i) any underwriter participating in any disposition pursuant to a Registration Statement, (ii) one firm of attorneys or other agents retained by the Investors who own a majority of the Registrable Securities, and (iii) one firm of attorneys retained by all such underwriters (collectively, the “Inspectors”) all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (b) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to allow such inspection more than once per calendar year. Following such due diligence review, Investor may require the Company to withdraw the Registrable Securities of such Investor from the Registration Statement, if the Company does not make changes to the Registration Statement requested by such Investor.

(k) The Company shall not be required to disclose any confidential information in such Records to any Inspector or to any Investor pursuant to this Agreement until and unless such Inspector and Investor shall have entered into confidentiality agreements (in

form and substance satisfactory to the Company) with the Company with respect thereto. Each Investor agrees that it shall, upon learning that disclosure of such Records or other information is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investor’s ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.

(l) The Company shall (i) cause all the Registrable Securities covered by the Registration Statement to be listed on each national securities exchange, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) to the extent the securities of the same class or series are not then listed on a national securities exchange, to use reasonable efforts to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. (“NASD”) as such with respect to such Registrable Securities.

(m) The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement.

(n) At the request of the holders of a majority of the Registrable Securities offered pursuant to the Registration Statement, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement.

(o) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement.

4. OBLIGATIONS OF THE INVESTORS.

In connection with the registration of the Registrable Securities, the Investors shall have the following obligations:

(a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five (5) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor.

(b) Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Investor has notified the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable Securities from the Registration Statements.

(c) In the event the Company or Investors holding a majority of the Registrable Securities being registered determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor’s obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable Securities from such Registration Statement.

(d) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor’s possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.

(e) No Investor may participate in any underwritten registration hereunder unless such Investor if requested by the Company (i) agrees to sell such Investor’s Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below. Notwithstanding the foregoing, there is no obligation on the part of the Company or any underwriter to include Registrable Securities of Investor in the securities to be purchased or sold by the underwriter.

5. EXPENSES OF REGISTRATION.

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel selected by the Investors holding a majority of the Registrable Securities shall be borne by the Company, provided the Company shall not be required to pay legal fees and disbursements of such legal counsel in excess of $15,000.

6. INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

(a) To the extent permitted by law, the Company will indemnify, hold harmless and defend (i) each Investor who holds such Registrable Securities, (ii) the directors, officers, partners, employees, agents and each person who controls any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”), if any, (iii) any underwriter (as defined in the 1933 Act) for the Investors, and (iv) the directors, officers, partners, employees and each person who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an “Indemnified Person”), against any joint or several losses, claims, damages, liabilities or expenses (collectively, together with actions, proceedings or inquiries by any regulatory or self-regulatory organization, whether commenced or threatened, in respect thereof, “Claims”) to which any of them may become subject insofar as such Claims arise out of or are based upon: (i) any untrue statement of a material fact in a Registration Statement or the omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading; (ii) any untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities (the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Indemnified Person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person, or any of their legal counsel, expressly for use in connection with the preparation of such Registration Statement or any such amendment thereof or supplement thereto; (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld; and (iii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

(b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees severally and not jointly to indemnify, hold harmless and defend, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other shareholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such shareholder or underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an “Indemnified Party”), against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation by such Investor, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor, or its legal counsel, expressly for use in connection with such Registration Statement; and subject to Section 6(c) such Investor will reimburse any legal or other expenses (promptly as such expenses are incurred and are due and payable) reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Agreement (including this Section 6(b) and Section 7) for only that amount as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented.

(c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between

such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority-in-interest of the Investors), if the Investors are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable.

7. CONTRIBUTION.

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution (together with any indemnification or other obligations under this Agreement) by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

8. REPORTS UNDER THE 1934 ACT.

With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the investors to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to use its best efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144;

(b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

(c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied

with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act and (ii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.

9. ASSIGNMENT OF REGISTRATION RIGHTS.

The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Subscription Agreement, and (vi) such transferee shall not be a “U.S. Person” as that term defined in Regulation S promulgated under the 1933 Act.

10. AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company and Investors who hold a majority of the Registrable Securities, except that any person or entity who acquires Registrable Securities may become a part to this Agreement by the Company and such person or entity signing a counterpart of this Agreement. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. In the event the Company becomes a subsidiary of any company whose Common Stock is publicly traded (“Holding Company”), and the Investor receives shares of Common Stock of such Holding Company, all obligations of the Company under this Agreement shall terminate upon such Holding Company assuming this Agreement, which may be done without the consent or approval of Investor.

11. MISCELLANEOUS.

(a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

(b) Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective

five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:

If to the Company:

Michael Nouri

Smart Online, Inc.

Post Office Box 12794

Research Triangle Park, NC 27709-2794

Telephone: (919) 765-5000

E-mail: dnouri@us.smartonline.com

With copies to:

Daniels Daniels & Verdonik, P.A.

Post Office Drawer 12218

Research Triangle Park, NC 27709-2218

Telephone: (919) 544-5444

Facsimile: (919) 544-5920

Email: jverdonik@d2vlaw.com

If to an Investor:

to the address set forth immediately below such Investor’s name on the signature pages to the Subscription Agreement, or on the address set forth immediately below such Investor’s name on the agreement entered into pursuant to Section 9 of this Agreement.

(c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

(d) THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.

(e) In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

(f) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

(g) Subject to the requirements of Section 9 hereof, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.

(h) The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.

(i) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

(j) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

(k) Except as otherwise provided herein, all consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if the all options, warrants and convertible securities then outstanding have been issued and/or converted into Registrable Securities.

(l) The Company and each Investor acknowledges that a breach by it of its obligations hereunder will cause irreparable harm by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the parties acknowledge that the remedy at law for breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach of any of the provisions under this Agreement, that the other parties shall be entitled, in addition to all other available remedies in law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.

(m) The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

(n) No Investor may bring any legal or other action or proceeding for breach of this Agreement or arising out of any matter related to this Agreement, unless the Investors who own a majority of the Registrable Securities consent to the bringing of such action. Any claim may be settled by the Company and the Investors who own a majority of the Registrable Securities.

[The Remainder of this Page is Blank.]

IN WITNESS WHEREOF, the Company and the undersigned Investors have caused this Agreement to be duly executed as of the date on the first page of this Agreement.

SMART ONLINE, INC.

By: / s/ Michael Nouri

Name: D.M. Nouri

Title: CEO

INVESTOR:

Atlas Capital SA as Designee of Credit Suisse Zurich

By: /s/ Moise Dwek /s/ Avy Lagussy

Name: Alexandra Zunner

Title: Designee

Address: SWEC 18, P.O. Box 500

Paradeplatz 8 CH - 8070 Zuruich

Telephone: 41 1 333 63 50

Facsimile: ____________________________

Email: _______________________________

Initial Number of Registrable Securities: 181,820

APPENDIX B

DRIBBLE OUT AGREEMENT

AGREEMENT dated as of August ___, 2005 between Smart Online, Inc., Delaware corporation (the “Company”), and _____________________ (Subscriber”).

WHEREAS, Subscriber has purchased shares of Common Stock (the “Purchased Shares”) from the Company and the Company desires Subscriber to agree to limit its sales of the Purchased Shares in return for granting Subscriber the right to have the Purchased Shares registered. The Purchased Shares are hereinafter individually and collectively referred to as the “Securities”).

NOW, THEREFORE, the parties hereby agree as follows:

(1) Registration of Shares. The Company agrees to enter into the Registration Rights Agreement with Subscriber.

(2) “ Dribble-Out” Agreement .

(a) In consideration for the Registration Rights Agreement, Subscriber hereby agrees that, except as permitted under subsection (c) of this Section, during the Dribble Out Period, as defined herein, Subscriber will not:

(i) Sell any of the Securities or other securities of the Company or Holding Company received on account of ownership of the Securities (the “Dribble-Out Securities”).

(ii) Transfer, assign or otherwise dispose of any of the Dribble-Out Securities.

(iii) Pledge, hypothecate or otherwise create a lien on any of the Lock-Up Securities.

(iv) Loan to any person or entity any shares or other securities of the Company or Holding Company.

(v) Sell short any shares or other securities of the Company or Holding Company.

(vi) Acquire a put option or grant a call option with respect to any shares or other securities of the Company or Holding Company.

(vii) Enter into any agreement concerning any of the foregoing transactions, or otherwise facilitate any other person conducting any of the foregoing transactions.

