UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

FORM 10-Q

QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2011

Commission File Number 001-32300

|                                                                  |                | 
|----------------------------------------------------------------- | -------------- | 
|                                                                  | SMARTPROS LTD. | 
|                                                                  |                | 
|(Exact name of small business issuer as specified in its charter)

|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 13-4100476                           
|                                                                |  |                                      
|(State or other jurisdiction
 of incorporation or organization) |  | (I.R.S. Employer
 Identification No.)

|                                           
|-------------------------------------------
|12 Skyline Drive, Hawthorne, New York 10532
|                                           
|(Address of principal executive office)    

|                                                
|------------------------------------------------
|(914) 345-2620                                  
|                                                
|(Issuers telephone number, including area code)

Check whether
the issuer: (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x          No o


Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes o          No o


Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.

| |                               |  |                                          | 
| | ----------------------------- |  | ---------------------------------------- | 
| | Large
 accelerated filer    o |  | Accelerated
 filer                  
  o | 
|
| | Non-accelerated
 filer      o |  | Smaller
 reporting company   x           | 

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).

Yes o          No x

Number of
shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: As of May 10, 2011, there were 4,919,659 shares of
common stock outstanding.

---



SMARTPROS LTD.FORM 10-Q REPORT

March 31, 2011

TABLE OF CONTENTS

|                               |         |                                                                                        |  |      | 
|------------------------------ | ------- | -------------------------------------------------------------------------------------- |  | ---- | 
|                               |         |                                                                                        |  | PAGE
|                               |         |                                                                                        |  |     
|                              
|PART I  FINANCIAL INFORMATION |         |                                                                                        | 
|                               |         |                                                                                        | 
|                               | Item 1. | Condensed Consolidated Financial Statements (Unaudited)                                |  |      | 
|                               |         |                                                                                        |  |      | 
|                               |         | Balance Sheets  March 31, 2011 and December 31, 2010 (Audited)                        |  | 3    | 
|                               |         |                                                                                        |  |      | 
|                               |         | Statements of Operations for the three-month periods ended March 31,
 2011 and 2010    |  | 4    | 
|                               |         |                                                                                        |  |      | 
|                               |         | Statements of Cash Flows for the three-month periods ended March 31,
 2011 and 2010    |  | 5    | 
|                               |         |                                                                                        |  |      | 
|                               |         | Notes to Condensed Consolidated Financial Statements                                   |  | 6    | 
|                               |         |                                                                                        |  |      | 
|                               | Item 2. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations |  | 10   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 3. | Quantitative and Qualitative Risk Disclosures About Market Risk                        |  | 17   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 4. | Controls and Procedures                                                                |  | 17   | 
|                               |         |                                                                                        |  |      | 
|PART II  OTHER INFORMATION    |         |                                                                                        | 
|                               |         |                                                                                        | 
|                               | Item 1. | Legal Proceedings                                                                      |  | 17   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds                            |  | 17   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 3. | Defaults Upon Senior Securities                                                        |  | 18   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 4. | [Removed and Reserved]                                                                 |  | 18   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 5. | Other Information                                                                      |  | 18   | 
|                               |         |                                                                                        |  |      | 
|                               | Item 6. | Exhibits                                                                               |  | 18   | 
|                               |         |                                                                                        |  |      | 
|SIGNATURES                     |         | 19                                                                                     | 

i

---



FORWARD-LOOKING
STATEMENTS

Some
of the statements made in this Quarterly Report on Form 10-Q are
forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934. These statements relate to our plans and
objectives for future operations as well as to market trends and expectations.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from any expressed or implied future results, performance
or achievements. The forward-looking statements included in this report are
based on current expectations, plans and assumptions relating to the future
operation of our business. These expectations, plans and assumptions involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our expectations, plans and assumptions underlying the
forward-looking statements are reasonable, we cannot assure you that the
forward-looking statements included in this report will, ultimately, prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the fact that we have
included forward-looking statements in this report should not be interpreted as
a representation by us or any other person that our objectives and plans will
be achieved. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.

Forward-looking
statements in this report include statements relating to our operating results,
the development of new products, the timing of the launch of such products and
the timing of any revenue to be generated from such products as well as
statements regarding our plans for acquisitions. Whether or not our
expectations regarding such forward-looking statements are ultimately realized
depends on such factors as our ability to increase revenues, control costs,
complete the development of new products in a timely manner and on budget, our
ability to successfully market our products, general economic conditions, our
ability to successfully identify acquisition candidates and our ability to
successfully complete those acquisitions and integrate the newly acquired
business into our existing operating and business platform.

ii

---



PART I
FINANCIAL INFORMATION

Item 1. Condensed
Consolidated Financial Statements

SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ---------- | ----------------------------- | - | ---------- | -
|                                                                                                                                                                                                                                                                         |  | March 31,
 2011
 (Unaudited) |            | December 31,
 2010
 (Audited) |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |  
|ASSETS                                                                                                                                                                                                                                                                   |  |                              |            |                               |   |            |  
|Current Assets:                                                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                                                |  | $                            | 6,579,426  |                               | $ | 7,007,541  |  
|Accounts receivable, net of allowance for
 doubtful accounts of approximately
 $39,000 at March 31, 2011 and December 31, 2010, respectively                                                                                                                             |  |                              | 1,041,680  |                               |   | 2,149,067  |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                |  |                              | 565,484    |                               |   | 391,136    |  
|Current tax benefit                                                                                                                                                                                                                                                      |  |                              | 240,000    |                               |   |           |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Total Current Assets                                                                                                                                                                                                                                                     |  |                              | 8,426,590  |                               |   | 9,547,744  |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Property and equipment, net                                                                                                                                                                                                                                              |  |                              | 669,664    |                               |   | 717,428    |  
|Goodwill                                                                                                                                                                                                                                                                 |  |                              | 3,375,257  |                               |   | 3,375,257  |  
|Other intangibles, net                                                                                                                                                                                                                                                   |  |                              | 3,951,706  |                               |   | 3,891,858  |  
|Other assets, including restricted cash of
 $75,000                                                                                                                                                                                                                      |  |                              | 85,626     |                               |   | 85,626     |  
|Deferred tax asset                                                                                                                                                                                                                                                       |  |                              | 1,290,000  |                               |   | 1,290,000  |  
|Investment in joint venture, at cost                                                                                                                                                                                                                                     |  |                              | 9,992      |                               |   | 3,867      |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                                                                         |  |                              | 9,382,245  |                               |   | 9,364,036  |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Total Assets                                                                                                                                                                                                                                                             |  | $                            | 17,808,835 |                               | $ | 18,911,780 |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                     |  |                              |            |                               |   |            |  
|Current Liabilities:                                                                                                                                                                                                                                                     |  |                              |            |                               |   |            |  
|Accounts payable                                                                                                                                                                                                                                                         |  | $                            | 262,953    |                               | $ | 722,683    |  
|Accrued expenses                                                                                                                                                                                                                                                         |  |                              | 404,771    |                               |   | 391,626    |  
|Deferred revenue                                                                                                                                                                                                                                                         |  |                              | 5,342,965  |                               |   | 5,514,388  |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Total Current Liabilities                                                                                                                                                                                                                                                |  |                              | 6,010,689  |                               |   | 6,628,697  |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Other liabilities                                                                                                                                                                                                                                                        |  |                              | 36,015     |                               |   | 32,901     |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                            |  |                              |            |                               |   |            |  
|Stockholders Equity:                                                                                                                                                                                                                                                    |  |                              |            |                               |   |            |  
|Preferred stock, $.001 par value,
 authorized 1,000,000 shares, 0 shares issued and outstanding                                                                                                                                                                          |  |                              |           |                               |   |           |  
|Common stock, $.0001 par value, authorized
 30,000,000 shares, 5,616,933 and
 5,561,100 shares issued as of March 31, 2011 and December 31, 2010 respectively; and 4,919,659 and 4,873,826
 shares outstanding as of March 31,
 2011 and December 31, 2010, respectively |  |                              | 562        |                               |   | 556        |  
|Additional paid-in capital                                                                                                                                                                                                                                               |  |                              | 17,573,352 |                               |   | 17,607,921 |  
|Accumulated (deficit)                                                                                                                                                                                                                                                    |  |                              | (3,665,193 | )                             |   | (3,235,805 | )
|Common stock in treasury, at cost  697,274
 and 687,274 shares at March 31, 2011 and December 31, 2010, respectively                                                                                                                                                    |  |                              | (2,146,590 | )                             |   | (2,122,490 | )
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                                                               |  |                              | 11,762,131 |                               |   | 12,250,182 |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                                               |  | $                            | 17,808,835 |                               | $ | 18,911,780 |  
|                                                                                                                                                                                                                                                                         |  |                              |            |                               |   |            |  

