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 SEPTEMBER 30, 2009

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 x     No
o


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


Yes o     No
o


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

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

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

Yes o     No
x

Number of
shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: As of November 10, 2009, there were 5,079,351 shares
of common stock outstanding.

---



SMARTPROS LTD.

FORM 10-Q REPORT

September 30, 2009

TABLE OF CONTENTS

|                               |  |                                                                                                        |  |      | 
|------------------------------ |  | ------------------------------------------------------------------------------------------------------ |  | ---- | 
|                               |  |                                                                                                        |  | PAGE | 
|PART I  FINANCIAL INFORMATION |  |                                                                                                        | 
|                               |  |                                                                                                        | 
|Item 1.                        |  | Condensed Consolidated Financial Statements (Unaudited)                                                |  |      | 
|                               |  |                                                                                                        |  |      | 
|                               |  | Balance Sheets  September 30, 2009 and December 31, 2008 (Audited)                                    |  | 3    | 
|                               |  |                                                                                                        |  |      | 
|                               |  | Statements of Operations for the nine-month and three-month periods
 ended September 30, 2009 and 2008 |  | 4    | 
|                               |  |                                                                                                        |  |      | 
|                               |  | Statements of Cash Flows for the nine-month periods ended September
 30, 2009 and 2008                 |  | 5    | 
|                               |  |                                                                                                        |  |      | 
|                               |  | Notes to Condensed Consolidated Financial Statements                                                   |  | 6    | 
|                               |  |                                                                                                        |  |      | 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                 |  | 10   | 
|                               |  |                                                                                                        |  |      | 
|Item 3.                        |  | Quantitative and Qualitative Risk Disclosures About Market Risk                                        |  | 20   | 
|                               |  |                                                                                                        |  |      | 
|Item 4T.                       |  | Controls and Procedures                                                                                |  | 20   | 
|                               |  |                                                                                                        |  |      | 
|PART II  OTHER INFORMATION    |  |                                                                                                        | 
|                               |  |                                                                                                        | 
|Item 1.                        |  | Legal Proceedings                                                                                      |  | 20   | 
|                               |  |                                                                                                        |  |      | 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 20   | 
|                               |  |                                                                                                        |  |      | 
|Item 3.                        |  | Defaults Upon Senior Securities                                                                        |  | 21   | 
|                               |  |                                                                                                        |  |      | 
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                    |  | 21   | 
|                               |  |                                                                                                        |  |      | 
|Item 5.                        |  | Other Information                                                                                      |  | 21   | 
|                               |  |                                                                                                        |  |      | 
|Item 6.                        |  | Exhibits                                                                                               |  | 21   | 
|                               |  |                                                                                                        |  |      | 
|SIGNATURES                     |  | 21                                                                                                     | 

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.

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

2

---



PART I
FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial
Statements

SMARTPROS LTD. AND SUBSIDIARIESCondensed Consolidated Balance Sheets

|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ----------------------------- | - | ---------- | -
|                                                                                                                                                                                                      |  | September 30,
 2009
 (Unaudited) |            | December 31,
 2008
 (Audited) |  
|                                                                                                                                                                                                      |  |                                  |            |                               |  
|ASSETS                                                                                                                                                                                                |  |                                  |            |                               |   |            |  
|Current Assets:                                                                                                                                                                                       |  |                                  |            |                               |   |            |  
|Cash and cash equivalents                                                                                                                                                                             |  | $                                | 6,480,537  |                               | $ | 6,626,181  |  
|Accounts receivable, net of allowance for
 doubtful accounts of $39,627 at September 30, 2009 and $39,677 at December
 31, 2008                                                                       |  |                                  | 2,481,718  |                               |   | 3,114,139  |  
|Prepaid expenses and other current assets                                                                                                                                                             |  |                                  | 491,851    |                               |   | 249,281    |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Total Current Assets                                                                                                                                                                                  |  |                                  | 9,454,106  |                               |   | 9,989,601  |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Property and equipment, net                                                                                                                                                                           |  |                                  | 584,275    |                               |   | 607,988    |  
|Goodwill                                                                                                                                                                                              |  |                                  | 3,375,257  |                               |   | 3,394,329  |  
|Other intangibles, net                                                                                                                                                                                |  |                                  | 4,492,718  |                               |   | 4,500,639  |  
|Other assets, including restricted cash of
 $75,000                                                                                                                                                   |  |                                  | 160,626    |                               |   | 155,613    |  
|Deferred tax asset                                                                                                                                                                                    |  |                                  | 1,250,924  |                               |   | 1,103,923  |  
|Investment in joint venture, at cost                                                                                                                                                                  |  |                                  | 15,331     |                               |   | 23,890     |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  | 9,879,131  |                               |   | 9,786,382  |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Total Assets                                                                                                                                                                                          |  | $                                | 19,333,237 |                               | $ | 19,775,983 |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                  |  |                                  |            |                               |   |            |  
|Current Liabilities:                                                                                                                                                                                  |  |                                  |            |                               |   |            |  
|Accounts payable                                                                                                                                                                                      |  | $                                | 832,456    |                               | $ | 779,870    |  
|Accrued expenses                                                                                                                                                                                      |  |                                  | 276,189    |                               |   | 1,294,042  |  
|Deferred revenue                                                                                                                                                                                      |  |                                  | 5,615,952  |                               |   | 5,576,607  |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Total Current Liabilities                                                                                                                                                                             |  |                                  | 6,724,597  |                               |   | 7,650,519  |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Other liabilities                                                                                                                                                                                     |  |                                  | 22,139     |                               |   |           |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                         |  |                                  |            |                               |   |            |  
|Stockholders Equity:                                                                                                                                                                                 |  |                                  |            |                               |   |            |  
|Convertible 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, 5,562,100 issued and 5,079,351 outstanding at September
 30, 2009; and 5,324,316 issued and 4,841,567 outstanding at December 31, 2008 |  |                                  | 556        |                               |   | 532        |  
|Additional paid-in capital                                                                                                                                                                            |  |                                  | 17,551,140 |                               |   | 17,155,851 |  
|Accumulated (deficit)                                                                                                                                                                                 |  |                                  | (3,439,472 | )                             |   | (3,505,196 | )
|Common stock in treasury, at cost  482,749
 shares                                                                                                                                                   |  |                                  | (1,525,723 | )                             |   | (1,525,723 | )
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Total Stockholders Equity                                                                                                                                                                            |  |                                  | 12,586,501 |                               |   | 12,125,464 |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                            |  | $                                | 19,333,237 |                               | $ | 19,775,983 |  
|                                                                                                                                                                                                      |  |                                  |            |                               |   |            |  

|                                                                     | 
|-------------------------------------------------------------------- | 
|                                                                     | 
|See Notes to Condensed Consolidated Financial Statements (Unaudited)
|                                                                     | 
|3                                                                   

