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Employment Agreement - SMART ONLINE INC - 9-30-2004

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Employment Agreement - SMART ONLINE INC - 9-30-2004 Powered By Docstoc
					EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Smart Online, Inc. a Delaware corporation (the "Company"), and Anil Kamath (the "Employee"), dated as of the 1st day of May, 2004. WITNESSETH THAT WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's commitment to continue to employ the Employee and for other additional consideration agreed to between the parties; NOW, THEREFORE, it is hereby agreed as follows: 1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to this Agreement shall commence on the date hereof and, unless earlier terminated as hereinafter provided, shall continue for an initial period through December 31, 2005. The Company may extend the period of employment of the Employee pursuant to this Agreement for additional periods of up to one (1) year for each extension by written notice to the Employee given not less than ninety (90) days prior to the expiration of the initial period or any renewal period. The period of employment of Employee hereunder shall be hereinafter referred to as the Employment Period. 2. POSITION AND DUTIES. (a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as Vice President, Technology, with such duties and responsibilities as are customarily assigned to such position and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the President, Chief Executive Officer or Board of Directors.

(b) During the Employment Period, the Employee shall devote his loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently. (c) The Employee's services shall be performed primarily at the Company's headquarters in Durham, North Carolina. 3. COMPENSATION. (a) Base Salary. The Employee's base salary shall be $100,000 per annum, payable monthly, which salary shall be reevaluated annually and is subject to such increases as the Board of Directors approves. Effective June 1, 2004 Employee's base salary shall be $125,000 per annum. The term "Annual Base Salary" shall refer to the base salary prevailing during the applicable period until such time of any increase in base salary whereupon it shall thereafter refer to such increased amount. (b) Stock Options. The Company and the Employee shall execute a Stock Option Agreement dated as of May 1, 2004 whereby the Company grants options to purchase an aggregate of 75,000 shares of the Company's Class Common Stock pursuant to the Company's 2004 Equity Compensation Plan. (c) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company for which senior management employees are eligible generally. (d) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes. 4. TERMINATION OF EMPLOYMENT. (a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "Disability Effective Date"). (b) By the Company. (i) The Company may terminate the Employee's employment at any time during the Employment Period for Cause or without Cause. A termination of 2

the Employee's employment with Cause shall be effective when communicated to the Employee by written or verbal notice. "Cause" means unacceptable conduct, including: A. participation in a fraud or act of dishonesty against the Company; B. any chemical dependence which affects the performance of his duties and responsibilities to the Company; C. breach of Employee's fiduciary obligations to the Company; D. Employee willfully fails to perform his duties; E. breach of the Company's policies or any material provision of this Agreement; F. misconduct resulting in loss to the Company or damage to the reputation of the Company; or G. conduct by the Employee which, in the determination of the Company's Board of Directors, demonstrates unfitness to serve. (ii) "Without cause" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by written or verbal notice. (c) By the Employee. The Employee may signify his intention to terminate his employment at any time upon the giving of ninety (90) days' notice ("Notice Period") to the Company of his intent to do so. Upon the expiration of the Notice Period the termination will be effective and the Date of Termination will be effective as referred to below. The Company reserves the right to accelerate the effective "Date of Termination" in its discretion after the inception of the Notice Period. (d) Date of Termination. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) Termination by the Company Without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as 3

defined in Section 4(b) above) or if the Employee terminates her employment for Good Reason (as defined below): (i) the Company shall pay the Employee the portion of his base salary in termination as he may be entitled to receive for services rendered prior to the date of such termination; (ii) for a period of three (3) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee her base salary in effect at the time of her termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if she had remained employed by the Company pursuant to this Agreement during the entire such three (3) month period; and For purposes of this Agreement, the Employee shall be deemed to have terminated her employment for "Good Reason" if she voluntarily terminates his employment with the Company under any of the following circumstances: (i) any demotion or diminution in the Employee's position, title, reporting position or duties; (ii) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or (iii) any material breach of this Agreement by the Company. (b) By the Company for Cause; By the Employee; Death or Disability. If the Employee's employment is terminated by the Company for Cause during the Employment Period, if Employee terminates employment during the Employment Period or if the Employee's employment is terminated by reason of the Employee's death or disability during the Employment Period, the Company shall pay the Employee the Annual Base Salary (then in effect) through the Date of Termination and the Company shall have no further obligations under this Agreement. 6. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish. 7. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that: (a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and 4