|                                                                      | 
|--------------------------------------------------------------------- | 
|                                                                      | 
|See Notes to Condensed Consolidated
 Financial Statements (Unaudited)

3

---



SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of
Operations (Unaudited)

|                                                |  |                               |           |      |   |           |  
|----------------------------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | -
|                                                |  | Three Months Ended
 March 31, |          
|                                                |  |                               |          
|                                               
|                                                |  | 2011                          |           | 2010 |  
|                                                |  |                               |           |      |  
|                                                |  |                               |           |      |   |           |  
|Net revenues                                    |  | $                             | 3,054,596 |      | $ | 3,615,496 |  
|Cost of
 revenues                               |  |                               | 1,352,758 |      |   | 1,960,109 |  
|                                                |  |                               |           |      |   |           |  
|Gross profit                                    |  |                               | 1,701,838 |      |   | 1,655,387 |  
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Operating
 Expenses:                            |  |                               |           |      |   |           |  
|Selling, general and administrative             |  |                               | 2,112,558 |      |   | 2,207,984 |  
|Depreciation and amortization                   |  |                               | 257,572   |      |   | 254,237   |  
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               | 2,370,130 |      |   | 2,462,221 |  
|                                                |  |                               |           |      |   |           |  
|Operating
 (loss)                               |  |                               | (668,292  | )    |   | (806,834  | )
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Other Income
 (Expense):                        |  |                               |           |      |   |           |  
|Interest income (net)                           |  |                               | 2,779     |      |   | 4,334     |  
|Equity loss from joint venture                  |  |                               | (3,875    | )    |   | (550      | )
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               | (1,096    | )    |   | 3,784     |  
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|(Loss)
 before income tax                       |  |                               | (669,388  | )    |   | (803,050  | )
|                                                |  |                               |           |      |   |           |  
|Benefit from
 income tax                        |  |                               | 240,000   |      |   | 300,000   |  
|                                                |  |                               |           |      |   |           |  
|Net (loss)                                      |  | $                             | (429,388  | )    | $ | (503,050  | )
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Net (loss)
 per common share:                   |  |                               |           |      |   |           |  
|Basic net (loss) per common share               |  | $                             | (0.09     | )    | $ | (0.10     | )
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Diluted net (loss) per common share             |  | $                             | (0.09     | )    | $ | (0.10     | )
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Weighted
 Average Number of Shares Outstanding: |  |                               |           |      |   |           |  
|Basic                                           |  |                               | 4,878,807 |      |   | 5,043,194 |  
|                                                |  |                               |           |      |   |           |  
|                                                |  |                               |           |      |   |           |  
|Diluted                                         |  |                               | 4,878,807 |      |   | 5,043,194 |  
|                                                |  |                               |           |      |   |           |  

|                                                                      | 
|--------------------------------------------------------------------- | 
|                                                                      | 
|See Notes to Condensed Consolidated
 Financial Statements (Unaudited)

4

---



SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

|                                                                                          |  |                               |           |      |   |           |  
|----------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | -
|                                                                                          |  | Three Months Ended
 March 31, |          
|                                                                                          |  |                               |          
|                                                                                          |  | 2011                          |           | 2010 |  
|                                                                                          |  |                               |           |      |  
|Cash Flows from Operating
 Activities:                                                    |  |                               |           |      |   |           |  
|Net loss                                                                                  |  | $                             | (429,388  | )    | $ | (503,050  | )
|                                                                                          |  |                               |           |      |   |           |  
|Adjustments to reconcile net (loss) net cash (used in) provided by
 operating activities: |  |                               |           |      |   |           |  
|Depreciation and amortization                                                             |  |                               | 257,572   |      |   | 254,237   |  
|Stock compensation expense                                                                |  |                               | 26,933    |      |   | 47,959    |  
|Current income tax benefit                                                                |  |                               | (240,000  | )    |   | (300,000  | )
|Equity loss from joint venture                                                            |  |                               | 3,875     |      |   | 550       |  
|Changes in operating assets and liabilities:                                              |  |                               |           |      |   |           |  
|(Increase) decrease in operating assets:                                                  |  |                               |           |      |   |           |  
|Accounts receivable                                                                       |  |                               | 1,107,387 |      |   | 1,172,182 |  
|Prepaid expenses and other current assets                                                 |  |                               | (174,349  | )    |   | (179,995  | )
|Other assets                                                                              |  |                               |          |      |   | 75,000    |  
|(Decrease) increase in operating liabilities:                                             |  |                               |           |      |   |           |  
|Accounts payable and accrued expenses                                                     |  |                               | (446,585  | )    |   | (388,339  | )
|Deferred revenue                                                                          |  |                               | (171,423  | )    |   | 36,043    |  
|Other liabilities                                                                         |  |                               | 3,114     |      |   | 7,362     |  
|                                                                                          |  |                               |           |      |   |           |  
|Total adjustments                                                                         |  |                               | 366,524   |      |   | 724,999   |  
|                                                                                          |  |                               |           |      |   |           |  
|Net Cash (Used in) provided
 by Operating Activities                                      |  |                               | (62,864   | )    |   | 221,949   |  
|                                                                                          |  |                               |           |      |   |           |  
|                                                                                          |  |                               |           |      |   |           |  
|Cash Flows from Investing
 Activities:                                                    |  |                               |           |      |   |           |  
|Acquisition of property and equipment                                                     |  |                               | (15,202   | )    |   | (66,805   | )
|Capitalized software development costs                                                    |  |                               | (216,138  | )    |   | (11,118   | )
|Capitalized course costs                                                                  |  |                               | (14,315   | )    |   | (13,793   | )
|Intangibles acquired                                                                      |  |                               | (24,000   | )    |   |          |  
|Additional capital invested in joint venture                                              |  |                               | (10,000   | )    |   |          |  
|                                                                                          |  |                               |           |      |   |           |  
|Net Cash (Used in)
 Investing Activities                                                  |  |                               | (279,655  | )    |   | (91,716   | )
|                                                                                          |  |                               |           |      |   |           |  
|                                                                                          |  |                               |           |      |   |           |  
|Cash Flows from Financing
 Activities:                                                    |  |                               |           |      |   |           |  
|Purchase of treasury stock                                                                |  |                               | (24,100   | )    |   | (461,915  | )
|Dividend paid                                                                             |  |                               | (61,496   | )    |   |          |  
|                                                                                          |  |                               |           |      |   |           |  
|Net Cash (Used in)
 Financing Activities                                                  |  |                               | (85,596   | )    |   | (461,915  | )
|                                                                                          |  |                               |           |      |   |           |  
|                                                                                          |  |                               |           |      |   |           |  
|Net (decrease) in cash and
 cash equivalents                                              |  |                               | (428,115  | )    |   | (331,682  | )
|Cash and cash equivalents,
 beginning of period                                           |  |                               | 7,007,541 |      |   | 6,720,649 |  
|                                                                                          |  |                               |           |      |   |           |  
|Cash and cash equivalents,
 end of period                                                 |  | $                             | 6,579,426 |      | $ | 6,388,967 |  
|                                                                                          |  |                               |           |      |   |           |  
|                                                                                          |  |                               |           |      |   |           |  
|Supplemental Disclosure of
 Cash Flow Information:                                        |  |                               |           |      |   |           |  
|                                                                                          |  |                               |           |      |   |           |  
|Common stock dividend
 declared March 9, 2010, paid April 11, 2010                        |  |                               |          |      | $ | 49,263    |  
|                                                                                          |  |                               |           |      |   |           |  