(b) For purposes of this Section, Holding Company shall mean any company whose stock is publicly traded (i) with which the Company merges or consolidates or (ii) of which the Company or its successor becomes a subsidiary. For purposes of this Section, the Dribble Out Period shall mean the period beginning on the date of this Agreement and ending six (6) months after the effective date of the first registration statement of the Company that registers for resale the Dribble-Out Securities (the “Effective Date”). Notwithstanding the foregoing, after the Effective Date Subscriber may sell (if permitted under a registration statement), during any rolling thirty-day period during the Dribble Out Period, up to 25% of the Dribble-Out Securities owned by Subscriber on the Effective Date. The Board of Directors of the Company or Holding Company may terminate the Dribble Out Period or allow Subscriber to take a prohibited action prior to termination of the Dribble Out Period with respect to some or all of the Dribble-Out Securities owned by the Subscriber, if the Board provides all other Subscribers of the Company or Holding Company who have the same Dribble Out Period with the same termination or waiver at the same time and to the same extent as for Subscriber.

(c) Notwithstanding the foregoing, provided the transferee first signs an agreement on substantially the terms set forth herein and reasonably acceptable to the Company or Holding Company, Subscriber may transfer securities of the Company or Holding Company without payment or other consideration: (i) if Subscriber is an individual, to any family member, (ii) if Subscriber is a corporation, to any direct or indirect parent or subsidiary or any shareholder of Subscriber, (iii) if Subscriber is a partnership, to any partner of Subscriber, (iv) if Subscriber is a limited liability company, to any member of Subscriber, and (v) if Subscriber is a trust, to any beneficiary of such trust.

(d) Subscriber further agrees that before and after termination of the Dribble Out Period, Subscriber will comply with all securities laws, rules and regulations when purchasing or reselling securities of the Company or Holding Company, including, without limitation, those prohibiting sales and purchases of securities while in possession of material nonpublic information.

(e) The Dribble-Out Securities of Subscriber shall have a legend in form and substance acceptable to the Company and Holding Company referring to the restrictions of this Agreement and the Company or Holding Company may instruct the transfer agent of the Company or Holding Company to stop any transfer of any securities in violation of this Agreement and may take any other action required to avoid violation of this Agreement, including, without limitation, obtaining an injunction.

(f) The provisions of this Section shall continue in effect after the Dribble-Out Securities are registered pursuant to the Registration Rights Agreement.

(g) Stop Transfer Instructions. Subscriber agrees that the Company may issue instructions to its transfer agent that prohibit transfer in violation of this Agreement.

(h) Legends. The Company may place a legend on the Dribble Out Securities referring to the restrictions contained in this Agreement.

(3) The representations, warranties, understandings, acknowledgments and agreements in this Agreement are true and accurate as of the date hereof, shall be true and accurate as of the date of the acceptance hereof by the Company and shall survive thereafter.

(4) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of Delaware, as such laws are applied by Delaware courts to agreements entered into and to be performed in Delaware, and shall be binding upon Subscriber, the Subscriber’s heirs, estate, legal representatives, successors and assigns and shall inure to the benefit of the Company and its successors and assigns.

(5) Subscriber agrees not to transfer or assign this Agreement, or any of Subscriber’s interest herein, without the express written consent of the Company.

(6) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous representations, warranties, agreements and understandings in connection therewith. This Agreement may be amended only by a writing executed by all parties hereto. This Agreement may be executed in one or more counterparts.

(The remainder of this page is intentionally left blank.)

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

SMART ONLINE, INC.	Atlas Capital SA as Designee of Credit Suisse Zurich


By: /s/ Michael Nouri	By: /s/ Moise Dwek /s/ Avy Lugassy
Michael Nouri, President	Name: Alexandra Zunner
	Title: Designee

	Address: Credit Suisse
	SWEC 18
	Paradeplatz 8
	P.O. Box 500 CH - 8070 Zurich

APPENDIX C

An Accredited Investor is defined as follows:

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

(2)

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 (the year in which the purchase is made);

(3)

any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of investing in the Company, whose purchase is directed by a sophisticated person having such knowledge and experience in financial and business matters that she is capable of evaluating the risks and merits of investing in the Company;

(4)	a director or executive officer of the Company;

(5)	an organization described in Section 501(c)(3) of the Internal Revenue Code, 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;

(6)

a bank as defined in the Securities Act of 1933 (the “Act”), or a savings and loan association or other institution as defined in the Act whether acting in its individual or fiduciary capacity; a broker or dealer registered under the Securities Exchange Act of 1934; an insurance company as defined in the Act; an investment company registered under the Investment Company act of 1940 or a business development company as defined in the Act; a Small Business Investment Company licensed under the Small Business Investment Act of 1958; an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, an 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 investment decisions made solely by persons that are accredited investors;

(7)	a “private business development company” as defined in the Investment Advisers Act of 1940; or

(8)	an entity in which all of the equity owners are accredited investors.

SUBSCRIPTION AGREEMENT

Smart Online, Inc.

2530 Meridian Parkway

2 ^nd Floor

Durham, North Carolina 27713

Attention: Michael Nouri

Gentlemen:

(1) Pursuant to prior understandings and discussions, the undersigned (“Subscriber”) hereby agrees to purchase from Smart Online, a Delaware corporation (the “Company”), for a purchase price of Five Dollars ($5.00) per share the number of shares of Common Stock, par value $0.001 per share (“Common Stock”) set forth on the signature page of this Agreement. (The Common Stock is sometimes hereinafter referred to as the “Securities.”) Subscriber hereby acknowledges (i) that this subscription shall not be deemed to have been accepted by the Company until the Company indicates its acceptance by returning to Subscriber an executed copy of this subscription, and (ii) that acceptance by the Company of this subscription is conditioned upon the information and representations of Subscriber hereunder being complete, true and correct as of the date of this subscription and as of the date of closing of sale of the Securities to Subscriber. As a condition to Subscriber’s purchase of the Securities pursuant to this Agreement, Subscriber and the Company will execute and deliver to one another a copy of the Registration Rights Agreement in substantially the form attached hereto as Appendix B (the “Registration Rights Agreement”) and a Dribble Out Agreement in substantially the form of Appendix C (the “Dribble Out Agreement”).

(3) Subscriber hereby represents and warrants to the Company as follows:

(a) Disclosure . Subscriber has carefully reviewed the Form SB-2 Registration Statement of the Company on file with the U.S. Securities and Exchange Commission, including its most recent amendment (available at www.sec.gov), including financial information and including all risk factors, and fully understands all risks associated with investment in the Company.

(b) Authorization . Subscriber has full power and authority to enter into this Agreement. This Agreement constitutes Subscriber’s valid and legally binding obligation, enforceable in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, receivership, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) general principals of equity, the application of which may deny the Company the right to specific performance, injunctive relief and other equitable remedies.

(f) Regulation S . Attached as Appendix A hereto are the defined terms in Regulation S. All defined terms shall have the meanings set forth in Appendix A and Regulation S.

(i) The undersigned understands and acknowledges that: (A) the Securities acquired pursuant to this Subscription Agreement have not been registered under the Securities Act, are being sold in reliance upon an exemption from registration afforded by Regulation S; and that such Securities have not been registered with any state securities commission or authority; (B) pursuant to the requirements of Regulation S, the Securities may not be transferred, sold or otherwise exchanged unless in compliance with the provisions of Regulation S and/or pursuant to registration under the Securities Act, or pursuant to an available exemption thereunder; and (C) other than as set forth in this Subscription Agreement between the Company and the undersigned, including the Registration Rights Agreement, the Company is under no obligation to register the Securities under the Securities Act or any state securities law, or to take any action to make any exemption from any such registration provisions available;

(ii) (A) The undersigned is not a U.S. person and is not acquiring the Securities for the account of any U.S. Person; (B) if a corporation, it is not organized or incorporated under the laws of the United States; (C) if a corporation, no director or executive officer is a national or citizen of the United States; and (D) is not otherwise deemed to be a “U.S. Person” within the meaning of Regulation S:

(iii) The undersigned, if not an individual, was not formed specifically for the purpose of acquiring the Securities purchased pursuant to this Subscription Agreement;

(iv) The undersigned is purchasing the Securities for his or its own account and risk and not for the account or benefit of a “U.S. Person” as defined in Regulation S and no other person has any interest in or participation in the Securities or any right, option, security interest, pledge or other interest in or to the Securities. The undersigned understands, acknowledges and agrees that he or it must bear the economic risk of his or its investment in the Securities for an indefinite period of time and that prior to any such offer or sale, the Company may require, as a condition to effecting a transfer of the Securities, an opinion of counsel, acceptable to the Company, as to the registration or exemption therefrom under the Securities Act and any state securities acts, if applicable;

