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 June 30, 2010

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                     |  | (I.R.S. Employer   
|of incorporation or organization)                |  | 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 xNo 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 oNo 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 oNo x

Number of
shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: As of August 9, 2010, there were 4,921,005 shares of
common stock outstanding.

---



SMARTPROS LTD.

FORM 10-Q REPORT

June 30, 2010

TABLE OF CONTENTS

|                               |         |                                                                                                   |  |    | 
|------------------------------ | ------- | ------------------------------------------------------------------------------------------------- |  | -- | 
|                               |         | PAGE                                                                                             
|                               |         |                                                                                                   | 
|PART I  FINANCIAL INFORMATION |         |                                                                                                   | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 1. | Condensed Consolidated Financial Statements (Unaudited)                                           |  |    | 
|                               |         |                                                                                                   |  |    | 
|                               |         | Balance Sheets  June 30, 2010 and December 31, 2009 (Audited)                                    |  | 4  | 
|                               |         |                                                                                                   |  |    | 
|                               |         | Statements of Operations for the six month and three-month
 periods ended June 30, 2010 and 2009 |  | 5  | 
|                               |         |                                                                                                   |  |    | 
|                               |         | Statements of Cash Flows for the six-month periods ended June 30,
 2010 and 2009                  |  | 6  | 
|                               |         |                                                                                                   |  |    | 
|                               |         | Notes to Condensed Consolidated Financial Statements (Unaudited)                                  |  | 7  | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 2. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations            |  | 11 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 3. | Quantitative and Qualitative Risk Disclosures About Market Risk                                   |  | 21 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 4. | Controls and Procedures                                                                           |  | 21 | 
|                               |         |                                                                                                   |  |    | 
|PART II  OTHER INFORMATION    |         |                                                                                                   | 
|                               |         |                                                                                                   | 
|                               | Item 1. | Legal Proceedings                                                                                 |  | 22 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds                                       |  | 22 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 3. | Defaults Upon Senior Securities                                                                   |  | 22 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 4. | [Removed and Reserved]                                                                            |  | 22 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 5. | Other Information                                                                                 |  | 22 | 
|                               |         |                                                                                                   |  |    | 
|                               | Item 6. | Exhibits                                                                                          |  | 23 | 
|                               |         |                                                                                                   |  |    | 
|SIGNATURES                     |         | 23                                                                                                | 

2

---



FORWARD-LOOKING STATEMENTS

Certain
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 the plans and objectives of management
for future operations as well as to market trends and expectations. Such
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 future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
included herein 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, they
could prove inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded 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.

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.

3

---



PART I
FINANCIAL INFORMATION

|        |                                            
|------- | -------------------------------------------
|Item 1. | Condensed Consolidated Financial Statements

SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | ----------------------------- | - | ---------- | -
|                                                                                                                                                                                                                         |  | June 30,
 2010
 (Unaudited) |            | December 31,
 2009
 (Audited) |  
|                                                                                                                                                                                                                         |  |                             |            |                               |  
|ASSETS                                                                                                                                                                                                                   |  |                             |            |                               |   |            |  
|Current Assets:                                                                                                                                                                                                          |  |                             |            |                               |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                |  | $                           | 4,867,436  |                               | $ | 6,720,649  |  
|Accounts receivable, net of allowance for
 doubtful accounts of $39,051 and $39,627 at June 30, 2010 and December 31,
 2009, respectively                                                                                |  |                             | 3,053,140  |                               |   | 2,700,111  |  
|Prepaid expenses and other current assets                                                                                                                                                                                |  |                             | 301,459    |                               |   | 260,357    |  
|Note receivable                                                                                                                                                                                                          |  |                             | 900,000    |                               |   |           |  
|Current tax benefit                                                                                                                                                                                                      |  |                             | 230,000    |                               |   |           |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Total Current Assets                                                                                                                                                                                                     |  | $                           | 9,352,035  |                               |   | 9,681,117  |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Property and equipment, net                                                                                                                                                                                              |  |                             | 587,752    |                               |   | 608,850    |  
|Goodwill                                                                                                                                                                                                                 |  |                             | 3,375,257  |                               |   | 3,375,257  |  
|Other intangibles, net                                                                                                                                                                                                   |  |                             | 4,106,624  |                               |   | 4,421,749  |  
|Other assets, including restricted cash of
 $75,000 and $150,000, at June 30, 2010 and December 31, 2009, respectively                                                                                                   |  |                             | 85,626     |                               |   | 160,626    |  
|Deferred tax asset                                                                                                                                                                                                       |  |                             | 1,250,924  |                               |   | 1,250,924  |  
|Investment in joint venture, at cost                                                                                                                                                                                     |  |                             | 13,067     |                               |   | 14,755     |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             | 9,419,250  |                               |   | 9,832,161  |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Total Assets                                                                                                                                                                                                             |  | $                           | 18,771,285 |                               | $ | 19,513,278 |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                     |  |                             |            |                               |   |            |  
|Current Liabilities:                                                                                                                                                                                                     |  |                             |            |                               |   |            |  
|Accounts payable                                                                                                                                                                                                         |  | $                           | 864,791    |                               | $ | 776,059    |  
|Accrued expenses                                                                                                                                                                                                         |  |                             | 372,193    |                               |   | 446,929    |  
|Dividends payable                                                                                                                                                                                                        |  |                             | 49,210     |                               |   |           |  
|Deferred revenue                                                                                                                                                                                                         |  |                             | 5,373,568  |                               |   | 5,299,450  |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Total Current Liabilities                                                                                                                                                                                                |  |                             | 6,659,762  |                               |   | 6,522,438  |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Other liabilities                                                                                                                                                                                                        |  |                             | 37,911     |                               |   | 23,187     |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|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, 5,561,100 issued as of June 30, 2010 and December 31, 2009:
 4,921,005 and 5,076,305 outstanding as of June 30, 2010 and December 31,
 2009, respectively |  |                             | 556        |                               |   | 556        |  
|Additional paid-in capital                                                                                                                                                                                               |  |                             | 17,707,014 |                               |   | 17,610,392 |  
|Accumulated (deficit)                                                                                                                                                                                                    |  |                             | (3,621,886 | )                             |   | (3,106,513 | )
|Common stock in treasury, at cost  640,095
 and 485,795 shares at June 30, 2010 and December 31, 2009, respectively                                                                                                     |  |                             | (2,012,072 | )                             |   | (1,536,782 | )
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Total Stockholders Equity                                                                                                                                                                                               |  |                             | 12,073,612 |                               |   | 12,967,653 |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                               |  | $                           | 18,771,285 |                               | $ | 19,513,278 |  
|                                                                                                                                                                                                                         |  |                             |            |                               |   |            |  