---



SMARTPROS LTD. AND SUBSIDIARIESCondensed Consolidated Statements of
Operations (Unaudited)

|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|----------------------------------------------- |  | -------------------------------- | ---------- | --------------------------------- | - | ---------- |  | ---- | --------- | - | - | --------- | 
|                                                |  | Nine Months Ended
 September 30, |            | Three Months Ended
 September 30, |  
|                                                |  |                                  |            |                                   |   |            |  |      |          
|                                                |  |                                  |            |                                   |   |            |  |      |          
|                                                |  | 2009                             |            | 2008                              |   | 2009       |  | 2008 |          
|                                                |  |                                  |            |                                   |   |            |  |      |          
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Net revenues                                    |  | $                                | 13,439,072 |                                   | $ | 12,579,448 |  | $    | 4,353,785 |   | $ | 4,641,915 | 
|Cost of
 revenues                               |  |                                  | 6,314,008  |                                   |   | 5,557,525  |  |      | 2,131,624 |   |   | 2,001,564 | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Gross profit                                    |  |                                  | 7,125,064  |                                   |   | 7,021,923  |  |      | 2,222,161 |   |   | 2,640,351 | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Operating
 Expenses:                            |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Selling, general and administrative             |  |                                  | 6,336,450  |                                   |   | 5,929,489  |  |      | 2,203,537 |   |   | 1,879,322 | 
|Depreciation and amortization                   |  |                                  | 776,693    |                                   |   | 618,049    |  |      | 279,142   |   |   | 212,199   | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  | 7,113,143  |                                   |   | 6,547,538  |  |      | 2,482,679 |   |   | 2,091,521 | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Operating income
 (loss)                        |  |                                  | 11,921     |                                   |   | 474,385    |  |      | (260,518  | ) |   | 548,830   | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Other Income
 (Expense):                        |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Interest income (net)                           |  |                                  | 31,695     |                                   |   | 194,817    |  |      | 4,468     |   |   | 46,224    | 
|Loss from joint venture                         |  |                                  | (8,559     | )                                 |   |           |  |      | (6,235    | ) |   |          | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  | 23,136     |                                   |   | 194,817    |  |      | (1,767    | ) |   | 46,224    | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Income
 (loss) before benefit for income tax    |  |                                  | 35,057     |                                   |   | 669,202    |  |      | (262,285  | ) |   | 595,054   | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Benefit for
 income tax                         |  |                                  | 30,667     |                                   |   | 166,515    |  |      | 81,153    |   |   | 131,515   | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Net income
 (loss)                              |  | $                                | 65,724     |                                   | $ | 835,717    |  | $    | (181,132  | ) | $ | 726,569   | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Net income
 (loss) per common share:            |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Basic net income (loss) per common share        |  | $                                | .01        |                                   | $ | .17        |  | $    | (.04      | ) | $ | .15       | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Diluted net income (loss) per common share      |  | $                                | .01        |                                   | $ | .17        |  | $    | (.04      | ) | $ | .15       | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Weighted
 Average Number of Shares Outstanding: |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Basic                                           |  |                                  | 5,031,484  |                                   |   | 4,956,732  |  |      | 5,079,351 |   |   | 4,920,755 | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 
|Diluted                                         |  |                                  | 5,054,075  |                                   |   | 4,995,932  |  |      | 5,079,351 |   |   | 4,949,992 | 
|                                                |  |                                  |            |                                   |   |            |  |      |           |   |   |           | 

|                                                                     | 
|-------------------------------------------------------------------- | 
|                                                                     | 
|See Notes to Condensed Consolidated Financial Statements (Unaudited) | 
|                                                                     | 
|4                                                                   

---



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

|                                                                                            |  |                                   |            |      |   |            |  
|------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                            |  | Nine
 Months Ended
 September 30, |           
|                                                                                            |  |                                  
|                                                                                            |  | 2009                              |            | 2008 |  
|                                                                                            |  |                                   |            |     
|Cash Flows from Operating Activities:                                                       |  |                                   |            |      |   |            |  
|Net income                                                                                  |  | $                                 | 65,724     |      | $ | 835,717    |  
|                                                                                            |  |                                   |            |      |   |            |  
|Adjustments to reconcile net income to net cash provided by operating
 activities:          |  |                                   |            |      |   |            |  
|Depreciation and amortization                                                               |  |                                   | 776,693    |      |   | 618,049    |  
|Deferred compensation                                                                       |  |                                   |           |      |   | 16,968     |  
|Stock compensation expense                                                                  |  |                                   | 176,512    |      |   | 145,039    |  
|Deferred income taxes                                                                       |  |                                   | (147,001   | )    |   | (174,000   | )
|Gain on sale of equipment                                                                   |  |                                   |           |      |   | (3,616     | )
|Loss from joint venture                                                                     |  |                                   | 8,559      |      |   |           |  
|Changes in operating assets and liabilities:                                                |  |                                   |            |      |   |            |  
|(Increase) decrease in operating assets:                                                    |  |                                   |            |      |   |            |  
|Accounts receivable                                                                         |  |                                   | 632,421    |      |   | 803,308    |  
|Prepaid expenses and other current assets                                                   |  |                                   | (161,661   | )    |   | 12,061     |  
|Other assets                                                                                |  |                                   | (5,013     | )    |   |           |  
|(Decrease) increase in operating liabilities:                                               |  |                                   |            |      |   |            |  
|Accounts payable and accrued expenses                                                       |  |                                   | (46,478    | )    |   | (393,605   | )
|Deferred revenue                                                                            |  |                                   | (6,095     | )    |   | (131,358   | )
|Other liabilities                                                                           |  |                                   | 22,139     |      |   | (30,042    | )
|                                                                                            |  |                                   |            |      |   |            |  
|Total adjustments                                                                           |  |                                   | 1,250,076  |      |   | 862,804    |  
|                                                                                            |  |                                   |            |      |   |            |  
|Net Cash Provided by Operating Activities                                                   |  |                                   | 1,315,800  |      |   | 1,698,521  |  
|                                                                                            |  |                                   |            |      |   |            |  
|                                                                                            |  |                                   |            |      |   |            |  
|Cash Flows from Investing Activities:                                                       |  |                                   |            |      |   |            |  
|Acquisition of property and equipment                                                       |  |                                   | (126,831   | )    |   | (204,116   | )
|Capitalized software development costs                                                      |  |                                   | (251,330   | )    |   | (617,961   | )
|Capitalized course costs                                                                    |  |                                   | (53,640    | )    |   | (31,449    | )
|Proceeds from sale of asset                                                                 |  |                                   |           |      |   | 12,000     |  
|Property and equipment acquired from acquisitions                                           |  |                                   |           |      |   | (25,252    | )
|Intangible assets acquired form acquisitions                                                |  |                                   |           |      |   | (66,558    | )
|Cash paid for business acquisitions                                                         |  |                                   | (348,715   | )    |   | (4,350,160 | )
|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                                                       |  |                                   | (1,461,444 | )    |   | (5,283,496 | )
|                                                                                            |  |                                   |            |      |   |            |  
|                                                                                            |  |                                   |            |      |   |            |  
|Cash Flows from Financing Activities:                                                       |  |                                   |            |      |   |            |  
|Exercise of stock options, warrants and other                                               |  |                                   |           |      |   | 20,174     |  
|Purchase of treasury stock                                                                  |  |                                   |           |      |   | (350,792   | )
|                                                                                            |  |                                   |            |      |   |            |  
|Net Cash Used in Financing Activities                                                       |  |                                   |           |      |   | (330,618   | )
|                                                                                            |  |                                   |            |      |   |            |  
|                                                                                            |  |                                   |            |      |   |            |  
|Net decrease in cash and cash equivalents                                                   |  |                                   | (145,644   | )    |   | (3,915,593 | )
|Cash and cash equivalents, beginning of period                                              |  |                                   | 6,626,181  |      |   | 10,072,338 |  
|                                                                                            |  |                                   |            |      |   |            |  
|Cash and cash equivalents, end of period                                                    |  | $                                 | 6,480,537  |      | $ | 6,156,745  |  
|                                                                                            |  |                                   |            |      |   |            |  
|                                                                                            |  |                                   |            |      |   |            |  
|Supplemental Disclosure of Cash Flow Information:                                           |  |                                   |            |      |   |            |  
|Cash paid for interest                                                                      |  | $                                 |           |      | $ | 140        |  
|                                                                                            |  |                                   |            |      |   |            |  
|Cash paid for income taxes                                                                  |  | $                                 | 89,000     |      | $ | 7,485      |  
|                                                                                            |  |                                   |            |      |   |            |  
|                                                                                            |  |                                   |            |      |   |            |  
|Supplemental Disclosure of Non-Cash Investing Activities:                                   |  |                                   |            |      |   |            |  
|Stock issued for additional purchase consideration for acquisition of
 Skye Multimedia Ltd. |  | $                                 | 218,783    |      | $ |           |  
|                                                                                            |  |                                   |            |      |   |            |  