|                                                                     | 
|-------------------------------------------------------------------- | 
|                                                                     | 
|See Notes to Condensed Consolidated Financial Statements (Unaudited)

5

---



Notes to
Condensed Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

The
unaudited condensed consolidated financial statements of SmartPros Ltd. and
subsidiaries (SmartPros or the Company), including these notes, have been
prepared by the Company in accordance with generally accepted accounting
principles (GAAP) for interim financial information and pursuant to the rules
and regulations promulgated by the U.S. Securities and Exchange Commission (the
SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with GAAP have been omitted or
condensed. However, in the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These unaudited condensed consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial
statements for the year ended December 31, 2010, and the notes thereto included
in the Companys Annual Report on Form 10-K filed with the SEC on March 29,
2011. Results of consolidated operations for the interim periods are not
necessarily indicative of a full years operating results. The unaudited
condensed consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiaries, SmartPros Legal and Ethics, Ltd.
(SLE), Skye Multimedia Ltd. (Skye) and Loscalzo Associates Ltd.
(Loscalzo). All material inter-company accounts and transactions have been
eliminated.

Note 2. Description of Business and Summary
of Significant Accounting Policies

Nature of Operations

The
Company, a Delaware corporation, was organized in 1981 under the name Center
for Video Education Inc. for the purpose of producing educational programs
primarily directed to the accounting profession. SmartPros primary products
today include the following:

| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The
 Accounting division produces video and Internet-based subscription programs,
 live training seminars and other continuing professional education programs
 and services for the accounting profession and finance professionals. The
 Company is a leading provider of live training to certified public
 accountants, accountants in industry and financial professionals.
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | The
 Engineering division produces a series of continuing education courses for
 engineers, as well as courses designed for candidates of the various
 professional engineering exams.                                                                                                                                                                                          
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | The
 Financial Services division produces online training solutions for the
 insurance, securities and banking industries under the trade name Financial
 Campus, as well as courses designed for live training.                                                                                                                                                                
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | The SmartIt
 Information Technology division produces a subscription-based program called
 WatchIT and also develops custom courses for corporate information technology
 professionals.                                                                                                                                                                                        
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | SLEs
 Working Values Ethics and Compliance division, produces ethics, governance
 and compliance programs for corporate clients and its Cognistar Legal
 division produces online and customized training for the legal profession.                                                                                                                                            
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | Skye
 produces customized training solutions for a number of industries including
 pharmaceutical and professional services firms.                                                                                                                                                                                                                                              
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | The
 SmartPros Interactive division produces custom videos, rents out its
 recording studio and editing facilities and provides web development and
 other multi-media technology consulting services.                                                                                                                                                                          

While
management monitors the revenue streams of the various products and services,
operations are managed and financial performance is evaluated on a company-wide
basis. Accordingly, all of the Companys operations are considered to be
aggregated in one reportable segment.

6

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

SmartPros
is headquartered in Hawthorne, New York, where it maintains its corporate
offices, new media lab and video production facilities.

Use of Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The
Company recognizes revenue from its subscription services as earned.
Subscriptions are generally billed on an annual basis, deferred at the time of
billing and amortized into revenue on a monthly basis over the term of the
subscription, generally one year. Engineering products are non-subscription
based and revenue is recognized upon shipment or, in the case of online sales,
upon receipt of payment. Revenues from other non-subscription services, such as
website design, video production, consulting services, and custom projects, are
recognized on a proportional performance basis where sufficient information
relating to project status and other supporting documentation is available. The
contracts may have different billing arrangements resulting in either unbilled
or deferred revenue. The Company obtains either signed agreements or purchase
orders from its non-subscription customers outlining the terms and conditions
of the products or services to be provided. Otherwise, revenues are recognized
after completion and/or delivery of services to the customer. Revenue from live
training programs is recognized upon completion of the conference or seminar,
which usually lasts one to three days. Expenses directly related to the
seminars including marketing expenses are charged to expense in the quarter in
which the seminar is held.

Capitalized Course Costs

Capitalized
course costs include the direct cost of internally developing proprietary
educational products and materials that have extended useful lives.
Amortization of these capitalized course costs commences when the courses are
available for sale from the Companys catalog. The amortization period is the
estimated useful lives of the courses, which are usually five years. Other
course costs incurred in connection with any of the Companys monthly
subscription products or custom work is charged to expense as incurred. As a
result of acquisitions, the Company is amortizing $1,113,000 of course costs
over a five-year period. Included in other intangible assets at March 31, 2011
are capitalized course costs of $307,000, net of accumulated amortization of
$145,000.