(v) The undersigned will, after the expiration of the Restricted Period, as set forth in Rule 903(b)(3)(iii)(A) under Regulation S, offer, sell, pledge or otherwise transfer the Securities only in accordance with Regulation S, or pursuant to an available exemption under the Securities Act and, in any case, in accordance with applicable state securities laws. The transactions contemplated by this Subscription Agreement have neither been pre-arranged with a purchaser who is in the United States or who is a U.S. Person, nor are they part of a plan or scheme to evade the registration provisions of the United States federal securities laws;

(vi) The offer leading to the sale evidenced hereby was made in an “offshore transaction.” For purposes of Regulation S, the undersigned understands that an “offshore transaction” is defined as any offer or sale not made to a person in the United States and either (A) at the time the buy order originated, the purchaser is outside the United States, or the seller or any person acting on his behalf reasonably believes that the purchaser is outside the United States; or (B) for purposes of (1) Rule 903 under Regulation S, the transaction is executed in, or on or through a physical trading floor of an established foreign exchange that is located outside of the United States, or (2) Rule 904 under Regulation S, the transaction is executed in, on or through the facilities of a designated offshore securities market, and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States;

(vii) Neither the undersigned nor any affiliate of the undersigned nor any person acting on his or its behalf, has made or is aware of any “directed selling efforts” in the United States, which term is defined in Regulation S as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Securities being purchased hereby;

(viii) The undersigned understands that the Company is the seller of the Securities and that, for purpose of Regulation S, a “distributor” is any underwriter, dealer or other person who participates, pursuant to a contractual arrangement, in the distribution of

securities offered or sold in reliance on Regulation S and that an “affiliate” is any partner, officer, director or any person directly or indirectly controlling, controlled by or under common control with any person in question. The undersigned agrees that he or it will not, during the Restricted Period (as defined above), act as a distributor, either directly or through any affiliate, nor shall it sell, transfer, hypothecate or otherwise convey the Securities other than to a non-U.S. Person other than in compliance with the Securities Act and any state securities laws, if applicable; and

(ix) The undersigned acknowledges that the Securities will bear a legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN OFFERED AND SOLD IN AN “OFFSHORE TRANSACTION” IN RELIANCE UPON REGULATION S AS PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) AND MAY NOT BE TRANSFERRED OTHER THAN IN ACCORDANCE WITH REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE CANNOT BE THE SUBJECT OF A HEDGING TRANSACTION UNLESS SUCH TRANSACTIONS ARE CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT.

(g) No Public Market . Subscriber understands that no public market now exists for any of the securities issued by the Company and that it is uncertain whether a public market will ever exist for the Securities.

(h) Access to Information . Subscriber has received all information that Subscriber considers necessary or appropriate for deciding whether to purchase Securities. Subscriber has had an opportunity to ask questions and receive answers from the Company’s management regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company and to obtain additional information from the Company (to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Subscriber or to which Subscriber had access.

(i) Stop Transfer Instructions. Subscriber agrees that the Company may issue instructions to its transfer agent that prohibit transfer in violation of this Agreement or Regulation S.

(6) Subscriber agrees not to transfer or assign this Agreement, or any of Subscriber’s interest herein, without the express written consent of the Company.

(7) The proceeds from sale of the Securities may be used by the Company for any purpose, including, without limitation, working capital, acquisition, salary and repayment of debt, including debts to officers, directors and shareholders.

(8) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous representations, warranties, agreements and understandings in connection therewith. This Agreement may be amended only by a writing executed by all parties hereto. This Agreement may be executed in one or more counterparts.

(The remainder of this page is intentionally left blank.)

IN WITNESS WHEREOF, Subscriber has executed this Subscription Agreement this 3rd day of January, 2005.

SUBSCRIPTION

500,000	Number of Shares of Common Stock

$2,500,000	Total payment enclosed

ADDRESS:

Walker House
Mary Street	THE BLUELINE FUND
P.O. Box 908 GT	(Name of Subscriber)
George Town, Grand Cayman	/s/ Philippe Pouponnot
Cayman Islands	(Signature)

_______________________
Incorporation /s/ Philippe Pouponnot

ACCEPTANCE

The foregoing Subscription Agreement is accepted on this the 25th day of February, 2005.

	SMART ONLINE, INC.


	By: /s/ Michael Nouri
	Michael Nouri, President

APPENDIX A

RULE 902 of REGULATION S: DEFINITIONS

As used in Regulation S, the following terms shall have the meanings indicated.

Debt securities. "Debt securities" of an issuer is defined to mean any security other than an equity security as defined in Rule 405 , as well as the following:

Non-participatory preferred stock, which is defined as non-convertible capital stock, the holders of which are entitled to a preference in payment of dividends and in distribution of assets on liquidation, dissolution, or winding up of the issuer, but are not entitled to participate in residual earnings or assets of the issuer; and

Asset-backed securities, which are securities of a type that either:

Represent an ownership interest in a pool of discrete assets, or certificates of interest or participation in such assets (including any rights designed to assure servicing, or the receipt or timeliness of receipt by holders of such assets, or certificates of interest or participation in such assets, of amounts payable thereunder), provided that the assets are not generated or originated between the issuer of the security and its affiliates; or

ii.

Are secured by one or more assets or certificates of interest or participation in such assets, and the securities, by their terms, provide for payments of principal and interest (if any) in relation to payments or reasonable projections of payments on assets meeting the requirements of paragraph (a)(2)(i) of this section, or certificates of interest or participations in assets meeting such requirements.

iii.

For purposes of paragraph (a)(2) of this section, the term "assets" means securities, installment sales, accounts receivable, notes, leases or other contracts, or other assets that by their terms convert into cash over a finite period of time.

Designated offshore securities market. "Designated offshore securities market" means:

The Eurobond market, as regulated by the International Securities Market Association; the Alberta Stock Exchange; the Amsterdam Stock Exchange; the Australian Stock Exchange Limited; the Bermuda Stock Exchange; the Bourse de Bruxelles; the Copenhagen Stock Exchange; the European Association of Securities Dealers Automated Quotation; the Frankfurt Stock Exchange; the Helsinki Stock Exchange; The Stock Exchange of Hong Kong Limited; the Irish

Stock Exchange; the Istanbul Stock Exchange; the Johannesburg Stock Exchange; the London Stock Exchange; the Bourse de Luxembourg; the Mexico Stock Exchange; the Borsa Valori di Milan; the Montreal Stock Exchange; the Oslo Stock Exchange; the Bourse de Paris; the Stock Exchange of Singapore Ltd.; the Stockholm Stock Exchange; the Tokyo Stock Exchange; the Toronto Stock Exchange; the Vancouver Stock Exchange; the Warsaw Stock Exchange and the Zurich Stock Exchange; and

Any foreign securities exchange or non-exchange market designated by the Commission. Attributes to be considered in determining whether to designate an offshore securities market, among others, include:

Organization under foreign law;

ii.

Association with a generally recognized community of brokers, dealers, banks, or other professional intermediaries with an established operating history;

iii.

Oversight by a governmental or self-regulatory body;

iv.

Oversight standards set by an existing body of law;

Reporting of securities transactions on a regular basis to a governmental or self-regulatory body;

vi.

A system for exchange of price quotations through common communications media; and

vii.

An organized clearance and settlement system.

Directed selling efforts.

"Directed selling efforts" means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered in reliance on this Regulation S (Rule 901 through Rule 905, and Preliminary Notes). Such activity includes placing an advertisement in a publication "with a general circulation in the United States" that refers to the offering of securities being made in reliance upon this Regulation S.

Publication "with a general circulation in the United States":

Is defined as any publication that is printed primarily for distribution in the United States, or has had, during the preceding twelve months, an average circulation in the United States of 15,000 or more copies per issue; and

ii.

Will encompass only the U.S. edition of any publication printing a separate U.S. edition if the publication, without considering its U.S. edition, would not constitute a publication with a general circulation in the United States.

The following are not "directed selling efforts":

Placing an advertisement required to be published under U.S. or foreign law, or under rules or regulations of a U.S. or foreign regulatory or self- regulatory authority, provided the advertisement contains no more information than legally required and includes a statement to the effect that the securities have not been registered under the Act and may not be offered or sold in the United States (or to a U.S. person, if the advertisement relates to an offering under Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903 ) absent registration or an applicable exemption from the registration requirements;

ii.

Contact with persons excluded from the definition of "U.S. person" pursuant to paragraph (k)(2)(vi) of this section or persons holding accounts excluded from the definition of "U.S. person" pursuant to paragraph (k)(2)(i) of this section, solely in their capacities as holders of such accounts;

iii.