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

5

---



Notes to Condensed
Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements of SmartPros
Ltd. and subsidiaries (SmartPros or the Company) have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the Companys audited consolidated financial
statements for the year ended December 31, 2008, and the notes thereto included
in the Companys Annual Report on Form 10-K filed with the United States
Securities and Exchange Commission on March 24, 2009. 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 are
periodic video and internet subscription-based programs and services directed
to corporate accountants and financial managers, accountants in public practice
and CPA exam candidates. In 2008, the Company acquired Loscalzo, a leading
provider of live training to accountants. On July 1, 2009 the Company acquired
substantially all of the operating assets of Executive Enterprise Institute
(EEI) for approximately $349,000. The purchase price of $349,000 was
allocated as follows: course costs of $313,000 which are being amortized over a
five year period, prepaid expenses of $81,000 offset by deferred revenue of
$45,000. EEI provides continuing professional education directed to
accountants, financial professionals and attorneys through live seminars
conducted throughout the United States.

The
Company also produces a series of continuing education courses directed to the
engineering profession, as well as a series of courses designed for candidates
for the professional engineering exam. Through its wholly-owned subsidiary,
SLE, the Company produces ethics, governance and compliance programs for
corporate clients, and through SLEs Cognistar Legal division, produces online
and customized training courses for the legal profession. The Companys other
wholly-owned subsidiary, Skye, produces customized training solutions for a
number of industries including pharmaceutical and professional services. In
addition, the Companys Financial Campus division owns a library of online
training solutions for the banking, securities and insurance industries, as
well as courses designed for live training. Through our WatchIT division the
Company sells a subscription-based program and develops custom courses for
corporate information technology professionals. Finally, SmartPros produces
custom videos, rents out its studios and provides multi-media and technology
consulting services.

While
the Companys 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 located 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

6

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

Note 2. Description of Business and Summary
of Significant Account Policies (contd)

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 acquired $1,113,000 of course costs that
are being amortized over a five-year period. Included in other intangible
assets at September 30, 2009, are capitalized course costs of $226,000, net of
accumulated amortization of $66,000.

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 Campus division and the Information Technology division
recognize revenue either immediately from the direct sale of courses or on a
deferred basis as earned, from the sale of prepaid courses.

Earnings (Loss) Per Share

Basic
earnings or loss per common share is net income or loss, as the case may be,
divided by the weighted average number of outstanding shares outstanding of the
Companys common stock, par value $.0001 per share (the Common Stock) during
the period. Basic earnings or loss per share exclude any dilutive effects of
options, warrants and convertible securities. Diluted earnings per common share
include the dilutive effect of shares of Common Stock issuable under stock options
and warrants. Diluted earnings per share are computed using the weighted
average number of Common Stock and Common Stock equivalent shares outstanding
during the period. Common Stock equivalent shares for the nine-month and
three-month periods ended September 30, 2008 were 39,200 and 29,237
respectively. For the nine month ended September 30, 2009 Common Stock
equivalent shares were 22,591. For the three month period ended September 30,
2009 the inclusion of Common Stock equivalents would be anti-dilutive.

7

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

Note 3. Stock-Based Compensation

The
Companys 2009 Stock Option Plan (the 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 Incentive Compensation Plan
adopted at the Companys annual meeting in June 2009 is 800,000, provided that
future restricted stock grants may not exceed 200,000 shares. As of September
30, 2009, there were 410,421 options outstanding, of which 296,412 are
currently exercisable, and restricted stock grants totaled 136,404, none of
which had vested as of September 30, 2009. All of the outstanding restricted
stock grants were issued prior to the approval of the 2009 Plan. There are
currently 253,175 shares available under the Plan for issuance of grants and
options, of which stock grants may not exceed 200,000 shares. All stock options
and restricted stock awards granted under the Plan are granted with an exercise
price or grant value equal to 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. Unvested shares are subject to
forfeiture unless certain time and/or performance requirements are satisfied.