(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability which will render him incapable of performing the essential functions involved in his anticipated duties or that would otherwise hinder the performance of duties under this Agreement. 8. COVENANT NOT TO COMPETE. The Employee covenants that during the "Noncompetition Period," as defined in paragraph 14, and within the "Noncompetition Area," as defined in paragraph 15, he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency engage in the "Business," as defined in paragraph 16. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, he shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business. 9. NONDISCLOSURE COVENANT. (a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "Confidential Data"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that his relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) he shall keep and maintain the Confidential Data in strictest confidence, and (ii) he shall not, either directly or indirectly, use any Confidential Data for his own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will return to the Company all documents, notes, programs, data and any other materials (including any copies thereof) in his/her possession. (b) For purposes of this Agreement, the term "Confidential Data" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United 5

States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement. 10. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period he shall not directly or indirectly, on behalf of himself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity, solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period he shall not induce or attempt to induce any person to leave the employ of the Company. 11. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during his employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "Developments"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "works made for hire" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement. 6

12. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 8, 9, 10, and 11 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant. 13. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, by entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction. 14. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of two years after termination of the Employee's employment for any reason (such period not to include any period(s) of violation or period(s) of time required for litigation to enforce the covenants set forth herein). 15. NONCOMPETITION AREA. (a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and additionally existing in Europe, particularly servicing France, Spain, the United Kingdon and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area: (i) The State of North Carolina; (ii) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company; (iii) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and 7

(iv) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company. 16. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to: (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, legal services, whether for use by professionals or consumers; (ii) providing web-hosted applications and technology infrastructure syndication and/or (iii) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing to enter. 17. MISCELLANEOUS. (a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina. (b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision. (c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision. (e) This Agreement shall not be assignable without the written consent of the Company and the Employee. (f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns. (g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment Agreement, understanding or arrangement between Company and the Employee. 18. This Agreement terminates the Employment Agreement dated October 16, 2000, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect. 8

IN WITNESS WHEREOF, the parties executed this Agreement as of the day and year first above written. SMART ONLINE, INC. By:____________________________________ Title:_________________________________ WITNESS: ______________________ EMPLOYEE: _____________________________ 9

SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of October 13, 2003 (this "SECURITY AGREEMENT"), is entered into by Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713 (the "DEBTOR") in favor of the persons listed on SCHEDULE A hereto, ("SECURED PARTIES"), and such other persons as may become Secured Parties of secured obligations as described herein. WITNESSETH WHEREAS, Secured Parties have agreed to allow Debtor to defer certain payments owed to the Secured Parties pursuant to certain outstanding loans and employment agreements and in exchange Debtor has agreed to issue to the Secured Parties certain promissory notes dated October 13, 2003 (the "PROMISSORY NOTES") by Debtor in favor of Secured Parties, which agreements are evidenced by certain Deferred Compensation Agreements and certain Loan and Settlement Agreements, each of which are listed on SCHEDULE A hereto; and WHEREAS, in order to induce Secured Parties to make the loans under the Promissory Notes, Debtor has agreed to enter into this Agreement; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Debtor and Secured Parties hereby agree as follows: 1. DEFINITIONS. The following terms when used in this Security Agreement shall have the meanings set forth below: 1.1 "SECURED COLLATERAL" shall mean all tangible and intangible property of Debtor of any kind, whether now owned or existing or hereafter acquired, including, without limitation: (a) all equipment in all of its forms of Debtor, wherever located, and all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefore (all of the foregoing being "EQUIPMENT"); (b) all inventory in all of its forms of Debtor, wherever located, including all accessions thereto, products thereof and documents therefore (all of the foregoing being "INVENTORY"); (c) all accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles of Debtor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of Debtor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles; (d) all books, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing; (e) all software programs (including both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by Debtor, all firmware associated therewith; all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such software and firmware described in the preceding clauses; and all rights with respect to all of the foregoing, including, without limitation, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing; (f) all intellectual property of Debtor, including, without limitation,