A tombstone advertisement in any publication with a general circulation in the United States, provided:

The publication has less than 20% of its circulation, calculated by aggregating the circulation of its U.S. and comparable non-U.S. editions, in the United States;

Such advertisement contains a legend to the effect that the securities have not been registered under the Act and may not be offered or sold in the United States (or to a U.S. person, if the advertisement relates to an offering under Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903) absent registration or an applicable exemption from the registration requirements; and

Such advertisement contains no more information than:

The issuer's name;

The amount and title of the securities being sold;

A brief indication of the issuer's general type of business;

The price of the securities;

The yield of the securities, if debt securities with a fixed (non- contingent) interest provision;

The name and address of the person placing the advertisement, and whether such person is participating in the distribution;

The names of the managing underwriters;

The dates, if any, upon which the sales commenced and concluded;

Whether the securities are offered or were offered by rights issued to security holders and, if so, the class of securities that are entitled or were entitled to subscribe, the subscription ratio, the record date, the dates (if any) upon which the rights were issued and expired, and the subscription price; and

10.

Any legend required by law or any foreign or U.S. regulatory or self- regulatory authority;

iv.

Bona fide visits to real estate, plants or other facilities located in the United States and tours thereof conducted for a prospective investor by an issuer, a distributor, any of their respective affiliates or a person acting on behalf of any of the foregoing;

Distribution in the United States of a foreign broker-dealer's quotations by a third-party system that distributes such quotations primarily in foreign countries if:

Securities transactions cannot be executed between foreign broker-dealers and persons in the United States through the system; and

The issuer, distributors, their respective affiliates, persons acting on behalf of any of the foregoing, foreign broker-dealers and other participants in the system do not initiate contacts with U.S. persons or persons within the United States, beyond those contacts exempted under Rule 15a-6 under the Exchange Act; and

vi.

Publication by an issuer of a notice in accordance with Rule 135 or Rule 135c .

vii.

Providing any journalist with access to press conferences held outside of the United States, to meetings with the issuer or selling security holder representatives conducted outside the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, if the requirements of Rule 135e are satisfied.

Distributor. "Distributor" means any underwriter, dealer, or other person who participates, pursuant to a contractual arrangement, in the distribution of the securities offered or sold in reliance on this Regulation S (Rule 901 through Rule 905, and Preliminary Notes).

Domestic issuer/Foreign issuer. "Domestic issuer" means any issuer other than a "foreign government" or "foreign private issuer" (both as defined in Rule 405 ). "Foreign issuer" means any issuer other than a "domestic issuer."

Distribution compliance period. "Distribution compliance period" means a period that begins when the securities were first offered to persons other than distributors in reliance upon this Regulation S (Rule 901 through Rule 905, and Preliminary Notes) or the date of closing of the offering, whichever is later, and continues until the end of the period of time specified in the relevant provision of Rule 903 , except that:

All offers and sales by a distributor of an unsold allotment or subscription shall be deemed to be made during the distribution compliance period;

In a continuous offering, the distribution compliance period shall commence upon completion of the distribution, as determined and certified by the managing underwriter or person performing similar functions;

In a continuous offering of non-convertible debt securities offered and sold in identifiable tranches, the distribution compliance period for securities in a tranche shall commence upon completion of the distribution of such tranche, as determined and certified by the managing underwriter or person performing similar functions; and

That in a continuous offering of securities to be acquired upon the exercise of warrants, the distribution compliance period shall commence upon completion of the distribution of the warrants, as determined and certified by the managing underwriter or person performing similar functions, if requirements of Rule 903(b)(5) are satisfied.

Offering restrictions. "Offering restrictions" means:

Each distributor agrees in writing:

That all offers and sales of the securities prior to the expiration of the distribution compliance period specified in Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903, as applicable, shall be made only in accordance with the provisions of Rule 903 or Rule 904 ; pursuant to registration of the securities under the Act; or pursuant to an available exemption from the registration requirements of the Act; and

ii.

For offers and sales of equity securities of domestic issuers, not to engage in hedging transactions with regard to such securities prior to the expiration of the distribution compliance period specified in Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903, as applicable, unless in compliance with the Act; and

All offering materials and documents (other than press releases) used in connection with offers and sales of the securities prior to the expiration of the distribution compliance period specified in Category 2 or 3 (paragraph (b)(2) or (b)(3)) in Rule 903, as applicable, shall include statements to the effect that the securities have not been registered under the Act and may not be offered or sold in the United States or to U.S. persons (other than distributors) unless the securities are registered under the Act, or an exemption from the registration requirements of the Act is available. For offers and sales of equity securities of domestic issuers, such offering materials and documents also must state that hedging transactions involving those securities may not be conducted unless in compliance with the Act. Such statements shall appear:

On the cover or inside cover page of any prospectus or offering circular used in connection with the offer or sale of the securities;

ii.

In the underwriting section of any prospectus or offering circular used in connection with the offer or sale of the securities; and

iii.

In any advertisement made or issued by the issuer, any distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. Such statements may appear in summary form on prospectus cover pages and in advertisements.

Offshore transaction.

An offer or sale of securities is made in an "offshore transaction" if:

The offer is not made to a person in the United States; and

ii.

Either:

At the time the buy order is originated, the buyer is outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer is outside the United States; or

For purposes of:

Section Rule 903 , the transaction is executed in, on or through a physical trading floor of an established foreign securities exchange that is located outside the United States; or

Section Rule 904 , the transaction is executed in, on or through the facilities of a designated offshore securities market described in paragraph (b) of this section, and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.

Notwithstanding paragraph (h)(1) of this section, offers and sales of securities specifically targeted at identifiable groups of U.S. citizens abroad, such as members of the U.S. armed forces serving overseas, shall not be deemed to be made in "offshore transactions."

Notwithstanding paragraph (h)(1) of this section, offers and sales of securities to persons excluded from the definition of "U.S. person" pursuant to paragraph (k)(2)(vi) of this section or persons holding accounts excluded from the definition of "U.S. person" pursuant to paragraph (k)(2)(i) of this section, solely in their capacities as holders of such accounts, shall be deemed to be made in "offshore transactions."

Reporting issuer. "Reporting issuer" means an issuer other than an investment company registered or required to register under the 1940 Act that:

Has a class of securities registered pursuant to Section 12(b) or 12(g) of the Exchange Act or is required to file reports pursuant to Section 15(d) of the Exchange Act; and

Has filed all the material required to be filed pursuant to Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve months immediately preceding the offer or sale of securities made in reliance upon this Regulation S (Rule 901 through Rule 905, and Preliminary Notes) (or for such shorter period that the issuer was required to file such material).

Substantial U.S. market interest.

"Substantial U.S. market interest" with respect to a class of an issuer's equity securities means:

The securities exchanges and inter-dealer quotation systems in the United States in the aggregate constituted the single largest market for such class of securities in the shorter of the issuer's prior fiscal year or the period since the issuer's incorporation; or

ii.

20 percent or more of all trading in such class of securities took place in, on or through the facilities of securities exchanges and inter-dealer quotation systems in the United States and less than 55 percent of such trading took place in, on or through the facilities of securities markets of a single foreign country in the shorter of the issuer's prior fiscal year or the period since the issuer's incorporation.

"Substantial U.S. market interest" with respect to an issuer's debt securities means:

Its debt securities, in the aggregate, are held of record (as that term is defined in Rule 12g5-1 under the Exchange Act and used for purposes of paragraph (j)(2) of this section) by 300 or more U.S. persons;

ii.

$1 billion or more of: The principal amount outstanding of its debt securities, the greater of liquidation preference or par value of its securities described in Rule 902(a)(1), and the principal amount or principal balance of its securities described in Rule 902(a)(2), in the aggregate, is held of record by U.S. persons; and

iii.

20 percent or more of: The principal amount outstanding of its debt securities, the greater of liquidation preference or par value of its securities described in Rule 902(a)(1), and the principal amount or principal balance of its securities described in Rule 902(a)(1), in the aggregate, is held of record by U.S. persons.

Notwithstanding paragraph (j)(2) of this section, substantial U.S. market interest with respect to an issuer's debt securities is calculated without reference to securities that qualify for the exemption provided by Section 3(a)(3) of the Act.

U.S. person.

"U.S. person" means:

Any natural person resident in the United States;

ii.

Any partnership or corporation organized or incorporated under the laws of the United States;

iii.

Any estate of which any executor or administrator is a U.S. person;

iv.

Any trust of which any trustee is a U.S. person;

Any agency or branch of a foreign entity located in the United States;

vi.

Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person;

vii.

Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and

viii.

