UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

FORM 10-Q

QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

Commission File Number 001-32300

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

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



|                                                
|------------------------------------------------
|12 Skyline Drive, Hawthorne, New York 10532     
|                                                
|(Address of principal executive office)         
|                                                
|(914) 345-2620                                  
|                                                
|(Issuers telephone number, including area code)

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

Yes x          No
o

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

Yes o          No
o

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

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

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

Yes o          No
x

Number of
shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: As of May 10, 2010, there were 4,926,305 shares of
common stock outstanding.

---



SMARTPROS LTD.

FORM 10-Q REPORT

March 31, 2010

TABLE OF CONTENTS

|                               |         |                                                                                        |     
|------------------------------ | ------- | -------------------------------------------------------------------------------------- | ----
|                               |         |                                                                                        | PAGE
|                               |         |                                                                                        |     
|PART I  FINANCIAL INFORMATION |        
|                               |         |                                                                                        |     
|                               | Item 1. | Condensed Consolidated Financial Statements (Unaudited)                                |     
|                               |         |                                                                                        |     
|                               |         | Balance Sheets  March 31, 2010 and December 31, 2009 (Audited)                        | 4   
|                               |         |                                                                                        |     
|                               |         | Statements of Operations for the three-month periods ended March 31,
 2010 and 2009    | 5   
|                               |         |                                                                                        |     
|                               |         | Statements of Cash Flows for the three-month periods ended March 31,
 2010 and 2009    | 6   
|                               |         |                                                                                        |     
|                               |         | Notes to Condensed Consolidated Financial Statements (Unaudited)                       | 7   
|                               |         |                                                                                        |     
|                               | Item 2. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations | 10  
|                               |         |                                                                                        |     
|                               | Item 3. | Quantitative and Qualitative Risk Disclosures About Market Risk                        | 17  
|                               |         |                                                                                        |     
|                               | Item 4. | Controls and Procedures                                                                | 17  
|                               |         |                                                                                        |     
|PART II  OTHER INFORMATION    |        
|                               |         |                                                                                        |     
|                               | Item 1. | Legal Proceedings                                                                      | 18  
|                               |         |                                                                                        |     
|                               | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds                            | 18  
|                               |         |                                                                                        |     
|                               | Item 3. | Defaults Upon Senior Securities                                                        | 18  
|                               |         |                                                                                        |     
|                               | Item 4. | [Removed and Reserved]                                                                 | 18  
|                               |         |                                                                                        |     
|                               | Item 5. | Other Information                                                                      | 18  
|                               |         |                                                                                        |     
|                               | Item 6. | Exhibits                                                                               | 19  
|                               |         |                                                                                        |     
|SIGNATURES                     | 19     

2

---



FORWARD-LOOKING
STATEMENTS

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

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

3

---



PART
I
FINANCIAL INFORMATION

Item 1. Condensed
Consolidated Financial Statements

SMARTPROS LTD. AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets

|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ----------------------------- | - | ---------- | -
|                                                                                                                                                                                                                          |  | March 31,
 2010
 (Unaudited) |            | December 31,
 2009
 (Audited) |  
|                                                                                                                                                                                                                          |  |                              |            |                               |  
|ASSETS                                                                                                                                                                                                                    |  |                              |            |                               |   |            |  
|Current Assets:                                                                                                                                                                                                           |  |                              |            |                               |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                 |  | $                            | 6,388,967  |                               | $ | 6,720,649  |  
|Accounts receivable, net of allowance for doubtful accounts of
 $39,447 and $39,627 at March 31, 2010 and December 31, 2009                                                                                               |  |                              | 1,527,929  |                               |   | 2,700,111  |  
|Prepaid expenses and other current assets                                                                                                                                                                                 |  |                              | 440,352    |                               |   | 260,357    |  
|Current tax benefit                                                                                                                                                                                                       |  |                              | 300,000    |                               |   |           |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Total Current Assets                                                                                                                                                                                                      |  |                              | 8,657,248  |                               |   | 9,681,117  |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Property and equipment, net                                                                                                                                                                                               |  |                              | 624,693    |                               |   | 608,850    |  
|Goodwill                                                                                                                                                                                                                  |  |                              | 3,375,257  |                               |   | 3,375,257  |  
|Other intangibles, net                                                                                                                                                                                                    |  |                              | 4,243,385  |                               |   | 4,421,749  |  
|Other assets, including restricted cash of
 $75,000 and $150,000, respectively                                                                                                                                            |  |                              | 85,626     |                               |   | 160,626    |  
|Deferred tax asset                                                                                                                                                                                                        |  |                              | 1,250,924  |                               |   | 1,250,924  |  
|Investment in joint venture, at cost                                                                                                                                                                                      |  |                              | 14,205     |                               |   | 14,755     |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              | 9,594,090  |                               |   | 9,832,161  |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Total Assets                                                                                                                                                                                                              |  | $                            | 18,251,338 |                               | $ | 19,513,278 |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                      |  |                              |            |                               |   |            |  
|Current Liabilities:                                                                                                                                                                                                      |  |                              |            |                               |   |            |  
|Accounts payable                                                                                                                                                                                                          |  | $                            | 584,183    |                               | $ | 776,059    |  
|Accrued expenses                                                                                                                                                                                                          |  |                              | 250,466    |                               |   | 446,929    |  
|Dividends payable                                                                                                                                                                                                         |  |                              | 49,263     |                               |   |           |  
|Deferred revenue                                                                                                                                                                                                          |  |                              | 5,335,493  |                               |   | 5,299,450  |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Total Current Liabilities                                                                                                                                                                                                 |  |                              | 6,219,405  |                               |   | 6,522,438  |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Other liabilities                                                                                                                                                                                                         |  |                              | 30,549     |                               |   | 23,187     |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|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, 5,561,100 issued as of March
 31, 2010 and December 31, 2009:
 4,926,305 and 5,076,305 outstanding as of March 31, 2010 and December 31, 2009 repsectively |  |                              | 556        |                               |   | 556        |  
|Additional paid-in capital                                                                                                                                                                                                |  |                              | 17,658,351 |                               |   | 17,610,392 |  
|Accumulated (deficit)                                                                                                                                                                                                     |  |                              | (3,658,826 | )                             |   | (3,106,513 | )
|Common stock in treasury, at cost  634,795
 and 485,795 shares at March 31, 2010
 and December 31, 2009 respectively                                                                                                     |  |                              | (1,998,697 | )                             |   | (1,536,782 | )
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                |  |                              | 12,001,384 |                               |   | 12,967,653 |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  
|Total Liabilities and
 Stockholders Equity                                                                                                                                                                               |  | $                            | 18,251,338 |                               | $ | 19,513,278 |  
|                                                                                                                                                                                                                          |  |                              |            |                               |   |            |  