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

4

---



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

|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|----------------------------------------------- |  | -------------------------- | --------- | ---------------------------- | - | --------- | - | ---- | --------- | - | - | --------- | -
|                                                |  | Six Months Ended
 June 30, |           | Three Months Ended
 June 30, |  
|                                                |  |                            |           |                              |  
|                                                |  |                            |           |                              |  
|                                                |  | 2010                       |           | 2009                         |   | 2010      |   | 2009 |          
|                                                |  |                            |           |                              |   |           |   |      |          
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Net revenues                                    |  | $                          | 8,654,992 |                              | $ | 9,085,287 |   | $    | 5,039,496 |   | $ | 4,731,684 |  
|Cost of
 revenues                               |  |                            | 4,244,175 |                              |   | 4,182,384 |   |      | 2,284,066 |   |   | 2,181,624 |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Gross profit                                    |  |                            | 4,410,817 |                              |   | 4,902,903 |   |      | 2,755,430 |   |   | 2,550,060 |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Operating
 Expenses:                            |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Selling, general and administrative             |  |                            | 4,548,444 |                              |   | 4,132,913 |   |      | 2,340,460 |   |   | 2,054,693 |  
|Depreciation and amortization                   |  |                            | 510,564   |                              |   | 497,551   |   |      | 256,327   |   |   | 250,608   |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            | 5,059,008 |                              |   | 4,630,464 |   |      | 2,596,787 |   |   | 2,305,301 |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Operating
 (loss) income                        |  |                            | (648,191  | )                            |   | 272,439   |   |      | 158,643   |   |   | 244,759   |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Other Income
 (Expense):                        |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Interest income (net)                           |  |                            | 9,478     |                              |   | 27,227    |   |      | 5,144     |   |   | 10,559    |  
|Equity loss from joint venture                  |  |                            | (1,688    | )                            |   | (2,324    | ) |      | (1,138    | ) |   | (1,491    | )
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            | 7,790     |                              |   | 24,903    |   |      | 4,006     |   |   | 9,068     |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|(Loss)
 income before income tax                |  |                            | (640,401  | )                            |   | 297,342   |   |      | 162,649   |   |   | 253,827   |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Benefit
 (provision) for income tax             |  |                            | 223,500   |                              |   | (50,486   | ) |      | (76,500   | ) |   | (36,486   | )
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Net (loss)
 income                              |  | $                          | (416,901  | )                            | $ | 246,856   |   | $    | 86,149    |   | $ | 217,341   |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Net (loss)
 income per common share:            |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Basic net (loss) income per common share        |  | $                          | (.08      | )                            | $ | .05       |   | $    | .02       |   | $ | .04       |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Diluted net (loss) income per common share      |  | $                          | (.08      | )                            | $ | .05       |   | $    | .02       |   | $ | .04       |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Weighted
 Average Number of Shares Outstanding: |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Basic                                           |  |                            | 4,984,188 |                              |   | 5,007,912 |   |      | 4,924,026 |   |   | 5,072,913 |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  
|Diluted                                         |  |                            | 4,984,188 |                              |   | 5,168,384 |   |      | 4,932,941 |   |   | 5,239,710 |  
|                                                |  |                            |           |                              |   |           |   |      |           |   |   |           |  

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

5

---



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

|                                                                                                    |  |                            |            |      |   |           |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ---- | - | --------- | -
|                                                                                                    |  | Six Months Ended
 June 30, |           
|                                                                                                    |  |                            |           
|                                                                                                    |  | 2010                       |            | 2009 |  
|                                                                                                    |  |                            |            |      |  
|Cash Flows from Operating
 Activities:                                                              |  |                            |            |      |   |           |  
|Net (loss) income                                                                                   |  | $                          | (416,901   | )    | $ | 246,856   |  
|                                                                                                    |  |                            |            |      |   |           |  
|Adjustments to reconcile net (loss) income to net cash (used in)
 provided by operating activities: |  |                            |            |      |   |           |  
|Depreciation and amortization                                                                       |  |                            | 510,564    |      |   | 497,551   |  
|Stock compensation expense                                                                          |  |                            | 96,622     |      |   | 105,151   |  
|Deferred income taxes                                                                               |  |                            |           |      |   | (40,722   | )
|Current income tax benefit                                                                          |  |                            | (230,000   | )    |   |          |  
|Equity loss from joint venture                                                                      |  |                            | 1,688      |      |   | 2,324     |  
|Changes in operating assets and liabilities:                                                        |  |                            |            |      |   |           |  
|(Increase) decrease in operating assets:                                                            |  |                            |            |      |   |           |  
|Accounts receivable                                                                                 |  |                            | (353,029   | )    |   | (256,627  | )
|Prepaid expenses and other current assets                                                           |  |                            | (41,102    | )    |   | 56,873    |  
|Other assets                                                                                        |  |                            | 75,000     |      |   | (5,013    | )
|(Decrease) increase in operating liabilities:                                                       |  |                            |            |      |   |           |  
|Accounts payable and accrued expenses                                                               |  |                            | 13,996     |      |   | (283,478  | )
|Deferred revenue                                                                                    |  |                            | 74,118     |      |   | 257,135   |  
|Other liabilities                                                                                   |  |                            | 14,724     |      |   |          |  
|                                                                                                    |  |                            |            |      |   |           |  
|Total adjustments                                                                                   |  |                            | 162,581    |      |   | 333,194   |  
|                                                                                                    |  |                            |            |      |   |           |  
|Net Cash (Used in) Provided
 by Operating Activities                                                |  |                            | (254,320   | )    |   | 580,050   |  
|                                                                                                    |  |                            |            |      |   |           |  
|                                                                                                    |  |                            |            |      |   |           |  
|Cash Flows from Investing
 Activities:                                                              |  |                            |            |      |   |           |  
|Acquisition of property and equipment                                                               |  |                            | (82,914    | )    |   | (88,918   | )
|Capitalized software development costs                                                              |  |                            | (70,024    | )    |   | (153,898  | )
|Capitalized course costs                                                                            |  |                            | (21,402    | )    |   | (38,592   | )
|Note receivable                                                                                     |  |                            | (900,000   | )    |   |          |  
|Adjustment to cash paid for goodwill                                                                |  |                            |           |      |   | 19,072    |  
|Additional purchase consideration for acquisition of Skye Multimedia,
 Ltd.                         |  |                            |           |      |   | (700,000  | )
|                                                                                                    |  |                            |            |      |   |           |  
|Net Cash (Used in)
 Investing Activities                                                            |  |                            | (1,074,340 | )    |   | (962,336  | )
|                                                                                                    |  |                            |            |      |   |           |  
|                                                                                                    |  |                            |            |      |   |           |  
|Cash Flows from Financing
 Activities:                                                              |  |                            |            |      |   |           |  
|Purchase of treasury stock                                                                          |  |                            | (475,290   | )    |   |          |  
|Dividends paid                                                                                      |  |                            | (49,263    | )    |   |          |  
|                                                                                                    |  |                            |            |      |   |           |  
|Net Cash (Used in)
 Financing Activities                                                            |  |                            | (524,553   | )    |   |          |  
|                                                                                                    |  |                            |            |      |   |           |  
|                                                                                                    |  |                            |            |      |   |           |  
|Net (decrease) increase in
 cash and cash equivalents                                               |  |                            | (1,853,213 | )    |   | (382,286  | )
|Cash and cash equivalents,
 beginning of period                                                     |  |                            | 6,720,649  |      |   | 6,626,181 |  
|                                                                                                    |  |                            |            |      |   |           |  
|Cash and cash equivalents,
 end of period                                                           |  | $                          | 4,867,436  |      | $ | 6,243,895 |  
|                                                                                                    |  |                            |            |      |   |           |  
|                                                                                                    |  |                            |            |      |   |           |  
|Supplemental Disclosure of
 Cash Flow Information:                                                  |  |                            |            |      |   |           |  
|Cash paid for interest                                                                              |  | $                          | 1,009      |      | $ |          |  
|                                                                                                    |  |                            |            |      |   |           |  
|Cash paid for income taxes                                                                          |  | $                          |           |      | $ | 10,000    |  
|                                                                                                    |  |                            |            |      |   |           |  