Any partnership or corporation if:

Organized or incorporated under the laws of any foreign jurisdiction; and

Formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) ) who are not natural persons, estates or trusts.

The following are not "U.S. persons":

Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States;

ii.

Any estate of which any professional fiduciary acting as executor or administrator is a U.S. person if:

An executor or administrator of the estate who is not a U.S. person has sole or shared investment discretion with respect to the assets of the estate; and

The estate is governed by foreign law;

iii.

Any trust of which any professional fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person;

iv.

An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country;

Any agency or branch of a U.S. person located outside the United States if:

The agency or branch operates for valid business reasons; and

The agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and

vi.

The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans.

United States. "United States" means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia.

APPENDIX B

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of March 1, 2005, by and among Smart Online, Inc., a Delaware corporation with its headquarters located at 2530 Meridian Parkway, Durham, North Carolina 27713 (the “Company”), and the undersigned (together with its affiliates and any assignees or transferees of all of its respective rights hereunder, the “Investors”).

WHEREAS:

1. DEFINITIONS.

(a) As used in this Agreement, the following terms shall have the following meanings:

(ii) “Listing Date” the date on which the Common Stock of the Company becomes listed on the OTCBB.

(iii) “OTCBB” the Over-the-Counter Bulletin Board.

(vi) “Registration Statement” means a registration statement of the Company under the 1933 Act.

(b) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Subscription Agreement.

2. REGISTRATION.

3. OBLIGATIONS OF THE COMPANY.

In connection with the registration of the Registrable Securities, the Company shall have the following obligations:

(m) The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement.

(o) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement.

4. OBLIGATIONS OF THE INVESTORS.

In connection with the registration of the Registrable Securities, the Investors shall have the following obligations:

5. EXPENSES OF REGISTRATION.

6. INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

7. CONTRIBUTION.

8. REPORTS UNDER THE 1934 ACT.

(a) make and keep public information available, as those terms are understood and defined in Rule 144;

(c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied

9. ASSIGNMENT OF REGISTRATION RIGHTS.

10. AMENDMENT OF REGISTRATION RIGHTS.

11. MISCELLANEOUS.

If to the Company:

Michael Nouri

Smart Online, Inc.

Post Office Box 12794

Research Triangle Park, NC 27709-2794

Telephone: (919) 765-5000

E-mail: dnouri@us.smartonline.com

With copies to:

Daniels Daniels & Verdonik, P.A.

Post Office Drawer 12218

Research Triangle Park, NC 27709-2218

Telephone: (919) 544-5444

Facsimile: (919) 544-5920

Email: jverdonik@d2vlaw.com

If to an Investor:

(c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

(g) Subject to the requirements of Section 9 hereof, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.

(h) The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.

(m) The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

[The Remainder of this Page is Blank.]

IN WITNESS WHEREOF, the Company and the undersigned Investors have caused this Agreement to be duly executed as of the date on the first page of this Agreement.

SMART ONLINE, INC.

By: /s/ Michael Nouri

Name: Michael D. Nouri

Title: CEO

INVESTOR:

The Blueline Fund

By: /s/ Philippe Pouponot

Name: Philippe Pouponnot

Title: Delegate

Address: Walker House, Mary Street

George Town, Grand Cayman

Telephone: + 41 22 737 4050

Facsimile: + 41 22 737 4055

Email: _______________________________

CR: 100045 Incorporation Number /s/ Philippe Pouponnot

Initial Number of Registrable Securities: 500,000 units /s/ Philippe Pouponnot

WARRANT PURCHASE AND DRIBBLE OUT AGREEMENT

AGREEMENT dates as of January 3, 2005 between Smart Online, Inc., Delaware corporation (the "Company"), and THE BLUELINE FUND located in the Cayman Islands (Subscriber").

WHEREAS, Subscriber has purchased 500,000 shares of Common Stock (the "Purchased Shares") from the Company and the Company desires Subscriber to agree to limit its sales of the Purchased Shares in return for issuance of a warrant (the "Warrant") to purchase 50,000 additional shares ("Warrant Shares") of Common Stock of the Company for an exercise price of $5.00 per share, which Warrant terminates on January 1, 2007. The Purchased Shares, the Warrant and the Warrant Shares are hereinafter individually and collectively referred to as the "Securities").

NOW, THEREFORE, the parties hereby agree as follows:

(1) Warrant Issuance . The Company shall issue to Subscriber the Warrant in exchange for the agreement of Subscriber to the provisions of this Agreement without further payment by Subscriber. Such issuance shall occur at the same time as the Purchased shares are issued to Subscriber.

(2) Registration of Warrant Shares . The Warrant Shares shall be registered by the Company at the same time as the Purchased Shares pursuant to the terms of the Registration Rights Agreement between the Company and Shareholder with respect to the Purchased Shares.

(3) "Dribble-Out" Agreement .

(a) Subscriber hereby agrees that, except as permitted under subsection (c) of this Section (3), during the Dribble Out Period, as defined herein, Subscriber will not:

(i) Sell any of the Securities or other securities of the Company or Holding Company received on account of ownership of the Securities (the "Dribble-Out Securities").

(ii) Transfer, assign or otherwise dispose of any of the Dribble-Out Securities.

(iii) Pledge, hypothecate or otherwise create a lien on any of the Lock-Up Securities.

(iv) Loan to any person or entity any shares or other securities of the Company or Holding Company.

(v) Sell short any shares or other securities of the Company or Holding Company.

(vi) Acquire a put option or grant a call option with respect to any shares or other securities of the Company or Holding Company.

(vii) Enter into any agreement concerning any of the foregoing transactions, or otherwise facilitate any other person conducting any of the foregoing transactions.

(b) For purposes of this Section (3), Holding Company shall mean any company whose stock is publicly traded (i) with which the Company merges or consolidates or (ii) of which the Company or its successor becomes a subsidiary. For purposes of this Section (3), the Dribble Out Period shall mean the period beginning on the date of this Agreement and ending six (6) months after the effective date of the first registration statement of the Company that registers for resale the Dribble-Out Securities (the "Effective Date"). Notwithstanding the foregoing, after the Effective Date Subscriber may sell (if permitted under Regulation S or a registration statement), during any rolling thirty-day period during the Dribble Out Period, up to 25% of the Dribble-Out Securities owned by Subscriber on the Effective Date. The Board of Directors of the Company or Holding Company may terminate the Dribble Out Period or allow Subscriber to take a prohibited action prior to termination of the Dribble Out Period with respect to some or all of the Dribble-Out Securities owned by the Subscriber, if the Board provides all other Subscribers of the Company or Holding Company who have the same Dribble Out Period with the same termination or waiver at the same time and to the same extent as for Subscriber.

(f) The provisions of this Section (3) shall continue in effect after the Dribble- Out Securities are registered pursuant to the Registration Rights Agreement.

(4) Subscriber hereby represents and warrants to the Company as follows:

(b) Authorization . Subscriber has full power and authority to enter into this Agreement. This Agreement constitutes Subscriber's valid and legally binding obligation, enforceable in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, receivership, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) general principals of equity, the, application of which may deny the Company the right to specific performance, injunctive relief and other equitable remedies.

(c) Experience . Subscriber is experienced in evaluating and investing in private placement transactions of securities of technology companies such as the Company, has such knowledge and experience in financial and business matters that Subscriber is capable of evaluating the merits and risks of Subscriber's investment in the Securities, is able to bear the economic risk of the investment and is prepared to hold the shares for an indefinite period of time.

(d) Investment . Subscriber is acquiring the Securities for investment for Subscriber's own account and not with a view to, or for resale in connection with, any distribution 'thereof, and Subscriber has no present intention of selling or distributing the Securities. Subscriber does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person with respect to any of the Securities other than as set forth in this Agreement. Subscriber understands that the Securities to be purchased by Subscriber have not been registered under the Securities Act of 1933, as amended (the "Act") by reason of a specific exemption from the registration provisions of the Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.

(f) Regulation S . Attached as Appendix A hereto are the defined terms in Regulation S. All defined terms shall have the meanings set forth in Appendix A and Regulation S.