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

4

---



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

|                                                |  |                                |           |      |   |           |  
|----------------------------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | -
|                                                |  | Three
 Months Ended
 March 31, |          
|                                                |  |                                |          
|                                                |  | 2010                           |           | 2009 |  
|                                                |  |                                |           |      |  
|                                                |  |                                |           |      |   |           |  
|Net revenues                                    |  | $                              | 3,615,496 |      | $ | 4,353,603 |  
|Cost of
 revenues                               |  |                                | 1,960,109 |      |   | 2,000,760 |  
|                                                |  |                                |           |      |   |           |  
|Gross profit                                    |  |                                | 1,655,387 |      |   | 2,352,843 |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Operating
 Expenses:                            |  |                                |           |      |   |           |  
|Selling, general and administrative             |  |                                | 2,207,984 |      |   | 2,078,220 |  
|Depreciation and amortization                   |  |                                | 254,237   |      |   | 246,943   |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                | 2,462,221 |      |   | 2,325,163 |  
|                                                |  |                                |           |      |   |           |  
|Operating (loss)
 income                        |  |                                | (806,834  | )    |   | 27,680    |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Other Income
 (Expense):                        |  |                                |           |      |   |           |  
|Interest income (net)                           |  |                                | 4,334     |      |   | 16,668    |  
|Equity loss from joint venture                  |  |                                | (550      | )    |   | (833      | )
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                | 3,784     |      |   | 15,835    |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|(Loss)
 income before income tax                |  |                                | (803,050  | )    |   | 43,515    |  
|                                                |  |                                |           |      |   |           |  
|Benefit
 (provision) for income tax             |  |                                | 300,000   |      |   | (14,000   | )
|                                                |  |                                |           |      |   |           |  
|Net (loss)
 income                              |  | $                              | (503,050  | )    | $ | 29,515    |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Net (loss)
 income per common share:            |  |                                |           |      |   |           |  
|Basic net (loss) income per common share        |  | $                              | (.10      | )    | $ | .01       |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Diluted net (loss) income per common share      |  | $                              | (.10      | )    | $ | .01       |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Weighted
 Average Number of Shares Outstanding: |  |                                |           |      |   |           |  
|Basic                                           |  |                                | 5,043,194 |      |   | 4,942,198 |  
|                                                |  |                                |           |      |   |           |  
|                                                |  |                                |           |      |   |           |  
|Diluted                                         |  |                                | 5,043,194 |      |   | 4,951,389 |  
|                                                |  |                                |           |      |   |           |  