Current
accounting literature authorizes 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 $177,000 and $145,000 for the nine-month periods ended
September 30, 2009 and 2008, respectively.

The
assumptions used for the nine-month periods ended September 30, 2009 and 2008,
and the resulting estimates of weighted-average fair value of options granted
during those periods are as follows:

|                                                          |  |                                 |          |      |   |          |  
|--------------------------------------------------------- |  | ------------------------------- | -------- | ---- | - | -------- | -
|                                                          |  | Nine months ended September 30, |         
|                                                          |  | 2009                            |          | 2008 |  
|                                                          |  |                                 |          |      |  
|Expected life
 (years)                                    |  |                                 | 4.5      |      |   | 5.5      |  
|Risk-free
 interest rate                                  |  |                                 | 2.0%-2.1 | %    |   | 2.8%-3.0 | %
|Volatility                                                |  |                                 | 40%-45.0 | %    |   | 45.0     | %
|Dividend
 yields                                          |  |                                 |         |      |   |         |  
|Weighted-average
 fair value of options during the period |  | $                               | 1.08     |      | $ | 2.48     |  

The
Company granted 65,750 options under the Plan during the nine months ended
September 30, 2009, of which 55,750 are exercisable at a price of $2.54 per
share and the Company granted 10,000 options on July 1, 2009 immediately
exercisable at a price of $3.50 in conjunction with the acquisition of EEI.

The
following table represents our stock options granted, exercised and forfeited
for the nine months ended September 30, 2009:

|                                   |  |                 |         |                                             |   |                                               |  |      |  | 
|---------------------------------- |  | --------------- | ------- | ------------------------------------------- | - | --------------------------------------------- |  | ---- |  | 
|Stock Options                      |  | Numberof Shares |         | Weighted Average
 Exercise Price per
 Share |   | Weighted Average
 Remaining
 Contractual Term | 
|                                   |  |                 |         |                                             |   |                                               | 
|                                  
|Outstanding at January 1,
 2009    |  |                 | 365,144 |                                             | $ | 4.71                                          |  | 5.7  |  | 
|Granted                            |  |                 | 65,750  |                                             | $ | 2.69                                          |  | 10.0 |  | 
|Exercised                          |  |                 |        |                                             |   |                                              |  |     |  | 
|Forfeited/expired                  |  |                 | (20,473 | )                                           | $ | 4.35                                          |  |     |  | 
|                                   |  |                 |         |                                             |   |                                               |  |      |  | 
|Outstanding at September
 30, 2009 |  |                 | 410,421 |                                             | $ | 4.40                                          |  | 5.5  |  | 
|                                   |  |                 |         |                                             |   |                                               |  |      |  | 
|Exercisable at September
 30, 2009 |  |                 | 296,412 |                                             | $ | 4.53                                          |  | 5.0  |  | 
|                                   |  |                 |         |                                             |   |                                               |  |      |  | 

8

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Note 4. Income Tax Benefit

The
Company recognizes a deferred income tax asset available from its net operating
loss carryforwards, which begin to expire in 2023. This benefit is offset by
any corporate alternative minimum income tax. The Company has now recognized
all of the benefits of its available net operating loss carryforwards to offset
current taxable income and as such has recognized a net income tax benefit of
approximately $115,000 for the nine- and three-months ended September 30, 2009.
The benefit was offset by a charge for state and local taxes of $84,000 and
$34,000 for the nine- and three-months periods ended September 30, 2009,
respectively. The Company recognized a net benefit fo $167,000 and $132,000 for
the nine- and three-months periods ended September 30, 2008, respectively. The
Company has approximately $1.25 million of deferred income tax assets as of
September 30, 2009 primarily on account of net operating loss carryforwards.
The Company does not believe that it takes any uncertain income tax positions
that would require disclosure under the Accounting Standards Codification, as
defined below.

Note 5. Stockholders Equity

In
February 2009 the Company issued an additional 18,116 restricted shares of our
common stock as part of the 2008 bonus paid in 2009. These shares vest over a
three-year period. The remaining bonuses were paid in cash. The Companys
Compensation Committee awarded 98,500 restricted shares of our common stock to
various officers and employees from our Incentive Stock Plan to align the
stockholders interest with those of management and senior level employees and
as an inducement for those employees to remain with the Company. Of these
grants, 50,000 shares vest ratably over a four-year period and the remaining
48,500 shares vest at the end of three years.

In
April 2009 the Company issued 83,825 shares of our common stock valued at approximately
$219,000 in satisfaction of the earn-out contingent purchase price for the
Skye assets.

Note 6. New Accounting Pronouncements

In
July 2009, the Financial Accounting Standards Board adopted The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, (the
Codification) (ASC). The Codification will be the single source of
authoritative U.S. nongovernmental generally accepted accounting principles.
The Codification does not change generally accepted accounting principles, but
is intended to make it easier to find and research issues and will change the
way GAAP is referenced. The Codification is effective for interim and annual
periods ending after September 15, 2009. The Company has begun to use the new
Codification when referring to GAAP in its financial statements for the third
quarter of 2009.

The
Subsequent Events topic of the ASC provides guidance on managements assessment
of subsequent events. This standard establishes the accounting and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the basis
for that date. This section is effective for interim and annual periods ending
after June 15, 2009. In accordance with the ASC, the Company reviewed the
events for inclusion in the financial statements through the filing date of
this Form 10-Q. The implementation of this standard did not have a material
impact on the Companys consolidated financial statements.

*             *             *

9

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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. In addition, we provide training solutions
for the banking, insurance, information technology industries and others. We
also provide information technology, 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., acquired in July 2008 and our newly acquired EEI 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 corporations that they must
 continually improve their skills and those of their employees in order to
 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 four years, our annual revenues have grown from $10.2 million to $18.3
million. This growth is due in large part to eight acquisitions that we have
completed in this period. Our most recent and ninth acquisition was in July
2009, when we acquired Executive Enterprise Institute (EEI), which provides
continuing professional education directed to accountants, financial
professionals and attorneys through live seminars conducted throughout the
United States. In conjunction with the recent acquisition of EEI, we are
experiencing increased operating costs in the second half of the year as we
build EEIs business. EEI has historically earned the majority of its revenues
in the second and fourth calendar quarters of each year. Marketing and related
costs associated with these seminars produced by EEI are expensed in the
quarter in which the seminars take place. However, other operating costs, such
as payroll, are recorded as incurred. This had an adverse effect on our
operating results in the third quarter of 2009.

In
August 2009 we hired a senior executive to assist one of our division heads
that we believe will be reducing their time significantly in the second half of
2010. The additional expense related to this executive should be significantly reduced
commencing in the third quarter of 2010.