|                                                                     
|---------------------------------------------------------------------
|                                                                     
|See Notes to Condensed Consolidated Financial Statements
 (Unaudited)
|                                                                     
|6                                                                    

---



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, 2009, and the notes thereto included
in the Companys Annual Report on Form 10-K filed with the SEC on March 26,
2010. 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 as 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
 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.                                                                                                                                                             

7

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

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.

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 June 30, 2010,
are capitalized course costs of $266,000, net of accumulated amortization of
$96,000.

Deferred Revenue

Deferred
revenue related to subscription services represents the portion of unearned
subscription revenue amortized on a straight-line basis as earned. Deferred
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

8

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

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 equivalent shares outstanding during the period.
Common Stock equivalent shares for the six-month period ended June 30, 2009 was
9,191. For the six-month period ended June 30, 2010 the inclusion of Common
Stock equivalents would be anti-dilutive. For the three-month periods ended
June 30, 2010 and 2009 Common Stock equivalent shares were 8,915 and 166,797,
respectively.

|        |                         
|------- | ------------------------
|Note 3. | Stock-Based Compensation

The
Companys 2009 Stock Option 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 adopted at the
Companys annual meeting in June 2009 is 800,000, provided that restricted
stock grants under the Plan may not exceed 200,000 shares in the aggregate.
However, 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 exercised, forfeited or terminated,
the number of options available for grant under the 2009 Plan increase. Restricted
stock grants under the 1999 Plan have no impact on the availability of
restricted stock grants under the 2009 Plan.

As
of June 30, 2010, 405,648 options were outstanding, all of which had been
granted under our 1999 Stock Option Plan and of which 319,239 are currently
exercisable. In addition, restricted stock grants as of June 30, 2010 totaled
111,038, none of which had vested. None of the outstanding restricted stock
grants were made under the 2009 Plan. As of June 30, 2010, 258,198 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 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 Companys 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 an incremental
stock-based compensation expense of $97,000 and $105,000 for the six-month
periods ended June 30, 2010 and 2009, respectively.

The
Company did not grant any options in 2010 and in the 2009 period it granted
55,750 options under the Plan, which are exercisable at a price of $2.54 per
share.

The
assumptions used for the six-month period ended June 30, 2009, and the
resulting estimates of weighted-average fair value of options granted during
those periods are as follows:

|                                                          |  |                           |   |      |   |      |  
|--------------------------------------------------------- |  | ------------------------- | - | ---- | - | ---- | -
|                                                          |  | Six months ended June 30, |  
|                                                          |  | 2010                      |   | 2009 |  
|                                                          |  |                           |   |      |  
|Expected
 life (years)                                    |  |                           |  |      |   | 5.1  |  
|Risk-free
 interest rate                                  |  |                           |  |      |   | 1.99 | %
|Volatility                                                |  |                           |  |      |   | 45.0 | %
|Dividend
 yields                                          |  |                           |  |      |   |     |  
|Weighted-average
 fair value of options during the period |  | $                         |  |      | $ | 2.54 |  

9

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

The
following table represents our stock options granted, exercised and forfeited
for the six months ended June 30, 2010:

|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|------------------------------ |  | ----------------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  |  | ---- | 
|Stock Options                  |  | Number
 of Shares |         | Weighted Average
 Exercise Price per
 Share |   | Weighted Average
 Remaining
 Contractual Term | 
|                               |  |                   |         |                                             |   |                                               | 
|                               |  |                   |         |                                             |   |                                               | 
|Outstanding at January 1, 2010 |  |                   | 410,121 |                                             | $ | 4.40                                          |  |  | 5.92 | 
|Granted                        |  |                   |        |                                             |   |                                              |  |  |     | 
|Exercised                      |  |                   |        |                                             |   |                                              |  |  |     | 
|Forfeited/expired              |  |                   | (4,473  | )                                           | $ | 5.13                                          |  |  |     | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|Outstanding at June 30, 2010   |  |                   | 405,648 |                                             | $ | 4.40                                          |  |  | 4.00 | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 
|Exercisable at June 30, 2010   |  |                   | 319,239 |                                             | $ | 4.48                                          |  |  | 2.89 | 
|                               |  |                   |         |                                             |   |                                               |  |  |      | 

|        |                   
|------- | ------------------
|Note 4. | Income Tax Benefit