Deferred Revenue

Deferred
revenue related to subscription services represents the portion of unearned
subscription revenue amortized on a straight-line basis as earned. Deferred
revenues from seminars represent paid registrations for future programs.
Deferred revenue related to website design, video production or technology
services represents that portion of amounts billed by the Company, or cash
collected by the Company for which services have not yet been provided or
earned in accordance with the Companys revenue recognition policy. The
Cognistar Legal division, the Financial Services division and the SmartIT
Information Technology division recognize revenue either immediately from the
direct sale of courses on a prepaid basis or on a deferred basis as earned,
from the sale of subscriptions to their various products or from custom
projects.

Earnings (Loss) Per Share

Basic
earnings or loss per common share is net income or loss, as the case may be,
divided by the weighted average number of outstanding shares outstanding of the
Companys common stock, par value $.0001 per share (the Common Stock) during
the period. Basic earnings or loss per share exclude any dilutive effects of
options, warrants and convertible securities. Diluted earnings per common share
include the dilutive effect of shares of Common Stock issuable under stock
options and warrants. Diluted earnings per share are computed using the
weighted average number of Common Stock and Common Stock

7

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

equivalent
shares outstanding during the period. For the three-month periods ended March
31, 2011 and 2010 the inclusion of Common Stock equivalents would be
anti-dilutive.

Note 3. Stock-Based Compensation

The
Companys 2009 Incentive Compensation Plan (the 2009 Plan) permits the grant
of options and restricted stock to employees, directors and consultants. The
total number of shares currently reserved for grants under the 2009 Plan is
800,000. Restricted stock grants under the Plan may not exceed 200,000 shares
in the aggregate. The number of shares available for issuance under the 2009
Plan is reduced by the sum of the number of shares (a) issued upon exercise of
options granted pursuant to the Companys 1999 Stock Option Plan (the 1999
Plan) and (b) issuable upon exercise of outstanding options granted under the
1999 Plan. As options granted under the 1999 Plan are forfeited or terminated,
the number of options available for grant under the 2009 Plan increase (but may
not exceed 800,000 in the aggregate). Restricted stock grants under the 1999
Plan have no impact on the availability of restricted stock grants under the
2009 Plan.

As
of March 31, 2011, 413,998 options were outstanding, of which 393,998 and
20,000 had been granted under our 1999 and 2009 Plans, respectively, and of
which 367,831 are currently exercisable. In February 2011, the Company granted
5,000 options. These options vest one-third each year commencing one year from
date of grant. The exercise price of the grant is $2.37 per share. In addition,
restricted stock grants as of March 31, 2011 totaled 128,333, none of which had
vested. Of these outstanding restricted stock grants, 72,500 were made under
the 1999 Plan. In March 2011, the Companys Compensation Committee granted
certain employees and board members a total of 55,833 shares of restricted
stock vesting over various periods, not to exceed four years from date of
grant. The value of the shares at the date of grant was $2.34. As of March 31,
2011, 146,781 shares are available under the 2009 Plan. All stock options
granted under the 2009 Plan are granted with an exercise price equal to or
greater than the fair market value of the Common Stock at the grant date.
Employee and director stock options generally expire 10 years from the grant
date and have various vesting periods. Restricted stock awards generally vest
over a period of three to five years. Unvested shares and options are subject
to forfeiture unless certain time and/or performance requirements are
satisfied.

Current
accounting standards permit the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes-Merton (BSM) option-pricing model, which incorporates various
assumptions including volatility, expected life, interest rates and dividend
yields. The expected volatility is based on the historic volatility of the
Common Stock over the most recent period commensurate with the estimated
expected life of the Companys stock options, adjusted for the impact of
unusual fluctuations not reasonably expected to recur. The expected life of an
award is based on historical experience and on the terms and conditions of the
stock awards granted to employees and directors. The Company has recorded
stock-based compensation expense of $27,000 and $48,000 for the three-month
periods ended March 31, 2011 and 2010, respectively.

As
previously noted, the Company granted 5,000 options in February 2011. These
options had a fair value of $0.91 per share.

The
assumptions used for the three-month period ended March 31, 2011, and the
resulting estimates of weighted-average fair value of options granted during
those periods are as follows:

|                                                          |  |   |      |  
|--------------------------------------------------------- |  | - | ---- | -
|Expected
 life (years)                                    |  |   | 5.0  |  
|Risk-free
 interest rate                                  |  |   | 2.3  | %
|Volatility                                                |  |   | 40.0 | %
|Dividend
 yields                                          |  |   |     |  
|Weighted-average
 fair value of options during the period |  | $ | 0.91 |  
|                                                          |  |   |      |  

8

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

The
following table represents our stock options granted, exercised and forfeited
for the three months ended March 31, 2011:

|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|------------------------------ |  | ----------------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  |  | ---- | 
|Stock Options                  |  | Number
 of Shares |         | Weighted Average
 Exercise Price per
 Share |   | Weighted Average
 Remaining
 Contractual Term | 
|                               |  |                   |         |                                             |   |                                               | 
|Outstanding at January 1, 2011 |  |                   | 409,798 |                                             | $ | 4.37                                          |  |  | 3.47 | 
|Granted                        |  |                   | 5,000   |                                             | $ | 2.37                                          |  |  | 9.92 | 
|Exercised                      |  |                   |        |                                             |   |                                              |  |  |     | 
|Forfeited/expired              |  |                   | (800    | )                                           | $ | 4.14                                          |  |  | 7.38 | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|Outstanding at March 31, 2011  |  |                   | 413,998 |                                             | $ | 4.35                                          |  |  | 3.44 | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|Exercisable at March 31, 2011  |  |                   | 367,831 |                                             | $ | 4.45                                          |  |  | 2.88 | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 

Note 4. Income Taxes

The
Company recognizes a deferred tax asset available from its temporary difference
between net income before taxes as reported on its financial statement and net
income for tax purposes, increased by net operating loss carryforwards, which
begin to expire in 2023. The Company has recorded a deferred tax asset of
$2,060,000 at March 31, 2011 which is partially offset by a reserve in the
amount of $770,000. For the three months ended March 31, 2011, the Company
recorded a current income tax benefit of $240,000 principally attributable to
its net loss for the period which is expected to be utilized against taxable
income generated in future quarterly periods in 2011. The Company does not have
any uncertain income tax positions that would require disclosure under the
Accounting Standards Codification.

Note 5. Stockholders Equity

During
the three month period ended March 31, 2011, (i) the Company purchased 10,000
shares of its Common Stock for approximately $24,100, (ii) on March 10, 2011
the Company declared a quarterly dividend of $.0125 per share, payable on April
4, 2011 to shareholders of record on March 24, 2011, (iii) the dividend was
paid as of March 31, 2011, and (iv) 55,833 shares of restricted stock were
granted under the 2009 Plan.

9

---



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and related notes included elsewhere in this report. Some of the
statements in this discussion and elsewhere in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934. See Forward-Looking Statements following the Table
of Contents of this report. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.

The
terms we, our, us, or any derivative thereof, as used in this report
refer to SmartPros Ltd., a Delaware corporation, its subsidiaries and its
predecessors.