10

---



We
intend to continue to focus primarily on acquisitions that will allow us to
increase the breadth and depth of our current product offerings. We will also
consider acquisitions that will give us access to new markets and products. 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, 2008. These risks include 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. Our
warrants were publicly traded until October 19, 2009, when they expired.

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

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), which runs 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.

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

11

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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.

Results of Operations

Comparison of three months ended
September 30, 2009 and 2008

Our
operating results for the quarter ended September 30, 2009 were adversely
impacted by the additional payroll and other costs related to the recent
acquisition of EEI, the hiring of an executive for one of our divisions as
previously noted in this document and a decrease in revenue from custom work as
well as a decrease in net revenues from our engineering division. We believe
this trend reflects the current economic climate as many companies are reducing
expenditures and some delaying the implementation of non-revenue producing
projects. In addition, many companies have reduced their staffs and are
reviewing usage of our products by their staffs.

We
experienced a $288,000, or 6.2%, decrease in net revenues, resulting in an
operating loss for the quarter of $261,000 as compared to an operating income
of $549,000 in the comparable quarter of 2008. 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 and banking 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 September 30, 2009 and 2008. 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.

12

---



|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|------------------------------------------------ |  | -------------------------------- | --------- | ---------- |  | ------ | -- | ---------- | --------- | ------ |  | ----- | - |  | ------ | --
|                                                 |  | Three months ended September 30, |          
|                                                 |  |                                  |          
|                                                 |  | 2009                             |           | 2008       |  |        |    |           
|                                                 |  |                                  |           |            |  |        |    |           
|                                                 |  | Amount                           |           | Percentage |  | Amount |    | Percentage |           | Change | 
|                                                 |  |                                  |           |            |  |        |    |            |           |        | 
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Net revenues                                     |  | $                                | 4,353,785 |            |  | 100.0  | %  | $          | 4,641,915 |        |  | 100.0 | % |  | (6.2   | %)
|Cost of revenues                                 |  |                                  | 2,131,624 |            |  | 49.0   | %  |            | 2,001,564 |        |  | 43.1  | % |  | 6.5    | % 
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Gross profit                                     |  |                                  | 2,222,161 |            |  | 51.0   | %  |            | 2,640,351 |        |  | 56.9  | % |  | (15.8  | %)
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Selling, general and
 administrative             |  |                                  | 2,203,537 |            |  | 50.6   | %  |            | 1,879,322 |        |  | 40.5  | % |  | 17.3   | % 
|Depreciation and
 amortization                   |  |                                  | 279,142   |            |  | 6.4    | %  |            | 212,199   |        |  | 4.6   | % |  | 31.5   | % 
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Total operating expenses                         |  |                                  | 2,482,679 |            |  | 57.0   | %  |            | 2,091,521 |        |  | 45.1  | % |  | 18.7   | % 
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Operating income (loss)                          |  |                                  | (260,518  | )          |  | (6.0   | %) |            | 548,830   |        |  | 11.8  | % |  | (147.5 | %)
|Other income (expense), net                      |  |                                  | (1,767    | )          |  |       |    |            | 46,224    |        |  | 1.0   | % |  | (103.8 | %)
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Net income (loss) before
 benefit for income tax |  |                                  | (262,285  | )          |  | (6.0   | %) |            | 595,054   |        |  | 12.8  | % |  | (144.1 | %)
|Benefit for income tax                           |  |                                  | 81,153    |            |  | 1.8    | %  |            | 131,515   |        |  | 2.8   | % |  | (38.3  | %)
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   
|Net income (loss)                                |  | $                                | (181,132  | )          |  | (4.2   | %) | $          | 726,569   |        |  | 15.6  | % |  | (124.9 | %)
|                                                 |  |                                  |           |            |  |        |    |            |           |        |  |       |   |  |        |   

Net revenues

Net
revenues for the three months ended September 30, 2009, decreased approximately
$288,000, or 6.2%, compared to net revenues for the three months ended
September 30, 2008. This decrease was primarily due to: (i) the
Accounting/Finance division whose net revenues decreased $106,000; (ii) a
$124,000 decrease in net revenues from the Ethics and Compliance division; (iii)
a $33,000 decrease in net revenues from our Cognistar legal division; (iv) a
net decrease of $88,000 in net revenues from our engineering division: and (v)
a decrease of $7,000 in revenues from our Technology training division. These
decreases were offset by: (i) a $25,000 increase in net revenues from the
Financial Services division; (ii) a $26,000 increase in net revenues from Skye;
and (iii) a $19,000 increase in net revenues from the video production and
consulting divisions. 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 third quarter of 2009, net revenues from the Accounting/Finance division
were $2.99 million, or 69% of net revenues, compared to $3.09 million, or 67%
of net revenues, in the comparable 2008 period. Net revenues from
subscription-based products and direct sales of course material on a
non-subscription basis, increased slightly from $2.01 million in the 2008
period to $2.03 million in the corresponding 2009 period. Net revenues from
other projects in our Accounting/Finance division that are not subscription
based decreased $20,000 from 2008 to 2009. Non-subscription-based revenues
fluctuate from period to period and are not indicative of any trends. In the
2009 period, net revenues from online sales of accounting products accounted
for approximately $1.03 million, or 24% of net revenues, compared to $966,000,
or 21% of net revenues, in the comparable 2008 period. Also, net revenues from
live training decreased from $908,000 in the third quarter of 2008 to $805,000
in the current period.

For
the three months ended September 30, 2009, Skye generated net revenues of
$442,000 compared to $416,000 in the third quarter of 2008. 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 $496,000 of net revenues in the
quarter ended September 30, 2009. For the quarter ended September 30, 2008,
this division generated $471,000 of net revenues. This increase is a result of
$70,000 increased revenues from our course sales offset by a decrease of
$45,000 in consulting work from the 2008 period. The decrease in consulting
work is again a result of current economic conditions as companies postpone
expenditures.

Our
Technology Training division generated $79,000 of net revenues in the 2009
period, as compared to $86,000 in the third quarter of 2008.

For
the quarter ended September 30, 2009, our SmartPros Legal & Ethics
subsidiary (SLE) had net revenues of $155,000 compared to net revenues of
$312,000 for the quarter ended September 30, 2008. For the 2009 period, $55,000
of SLEs net revenues was generated by the Ethics and Compliance division and
$100,000 was generated by the Cognistar Legal division. Net revenues generated
by the 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.

13

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Our
Engineering division generated $148,000 of net revenues in the third quarter of
2009 compared to $236,000 in the third quarter of 2008. This decrease is a
result of timing differences in the placement of orders from customers and due
to the current economic climate many engineering firms and governmental
agencies have reduced their budgets, including staff education. Sales of our
engineering products are not subscription based.