(ii) (A) The undersigned is not a US. person and is not acquiring the Securities for the account of any U S . Person; (B) if a corporation, it is not organized or incorporated under the laws of the United States; (C) if a corporation, no director or executive officer is a national or citizen of the United States; and (D) is not otherwise deemed to be a "US. Person" within the meaning of Regulation S:

(iii) The undersigned, if not an individual, was not formed specifically for the purpose of acquiring the Securities purchased pursuant to this Subscription Agreement;

(iv) The undersigned is purchasing the Securities for his or its own account and risk and not for the account or benefit of a "U.S. Person" as defined in Regulation S and no other person has any interest in or participation in the Securities or any right, option, security interest, pledge or other interest in or to the Securities. The undersigned understands, acknowledges and agrees that he or it must bear the economic risk of his or its investment in the Securities for an indefinite period of time and that prior to any such offer or sale, the Company may require, as a condition to effecting a transfer of the Securities, an opinion of counsel, acceptable to the Company, as to the registration or exemption therefrom under the Securities Act and any state securities acts, if applicable;

(v) The undersigned will, after the expiration of the Restricted Period, as set forth in Rule 903(b)(3)(iii)(A) under Regulation S, offer, sell, pledge or otherwise transfer the Securities only in accordance with Regulation S, or pursuant to an available exemption under the Securities Act and, in any case, in accordance with applicable state securities laws. The transactions contemplated by this Subscription Agreement have neither been pre-arranged with a purchaser who is in the United States or who is a US. Person, nor are they part of a plan or scheme to evade the registration provisions of the United States federal securities laws;

(vi) The offer leading to the sale evidenced hereby was made in an "offshore transaction." For purposes of Regulation S, the undersigned understands that an "offshore transaction" is defined as any offer or sale not made to a person in the United States and either (A) at the time the buy order originated, the purchaser is outside the United States, or the seller or any person acting on his behalf reasonably believes that the purchaser is outside the United States; or (B) for purposes of (1) Rule 903 under Regulation S, the transaction is executed in, or on or through a physical trading floor of an established foreign exchange that is located outside of the United States, or (2) Rule 904 under Regulation S, the transaction is executed in, on or through the facilities of a designated offshore securities market, and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States;

(vii) Neither the undersigned nor any affiliate of the undersigned nor any person acting on his or its behalf, has made or is aware of any "directed selling efforts" in the United States, which term is defined in Regulation S as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Securities being purchased hereby;

(viii) The undersigned understands that the Company is the seller of the Securities and that, for purpose of Regulation S, a "distributor" is any underwriter, dealer or other person who participates, pursuant to a contractual arrangement, in the distribution of securities offered or sold in reliance on Regulation S and that an "affiliate" is any partner, officer, director or any person directly or indirectly controlling, controlled by or under common control with any person in question. The undersigned agrees that he or it will not, during the Restricted Period (as defined above), act as a distributor, either directly or through any affiliate, nor shall it sell, transfer, hypothecate or otherwise convey the Securities other than to a non-U.S. Person other than in compliance with the Securities Act and any state securities laws, if applicable; and

(ix) The undersigned acknowledges that the Securities will bear a legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN OFFERED AND SOLD IN AN "OFFSHORE TRANSACTION" IN RELIANCE UPON REGULATION S AS PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE TRANSFERRED OTHER THAN IN ACCORDANCE WITH REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE CANNOT BE THE SUBJECT OF A HEDGING TRANSACTION UNLESS SUCH TRANSACTIONS ARE CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT.

(g) No Public Market. Subscriber understands that no public market now exists for any of the securities issued by the Company and that it is uncertain whether a public market will ever exist for the Securities.

(h) Access to Information . Subscriber has received all information that Subscriber considers necessary or appropriate for deciding whether to purchase Securities. Subscriber has had an opportunity to ask questions and receive answers from the Company's management regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company and to obtain additional information from the Company (to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Subscriber or to which Subscriber had access.

(i) Stop Transfer Instructions . Subscriber agrees that the Company may issue instructions to its transfer agent that prohibit transfer in violation of this Agreement or Regulation S.

(5) The representations, warranties, understandings, acknowledgments and agreements in this Agreement are true and accurate as of the date hereof, shall be true and accurate as of the date of the acceptance hereof by the Company and shall survive thereafter.

(6) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of Delaware, as such laws are applied by Delaware courts to agreements entered into and to be performed in Delaware, and shall be binding upon Subscriber, the Subscriber's heirs, estate, legal representatives, successors and assigns and shall inure to the benefit of the Company and its successors and assigns.

(7) Subscriber agrees not to transfer or assign this Agreement, or any of Subscriber's interest herein, without the express written consent of the Company.

(The remainder of this page is intentionally left blank.)

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

SMART ONLINE, INC.	THE BLUELINE FUND


By: /s/ Michael Nouri 2/25/05	By: /s/ Philippe Pouponnot
Michael Nouri, President	Name: Philippe Poupnott
	Title: Delegate
	Walker House, Mary Street
	P. 0. Box 908GT
	George Town Grand Cayman
	Cayman Islands

Delaware		95-4439334
(State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

2530 Meridian Parkway, Second Floor Durham, North Carolina		27713
(Address of principal executive offices)		(Zip Code)

		Page


	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 2.	Properties	39
Item 3.	Legal Proceedings	39
Item 4.	Submission of Matters to a Vote of Security Holders	40

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
Item 6.	Selected Financial Data	42
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations of Operations	42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	65
Item 9A.	Controls and Procedures	65
Item 9B.	Other Information	68

PART III

Item 10.	Directors and Executive Officers of the Registrant	68
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions	87
Item 14.	Principal Accounting Fees and Services	92

PART IV

Item 15.	Exhibits , Financial Statement Schedules	94

Competitive Factors	Smart Online
Customer Awareness Access. Most small businesses do not spend substantial time researching and evaluating solutions. Most purchase what is most readily available.	Many of our competitors have widely known brand names, large marketing budgets, and are widely available. Through our syndication, and OEM partnering programs, we seek to gain greater customer awareness and access to our products at relatively moderate cost to us. While we may lack the marketing dollars to compete with industry giants, we believe our corporate syndication partners will allow us to compete effectively if we are able to motivate our channel partners to devote resources to selling subscriptions. This will require us to hire additional personnel to manage these relationships.
Value. Most small businesses do not have sufficient cash and do not invest in information technology, unless they see a tangible value for their investment.	We believe one distinctive value our applications offer is the reduction of the time it takes small businesses to enter, change and retrieve important data. By integrating data sharing across applications through our platform small businesses can enter or change data once.
Suppliers must be able to supply the applications and features customers need.	We believe we offer more applications and features specifically targeted to small businesses than most of our competitors. However, our individual applications must also be competitive with the applications offered by industry leaders in those specific segments. This will require additional development work by us.
Applications must be user friendly and require little training. Small businesses generally do not have IT departments to train employees and support software.	We continue to improve the ease of use and performance of our applications as we have received feedback from our customers about difficulties in accessing and using our software. We also offer free telephone support services. Until recently, our software consisted primarily of simple business tools. With the addition of new, more complex applications, we expect to have additional support services.
Compatibility with other information technology	We have designed our platform and technology to be compatible with the information technology most often used by small businesses, which include personal computer operating systems, internet access software, email and instant messaging.

Price. Most small businesses are price sensitive.	Our pricing structure requires very little initial investment by small businesses and is cost competitive with the products of competitors over the long-term. Our product delivery model also includes automatic free updates.
Obsolescence.	We are always improving our platform and expanding our content and applications. We believe the release of our applications demonstrates our commitment to industry leadership in this area.

Quarter Ended	June 30, 2005	September 30, 2005	December 31, 2005	Year
High	$8.20	$11.50	$11.25	$11.50
Low	$1.50	$8.00	$6.30	$1.50

	2005			2004			2003			2002			2001

Revenues	$	2,701,976		$	1,002,970		$	1,261,223		$	1,391,645		$	3,193,078
Loss from Operations	$	(16,066,829	)	$	(2,801,935	)	$	(1,865,282	)	$	(999,765	)	$	(1,993,879	)
Net Loss Attributable to Common Stockholders	$	(15,590,609	)	$	(8,319,049	)	$	(4,375,836	)	$	(1,766,606	)	$	(1,994,203	)
Net Loss per Share - Basic and Diluted	$	(1.20	)	$	(0.82	)	$	(0.61	)	$	(0.25	)	$	(0.27	)
Number of Shares Used in Per Share Calculation		12,960,006			10,197,334			7,145,047			7,181,759			7,286,965

BALANCE SHEET DATA	As of December 31,
	2005		2004			2003			2002			2001

Total Assets	$	14,558,079	$	773,701		$	306,072		$	252,579		$	724,349
Long-term Obligations	$	2,963,289	$	1,091,814		$	1,193,211		$	958,925		$	722,309
Redeemable Preferred Stock	$	-	$	-		$	17,509,214		$	14,692,150		$	12,128,130
Stockholders' Equity (Deficit)	$	6,672,631	$	(1,911,090	)	$	(22,014,156	)	$	(19,268,323	)	$	(15,864,201	)