all inventions, whether patentable or not, trade secrets, patents, trademarks, service marks, applications for patents, trademarks and service marks, copyrights (registered and unregistered), software, including both object and source code, all names and domain names, telephone numbers and email addresses; (g) all of Debtor's other property and rights of every kind and description and interests therein; and (h) all products, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing, including, without limitation, all payments under insurance, or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing. 1.2 "SECURED OBLIGATIONS" shall mean all obligations of Debtor now or hereafter existing under the Loan Documents, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Debtor to the Secured Parties under any other agreement, whether existing now or arising in the future. 1.3 "LOAN DOCUMENTS" shall mean this Security Agreement and the Promissory Notes and other agreements listed on SCHEDULE A hereto. 1.4 "SECURED PARTIES" shall mean both the Secured Parties set forth above and any person that becomes a Secured Parties of any Note in accordance with the provisions of the Loan Documents. 1.5 "UNIFORM COMMERCIAL CODE" shall mean the Uniform Commercial Code as in effect in the State of North Carolina or other applicable jurisdiction. 1.6 Other terms used in this Agreement that are defined in the Uniform Commercial Code shall have the meanings set forth in such code. 2. GRANT OF SECURITY INTEREST. 2.1 GRANT. Debtor hereby assigns and pledges to the Secured Parties, and hereby grants to the Secured Parties a first priority security interest in, all of the Secured Collateral. 2.2 SECURITY FOR OBLIGATIONS. This Security Agreement secures the payment of all Secured Obligations. 2.3 CONTINUING SECURITY INTEREST; TRANSFER OF NOTES. This Security Agreement shall create a continuing security interest in the Secured Collateral and shall (a) remain in full force and effect until payment in full of all Secured Obligations; (b) be binding upon Debtor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Secured Parties hereunder, to the benefit of the Secured Parties and its successors, transferees and assigns. Without limiting the generality of this clause, Secured Parties may sell, assign, or otherwise transfer (in whole or in part) the Promissory Notes to any other person, and such other person shall thereupon become vested with all the rights and benefits in respect thereof granted to the Secured Parties under this Security Agreement. 2.4 DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding Debtor shall remain liable under the contracts and agreements included in the Secured Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed. The exercise by Secured Parties of any rights hereunder shall not release Debtor from any of its duties or obligations under any such contracts or agreements included in the Secured Collateral. The Secured Parties shall not have any 2

obligation or liability under any such contracts or agreements included in the Secured Collateral by reason of this Security Agreement, nor shall the Secured Parties be obligated to perform any of the obligations or duties of Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder by reason of this Security Agreement. 2.5 SECURITY INTEREST ABSOLUTE. All rights of the Secured Parties and the security interests granted to the Secured Parties hereunder, and all obligations of Debtor hereunder, shall be absolute and unconditional, irrespective of: (a) the failure of Secured Parties to assert any claim or demand or to enforce any right or remedy against Debtor or to exercise any right or remedy against any other guarantor of, or Secured Collateral security for, any Secured Obligations; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other extension, compromise or renewal of any Secured Obligation; (c) any reduction, limitation, impairment or termination of any Secured Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and Debtor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affect, any Secured Obligations; (d) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of any Loan Document; (e) any addition, exchange, release, surrender or nonperfection of any Secured Collateral, or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Secured Obligations, or (f) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, Debtor, any surety or any guarantor. 2.6 FURTHER ASSURANCES. Debtor agrees that, from time to time and at its own expense, Debtor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Parties may reasonably request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to exercise and enforce their rights and remedies hereunder with respect to any Secured Collateral, including any patent, trademark, service mark, copyright, or other intellectual property. With respect to the foregoing and the grant of the security interest hereunder, Debtor hereby authorizes the Secured Parties to file one or more financing or continuation statements, and amendments thereto and other documents Secured Parties determines is useful, relative to all or any part of the Secured Collateral without the signature of Debtor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Secured Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. 2.7 TERMINATION. Upon the payment in full of all Secured Obligations, the security interest granted herein shall terminate and all rights to the Secured Collateral shall revert to Debtor. Upon any such termination, the Secured Parties will, at Debtor's sole expense, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination. 3. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants unto the Secured Parties as follows: 3.1 LOCATION OF OFFICE AND SECURED COLLATERAL. The place of business and chief executive office of Debtor and the office where Debtor keeps its records concerning the Secured Collateral is 3