Net
revenues generated by the Video Production division were $28,000 and from the
Consulting division were $18,000 for the third quarter of 2009 compared to
$25,000 and $2,000 respectively for the third quarter of 2008. This increase is
not indicative of any trends as the revenues from these divisions vary from
period to period.

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 decreased for the three months ended September 30, 2009 to
51% compared to 57% for the three months ended September 30, 2008. This
decrease is attributable, in part, to costs related to the EEI acquisition, as
we did not acquire EEI until July 2009. 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.

Cost
of revenues increased by $130,000 in the current quarter from the comparable
period last year. The increase is attributable to a number of factors: (i)
salaries and related costs attributable to EEI were approximately $58,000; (ii)
outside labor and productions costs related to custom projects increased
approximately $77,000; and (iii) other costs decreased by approximately $5,000.
Beginning in 2008, we started to reduce our labor costs by outsourcing 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 increased 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, increased $77,000 after capitalizing a
 portion of these costs. This increase is directly related to the completion
 of a number of custom projects and internal work. Direct production costs,
 which are costs related to producing videos, courses, custom projects or live
 instruction and includes such costs as renting equipment and locations and
 the use of live instructors for either teaching or developing the courses
 decreased $125,000. 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. Our course libraries
 are constantly requiring updates as there are always changes such as the
 Codification of Accounting Standards which replaces the FASB accounting
 pronouncements.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Royalties.
 Royalty expense increased in the three months ended September 30, 2009,
 compared to the comparable 2008 period by $4,000. We often have to make
 estimates, as some of our partners do not always provide us with timely
 information. Royalty expense will vary from period to period based on sales
 and usage of our various products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Salaries.
 Overall, payroll and related costs attributable to production personnel
 increased by $67,000 after capitalizing a portion of these costs during the
 current quarter. Almost all of the increase is attributable to the EEI
 acquisition in July 2009. We have now stabilized our salaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

14

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | and related
 costs in our consulting and video production departments in 2009 as compared
 to 2008. We reduced some personnel costs as a result of decreased business in
 our duplication business and outsourcing of technology services.                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Other
 production related costs. These are other costs
 directly related to the production of our products such as purchases of
 materials, travel, shipping and other. These costs increased by $107,000 from
 2008 to 2009. This is primarily a direct result of travel-related expenses,
 most of which is reimbursed by the customer on whose behalf those expenses
 were incurred and purchases of materials used in classroom instruction.

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 three
months ended September 30, 2009 increased $324,000, or 17.3%, compared to the
three months ended September 30, 2008. The increase in selling, general and
administrative expenses is partially attributable to the Loscalzo and EEI
acquisitions as well as increases in salaries and related costs

Compensation
expense in the 2009 period increased $213,000 over compensation expense for the
2008 period. Our total number of full time general and administrative employees
at September 30, 2009 was 75 compared to 70 at September 30, 2008. This
increase is due to the EEI acquisition. Compensation expense includes stock
based compensation expense of $42,000 for the 2009 period and $40,000 for the
2008 period. In July 2009 we granted 10,000 options in conjunction with the
acquisition of EEI. The options vested immediately and had an exercise price of
$3.50. Using the Black-Scholes model, the options had a cost of $11,900 that
was charged to expense in the current period. The value of the options was
determined by using a volatility factor of 40%, an interest free rate of 2.1%
and a life expectancy of 4 years. We continue to look for other opportunities
to reduce our overhead.

Our
other selling, general and administrative costs, exclusive of compensation
costs, increased $111,000. These costs include customer service, insurance,
office expenses, professional fees, including approximately $10,000 of EEI
closing costs, 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.

Depreciation and amortization

Depreciation
and amortization expenses increased by $67,000 in the third quarter of 2009
compared to the third quarter of 2008 primarily from the amortization of
intangibles acquired in the Loscalzo and EEI acquisitions and from our
capitalized costs. 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 (loss)

For
the three months ended September 30, 2009, net loss from operations was
$261,000 compared to an operating profit of $549,000 in the comparable period
of 2008.

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. However, interest rates are substantially lower than
they were in 2008. For the third quarter of 2009 we had other loss of $1,800
compared to other income of $46,000 in the third quarter of 2008, 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 September 30, 2009 was $6,200.
We anticipate comparable interest income rates in future periods.

15

---



Income tax
benefit

We
account for deferred tax assets available principally from our net operating
loss carryforward pursuant to ASC. To date we have recognized a total of
approximately $1,250,000 in such assets. We recorded a benefit of $115,000 for
the quarter from the utilization of net operating loss carryforwards, offset by
a charge for state and local income taxes of $34,000 as compared to a tax
benefit of $132,000 in third quarter of 2008.

Net income
(loss)

For
the three months ended September 30, 2009, we recorded a net loss of $181,000,
or ($0.04) per share, basic and diluted, compared to a net income of $727,000
or $0.15 per share, basic and diluted, for the three months ended September 30,
2008.

Comparison of nine months ended September 30, 2009
and 2008

Our
operating results for the nine-months ended September 30, 2009 were mixed
compared to the comparable period of 2008:

| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | net
 revenues increased 6.8%;                                                         
| |   |                                                                                       
| |  | gross profit increased by $103,000, or 1.5%                                           
| |   |                                                                                       
| |  | selling, general and administrative expenses increased 6.9%, due
 to acquisitions; and
| |   |                                                                                       
| |  | pre-tax net income was $35,000 compared to $669,000 in the prior
 period.             

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 and banking 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 nine months
ended September 30, 2009 and 2008. 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.