	Year Ended DECEMBER 31, 2005		Year Ended DECEMBER 31, 2004		Year Ended DECEMBER 31, 2003

Smart II, Ltd. ("SIL"), formerly known as Smart Revenue Europe Ltd. - Integration fees	$	0	$	330,050	$	342,857

Parson and Shearson, Inc. - Consulting Services		0		0		150,000

Small Business Lending Institute Consulting Services		0		0		20,200
Total Related Party Revenues	$	0	$	330,050	$	513,057

	Year Ended DECEMBER 31, 2005		Year Ended DECEMBER 31, 2004		Year Ended DECEMBER 31, 2003
REVENUES:
Integration fees	$	798,178	$	374,055	$	367,617
Syndication fees		402,847		176,471		115,544
OEM revenue		48,000		55,936		48,620
Web services		-		62,365		207,570
Subscription Fees		914,674		-		-
Professional Services Fees		435,486		-		-
Other revenues		102,791		4,093		8,815
Related party revenues		-		330,050		513,057
Total revenues	$	2,701,976	$	1,002,970	$	1,261,223

	Period From OCTOBER 4, 2005 to DECEMBER 31, 2005		Year Ended DECEMBER 31, 2004		Year Ended DECEMBER 31, 2003
OPERATING EXPENSES:
General and administrative	$	169,484	$	498,074	$	443,392
Sales and marketing		36,326		547,526		324,229
Research & Development		87,135		282,359		183,779

Total operating expenses	$	292,945	$	1,327,959	$	951,400

	Period From OCTOBER 18, 2005 to DECEMBER 31, 2005		Year Ended DECEMBER 31, 2004		Year Ended DECEMBER 31, 2003
OPERATING EXPENSES:
General and administrative	$	166,930	$	630,502	$	618,071
Sales and marketing		98,182		323,003		240,593
Development		115,936		593,746		468,986

Total operating expenses	$	381,048	$	1,547,251	$	1,327,650

	Page number

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM	F-2

CONSOLIDATED BALANCE SHEETS	F-3

CONSOLIDATED STATEMENTS OF OPERATIONS	F-4

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ (DEFICIT) EQUITY	F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS	F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

Assets	December 31, 2005			December 31, 2004
CURRENT ASSETS:
Cash and cash equivalents	$	1,434,966		$	173,339
Restricted Cash		230,244			-
Marketable securities		-			395,000
Accounts receivable, net		504,979			30,904
Other accounts receivable		74,876			43,455
Prepaid expenses		370,225			24,850
Total current assets		2,615,290			667,548
PROPERTY AND EQUIPMENT, net		664,062			75,636
INTANGIBLE ASSETS, net		11,032,129			16,623
OTHER ASSETS		246,598			13,894
TOTAL ASSETS	$	14,558,079		$	773,701
Liabilities and Stockholders’ Equity (Deficit)
CURRENT LIABILITIES:
Accounts payable	$	855,904		$	186,382
Accrued payroll		42,559			110,079
Accrued payroll taxes, penalties and interest		-			574,707
Short-Term portion of Capital Lease		14,707			-
Short-Term Portion of Subscription Financing Payable		855,060			-
Accrued Registration Rights Penalty		129,945			-
Current Portion of Notes Payable		2,189,986			-
Deferred revenue		785,324			721,689
Accrued liabilities		48,674			120
Total current liabilities		4,922,159			1,592,977

LONG-TERM LIABILITIES:
Long-Term Portion of Notes Payable		2,331,152			-
Long Term Portion of Subscription Financing Payable		541,110			-
Unearned Revenue		91,027			-
Deferred compensation, notes payable and interest		-			1,091,814
Total long-term liabilities		2,963,289			1,091,814
Total liabilities		7,885,448			2,684,791

STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 45,000,000 shares authorized, shares issued and outstanding: December 31, 2005 -15,607,230, December 31, 2004 —11,631,832		15,607			11,632
Additional paid-in capital		58,982,617			34,809,832
Accumulated deficit		(52,325,593	)		(36,732,554	)
Total stockholders' equity (deficit)		6,672,631			(1,911,090	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	14,558,079		$	773,701

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		-			-			190,000
Repayments on notes payable		(326,157	)		(350,000	)		(10,000	)
Cash reserved for iMart purchase price payment - restricted cash		(230,244	)		-			-
Payments on Capital Lease		(2,287	)		-			-
(Repayments) borrowings from stockholder		-			(86,480	)		39,686
Issuance of Common Stock		8,212,641			4,672,250			544,895
Net cash provided by financing activities		7,653,953			4,235,770			764,581
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,261,627			71,853			74,546
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		173,339			101,486			26,940
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,434,966		$	173,339		$	101,486
Supplemental disclosures:
Cash payment during the year for interest:	$	158,232		$	47,447		$	89,047
Cash payment during the year for income taxes:	$	-			-			-
Non-cash financing activities:
Notes Payables issued related to Acquisitions	$	3,659,301			-			-
Notes Payable for iMart Non-Compete Agreements	$	715,998			-			-
Assets and Liabilities of Computility acquired for stock:
Accounts Receivable, net	$	6,894			-			-
Other Current Assets	$	10,742			-			-
P,P&E, net	$	388,128			-			-
Other Assets	$	246,228			-			-
Accounts Payable	$	109,897			-			-
Subscription & Notes Payable	$	1,807,327			-			-
Other Liabilities	$	29,549			-			-
Non-cash accretion of preferred					-			-
stock redemption value	$	-		$	2,215,625		$	2,321,744
Conversion of preferred stock
into Common Stock	$	-		$	19,724,839		$	-
Conversion of preferred stock
inducement cost	$	-		$	3,225,410		$	-

	Common Stock $.001 Par			Additional Paid- In Capital			Accumulated Deficit			Total
BALANCE, JANUARY 1, 2003	$	7,037		$	9,299,678		$	(28,575,038	)	$	(19,268,323	)
Issuance of restricted stock		75			49,500			-			49,575
Interest expense associated with notes payable		150			74,850			-			75,000
Accretion of redeemable preferred		-			(2,321,744	)		-			(2,321,744	)
Issuance of stock option to consultant		-			9,109			-			9,109
Issuance of warrant to financial advisor		-			466,000			-			466,000
Issuance of stock options to officers		-			535,000			-			535,000
Deemed dividend related to beneficial conversion features of redeemable convertible preferred stock		-			495,319			(495,319	)		-
Net loss		-			-			(1,558,773	)		(1,558,773	)
BALANCE, DECEMBER 31, 2003		7,262			8,607,712			(30,629,130	)		(22,014,156	)
Conversion of preferred stock into
Common Stock		2,949			19,721,890			-			19,724,839
Conversion of preferred stock
inducement cost		-			3,225,410			(3,225,410	)		-
Interest expense associated with notes
Payable		-			75,000			-			75,000
Accretion of redeemable preferred		-			(2,215,625	)		-			(2,215,625	)
Issuance of Common Stock, net of issuance costs of $183,350		1,289			4,762,355			-			4,763,644
Issuance of Common Stock rescinded		(29	)		(99,973	)		-			(100,002	)
Issuance of stock options to officers		-			161,000			-			161,000
Issuance of stock options to members of advisory board		-			6,034			-			6,034
Issuance of Common Stock to former holders of preferred stock pursuant to registration rights agreement		58			206,027			(206,085	)		-
Conversion of Bank One warrant into Common Stock		100			349,900			-			350,000
Issuance of stock option to consultant		-			1,495			-			1,495
Exercise of warrants		3			8,607			-			8,610
Net loss								(2,671,929	)		(2,671,929	)
BALANCE, DECEMBER 31, 2004		11,632			34,809,832			(36,732,554	)		(1,911,090	)
Issuance of Common Stock, net of issuance costs of $630,525		1,392			6,719,614			-			6,721,006
Exercise of warrants		580			1,305,518			-			1,306,098
Issuance of warrants		-			19,231			-			19,231
Issuance of Common Stock for services		40			343,408			-			343,448
Issuance of Common Stock to employees as bonus		4			40,106			-			40,110
Exercise of stock options		16			57,734			-			57,750
Issuance of IR Shares-GIC		625			5,174,375			-			5,175,000
Issuance of IR Shares-Berkley		625			4,561,875			-			4,562,500
iMart Acquisition		205			1,815,688			-			1,815,893
Computility Acquisition		484			3,534,271			-			3,534,755
Issuance of Shares to Spectrum Technologies		3			22,497			-			22,500
Elimination of iMart (Bayberry) Equity not acquired		-			-			(2,430	)		(2,430	)
Issuance of options to consultants		-			570,014			-			570,014
Issuance of Common Stock for technology license		1			7,499			-			7,500
Gift of shares to charitable organization		-			955			-			955
Net Loss								(15,590,609	)		(15,590,609	)
BALANCE DECEMBER 31, 2005	$	15,607		$	58,982,617		$	(52,325,593	)	$	6,672,631