Overview

We
provide learning solutions for accounting/finance, legal, insurance, securities
and engineering professionals  five large vertical markets with mandatory
continuing education requirements  as well as for banking and information
technology professionals. We also provide corporate governance, ethics and
compliance training for the general corporate market. We offer off-the-shelf
courses and custom-designed programs with delivery methods suited to the
specific needs of our clients. Through our wholly-owned subsidiary, Loscalzo
Associates Ltd. (Loscalzo) and our Executive Enterprise Institute (EEI)
product line within our Accounting division, we are a leading provider of live
training to accountants and financial professionals. These courses are
delivered through various state CPA societies, accounting firms, corporations
or through seminars and conferences that they conduct. Our customers include
professional firms of all sizes, and a large number of businesses.

We
measure our operations using both financial and other metrics. The financial
metrics include revenues, gross margins, operating expenses and income from
continuing operations. Other key metrics include (i) revenues by sales source,
(ii) online sales, (iii) cash flows and (iv) EBITDA.

Some
of the most significant trends affecting our business are the following:

| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 increasing recognition by professionals and their employers of the importance
 of continuing professional education in order to maintain their licenses,
 remain current on new developments, develop and improve their skills and to
 generally remain competitive;
| |   |                                                                                                                                                                                                                                                                          
| |  | continuing
 professional education requirements by governing bodies, including states and
 professional associations;                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                          
| |  | the plethora
 of new laws and regulations affecting the conduct of business and the
 relationship between employers and their employees;                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                          
| |  | the
 increased competition in todays economy for skilled employees and the
 recognition that effective training can be used to recruit and train
 employees; and                                                                                                        
| |   |                                                                                                                                                                                                                                                                          
| |  | the
 development and acceptance of the Internet as a delivery channel for the
 types of products and services we offer.                                                                                                                                                  

Over
the last five years, our annual net revenues have grown from $12.5 million to a
high of $19.3 million in 2009 and dropped to $17.6 million in 2010. We believe
the decline in revenues from 2009 to 2010 was primarily due to general economic
conditions. We believe that the overall growth in net revenues is due in large
part to the acquisitions of companies, assets and product lines that we have
completed over the past five years. Our most recent acquisition was in February
2011, when we acquired This Week in Accounting, a weekly update on current
accounting issues directed to accountants in both public and private practice.
This series is delivered in webinar format and qualifies for continuing
professional education credits.

10

---



While
our subscription-based revenue in general does not fluctuate from quarter to
quarter or year to year, we have experienced a decline in revenue from live
training programs and from custom-designed projects, which has adversely
impacted our operating results. We believe that this trend is primarily due to
current economic conditions and consolidations in various industries. However,
we believe that our subscription based products provide a cost-effective means
for many companies to provide continuing education for their employees. We are
constantly seeking both new markets and new ways to market our products. As we
expand our product offerings and the content of our various libraries, we are
able to offer more products to the same consumer through cross-selling.

We
continue to believe that acquisitions are still the best strategy for us to
increase the breadth and depth of our current product offerings. Unless there
are other compelling reasons, we will only consider acquisitions that we
believe will be accretive within the first year of ownership. Ultimately,
however, our goal is to maximize shareholder value rather than short-term
profits. The size of the acquisitions will be determined, in part, by the
amount of capital available to us and the liquidity and price of our stock. We
may use debt to enhance or augment our ability to consummate larger
transactions. We cannot assure that we will be able to identify appropriate acquisition
opportunities or negotiate reasonable terms or that any acquired business or
assets will deliver the shareholder value that we anticipated at the outset.

There
are many risks involved with acquisitions, some of which are discussed in Item
1 of Part 1 under the caption Certain Risk Factors That May Affect Our Growth
and Profitability of our annual report on Form 10-K for the fiscal year ended
December 31, 2010. These risks include seasonality of revenues, integrating the
acquired business into our existing operations and corporate structure,
retaining key employees and minimizing disruptions to our existing business.

Our
common stock trades on the NASDAQ Capital Market under the symbol SPRO.

Critical Accounting Policies and Estimates

The
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements that have been prepared
according to accounting principles generally accepted in the United States. In
preparing these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. We
evaluate these estimates on an ongoing basis. We base these estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. We consider the following accounting policies to be the most
important to the portrayal of our financial condition.

Revenue
recognition

A
large portion of our revenue is in the form of subscription fees for our
monthly accounting update programs or access to our library of accounting,
financial services training and legal courses. Other sources of revenue include
direct sales of programs or courses on a non-subscription basis or from various
forms of live training, fees for Web site design, software development, video
production, course design and development and ongoing maintenance fees from our
clients use of the SmartPros Professional Education Center (PEC), our
proprietary learning management system. Subscriptions are billed on an annual
basis, payable in advance and deferred at the time of billing. Sales made over
the Internet are by credit card only. Renewals are usually sent out 60 days
before the subscription period ends. Larger transactions are usually dealt with
by contract, the financial terms of which depend on the services being
provided. Contracts for development and production services typically provide
for a significant upfront payment and a series of payments based on
deliverables specifically identified in the contract.

Revenue
from subscription services are recognized as earned, deferred at the time of
billing or payment and amortized into revenue on a monthly basis over the term
of the subscription. Engineering products are non-subscription based and
revenue is recognized upon shipment of the product or, in the case of online
sales, payment. Revenue from non-subscription services provided to customers,
such as Web site design, video production, consulting services and custom
projects is generally recognized on a proportional performance basis where
sufficient information relating to project status and other supporting
documentation is available. The contracts may have different billing
arrangements resulting in either unbilled or deferred revenue. We obtain either
a signed agreement or purchase order from our non-

11

---



subscription
customers outlining the terms and conditions of the sale or service to be
provided. Otherwise, these services are recognized as revenue after completion
and delivery to the customer. Duplication and related services are generally
recognized upon shipment or, if later, when our obligations are complete and
realization of receivable amounts is assured.

Revenue
from live training is recognized when the seminar or conference is completed.
These are usually one to three day events.

Impairment
of long-lived assets

We
review long-lived assets and certain intangible assets annually for impairment
and whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered.

Stock-based
compensation

Compensation
costs are recognized in the financial statements for stock options or grants
awarded to employees and directors. Options and warrants granted to
non-employees are recorded as an expense at the date of grant based on the then
estimated fair value of the stock-based instrument granted.

Segment
accounting

All
of our operations constitute a single segment, that of educational services.
Revenues from non-educational services, such as video production are not a
material part of our operating income.

Income taxes

We
account for deferred tax assets available principally from our fixed and
intangible assets and our net operating loss carryforwards in accordance with
the Accounting Standards Codification. We make significant estimates and
assumptions in calculating our current period income tax liability and deferred
tax assets. The most significant of these are estimates regarding future period
earnings. Our net deferred tax asset is estimated by management using a
five-year taxable income projection.

Results of Operations

Net
revenues from our core subscription products have remained consistent while net
revenues from custom work continue to decline, a result of, we believe, the
lingering effects of the recession. In addition, an industry-wide slow-down in
live-training attendance has adversely affected our live training business. To
address these market conditions, we continue to cut expenses and staff when
appropriate. More recently, we have started to see more request for
proposals, leading us to be cautiously optimistic about the future of our
business and operations.