|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|------------------------------------ |  | ------------------------------- | ---------- | ---------- |  | ------ | - | ---------- | ---------- | ------ |  | ----- | - |  | ----- | --
|                                     |  | Nine months ended September 30, |           
|                                     |  |                                 |           
|                                     |  | 2009                            |            | 2008       |  |        |  
|                                     |  |                                 |            |            |  |        |  
|                                     |  | Amount                          |            | Percentage |  | Amount |   | Percentage |            | Change | 
|                                     |  |                                 |            |            |  |        |   |            |            |        | 
|                                    
|Net revenues                         |  | $                               | 13,439,072 |            |  | 100.0  | % | $          | 12,579,448 |        |  | 100.0 | % |  | 6.8   | % 
|Cost of revenues                     |  |                                 | 6,314,008  |            |  | 47.0   | % |            | 5,557,525  |        |  | 44.2  | % |  | 13.6  | % 
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Gross profit                         |  |                                 | 7,125,064  |            |  | 53.0   | % |            | 7,021,923  |        |  | 55.8  | % |  | 1.5   | % 
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Selling, general and
 administrative |  |                                 | 6,336,450  |            |  | 47.1   | % |            | 5,929,489  |        |  | 47.1  | % |  | 6.9   | % 
|Depreciation and
 amortization       |  |                                 | 776,693    |            |  | 5.8    | % |            | 618,049    |        |  | 4.9   | % |  | 25.7  | % 
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Total operating expenses             |  |                                 | 7,113,143  |            |  | 52.9   | % |            | 6,547,538  |        |  | 52.0  | % |  | 8.6   | % 
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Operating income (loss)              |  |                                 | 11,921     |            |  | 0.1    | % |            | 474,385    |        |  | 3.8   | % |  | (97.5 | %)
|Other income, net                    |  |                                 | 23,136     |            |  | 0.2    | % |            | 194,817    |        |  | 1.5   | % |  | (88.1 | %)
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Income before benefit for income tax |  |                                 | 35,057     |            |  | 0.3    | % |            | 669,202    |        |  | 5.3   | % |  | (94.8 | %)
|Benefit for income tax               |  |                                 | 30,667     |            |  | 0.2    | % |            | 166,515    |        |  | 1.3   | % |  | (81.6 | %)
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Net income (loss)                    |  | $                               | 65,724     |            |  | 0.5    | % | $          | 835,717    |        |  | 6.6   | % |  | (92.1 | %)
|                                     |  |                                 |            |            |  |        |   |            |            |        |  |       |   |  |       |   

Net revenues

Net
revenues for the nine months ended September 30, 2009, increased $859,000
million, or 6.8%, compared to net revenues for the nine months ended September
30, 2008. This increase was primarily due to: (i) the Accounting/Finance
division whose net revenues increased $758,000; (ii) Skye whose net revenues
increased $644,000; (iii) the Consulting division, whose revenues increased
$125,000; (iv) Video

16

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Production
whose net revenues increased $11,000 and (v) Financial Services division whose
net revenues increased by $19,000. These increases were offset by: (i) a $313,000
decrease in net revenues from the Ethics and Compliance division; (ii) a
$121,000 decrease in net revenues from the Cognistar Legal division; (iii) a
$200,000 decrease in net revenues from the Engineering division; and (iv) a
$64,000 decrease in net revenues from the Technology Training division. Under
our long-standing policy, revenue is credited to the originating department
regardless of the type of service that is performed. For example, a contract to
convert videotapes to digital format is credited to the Accounting/Finance
division if that is where the sale originated, even if the project has nothing
to do with accounting.

In
the first nine months of 2009, net revenues from the Accounting/Finance
division were $8.36 million, or 62% of net revenues, compared to $7.60 million,
or 60% of net revenues, in the comparable 2008 period. The 2009 period included
$1.77 million of net revenues generated by Loscalzo as compared to $908,000 in
2008. Loscalzo was acquired in July 2008. Net revenues from subscription-based
products and direct sales of course material on a non-subscription basis,
increased from $5.44 million in the 2008 period to $6.06 million in the
corresponding 2009 period. Net revenues derived from other projects in our
Accounting/Finance division that are not subscription based decreased from
$536,000 in 2008 to $517,000 in 2009. Non-subscription-based revenues fluctuate
from period to period and are not indicative of any trends. In the 2009 period,
net revenues from online sales of accounting products accounted for
approximately $3.05 million compared to $2.90 million in the comparable 2008
period, each representing 23% of sales. This represents a 5% increase in
absolute dollars. Total online sales were $4.96 million in the 2009 period, or
37% of net revenues, as compared to $4.84 million in the comparable 2008
period, an increase of 2.5%.

For
the nine months ended September 30, 2009, Skye generated net revenues of $2.11
million compared to $1.47 million in the comparable period of 2008. 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 $1.45 million of net revenues in
the nine months ended September 30, 2009 as compared to $1.43 million in the
comparable 2008 period. This increase was from $166,000 course and subscription
revenues offset by a decrease of $138,000 in consulting and custom work
revenue, a result of general economic conditions.

Our
Technology Training division generated $169,000 of net revenues in the 2009
period, as compared to $233,000 in the comparable 2008 period.

For
the nine months ended September 30, 2009, SLE had net revenues of $576,000
compared to net revenues of $1.01 million for the nine months ended September
30, 2008. For the 2009 period, $272,000 of SLEs net revenues was generated by
the Ethics and Compliance division and $304,000 was generated by the Cognistar
Legal division. Net revenues generated by the 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 $497,000 of net revenues in the first nine
months of 2009 compared to $697,000 in the first nine months of 2008. This
decrease is not necessarily indicative of any trends, but is a result of timing
differences in the placement of orders from customers and reduced staff and
budgets in engineering firms and governmental agencies. Sales of our
engineering products are not subscription based.

Net
revenues generated by the Video Production division were $135,000 and from the
Consulting division were $139,000 for the first nine months of 2009 compared to
$124,000 and $14,000 respectively for the comparable period of 2008. This
increase is not indicative of any trends as the revenues from these divisions
vary from period to period.

Cost of revenues

Our
gross profit margin decreased for the nine months ended September 30, 2009 to
53.0% compared to 55.8% for the nine months ended September 30, 2008. This
decrease is attributable, in part, to the seasonality of the Loscalzo business
whose income is derived primarily in the second half of the year

17

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and the recent
acquisition of EEI. We also devoted a significant amount of internal resources
to develop new products and to re-tooling existing products and technology.

Cost
of revenues increased by $756,000 in the current period from the comparable
period last year. The increase is attributable to a number of factors including
the following: (i) salaries and related costs increased by approximately
$238,000; (ii) outside labor and productions costs related to custom projects
increased approximately $335,000; (iii) other costs, including expenses
directly attributable to Loscalzo, which we acquired in July 2008, increased by
approximately $184,000.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Outside
 labor and direct production costs. The cost of
 outside labor increased $316,000 after capitalizing a portion of these costs.
 This increase is directly related to the completion of a number of custom
 projects and internal work. Direct production costs increased $19,000. 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. 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Royalties.
 Royalty expense decreased in the nine months ended September 30, 2009,
 compared to the comparable 2008 period by $62,000. This is a result of timing
 differences in payments to our partners in our engineering courses and to our
 organizational partners in the accounting education area for which we often
 have to make estimates.                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Salaries.
 Overall, payroll and related costs attributable to production personnel
 increased by $238,000 as a result of Loscalzo and EEI, after capitalizing a
 portion of these costs during the current period. We have reduced salaries
 and related costs in our consulting and video production departments as a
 result of decreased business in our duplication business and outsourcing of
 technology services.                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Other
 production related costs. These are other costs
 directly related to the production of our products such as purchases of
 materials, travel, shipping and other. These costs increased by $184,000 from
 2008 to 2009. This is primarily a direct result of travel-related expenses
 incurred by Loscalzo, SLE and Skye, most of which is reimbursed by the
 customer on whose behalf those expenses were incurred and a reduction in our
 material and shipping costs as a result of switching to DVD from videotape
 for our subscription based products.