Office equipment	5 years
Computer Software	3 years
Computer Hardware	5 years
Furniture and fixtures	7 years
Automobiles	5 years

		Amortized Cost			Fair Value
Municipal bonds - redeemed February 2005		$	395,000		$	395,000

		December 31, 2005			December 31, 2004			December 31, 2003
Office equipment	$	155,054		$	16,187		$	10,026
Furniture and fixtures		7,125			7,125			7,125
Computer software		550,775			393,629			389,064
Computer hardware and equipment		1,252,089			663,723			684,998
Automobiles		29,504			29,504			—
		1,994,547			1,110,168			1,091,213
Less accumulated depreciation		(1,330,485	)		(1,034,532	)		(1,042,266	)
Property and equipment, net	$	664,062		$	75,636		$	48,947

Asset Category	Value Assigned	Residual Value	Weighted Avg Useful Life	Accumulated Amortization	Carrying Value
Customer Base	$ 2,504,989	$0	5.9	$ 106,744	$ 2,398,245
Technology	$ 1,249,842	$0	3	$ 100,468	$ 1,149,374
Non-Compete	$ 891,785	$0	3.9	$ 49,260	$ 842,525
Copyright & Trademark	$ 50,339	$0	10	$ 34,313	$ 16,026
Trade Name *	$ 1,180,499	n/a	n/a	n/a	$ 1,180,499
Work Force & Goodwill *	$ 5,489,963	n/a	n/a	n/a	$ 5,489,963
TOTALS	$ 11,367,417			$290,785	$11,076,632

	December 31, 2005		December 31, 2004

Deferred Compensation	$	0	$	949,777
Accrued interest payable on deferred compensation		0		142,037
Total deferred compensation	$	0	$	1,091,814

Note Description	S/T Portion	L/T Portion	Total	Maturity	Rate
iMart Purchase Price Note	$1,559,657	$1,718,139	$3,277,796	Jan 2007	8.0%
iMart Non-Compete Note	352,041	375,921	727,962	Oct 2007	8.0%
Acquisition Fee - iMart	118,461	95,847	214,308	Oct 2007	8.0%
Acquisition Fee - Computility	97,327	53,745	151,072	Mar 2007	8.0%
Subscription Factor Payable	855,060	541,110	1,396,170	Various	9% - 10.5%
Floor Plan Agreement	62,500	87,500	150,000	Feb 2008	Prime+4

	Shares			Weighted Average Exercise Price

BALANCE, January 1, 2003		771,400		$	4.69
Granted		720,000		$	1.39
Forfeited		(132,500	)	$	2.27
BALANCE, December 31, 2003		1,358,900		$	3.18
Granted		755,000		$	3.07
Forfeited		(345,000	)	$	4.12
BALANCE, December 31, 2004		1,768,900		$	2.78
Granted		1,535,950		$	7.98
Exercised		(16,500	)	$	3.50
Forfeited		(560,400	)	$	3.61
BALANCE, December 31, 2005		2,727,950		$	5.34

				Currently Exercisable
Exercise Price	Number of Shares Outstanding	Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Number of Shares	Weighted Average Exercise Price

$ 1.30 - $ 1.43	670,000	3.0	$ 1.40	670,000	$ 1.40
$ 3.50	497,500	8.2	$ 3.50	240,748	$ 3.50
$ 5.00	286,700	8.8	$ 4.88	50,200	$ 4.88
$ 7.00 to $ 7.75	200,500	9.7	$ 7.17	39,250	$ 2.76
$ 8.20 to $ 8.61	811,750	9.5	$ 8.57	5,000	$ 8.61
$ 9.60 to $ 9.82	261,500	2.5	$ 9.82	52,500	$ 13.15

		Year Ended December 31, 2005
		Revenues		% of Total Revenues
Customer A	Subscription	$	319,874		11.8	%
Others	Various		2,382,102		88.2	%
Total		$	2,701,976		100.0	%

		Year Ended December 30, 2004
		Revenues		% of Total Revenues
Customer E	Integration	$	330,050		32.9	%
Others	Various		672,920		67.1	%
Total		$	1,002,970		100.0	%

		Year Ended December 30, 2003
		Revenues		% of Total Revenues
Customer E	Integration	$	342,847		27.2	%
Customer F	Consulting		150,000		11.9	%
Others	Various		768,376		60.9	%
Total		$	1,261,223		100.0	%

Assets:
Accounts Receivable, net	$	6,894
Other Current Assets		10,742
P,P & E, net		388,128
Other Assets		246,228

TOTAL ASSETS	$	651,992

Liabilities & Equity
Accounts Payable	$	109,897
Subscriptions Payable		1,657,327
Note Payable		150,000
Other Liabilities		29,549
TOTAL LIABILITIES		1,946,773

Equity		(1,294,781	)
TOTAL LIABILITIES AND EQUITY	$	651,992

Consideration Paid (including acquisition costs and liabilities assumed)	$	5,800,640
Tangible Assets Acquired		(651,992	)
Identifiable Intangible Assets Acquired		(1,424,220	)
Goodwill	$	3,724,428

Assets
Cash	$	32,035
Accounts Receivable		356,781
Prepaid Registration		77,038
Other Current Assets		8,882
Total Current Assets		474,736
P,P&E, net		64,099
Other Assets		25,000

TOTAL ASSETS	$	563,835

Liabilities
Accounts Payable	$	36,759
Deferred Revenue		533,447
Other Current Liabilities		1,641
Total Current Liabilities		571,847
Loan Payable		65,000

TOTAL LIABILITIES	$	636,847

Equity		(73,012	)
TOTAL LIABILITIES & EQUITY	$	563,835

Consideration Paid (including acquisition costs and liabilities assumed)	$	6,732,265
Tangible Assets Acquired		(563,835	)
Identifiable Intangible Assets Acquired		(4,402,895	)
Goodwill	$	1,765,535

	Smart CRM	Smart Commerce	Smart Online	Pro forma Unaudited
Revenue	$ 1,986,522	$ 3,380,609	$ 1,002,970	$6,370,101
Net Income / (Loss) (a)	445,494	1,423,691	(2,671,929)	(802,744)
Net Income / (Loss) Attributable To Common Stockholders	445,494	1,423,691	(8,319,049)	(6,449,864)

EPS				$ (.59)

	2005												2004
	1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			1st Qtr			2nd Qtr			3rd Qtr						4th Qtr
Revenues	$	253,238		$	406,116		$	344,692		$	1,697,930		$	249,728		$	235,845		$	237,545				$	279,852
Gross Profit	$	221,511		$	384,205		$	318,892		$	1,376,546		$	192,709		$	192,437		$	178,722				$	227,486
Loss from Operations	$	(847,484	)	$	(874,306	)	$	(2,188,462	)	$	(12,156,577	)	$	(519,325	)	$	(707,688	)	$	(1,075,619	)	(1	)	$	(499,303	)	(2)
Net Loss Attributable to Common Stockholders	$	(294,145	)	$	(860,819	)	$	(2,180,856	)	$	(12,254,789	)	$	(6,040,464	)	$	(692,786	)	$	(1,289,108	)			$	(296,691	)
Net Loss Per Share-
Basic and Diluted		(0.02	)		(0.07	)		(0.17	)		(0.84	)		(0.83	)		(0.06	)		(0.12	)				(0.03	)
Number of Shares Used in Per Share Calculation		11,829,610			12,387,333			12,832,365			14,667,137			7,321,707			10,722,507			11,089,101					11,630,471

Name	Age	Position
Dennis Michael Nouri (1)(2)	52	President, Chief Executive Officer, and Director
Henry Nouri (2)	50	Executive Vice President
Thomas Furr	39	Chief Operating Officer, Director
Anil Kamath	39	Chief Technology Officer
Joan Keston (4)	52	General Counsel and Secretary
Scott Whitaker (3)	36	Chief Financial Officer and Principal Accounting Officer
Gary Mahieu	38	Chief Operating Officer and Vice President of Smart Commerce, Inc., a wholly owned subsidiary
David S. Y. Sarna (5)	56	Director
Jeff LeRose	62	Director
Frank Coll (6)	47	Director

(a)		Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(b)		Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(c)		Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and
(d)		Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Name	Audit Committee	Compensation Committee	Corporate Governance Nominating Committee
Michael Nouri
Thomas Furr
Jeff LeRose	Chair	Chair	Chair