The
Company recognizes a deferred tax asset, available from its temporary
differences between the net income before taxes as reported on its financial
statement and net income for tax purposes and net operating loss carryforwards,
which begin to expire in 2023. At June 30, 2010, the Company recorded a current
tax benefit of approximately $230,000 attributable to the net loss recorded for
the six-month period ended June 30, 2010. The Company anticipates that it is
more likely than not that this benefit will be recognized over the balance of
2010 to the extent the Company generates net taxable income during the year.
The Company does not believe that it takes any uncertain income tax positions
that would require disclosure under the Accounting Standards Codification.

|        |                
|------- | ---------------
|Note 5. | Note Receivable

On
June 10, 2010, the Company entered into an agreement with an unrelated company
under which it agreed to provide up to $900,000 of credit, subject to various
conditions, to that company. The credit facility is secured by a first lien on
substantially all of the borrowers assets and borrowers obligations under the
financing agreement are guaranteed by the principles of the borrower. Interest
on the facility is the prime rate plus 8%. All amounts outstanding under the
facility are due and payable on October 11, 2010. In consideration for
extending credit, we obtained a ten-year right of first refusal to purchase the
assets of the borrower.

|        |                     
|------- | --------------------
|Note 6. | Stockholders Equity

Through
June 30, 2010 the Company has purchased 154,300 shares of its common stock for
approximately $475,000. On March 9, 2010 the Company declared a dividend of
$0.01 per common share, payable on April 11, 2010 to shareholders of record as
of April 1, 2010. Another $.01 dividend per common share was declared on May
11, 2010 payable July 12, 2010 to shareholders of record as of July 1, 2010.
During the period, 1,000 shares of restricted common stock previously granted
under the 1999 Plan were forfeited.

10

---



|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|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. Certain 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 Form
10-Q. Because this discussion involves risk and uncertainties, our actual
results may differ materially from those anticipated in these forward-looking
statements.

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 revenues have grown from $10.2 million to $19.3
million. This growth is due in large part to nine acquisitions that we have
completed in this period. Our most recent acquisition was in July 2009, when we
acquired EEI, which provides continuing professional education directed to
corporate accountants, financial professionals and attorneys through live
seminars. This particular line of business, i.e.,
live training seminars, is highly seasonal. EEIs revenues are primarily earned
in the second and fourth quarters of the year. Marketing and related costs
associated with seminars produced by EEI are expensed in the quarter in which
the seminars take place. However, other operating costs, such as payroll and
selling, general and administrative costs are recorded as incurred.

While
our subscription-based revenue has remained constant, we have experienced a
decline in some of our custom design projects for clients in various industries.
We have seen some consolidation in the pharmaceutical industry that has had an
impact on our operating results as well as the current economic

11

---



climate that
has caused many clients to either postpone or cancel some projects. However, in
other areas, such as legal training and engineering, we have seen a renewed
interest in our product offerings.

We
continue to focus on acquisitions that will allow us to increase the breadth
and depth of our current product offerings. We believe acquisitions are the
most effective means to access new markets and expand our product offerings. We
prefer acquisitions that are accretive within the first year of ownership, but
ultimately the decision will be based on maximizing shareholder value rather
than short-term profits. The size of the acquisitions will be determined, in part,
by our size, the 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.

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, 2009. 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. 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.

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 our 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-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.

12

---



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 now 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
make significant estimates and assumptions in calculating our current period
tax liability and deferred tax assets. The most significant of these are
estimates regarding future period earnings.

Results of Operations

Overall,
year-to-date, net revenues from our core subscription products has remained
stable while net revenues from custom work continues to reflect the effects of
the economy. 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 June 30, 2010 and 2009

We
recorded a $308,000, or 6.5%, increase in net revenues and a $205,400, or 8.1%,
increase in gross profit for the quarter ended June 30, 2010 compared to the
comparable quarter in 2009. On the other hand, operating income and net income
decreased, quarter-to-quarter, by $86,000 and $131,000, respectively. Operating
results for the quarter ended June 30, 2010 were impacted by a decline in
custom work from both our SmartPros Legal and Ethics, Ltd. (SLE) and Skye
Multimedia Ltd. (Skye) subsidiaries, as well as a moderate decline in revenue
from live training from Loscalzo. This decline was offset by net revenues from
EEI. We believe this trend reflects the current economic climate. Also, certain
custom projects that are currently under contract are completed over a period
of time and the revenue is recognized as such. However, certain divisions,
while affected by general economic conditions, have not experienced a
noticeable decline in revenues.

Online
revenues, which previously were primarily derived from the sales of
accounting/finance products, continue to be an important factor contributing to
our overall revenue growth. However, many of our other products, including our
Cognistar law library, our Financial Campus courses and our technology training
products are also delivered online and also contribute to our revenue growth.

The
following table compares our statement of operations data for the three-months
ended June 30, 2010 and 2009. 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.

13

---



|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|------------------------------------ |  | --------------------------- | --------- | ---------- |  | ------ | -- | ---------- | --------- | ------ |  | ----- | -- |  | ----- | --
|                                     |  | Three months ended June 30, |          
|                                     |  |                             |          
|                                     |  | 2010                        |           | 2009       |  |        |   
|                                     |  |                             |           |            |  |        |   
|                                     |  | Amount                      |           | Percentage |  | Amount |    | Percentage |           | Change | 
|                                     |  |                             |           |            |  |        |    |            |           |        | 
|                                    
|Net revenues                         |  | $                           | 5,039,496 |            |  | 100.0  | %  | $          | 4,731,684 |        |  | 100.0 | %  |  | 6.5   | % 
|Cost of revenues                     |  |                             | 2,284,066 |            |  | 45.3   | %  |            | 2,181,624 |        |  | 46.1  | %  |  | 4.7   | % 
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Gross profit                         |  |                             | 2,755,430 |            |  | 54.7   | %  |            | 2,550,060 |        |  | 53.9  | %  |  | 8.1   | % 
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Selling, general and
 administrative |  |                             | 2,340,460 |            |  | 46.4   | %  |            | 2,054,693 |        |  | 43.4  | %  |  | 13.9  | % 
|Depreciation and
 amortization       |  |                             | 256,327   |            |  | 5.1    | %  |            | 250,608   |        |  | 5.3   | %  |  | 2.3   | % 
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Total operating expenses             |  |                             | 2,596,787 |            |  | 51.5   | %  |            | 2,305,301 |        |  | 48.7  | %  |  | 12.6  | % 
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Operating income                     |  |                             | 158,643   |            |  | 3.1    | %  |            | 244,769   |        |  | 5.2   | %  |  | (35.2 | %)
|Other income, net                    |  |                             | 4,006     |            |  | 0.1    | %  |            | 9,068     |        |  | 0.2   | %  |  | (55.8 | %)
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Net income before income
 tax        |  |                             | 162,649   |            |  | 3.2    | %  |            | 253,827   |        |  | 5.4   | %  |  | (35.9 | %)
|Provision for income tax             |  |                             | (76,500   | )          |  | (1.5   | %) |            | (36,486   | )      |  | (0.8  | %) |  | 109.7 | % 
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   
|Net income                           |  | $                           | 86,149    |            |  | 1.7    | %  | $          | 217,341   |        |  | 4.6   | %  |  | (60.4 | %)
|                                     |  |                             |           |            |  |        |    |            |           |        |  |       |    |  |       |   