Comparison
of three months ended March 31, 2011 and 2010

We
recorded a $561,000, or 15.5%, decrease in net revenues in the 2011 period
compared to the 2010 period. However, because we made significant cuts in
direct expenses during 2010, our gross profit increased 2.8% from $1.66 million
in 2010 to $1.70 million in the current period and our gross profit margin for
the 2011 period was 55.7% compared to 45.8% in the 2010 period. In addition,
our operating loss and our net loss for the 2011 period was lower than it was
for the 2010 period. Operating results for the 2011 period were
impacted by a decline in custom work from both our Skye Multimedia Ltd. (Skye)
subsidiary, as well as custom work from our Financial Campus division. We also
experienced a moderate decline in net revenues from our live training product
offerings in the first quarter of 2011 as compared to 2010. Our Financial
Campus division also had non-repetitive business in the first quarter of 2010.
We believe these trends continue to reflect the general economic conditions. We
believe that demand for custom work trails the general economy as it takes
longer for our customers and potential customers to make decisions on these
projects because of budgetary constraints and other issues that impact these
decisions. Custom work is non-repetitive and subject to market conditions and
can vary from quarter to quarter.

Online
revenues, which previously were primarily derived from the sales of
accounting/finance products, continue to be an important factor to our net
revenues. However, many of our other products,

12

---



including our
Cognistar Legal library, our Financial Campus courses and our technology
training products, are also delivered online and also are significant
generators of net revenues.

The
following table compares our statement of operations data for the three-months
ended March 31, 2011 and 2010. The trends suggested by this table may not be
indicative of future operating results, which will depend on various factors
including the relative mix of products sold (accounting/finance, law, engineering,
financial services, sales training  product, technology or compliance and
ethics) and the method of sale (video or online) as well as the timing of
custom project work, which can vary from quarter to quarter. In addition, our
operating results in future periods may also be affected by acquisitions.

|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|----------------------------------- |  | ---------------------------- | --------- | ---------- |  | ------ | -- | ---------- | --------- | ------ |  | ----- | -- |  | ------ | --
|                                    |  | Three months ended March 31, |          
|                                    |  |                              |          
|                                    |  | 2011                         |           | 2010       |  |        |    |           
|                                    |  |                              |           |            |  |        |    |           
|                                    |  | Amount                       |           | Percentage |  | Amount |    | Percentage |           | Change | 
|                                    |  |                              |           |            |  |        |    |            |           |        | 
|                                   
|Net revenues                        |  | $                            | 3,054,596 |            |  | 100.0  | %  | $          | 3,615,496 |        |  | 100.0 | %  |  | (15.5  | %)
|Cost of
revenues                    |  |                              | 1,352,758 |            |  | 44.3   | %  |            | 1,960,109 |        |  | 54.2  | %  |  | (31.0  | %)
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Gross profit                        |  |                              | 1,701,838 |            |  | 55.7   | %  |            | 1,655,387 |        |  | 45.8  | %  |  | 2.8    | % 
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Selling,
general and administrative |  |                              | 2,112,558 |            |  | 69.2   | %  |            | 2,207,984 |        |  | 61.1  | %  |  | (4.3   | %)
|Depreciation
and amortization       |  |                              | 257,572   |            |  | 8.4    | %  |            | 254,237   |        |  | 7.0   | %  |  | 1.3    | % 
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Total
operating expenses            |  |                              | 2,370,130 |            |  | 77.6   | %  |            | 2,462,221 |        |  | 68.1  | %  |  | (3.7   | %)
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Operating
(loss)                    |  |                              | (668,292  | )          |  | (21.9  | %) |            | (806,834  | )      |  | (22.3 | %) |  | (17.2  | %)
|Other (loss)
income, net            |  |                              | (1,096    | )          |  | 0.0    | %  |            | 3,784     |        |  | (0.01 | %) |  | (129.0 | %)
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Net (loss)
before income tax        |  |                              | (669,388  | )          |  | (21.9  | %) |            | (803,050  | )      |  | (22.2 | %) |  | (16.6  | %)
|Benefit from
income tax             |  |                              | 240,000   |            |  | 7.9    | %  |            | 300,000   |        |  | 8.3   | %  |  | (20.0  | %)
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   
|Net (loss)                          |  | $                            | (429,388  | )          |  | (14.1  | %) | $          | (503,050  | )      |  | (13.9 | %) |  | (14.6  | %)
|                                    |  |                              |           |            |  |        |    |            |           |        |  |       |    |  |        |   

Net
revenues

The
decrease in net revenues reflected above was primarily due to: (i) a $74,000
decrease in net revenues in the Accounting/Finance division; (ii) a $155,000
decrease in net revenues in the Financial Services division; (iii) a $241,000
decrease in net revenues from Skye; (iv) a $25,000 decrease in net revenues
from our Watch IT products; and (v) a $95,000 decrease in net revenues from our
Engineering division. These decreases were offset, by an $8,000 increase in net
revenues from our SLE subsidiary and a $22,000 increase in net revenues from
our video production and consulting division. Under our long-standing policy,
revenue is credited to the originating department regardless of the type of
service that is performed. For example, a contract to convert videotapes to
digital format is credited to the Accounting/Finance division if that is where
the sale originated, even if the project has nothing to do with accounting.

In
the first quarter of 2011, net revenues from the Accounting/Finance division
were $2.10 million, or 69% of net revenues, compared to $2.18 million, or 60%
of net revenues, in the comparable 2010 period. Net revenues from
subscription-based products and direct sales of course material on a
non-subscription basis, decreased slightly from $1.97 million in the 2010
period to $1.90 million in the corresponding 2011 period. Net revenues from
other projects in our Accounting/Finance division that are not subscription
based increased $8,000 from 2010 to 2011, while live-training revenue decreased
by $13,000 in the 2011 period from the 2010 period. Non-subscription-based
revenues fluctuate from period to period and are not indicative of any trends.
In the 2011 period, net revenues from online sales of accounting products
accounted for approximately $903,000, or 30% of net revenues, compared to
$975,000, or 27% of net revenues, in the comparable 2010 period. Net revenues
from our Loscalzo live training subsidiary decreased $31,000 in the 2011 period
compared to the 2010 period due to current economic conditions as various
accounting firms have reduced their live, in-house training. However, our EEI
live training division generated $34,000 in revenue in the current period as
compared to $16,000 in 2010 period, as they introduce new products and services
to their clients.

For
the three months ended March 31, 2011, Skye generated net revenues of $270,000
compared to $511,000 in the first quarter of 2010. Skyes income is derived
primarily from designing custom training projects and, as such, varies from
quarter to quarter. We believe the decrease in Skyes net revenue reflects
general economic conditions as business organizations are continuing to defer
these types of products in order to cut costs.

Our
Financial Services Training division generated $359,000 of net revenues in the
quarter ended March 31, 2011. For the quarter ended March 31, 2010, this
division generated $511,000 of net revenues. This decrease is due primarily
from a reduction in custom work and some reduced subscription-based

13

---



revenues.
However, this division has approximately $390,000 in deferred revenue primarily
from uncompleted custom work which in anticipates completing throughout 2011.