located at the address above. All of the Secured Collateral is and will continue to be located at such place. 3.2 OWNERSHIP; NO LIENS. Debtor owns the Secured Collateral free and clear of any lien, security interest, charge or encumbrance except a security interest granted to secure certain obligations to William Furr and except for the security interest created by this Security Agreement and except as permitted by the Loan Documents. Debtor has exclusive possession and control of its Equipment and Inventory. 3.3 VALIDITY. This Security Agreement creates a valid security interest in the Secured Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken or shall be taken within three (3) business days. 3.4 CONTINUING INTEREST. Debtor will keep the Secured Collateral free from any adverse lien, security interest or encumbrance and do such other acts or things as Secured Parties may from time to time request to establish and maintain a valid and perfected security interest on the Secured Collateral (free of any adverse lien, security interest or encumbrance) to secure the payment and performance of the Secured Obligations and to permit Secured Parties to exercise all rights and privileges granted to it in this Agreement. 4. EVENTS OF DEFAULT AND REMEDIES. 4.1 EVENTS OF DEFAULT. Any one of the following events shall constitute a default hereunder: (a) failure of Debtor to pay as and when due any of the Secured Obligations; (b) failure of Debtor to perform its obligations under this Security Agreement; (c) if any representation or warranty of Debtor made in this Security Agreement shall prove to be untrue in any material respect; or (d) any other default as set forth in either of the Promissory Notes. 4.2 CERTAIN REMEDIES. If the event of a default the Secured Parties shall have the following rights: (a) RIGHTS UNDER THE UCC. The Secured Parties may exercise in respect of the Secured Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a Secured Parties on default under the UCC (whether or not the UCC applies to the affected Secured Collateral). (b) SALE OF SECURED COLLATERAL. Secured Parties may (i) require Debtor to, and Debtor hereby agrees that it will, at its expense and upon request of the Secured Parties forthwith, assemble all or part of the Secured Collateral as directed by the Secured Parties and make it available to the Secured Parties at a place to be designated by the Secured Parties which is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Secured Collateral or any part thereof in one or more parcels at public or private sale, at any Secured Parties's office or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Parties may deem commercially reasonable. Debtor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Secured Parties shall not be obligated to make any sale of the Secured Collateral regardless of notice of sale having been given. The 4

Secured Parties may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) PROCEEDS OF SALE AND DEFICIENCIES. The proceeds received by the Secured Parties in respect of any sale of, collection from, or other realization upon all or any part of the Secured Collateral may, in the discretion of the Secured Parties and after deduction of all costs and expenses of the sale (including reasonably attorneys fees), be held by the Secured Parties as Secured Collateral for, and/or then or at any time thereafter applied in whole or in part against all or any part of the Secured Obligations in such order as the Secured Parties shall elect. Any surplus of such cash or cash proceeds held by the Secured Parties and remaining after payment in full of all the Secured Obligations shall be paid over to Debtor or to whomsoever may be lawfully entitled to receive such surplus. Debtor shall remain liable to Secured Parties for any deficiency. 5. MISCELLANEOUS PROVISIONS 5.1 AMENDMENTS, ETC. No amendment to or waiver of any provision of this Security Agreement, nor consent to any departure by Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed on behalf of the Secured Parties, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 5.2 NOTICES. All notices and other communications hereunder shall be in writing and sent by registered or certified mail, by nationally recognized courier service, by facsimile transmission, or by personal delivery, addressed to Debtor or the Secured Parties at their respective addresses set forth above or at such other address as shall be designated by Debtor or by any Secured Parties in a written notice to Debtor and all Secured Parties at their respective addresses set above or as have been changed from time to time. 5.3 NO WAIVER; REMEDIES. No failure on the part of any Secured Parties to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. The Secured Parties shall exercise any of the rights of the Secured Parties hereunder (including any amendment of this Agreement or waiver of any rights) only as decided by Michael Nouri or a person designated in writing by Michael Nouri. In the event Michael Nouri shall die or be incapacitated without having designated a person to decide whether and how to exercise the rights of the Secured Parties hereunder, a majority of the Secured Parties, without regard to the amount owed to each, shall determine how to exercise the rights of all the Secured Parties hereunder, but any amounts collected shall be shared pro rata based on the amount owed by Debtor to each Secured Party. This Agreement may be amended only upon written consent of (i) Debtor; (ii) Michael Nouri; and (iii) a majority of the Secured Parties without regard to the amount owed to each. 5.4 SEVERABILITY. Wherever possible each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. 5