Net
revenues

The
increase in net revenues reflected above was primarily due to: (i) a $728,000
increase in net revenues in the Accounting/Finance division; (ii) a $115,000
increase in net revenues in the Financial Services division; and (iii) a
$35,000 increase in net revenues in SLE. These increases were offset by: (i) a
$37,000 decrease in net revenues in the Engineering division; (ii) a $435,000
decrease in net revenues in Skye; (iii) a $31,000 decrease in net revenues from
our SmartIt Information Technology division; and (iv) a $67,000 decrease in net
revenues in our SmartPros Interactive division, which provides media production
and consulting services. 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 second quarter of 2010, net revenues from the Accounting/Finance division
were $3.92 million, or 78% of net revenues, compared to $3.19 million, or 67%
of net revenues, in the comparable 2009 period. Net revenues from
subscription-based products and direct sales of course material on a
non-subscription basis, decreased slightly from $2.11 million in the 2009
period to $2.03 million in the corresponding 2010 period. Net revenues from
other projects in our Accounting/Finance division that are not subscription
based decreased $27,000 from 2009 to 2010. Non-subscription-based revenues
fluctuate from period to period and are not indicative of any trends. In the
2010 period, net revenues from online sales of accounting products accounted
for approximately $1.06 million, or 21% of net revenues, compared to $1.11
million, or 23% of net revenues, in the comparable 2009 period. Net revenues
from our Loscalzo live training subsidiary decreased $93,000 in the 2010 period
as compared to the 2009 period. This decrease is due to current economic
conditions as various professional organizations that sponsor live training are
experiencing lower enrollments. However, our EEI live training division
generated $937,000 for revenue in the current period. As EEI was acquired in
July 2009 there are no comparable results for the earlier period.

For
the three months ended June 30, 2010, Skye generated net revenues of $191,000
compared to $626,000 in the second quarter of 2009. Skyes income is derived
primarily from consulting projects that vary from quarter to quarter.
Therefore, quarterly results will vary and revenues are not necessarily
indicative of long-term trends.

Our
Financial Services Training division generated $548,000 of net revenues in the
quarter ended June 30, 2010. For the quarter ended June 30, 2009, this division
generated $433,000 of net revenues. This increase is due primarily from
increased consulting work as well as a growth in the penetration of our market
segments and the increased usage of our course libraries from existing
customers. The increase in consulting work is again not indicative of any
long-term trends.

Our
SmartIt Information Technology division generated $30,000 of net revenues in
the 2010 period, as compared to $61,000 in the first quarter of 2009, due to a
decrease in consulting work.

For
the quarter ended June 30, 2010, SLE had net revenues of $184,000 compared to net
revenues of $149,000 for the comparable 2009 quarter. For the 2010 period,
$100,000 of SLEs net revenues was generated by the Ethics and Compliance
division, and $84,000 was generated by the Cognistar Legal division, as
compared to $56,000 and $93,000, respectively, in the 2009 period. Net revenues
generated by the Working Values Ethics and Compliance division are derived
primarily from custom consulting work.

14

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Custom work is
non-repetitive and subject to market conditions and can vary from quarter to
quarter. The Cognistar Legal division derives its revenue primarily from
prepaid usage and direct sales of its courses.

Our
Engineering division generated $111,000 of net revenues in the second quarter
of 2010 compared to $148,000 in the second quarter of 2009. The decrease is a
result of timing differences in the placement of orders from customers. Sales
of our engineering products are not subscription based.

Net
revenues generated by the SmartPros Interactive division in the second quarter
of 2010 were $61,000 of which $30,000 was attributable to video production and
related services and $31,000 was attributable to consulting services. In
comparison, this division recorded $128,000 of net revenue for the second
quarter of 2009, $82,000 from video production and related services and $46,000
from consulting services. This decrease is indicative of the continual decline
in the duplication business and fluctuations in revenues from consulting
services.

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; and (iv) 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 June 30, 2010 to 55%
compared to 54% for the three months ended June 30, 2009. This increase is
attributable, in part, to a decrease in salaries and related costs and an
increase in net revenues, particularly from EEI. As discussed earlier, most of
EEIs net revenues are generated from May through December but the cost
associated with that revenue is incurred ratably over the course of the year.
We also devote a significant amount of internal and external resources to
develop new products and to re-tool existing products and technology.

Cost
of revenues increased by $102,000 in the current quarter from the comparable
period last year primarily due to EEI. Since EEI was acquired in July 2009, we
have no EEI expenses included in our operations for the 2009 period. For
example, non-payroll and other costs related to both live training and other products
increased $294,000, primarily due to EEI. This was offset, in part, by an
overall decrease of $26,000 in payroll and related costs despite the fact that
salaries and related costs attributable to EEI for the second quarter of 2010
were $58,000. In addition, royalty expense increased by $33,000 and outside
labor and productions costs related to custom projects and live training
decreased approximately $199,000.