For
the quarter ended March 31, 2011, SLE had net revenues of $132,000 compared to
net revenues of $124,000 for the comparable 2010 quarter. For the 2011 period,
$51,000 of SLEs net revenues was generated by the Working Values ethics and
compliance division, and $81,000 was generated by the Cognistar legal division,
as compared to $8,000 and $116,000, respectively, in the 2010 period. Net
revenues generated by the Working Values ethics and compliance division are
derived primarily from custom consulting work. The Cognistar Legal division
derives its revenue primarily from prepaid usage and direct sales of its
courses.

Our
Engineering division generated $143,000 of net revenues in the first quarter of
2011 compared to $238,000 in the first quarter of 2010. The decrease is
primarily a result of timing differences in the placement of orders from customers,
the timing of the licensing exams and the need to rewrite some of our courses,
which we anticipate doing in 2011.. Sales of our engineering products are not
subscription based.

Net
revenues generated by our other divisions, which consist of video production
and duplication and information technology in the first quarter of 2011 were
$48,000. In comparison, these divisions recorded $51,000 of net revenue for the
first quarter of 2010.

Cost
of revenues

Cost
of revenues includes: (i) production costs  i.e., the salaries, benefits
and other costs related to personnel, whether our employees or independent
contractors, who are used directly in production, including producing our
educational programs and/or upgrading our technology; (ii) royalties paid to
third parties; (iii) the cost of materials, such as DVDs and packaging
supplies; (iv) costs related to live training; and (v) shipping and other
costs. There are many different types of expenses that are characterized as
production costs and many of them vary from period to period depending on many
factors. Generally, subscription based products have higher profit margins than
non-subscription based products and online sales have higher profit margins
than sales involving physically delivery of DVDs and written materials.

Our
gross profit margin increased for the three months ended March 31, 2011 to 56%
compared to 46% for the three months ended March 31, 2010, even with a decline
in net revenues. This increase is attributable, in part, to cost reductions
made during 2010, primarily in staffing. We outsource a substantial amount of
technology projects to countries where labor costs are lower than they are in
the United States. We also devote a significant amount of internal and external
resources to develop new products and to re-tool existing products and
technology. Some of these costs are capitalized.

Cost
of revenues decreased by $607,000 in the 2011 period compared to the 2010
period. Outsourced labor related to both live training and other products
decreased $214,000. Payroll and related costs decreased $218,000 in the 2011
period compared to the 2010 period. However, royalty expense increased by
$15,000.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Outside
labor and direct production costs. Outside labor
includes the cost of hiring actors and production personnel such as
directors, producers and cameramen and the outsourcing of non-video
technology. The cost of such outside labor, which is primarily video
production and technology personnel, decreased $214,000. This decrease is
directly related to the reduced revenue from custom projects and the
completion of technology upgrades. Direct production costs, which are costs
related to producing videos, courses, custom projects or live instruction and
includes such costs as renting equipment and locations and the use of live
instructors for either teaching or developing the courses, decreased
$185,000. The decrease is primarily attributable to the reduction in custom
projects. The variation in direct production costs are related to the type of
production and other projects and do not reflect any trends in our business.
As our business grows we may be required to hire additional production
personnel, increasing our cost of revenues. Our course libraries are
constantly requiring updates as there are always changes such as the
Codification of Accounting Standards that replaced the FASB accounting
pronouncements.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Royalties.
Royalty expense increased in the three months ended March 31, 2011, compared
to the corresponding 2010 period by $15,000. Royalty expense varies from
period to period based on sales and usage of our various products. Royalty
expense is primarily driven by our accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

14

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | course
catalog and our engineering product sales. Generally, royalties are paid
twice per year and are calculated based on a number of factors, not all of
which are available to us on a monthly, or even a quarterly basis.
Accordingly, a substantial portion of our royalty expense for the quarter is
estimated.                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Salaries.
Overall, payroll and related costs attributable to production personnel
decreased by $218,000 after capitalizing a portion of these costs during the
current quarter. Almost all of the decrease is attributable to reduced
personnel costs as a result of decreased business. We have also replaced some
payroll with outsourced technology services.                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Other
production related costs. These are other costs
directly related to the production of our products or the costs related to
live training such as purchases of materials, cost of venues, travel,
shipping, and other. These costs were $52,000 for the first quarter of 2011
as compared to $57,000 for the first quarter of 2010. The decrease of $5,000
is primarily related to reduced costs such as travel associated with custom
projects.

Selling,
general and administrative expenses

Selling,
general and administrative expenses include corporate overhead, such as
compensation and benefits for administrative, sales and marketing and finance
personnel, rent, insurance, professional fees, travel and entertainment and
office expenses. Selling, general and administrative expenses for the 2011
period decreased $95,000, or 4.3%, compared to the 2010 period. This decrease
is primarily attributable to reduced payroll and related costs.

Compensation
expense in the 2011 period decreased by $102,000 compared to the 2010 period.
Although, there were 55 full-time general and administrative employees at both
March 31, 2011 and 2010, the decrease in cost is primarily from savings in
management salaries from our Loscalzo subsidiary. In addition, compensation
expense includes stock based compensation expense of $27,000 for the 2011
period and $49,000 for the 2010 period, a reduction of approximately $22,000.

Our
other selling, general and administrative costs, exclusive of compensation
costs, increased only $7,000. Although, we make every effort to control our
costs, we anticipate that selling, general and administrative expenses will
continue to increase as a result of general increases in costs such as rent,
insurance, travel and recent acquisitions.

Depreciationand
amortization

Depreciation
and amortization expenses increased by $3,000 in the first quarter of 2011 compared
to the third quarter of 2010 primarily from the amortization of acquired
intangibles assets and from capitalized costs relating to internally-developed
assets. We expect our depreciation and amortization expense on our fixed and
intangible assets to continue to
increase as we replace computer equipment, capitalize internal costs for the
development of new courses and other technology and amortize intangibles
acquired through acquisitions. We continually replace and add to our computer
and other equipment as it ages and as additional equipment is needed to
accommodate growth.

Operating
loss

For
the three months ended March 31, 2011,
the operating loss was $668,000 compared to an operating loss of
$807,000 in the corresponding 2010 period.

Other
income/expense, net

Other
income and expense items consist of interest earned on deposits and the net
loss from our iReflect joint venture. We have no debt other than trade payables
and accrued liabilities. For the first quarter of 2011 we had an expense of
$1,100 compared to other income of $4,000 in the first quarter of 2010. The
loss from our 50% interest in the iReflect joint venture was $3,900 in the
current period compared to only $550 in the 2010 period principally as a result
of our share of expenses relating to the development of a new version of the
software.

15

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Income taxes

For
the current period, we recorded a current income tax benefit of $240,000 as
compared to current benefit in the 2010 period of $300,000. We anticipate that
this amount will fluctuate over the balance of the year.