5.5 GOVERNING LAW. This Security Agreement shall be governed by and construed in accordance with internal laws of the State of North Carolina. 5.6 ENTIRE AGREEMENT. This Security Agreement and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral with respect thereto. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed and delivered by their duly authorized officer as of the date first above noted. DEBTOR SMART ONLINE, INC. (Corporate Seal) By: ___________________________ Title: ________________________ ATTEST: Secretary SECURED PARTIES Dennis Michael Nouri Henry Nouri Ronna Loprete Thomas Furr Eric Nouri 6

SCHEDULE A TO SECURITY AGREEMENT DATED OCTOBER ___, 2003
---------------------------- --------------------------------------------------SECURED PARTY ADDRESS ---------------------------- --------------------------------------------------500-201 Market Street Dennis Michael Nouri Chapel Hill, North Carolina 27516 ---------------------------- --------------------------------------------------106 Vapata Lane Henry Nouri Chapel Hill, North Carolina 27514 ---------------------------- --------------------------------------------------208 Village Crossing Drive Ronna Loprete Chapel Hill, North Carolina 27517 ---------------------------- --------------------------------------------------205 Calderon Drive Thomas Furr Chapel Hill, North Carolina 27516 ---------------------------- --------------------------------------------------604-204 Copperline Drive Eric Nouri Chapel Hill, North Carolina 27516 ---------------------------- ---------------------------------------------------

SECURED OBLIGATIONS $358,229.13 Promissory Note dated October 13, 2003 to Dennis Michael Nouri. $83,733.20 Promissory Note dated October 13, 2003 to Dennis Michael Nouri. $346,733.20 Promissory Note dated October 13, 2003 to Henry Nouri. $91,875.00 Promissory Note dated October 13, 2003 to Ronna Loprete. $113,039.78 Promissory Note dated October 13, 2003 to Thomas Furr. $54, 925.00 Promissory Note dated October 13, 2003 to Eric Nouri. Loan and Settlement Agreement dated October 13, 2003 with Dennis Michael Nouri. Deferred Compensation Agreement dated October 13, 2003 with Dennis Michael Nouri. Deferred Compensation Agreement dated October 13, 2003 with Henry Nouri. Deferred Compensation Agreement dated October 13, 2003 with Ronna Loprete. Deferred Compensation Agreement dated October 13, 2003 with Thomas Furr. Deferred Compensation Agreement dated October 13, 2003 with Eric Nouri. Employment Agreement dated July 14, 1999 with Dennis Michael Nouri. Employment Agreement dated July 14, 1999 with Henry Nouri. Employment Agreement dated June 29, 1999 with Ronna Loprete. Employment Agreement dated September 15, 2001with Thomas Furr. Employment Agreement dated April 1, 2002 with Eric Nouri.