Selling, general and administrative expenses

Selling,
general and administrative expenses for the nine months ended September 30,
2009 increased $407,000, or 6.9%, compared to the nine months ended September
30, 2008. The increase in selling, general and administrative expenses is
primarily attributable to the Loscalzo and EEI acquisitions.

Compensation
expense in the 2009 period increased $224,000 over compensation expense for the
2008 period. This increase includes additional personnel acquired in the
Loscalzo and EEI acquisitions. Compensation expense includes stock based
compensation expense of $177,000 for the 2009 period and $145,000 for the 2008
period.

In
February 2009 we granted 55,750 options to various employees. The closing price
of the stock on the dates of issuance was $2.54. Using the Black-Scholes model
we determined that these options had a cost of $59,000 that is being amortized
over a three-year period. The value of the options was determined by using a
volatility factor of 45%, a risk-free interest rate of 1.99% and expected life
of 5.1 years. In July 2009 we granted 10,000 options in conjunction with the
acquisition of EEI. The options vested immediately and had an exercise price of
$3.50. Using the Black-Scholes model, the options had a cost of $11,900 that was
charged to expense in the current period. The value of the options was
determined by using a volatility factor of 40%, an interest free rate of 2.1%
and a life expectancy of 4 years.

Our
other selling, general and administrative costs, exclusive of compensation
costs, increased $183,000. These costs include rent, insurance, customer
service and other expenses. We continue to look for other opportunities to
reduce our overhead.

Depreciation and amortization

Depreciation
and amortization expenses increased by $159,000 in the first nine months of
2009 compared to the first nine months of 2008 as a result of increased
amortization expense from our

18

---



capitalized course costs, intangibles acquired through
acquisitions and from the depreciation of fixed assets acquired from our
various acquisitions and/or purchased. 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 begin to amortize intangibles acquired through
acquisitions.

Operating income

For
the nine months ended September 30, 2009, operating income was $12,000 compared
to an operating income of $474,000 in the comparable period of 2008.

Other income, net

For
the nine months ended September 30, 2009 we had net other income of $23,000
compared to net other income of $195,000 in the first nine months of 2008. The
loss from our iReflect joint venture for the nine months ended September 30,
2009 was $8,600. We anticipate comparable interest income in future periods.

Income tax benefit

We
account for deferred tax assets available principally from our net operating
loss carryforward pursuant to the ASC. To date we have recognized a total of
approximately $1,250,000 in such assets, after applying a deferred tax benefit
of $115,000 for the nine months ended September 30, 2009, as compared to a
benefit of $167,000 in the comparable 2008 period. In addition, state and local
taxes reduced the current period benefit by $84,000, of which approximately
$54,000 is due to state and local taxes attributable to Loscalzo from 2008.

Net income

For
the nine months ended September 30, 2009, we recorded a net profit of $66,000,
or $.01 per share, basic and diluted, compared to a net income of $836,000 or
$0.17 per share, basic and diluted, for the nine months ended September 30,
2008.

Liquidity and Capital Resources

At
September 30, 2009, we had no indebtedness for borrowed money.

Our
working capital as of September 30, 2009 was approximately $2.7 million
compared to $2.3 million at December 31, 2008. Our current ratio at September
30, 2009 was 1.41 to 1 compared to 1.31 to 1 at December 31, 2008. 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 $5.6 million at September 30, 2009 and at December 31, 2008.

At
September 30, 2009, we had cash and cash equivalents of $6.5 million. For the
nine months ended September 30, 2009, we reported a net decrease in cash of $
146,000, which includes $1,316,000 of cash provided by operating activities
offset by $1,461,000 of cash used in investing 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
compensation, and the changes in our operating assets and liabilities, such as
accounts receivable, accounts payable and deferred revenues.

For
the 2009 period, net cash used in investing activities was $1,461,000, which
included capital expenditures of $127,000, consisting primarily of computer
equipment and software purchases, $251,000 for software development costs
relating to new products and $54,000 for course development. In addition, we
expended $700,000 as additional purchase consideration for Skye Multimedia Ltd.
and approximately $349,000 in July 2009 for the acquisition of EEI. This was
offset by a $19,000 decrease in goodwill relating to a closing adjustment in
connection with the Loscalzo acquisition and an adjustment to the estimated
contingent purchase price for Skye. We continually upgrade our technology
hardware and, as such, we anticipate additional capital expenditures relating
to equipment purchases over the next 12 months.

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In
April 2009 we paid $700,000 in cash to the former shareholders of Skye and
their designees and issued to them 83,825 shares of our common stock valued at
approximately $219,000 in satisfaction of the earn-out contingent purchase
price for the Skye assets. This liability was recorded at December 31, 2008.

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 4T. 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 15-d-15(e)) as of
the end of the period covered by this quarterly report (the Evaluation Date).
Based upon that evaluation, our principal executive officer and principal
financial officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act
(i) is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms and (ii) is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.

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

PART 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

In
April 2009 we issued 83,825 shares of our common stock to the former
shareholders of Skye in partial satisfaction of the earn-out contingent
purchase price for the Skye assets. The issuance of these shares is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the Act). The stock certificates representing these shares were imprinted
with a legend restricting transfer unless pursuant to an effective registration
statement or an exemption from registration under the Act.

Company Purchases of
its Equity Securities

On
November 11, 2008, 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 and
nine month periods ended September 30, 2009, no

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additional
shares were repurchased, and as of such date approximately $497,692 was
available under this program.

Item 3. Defaults Upon Senior
Securities

None.

Item 4. Submission of
Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6.
Exhibits

Exhibits:

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

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:
 November 10, 2009 | /s/ Allen S.
 Greene           | 
|                         |                                | 
|                         | Chief
 Executive Officer      
|                         | (Principal
 Executive Officer)

|                         |                                | 
|------------------------ | ------------------------------ | 
|Date:
 November 10, 2009 | /s/ Stanley
 P. Wirtheim       | 
|                         |                                | 
|                         | Chief
 Financial Officer      
|                         | (Principal
 Financial Officer)

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