We
outsource a substantial amount of technology projects to countries where labor
costs are lower than they are in the United States. Our outsourcing strategy
has been driven, in part, by business generated from Skye and internal
projects. We have determined that it is more efficient to outsource certain
projects rather than hire additional personnel.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 $343,000 after capitalizing a
 portion of these costs. This decrease is directly related to the reduced
 revenue from Skye and a reduction in the use of outsourced vendors. 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 increased $144,000. The increase is again primarily
 attributable to EEI. 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 June 30, 2010, compared
 to the corresponding 2009 period by $33,000. Royalty expense will vary from
 period to period based on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

15

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | sales and
 usage of our various products. In addition, we added one new partner in the
 second half of 2009 that has added to the increased expense. Royalty expense
 is primarily driven by our accounting course catalog and our engineering
 product sales. We estimate a substantial portion of our accounting royalties
 based on a number of factors as we only pay these royalties twice per year.
 In addition, we pay royalties to some of our partners and the information to
 calculate those royalties is not always readily available and requires
 estimates as well.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Salaries.
 Overall, payroll and related costs attributable to production personnel
 decreased by $26,000 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 offset by the addition of
 EEI. We have also replaced some payroll with outsourced technology services,
 where and when needed.                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | 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, travel, shipping, conference
 center costs and other. These costs were $475,000 for the second quarter of
 2010 as compared to $181,000 for the second quarter of 2009. The increase of
 $294,000 is primarily related to EEI live training seminars.                                                                                                                                            

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 quarter
ended June 30, 2010 increased $286,000, or 13.9%, compared to the quarter ended
June 30, 2009. The increase in selling, general and administrative expenses is
primarily attributable to payroll and related costs and marketing expenses for
EEI.

Compensation
expense in the 2010 period decreased by $5,000 as compared to the 2009 period.
Full-time general and administrative employees at June 30, 2010 and 2009 were
57, including the 3 people who we acquired with EEI in July 2009. Although we
reduced our overall headcount, the salary increases related to the EEI
acquisition and the hiring of a senior executive at Loscalzo were offset by
decreases in payroll in other areas. Compensation expense includes stock based
compensation expense of $64,000 for the 2010 period and $75,000 for the 2009 period.

Our
other selling, general and administrative costs, exclusive of compensation
costs, increased $291,000. Of this increase approximately $215,000 was directly
related to EEI selling and marketing expenses. Other costs include customer
service, insurance, office expenses, professional fees, non-income based taxes
and other expenses. 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 $6,000 in the second quarter of 2010
compared to the second quarter of 2009 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
income

For
the three months ended June 30, 2010, the operating income was $159,000
compared to operating income of $245,000 in the corresponding 2009 period.

Other
income, 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 second quarter of 2010 we had other income of
$4,000 compared to other income of $9,000 in the second quarter

16

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of 2009,
mostly as a result of substantially lower interest on our cash balances
invested in money market funds, offset by a loss from the iReflect joint
venture. The loss from our iReflect joint venture for the quarter ended June
30, 2010 was $1,138. In June 2010 we funded a $900,000 loan to an unaffiliated
company (see note 5 to our financial statements included in this report) at
eight percent over the prime rate.

Income
tax (provision)

We
account for deferred tax assets available principally from our fixed and
tangible assets and our net operating loss carryforwards in accordance with the
Accounting Standards Codification. As of December 31, 2009, we had recognized
approximately $1,250,000 in such assets, net of an allowance of $690,000. We
recorded a current income tax provision of $77,000 for the second quarter of
2010 from the utilization of the year to date net loss offset by the current
quarters income. We anticipate that this benefit will be absorbed over the
balance of the current year as we generate net income. For the second quarter
of 2009, we incurred an income tax expense of $36,000.

Net
income

For
the three months ended June 30, 2010, we
recorded a net income of $86,000, or $0.2 per share, basic and diluted,
compared to a net income of $217,000 or $0.4 per share, basic and diluted, for
the three months ended June 30, 2009.

Comparison
of six-months ended June 30, 2010 and 2009

Comparing
the six months ended June 30, 2010 to the six months ended June 30, 2009, we
experienced a $430,000, or 4.7%, decrease in net revenues, a $492,000, or
10.0%, reduction in gross profit, a $920,600 reduction in operating income and
a $664,000 reduction in net income. Our operating results for the
six-months ended June 30, 2010 were adversely impacted by the decrease in
revenues from Skye, SLE and SmartPros Interactive, all of which is primarily
derived from custom work. We believe this trend reflects the current economic
climate. Also, the timing of certain custom projects that are currently under
contract is completed over a period of time and the revenue is recognized as
such. However, certain divisions, while affected by general economic
conditions, have not experienced a noticeable decline in revenues.

Online
revenues, which previously were primarily derived from the sales of
accounting/finance products, continue to be an important factor contributing to
our overall revenue. However, many of our other products, including our
Cognistar law library, our Financial Campus banking courses and our technology
training products are also delivered online and also contribute to our revenue.

The
following table compares our statement of operations data for the six-months
ended June 30, 2010 and 2009. 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.

|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|----------------------------------- |  | ------------------------- | --------- | ---------- | ----- | ------ | - | ---------- | - | ------ | -- | ------ | --
|                                    |  | Six months ended June 30, |          
|                                    |  |                           |          
|                                    |  | 2010                      |           | 2009       |       |        |  
|                                    |  |                           |           |            |       |        |  
|                                    |  | Amount                    |           | Percentage |       | Amount |   | Percentage |   | Change |   
|                                    |  |                           |           |            |       |        |   |            |   |        |   
|                                   
|Net revenues                        |  | $                         | 8,654,992 |            | 100.0 | %      | $ | 9,085,287  |   | 100.0  | %  | (4.7   | %)
|Cost of revenues                    |  |                           | 4,244,175 |            | 49.0  | %      |   | 4,182,384  |   | 46.0   | %  | 1.5    | % 
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Gross profit                        |  |                           | 4,410,817 |            | 51.0  | %      |   | 4,902,903  |   | 54.0   | %  | (10.0  | %)
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Selling, general and administrative |  |                           | 4,548,444 |            | 52.6  | %      |   | 4,132,913  |   | 45.5   | %  | 10.1   | % 
|Depreciation and amortization       |  |                           | 510,564   |            | 5.9   | %      |   | 497,551    |   | 5.5    | %  | 2.6    | % 
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Total operating expenses            |  |                           | 5,059,008 |            | 58.5  | %      |   | 4,630,464  |   | 51.0   | %  | 9.3    | % 
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Operating (loss) income             |  |                           | (648,191  | )          | (7.5  | %)     |   | 272,439    |   | (1.0   | %) | (337.9 | %)
|Other income, net                   |  |                           | 7,790     |            | 0.1   | %      |   | 24,903     |   | 0.3    | %  | (68.7  | %)
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Net (loss) income before income tax |  |                           | (640,401  | )          | (7.4  | %)     |   | 297,342    |   | 3.3    | %  | (315.4 | %)
|Benefit (provision) for income tax  |  |                           | 223,500   |            | 2.6   | %      |   | (50,486    | ) | (1.2   | %) | (542.7 | %)
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   
|Net (loss) income                   |  | $                         | (416,901  | )          | (4.8  | %)     | $ | 246,856    |   | 2.7    | %  | (268.9 | %)
|                                    |  |                           |           |            |       |        |   |            |   |        |    |        |   