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $418,749.93 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Dennis Michael Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of four hundred eighteen thousand seven hundred forty-nine dollars and ninety-three cents ($418,749.93), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:___________________________ Title: _______________________ ATTEST:
Lender: ________________________________ Secretary ______________________________ Dennis Michael Nouri

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $64,602.90 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Dennis Michael Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of sixty-four thousand six hundred two dollars and ninety cents ($64,602.90), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:___________________________ Title: _______________________ ATTEST:
Lender: ________________________________ Secretary ______________________________ Dennis Michael Nouri

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $398,383.27 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Henry Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of three hundred ninety-eight thousand three hundred eighty-three dollars and twenty-seven cents ($398,383.27), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:___________________________ Title: _______________________
ATTEST: ________________________________ Secretary Lender: ______________________________ Henry Nouri

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $116,507.60 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Tom Furr, ("LENDER") or order, on or before May 31, 2005, the principal sum of one hundred sixteen thousand five hundred seven dollars and sixty cents ($116,507.60), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:_____________________________ President
ATTEST: ________________________________ Secretary Lender: ________________________________ Thomas Furr

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $92,500.00 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Ronna Loprete, ("LENDER") or order, on or before May 31, 2005, the principal sum of ninety-two thousand dollars and no cents ($92,500.00), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:____________________________ President
ATTEST: ________________________________ Secretary Lender: _______________________________ Ronna Loprete

SATISFACTION: The debt evidenced by this Note has been satisfied in full this ____ day of _____________, 20__. By: _______________________________ SUCCESSOR PROMISSORY NOTE TO PROMISSORY NOTE DATED OCTOBER 13, 2003 Durham, North Carolina $47,740.18 April 30, 2004 FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Eric Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of forty-seven thousand seven hundred forty dollars and eighteen cents ($47,740.18), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium. If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid. All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other

sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time. The terms of this Note are the same as the Note from October 13, 2003 except where noted. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described. IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written. Smart Online, Inc. (Corporate Seal) By:__________________________ President
ATTEST: ________________________________ Secretary Lender: _____________________________ Eric Nouri

STANDSTILL AND INTEREST MODIFICATION AGREEMENT AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and DENNIS MICHAEL NOURI ("Creditor"). This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable. NOW, THEREFORE, the parties hereby agree as follows: Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date. INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004. This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:

By: /S/ DENNIS MICHAEL NOURI -----------------------Title: CEO -----------------------

Signature: /S/ DENNIS MICHAEL NOURI -----------------------Print name: DENNIS MICHAEL NOURI --------------------

STANDSTILL AND INTEREST MODIFICATION AGREEMENT AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and HENRY NOURI ("Creditor"). This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable. NOW, THEREFORE, the parties hereby agree as follows: Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date. INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004. This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:

By: /S/ DENNIS MICHAEL NOURI Title: CEO -----------------------

Signature: /S/ HENRY NOURI Print name: HENRY NOURI -----------

STANDSTILL AND INTEREST MODIFICATION AGREEMENT AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and THOMAS FURR ("Creditor"). This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable. NOW, THEREFORE, the parties hereby agree as follows: Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date. INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004. This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:

By: /S/ DENNIS MICHAEL NOURI Title: CEO -----------------------

Signature: /S/ THOMAS FURR Print name: THOMAS FURR -----------

STANDSTILL AND INTEREST MODIFICATION AGREEMENT AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and RONNA LOPRETE ("Creditor"). This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable. NOW, THEREFORE, the parties hereby agree as follows: Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date. INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004. This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:

By: /S/ DENNIS MICHAEL NOURI Title: CEO -----------------------

Signature: /S/ RONNA LOPRETE Print name: RONNA LOPRETE -------------

STANDSTILL AND INTEREST MODIFICATION AGREEMENT AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and ERIC R. NOURI ("Creditor"). This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable. NOW, THEREFORE, the parties hereby agree as follows: Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date. INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004. This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:

By: /S/ DENNIS MICHAEL NOURI -----------------------Title: CEO -----------------------

Signature: /S/ ERIC R. NOURI ----------------Print name: ERIC R. NOURI -------------

EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Smart Online, Inc. Durham, North Carolina We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on Form SB-2 of our report dated July 21, 2004, except for footnote 13, which is September 10, 2004, relating to the financial statements of Smart Online, Inc., which contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus.
/s/ BDO Seidman, LLP ----------------------BDO Seidman, LLP High Point, North Carolina September 29, 2004