Net
loss

For
the three months ended March 31, 2011, we
recorded a net loss of $429,000, or $0.9 per share, basic and diluted, compared
to a net loss of $503,000 or $0.10 per share, basic and diluted, for the three
months ended March 31, 2010.

Liquidity and Capital
Resources

At
March 31, 2011, we had no long-term debt.

Our
working capital as of March 31, 2011 was approximately $2.4 million compared to
$2.9 million at December 31, 2010. Our current ratio at March 31, 2011 was 1.40
to 1 compared to 1.44 to 1 at December 31, 2010. The current ratio is derived
by dividing current assets by current liabilities and is a measure used by
lending sources to assess our ability to repay short-term liabilities. The
largest component of our current liabilities is deferred revenue, which was
$5.3 million at March 31, 2011 and $5.5 million at December 31, 2010.

At
March 31, 2011, we had cash and cash equivalents of $6.58 million. For the
three months ended March 31, 2011, we reported a net decrease in cash of
$428,000 that includes $124,000 of cash used in operating activities, $270,000
of cash used in investing activities and $34,000 used in financing activities.
The primary components of our operating cash flows are net income adjusted for
non-cash expenses, such as depreciation and amortization stock-based
compensation and deferred and current income taxes, and the changes in our
operating assets and liabilities, such as accounts receivable, accounts payable
and deferred revenues.

At
March 31, 2011, we had approximately $1.04 million in receivables and $668,000
in payables, as compared to $2.15 million of receivables and $1.11 million in
payables at December 31, 2010. We used approximately $447,000 of our cash
collections to reduce our payables and expended approximately $245,000 on
capital expenditures.

The
decline in receivables is not indicative of any long-term business trends but a
result of the seasonality of the live-training business. During the
first-quarter of 2011 we collected a large amount of receivables from our
live-training business. That business does not resume until the middle of the
second quarter.

For
the 2011 period, net cash used in investing activities was $280,000, which
included capital expenditures of $15,000, consisting primarily of computer
equipment and software purchases, $216,000 for software development costs
relating to new products and $14,000 for course development. We purchased
certain intangible assets, primarily a program known as This Week in
Accounting for $24,000. We also made an additional capital contribution to our
iReflect joint venture of $10,000. We continually upgrade our technology
hardware and, as such, we anticipate additional capital expenditures relating
to equipment purchases over the next 12 months.

Cash
used in financing activities reflects the purchase of our shares from one of
our key employees. During the three-month period ended March 31, 2011, we
purchased 10,000 shares of our common stock for approximately $24,000. On March
10, 2011, we declared a dividend of $.0125 per common share payable on April 4,
2011 to shareholders of record as of March 24, 2011. The dividend was funded on
March 31, 2011.

As
of December 31, 2010, we had recognized approximately $1,290,000 of deferred
tax assets, net of a valuation allowance of $740,000.

We
believe that our current cash balances together with cash flow from operations
will be sufficient to meet our working capital and capital expenditure
requirements for the next 12 months.

16

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In
the future, we may issue additional debt or equity securities to satisfy our
cash needs. Any debt incurred may be secured or unsecured, bear interest at a
fixed or variable rate and may contain other terms and conditions that we deem
are reasonable under the circumstances existing at the time. Any sales of
equity securities may be at or below current market prices. We cannot assure
you that we will be successful in generating sufficient capital to adequately
fund our needs.

Item 3.
Quantitative and Qualitative Risk Disclosures About Market Risk

As a
smaller reporting company we are not required to provide the information
required by this Item.

Item 4. Controls
and Procedures

Evaluation
of Disclosure Controls and Procedures. Management,
with the participation of our principal executive officer and principal
financial officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in the Securities Exchange Act
of 1934, as amended (the Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this quarterly report (the Evaluation Date).
Based upon that evaluation, our principal executive officer and principal
financial officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act
(i) is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms and (ii) is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.

Changes
in Internal Control over Financial Reporting. There
were no changes in our internal controls over financial reporting that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

PART IIOTHER INFORMATION

Item 1. Legal
Proceedings

We
are not a party to any material legal proceeding not in the ordinary course of
business at this time.

Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds

Recent Sales of
Unregistered Securities

None

Company
Purchases of its Equity Securities

On
November 11, 2010, the Board of Directors approved an extension of the stock
buy back program and replenished the funds reserved to purchase shares of our
common stock on the NASDAQ Capital Market to $750,000. During the three month
period ended March 31, 2011, 10,000 shares were purchased at a cost of
approximately $24,100, and as of such date approximately $615,000 was available
under this program.

17

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ISSUER PURCHASES OF EQUITY SECURITIES

|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 
|------------------------------- |  | -------------------------------------------- | ------ | -------------------------------------- | - | ------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------- | ------ |  | - | ------- | 
|Period                          |  | (a)Total
 Numberof Shares(or Units)Purchased |        | (b)AveragePrice Paidper Share(or Unit) |   | (c)Total
 Number
 of Shares (or
 Units)
 Purchased as
 Part of Publicly
 Announced
 Plans or
 Programs |  | (d)Maximum
 Number
 (or Approximate
 Dollar Value) of
 Shares (or Units)
 that May Yet Be
 Purchased Under
 the Plans or
 Programs |       
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |       
|                               
|Month #1
 (January 1-31, 2011)  |  |                                              | 10,000 |                                        | $ | 2.40                                                                                                   |  |                                                                                                                                    | 10,000 |  | $ | 615,482 | 
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 
|Month #2
 (February 1-28, 2011) |  |                                              |       |                                        |   |                                                                                                       |  |                                                                                                                                    |       |  |   |        | 
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 
|Month #3
 (March 1-31, 2011)    |  |                                              |       |                                        |   |                                                                                                       |  |                                                                                                                                    |       |  |   |        | 
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 
|Total                           |  |                                              | 10,000 |                                        | $ | 2.40                                                                                                   |  |                                                                                                                                    | 10,000 |  | $ | 615,482 | 
|                                |  |                                              |        |                                        |   |                                                                                                        |  |                                                                                                                                    |        |  |   |         | 

Item 3. Defaults Upon Senior Securities

None.

Item 4. [REMOVED AND RESERVED.]

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits:

|            |  |                                                                                                                                  | 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |  | Description                                                                                                                      | 
|            |  |                                                                                                                                  | 
|            |  |                                                                                                                                 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of
 the Sarbanes-Oxley Act of 2002.                            
|            |  |                                                                                                                                 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of
 the Sarbanes-Oxley Act of 2002.                            
|            |  |                                                                                                                                 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer
 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

18

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SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                    |                               
|------------------- | ------------------------------
|                    | SmartPros
 Ltd.               
|                    |                               
|                    | (Registrant)                  
|                    |                               
|Date: May
 10, 2011 | /s/ Allen S.
 Greene          
|                    |                               
|                    | Chief
 Executive Officer      
|                    | (Principal
 Executive Officer)
|                    |                               
|Date: May
 10, 2011 | /s/ Stanley
 P. Wirtheim      
|                    |                               
|                    | Chief
 Financial Officer      
|                    | (Principal
 Financial Officer)

19

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