17

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Net
revenues

The
decrease in net revenues reflected above was primarily due to: (i) a $113,000
decrease in net revenues in SLE; (ii) a $967,000 decrease in net revenues in
Skye; (iii) a $146,000 decrease in net revenues in the SmartPros Interactive
division; and (iv) a $30,000 decrease in net revenues in our SmartIt
Information Technology division. These decreases were offset by: (i) a $720,000
increase in our Accounting/Finance division; (ii) a $106,000 increase in net
revenues from our Financial Services division. Net revenues in the Engineering
division was unchanged between the two relevant periods.

In
the first six-months of 2010, net revenues from the Accounting/Finance division
were $6.09 million, or 70% of net revenues, compared to $5.37 million, or 59%
of net revenues, in the comparable 2009 period. Net revenues from
subscription-based products and direct sales of course material on a
non-subscription basis, decreased slightly from $4.03 million in the 2009
period to $3.99 million in the corresponding 2010 period. Net revenues from
other projects in our Accounting/Finance division that are not subscription
based decreased $87,000 from 2009 to 2010. Non-subscription-based revenues
fluctuate from period to period and are not indicative of any trends. In the 2010 period, net revenues from online
sales of accounting products accounted for approximately $2.03 million, or 23%
of net revenues, compared to $2.02 million, or 22% of net revenues, in the
comparable 2009 period. Net revenues from live training programs increased by
$847,000 in the 2010 period as result of the acquisition of EEI.

For
the six-months ended June 30, 2010, Skye generated net revenues of $702,000
compared to $1.67 million in the first half of 2009. Skyes income is derived
primarily from consulting projects that vary from quarter to quarter.
Therefore, quarterly results will vary and revenues are not necessarily
indicative of long-term trends.

Our
Financial Services Training division generated $1.06 million of net revenues in
the six-month period ended June 30, 2010 compared to $956,000 for the
six-months ended June 30, 2009. The increase is primarily from increased
consulting work and greater utilization of our course libraries.

Our
SmartIt Information Technology division generated $60,000 of net revenues in
the 2010 period, compared to $90,000 in the first six-months of 2009.

For
the six-months ended June 30, 2010, SLE had net revenues of $308,000 compared
to net revenues of $421,000 for the six-months ended June 30, 2009. For the
2010 period, $108,000 of SLEs net revenues was generated by the Working Values
Ethics and Compliance division and $200,000 was generated by the Cognistar
Legal division, compared to $217,000 and $204,000 respectively for the
comparable 2009 period. Net revenues generated by the Working Values Ethics and
Compliance division are derived primarily from custom consulting work. Custom
work is non-repetitive and subject to market conditions and can vary from
quarter to quarter. The Cognistar Legal division derives its revenue primarily
from prepaid usage and direct sales of its courses.

Our
Engineering division generated $349,000 of net revenues in both the 2010 and
2009 periods. The revenues in this division fluctuate as a result of timing
differences in the placement of orders from customers and the dates of the
licensing exams. Sales of our engineering products are not subscription based.

Net
revenues generated by the SmartPros Interactive division in the first half of
2010 were $82,000 of which $48,000 was attributable to video production and
related services and $34,000 was attributable to consulting services. In
comparison, this division recorded $228,000 of net revenue for the first half
of 2009, $107,000 from video production and related services and $121,000 from
consulting services. This decrease is indicative of the continual decline in
the duplication business and fluctuations in revenues from consulting services.

Cost
of revenues

Our
gross profit margin for the six-months ended June 30, 2010 was 51% compared to
54% for the six-months ended June 30, 2009. This decrease is attributable, in
part, to the fact that a greater portion of net revenues in the 2010 period was
attributable to live training programs, as opposed to online training programs,
which have lower gross margins. In addition, there were decreased revenues from
certain divisions without any significant decreases in payroll. We also devoted
a significant amount of internal and external resources to develop new products
and to re-tool existing products and technology.

18

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Cost
of revenues increased by only $62,000 in the first half of 2010 compared to the
first half of 2009 primarily due to EEI. Since EEI was acquired in July 2009,
we have no EEI expenses included in our operations for the 2009 period. Salaries
and related costs attributable to EEI were approximately $116,000 although
non-EEI payroll and related costs decreased by $74,000. In addition, other
costs, primarily related to live training increased by $326,000. Although,
royalty expense increased by $91,000, outside labor and productions costs
related to custom projects decreased approximately $397,000. We outsource a
substantial amount of technology projects to countries where labor costs are
lower than they are in the United States. Our outsourcing strategy has been
driven, in part, by business generated from Skye and internal projects. We have
determined that it is more efficient to outsource certain projects rather than
hire additional personnel.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 $521,000 after capitalizing a
 portion of these costs. This decrease is directly related to the completion
 of a number of custom projects and internal work and a reduction in the use
 of outsourced vendors. 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 increased $166,000. 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. In addition, our course libraries are
 constantly requiring updates as there are always changes.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Royalties.
 Royalty expense increased in the six-month period ended June 30, 2010,
 compared to the corresponding 2009 period by $91,000. Royalty expense will
 vary from period to period based on sales and usage of our various products
 and the addition of any partners. Royalty expense is primarily driven by our
 accounting course catalog and our engineering product sales. We estimate a
 substantial portion of our accounting royalties based on a number of factors
 as we only pay these royalties twice per year. In addition, we pay royalties
 to some of our partners and the information to calculate those royalties is
 not always readily available and requires estimates as well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Salaries.
 Overall, payroll and related costs attributable to production personnel
 increased by $43,000 after capitalizing a portion of these costs during the
 current quarter. All of the increase is attributable to EEI, as we have
 reduced other payroll costs by approximately $160,000. We have also reduced
 the capitalization of internal payroll as we have completed some of the
 projects that began in prior years. We have also reduced some personnel costs
 as a result of decreased business and replaced it with outsourced technology
 services, where and when needed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Other
 production related costs. These are other costs
 directly related to the production of our products such as purchases of
 materials, travel, shipping, cost of hosting live conferences and other.
 These costs increased by $283,000 from 2009 to 2010. This is primarily a
 direct result of cost related to EEIs live conferences that include site
 costs, instructors expenses and other related costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Selling,
general and administrative expenses

Selling,
general and administrative expenses for the six months ended June 30, 2010
increased $416,000, or 10.1%, compared to the six-months ended June 30, 2009.
The increase in selling, general and administrative expenses is primarily
attributable to EEI and Loscalzo payrolls as well as marketing and promotional
expenses for EEI.

Compensation
expense in the 2010 period increased $75,000 over compensation expense for the
corresponding 2009 period. Although we reduced our overall headcount, the
salary increases were due to additional payroll primarily from EEI and
Loscalzo, where we added two senior level executives. Compensation expense
includes stock based compensation expense of $127,000 for the 2010 period and
$107,000 for the 2009 period.

19

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Our
other selling, general and administrative costs, exclusive of compensation
costs, increased $340,000. These costs include marketing and advertising
expenses related to EEI, customer service, insurance, office expenses,
professional fees, non-income based taxes and other expenses. 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 from costs related to
recent acquisitions.

Depreciationand amortization

Depreciation
and amortization expenses increased by $13,000 in the first six-months of 2010
compared to the first six-months of 2009 primarily from the amortization of
acquired intangible 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) income

For
the six-months ended June 30, 2010, the operating loss was $648,000 compared to
operating income of $272,000 in the corresponding 2009 period.

Other
income, 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 six-months of 2010 we had other income
of $7,800 compared to other income of $25,000 in the first six-months of 2009,
mostly as a result of substantially lower interest on our cash balances
invested in money market funds, offset by a loss from the iReflect joint
venture. The loss from our iReflect joint venture for the six-months ended June
30, 2010 was $1,688. We anticipate comparable interest income rates in future
periods.

Income
tax benefit (provision)

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. As of December 31, 2009 we had
recognized approximately $1,250,000 in such assets net of an allowance of
$690,000. We recorded a tax benefit of $223,500 for the first six-months of
2010 from the utilization of the current period net loss. We anticipate that
this benefit will be absorbed over the balance of the current year as we
generate net income. For the first six-months of 2009, we incurred an income
tax expense of $50,000.

Net
(loss) income

For
the six-months ended June 30, 2010, we
recorded a net loss of $417,000, or $0.08 per share, basic and diluted,
compared to a net income of $247,000 or $0.5 per share, basic and diluted, for
the six-months ended June 30, 2009.

Liquidity and Capital Resources

At
June 30, 2010, we had no indebtedness for borrowed money.

Our
working capital as of June 30, 2010 was approximately $2.7 million compared to
$3.2 million at December 31, 2009. Our current ratio at June 30, 2010 was 1.40
to 1 compared to 1.48 to 1 at December 31, 2009. 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
$5.4 million at June 30, 2010 and $5.3 million at December 31, 2009.

20

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At
June 30, 2010, we had cash and cash equivalents of $4.9 million. For the six
months ended June 30, 2010, we reported a net decrease in cash of $1.85 million
that includes $254,000 of cash used in operating activities, $1.07 million of
cash used in investing activities and $525,000 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.

For
the 2010 period, net cash used in investing activities was $1.07 million, which
included capital expenditures of $83,000, consisting primarily of computer
equipment and software purchases, $70,000 for software development costs
relating to new products and $21,000 for course development. In addition, we
funded a $900,000 secured loan to a non-affiliated company at an interest rate
of prime plus eight per cent. (See note 5 to our financial statements included
in this report.) 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 in open market
transaction pursuant to our stock buy-back program. In the six-month period we
purchased 154,300 shares of our common stock for approximately $475,000. In
addition, in May 2011 we paid a dividend of approximately $49,000.

On
May 11, 2010, we declared a dividend of $.01 per common share payable on July
11, 2010 to shareholders of record as of July 1, 2010.

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.

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 liquidity 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.

21

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PART II
OTHER 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, 2009, 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 June 30, 2010, an aggregate of 5,300 shares were repurchased at a
cost of approximately $13,375, and as of such date approximately $264,000 was
available under this program.

ISSUER PURCHASES OF EQUITY SECURITIES

|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 
|---------------------------- |  | --------------------------------------------------- | ----- | ---------------------------------------------- | - | ------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | ----- |  | - | ------- | 
|Period                       |  | (a)
 Total Number
 of Shares
 (or Units)
 Purchased |       | (b)
 Average
 Price Paid
 per 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
 (April 1-30, 2010) |  |                                                     |      |                                                |   |                                                                                                        |  |                                                                                                                                     |      |  |   |        | 
|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 
|Month #2
 (May 1-31, 2010)   |  |                                                     | 5,300 |                                                | $ | 2.52                                                                                                    |  |                                                                                                                                     | 5,300 |  | $ | 264,000 | 
|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 
|Month #3
 (June 1-30, 2010)  |  |                                                     |      |                                                |   |                                                                                                        |  |                                                                                                                                     |      |  |   |        | 
|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 
|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 
|Total                        |  |                                                     | 5,300 |                                                | $ | 2.52                                                                                                    |  |                                                                                                                                     | 5,300 |  | $ | 264,000 | 
|                             |  |                                                     |       |                                                |   |                                                                                                         |  |                                                                                                                                     |       |  |   |         | 

|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities

None.

|        |                        
|------- | -----------------------
|Item 4. | [REMOVED AND RESERVED.]
|        |                        
|Item 5. | Other Information      

None.

22

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|        |         
|------- | --------
|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.

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: August
 10, 2010 | /s/ Allen S.
 Greene           | 
|                       |                                | 
|                       | Chief
 Executive Officer      
|                       | (Principal
 Executive Officer)
|                       |                               
|Date: August
 10, 2010 | /s/ Stanley
 P. Wirtheim       | 
|                       |                                | 
|                       | Chief
 Financial Officer      
|                       | (Principal
 Financial Officer)

23

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