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

5

---



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

|                                                                                          |  |                                |           |      |   |           |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | ---- | - | --------- | -
|                                                                                          |  | Three Months Ended 
 March 31, |          
|                                                                                          |  |                                |          
|                                                                                          |  | 2010                           |           | 2009 |  
|                                                                                          |  |                                |           |      |  
|                                                                                          |  |                                |           |      |   |           |  
|Cash Flows from Operating
 Activities:                                                    |  |                                |           |      |   |           |  
|Net (loss) income                                                                         |  | $                              | (503,050  | )    | $ | 29,515    |  
|                                                                                          |  |                                |           |      |   |           |  
|Adjustments to reconcile net (loss) income to net cash provided by
 operating activities: |  |                                |           |      |   |           |  
|Depreciation and amortization                                                             |  |                                | 254,237   |      |   | 246,943   |  
|Stock compensation expense                                                                |  |                                | 47,959    |      |   | 29,651    |  
|Deferred income taxes                                                                     |  |                                |          |      |   | 12,000    |  
|Current tax benefit                                                                       |  |                                | (300,000  | )    |   |          |  
|Equity loss from joint venture                                                            |  |                                | 550       |      |   | 833       |  
|Changes in operating assets and liabilities:                                              |  |                                |           |      |   |           |  
|(Increase) decrease in operating assets:                                                  |  |                                |           |      |   |           |  
|Accounts receivable                                                                       |  |                                | 1,172,182 |      |   | 844,242   |  
|Prepaid expenses and other current assets                                                 |  |                                | (179,995  | )    |   | 22,903    |  
|Other assets                                                                              |  |                                | 75,000    |      |   | (5,013    | )
|(Decrease) increase in operating liabilities:                                             |  |                                |           |      |   |           |  
|Accounts payable and accrued expenses                                                     |  |                                | (388,339  | )    |   | (387,361  | )
|Deferred revenue                                                                          |  |                                | 36,043    |      |   | (326,418  | )
|Other liabilities                                                                         |  |                                | 7,362     |      |   | 7,415     |  
|                                                                                          |  |                                |           |      |   |           |  
|Total adjustments                                                                         |  |                                | 724,999   |      |   | 445,195   |  
|                                                                                          |  |                                |           |      |   |           |  
|Net
 Cash Provided by Operating Activities                                                |  |                                | 221,949   |      |   | 474,710   |  
|                                                                                          |  |                                |           |      |   |           |  
|                                                                                          |  |                                |           |      |   |           |  
|Cash Flows from Investing
 Activities:                                                    |  |                                |           |      |   |           |  
|Acquisition of property and equipment                                                     |  |                                | (66,805   | )    |   | (44,312   | )
|Capitalized software development costs                                                    |  |                                | (11,118   | )    |   | (91,760   | )
|Capitalized course costs                                                                  |  |                                | (13,793   | )    |   | (41,458   | )
|Adjustment to cash paid for goodwill                                                      |  |                                |          |      |   | 19,072    |  
|                                                                                          |  |                                |           |      |   |           |  
|Net Cash (Used in)
 Investing Activities                                                  |  |                                | (91,716   | )    |   | (158,458  | )
|                                                                                          |  |                                |           |      |   |           |  
|                                                                                          |  |                                |           |      |   |           |  
|Cash Flows from Financing
 Activities:                                                    |  |                                |           |      |   |           |  
|Purchase of treasury stock                                                                |  |                                | (461,915  | )    |   |          |  
|                                                                                          |  |                                |           |      |   |           |  
|Net Cash (Used in)
 Financing Activities                                                  |  |                                | (461,915  | )    |   |          |  
|                                                                                          |  |                                |           |      |   |           |  
|                                                                                          |  |                                |           |      |   |           |  
|Net (decrease) increase in
 cash and cash equivalents                                     |  |                                | (331,682  | )    |   | 316,252   |  
|Cash and cash equivalents,
 beginning of period                                           |  |                                | 6,720,649 |      |   | 6,626,181 |  
|                                                                                          |  |                                |           |      |   |           |  
|Cash and cash equivalents,
 end of period                                                 |  |                                | 6,388,967 |      | $ | 6,942,433 |  
|                                                                                          |  |                                |           |      |   |           |  
|                                                                                          |  |                                |           |      |   |           |  
|Supplemental Disclosure of
 Cash Flow Information:                                        |  |                                |           |      |   |           |  
|Cash paid for interest                                                                    |  | $                              |          |      | $ |          |  
|                                                                                          |  |                                |           |      |   |           |  
|Cash paid for income taxes                                                                |  | $                              |          |      | $ | 10,000    |  
|                                                                                          |  |                                |           |      |   |           |  
|                                                                                          |  |                                |           |      |   |           |  
|Common stock dividend
 declared March 9, 2010, paid April 11, 2010                        |  | $                              | 49,263    |      | $ |          |  
|                                                                                          |  |                                |           |      |   |           |  

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

6

---



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, 2009, 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 26, 2010. Results of consolidated
operations for the interim periods are not necessarily indicative of a full
years operating results. The unaudited condensed consolidated financial
statements herein include the accounts of the Company and its wholly owned
subsidiaries, SmartPros Legal and Ethics, Ltd. (SLE), Skye Multimedia Ltd.
(Skye) and Loscalzo Associates, Ltd. (Loscalzo). All material inter-company
accounts and transactions have been eliminated.

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

Nature of Operations

The
Company, a Delaware corporation, was organized in 1981 as Center for Video
Education Inc. for the purpose of producing educational programs primarily
directed to the accounting profession. SmartPros primary products today 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. With the acquisition of Loscalzo in 2008 and Executive
Enterprise Institute (EEI) in 2009, the Company is now a leading provider of
live training to public accountants, accountants in industry, financial
professionals and attorneys.

The
Companys other product lines include the following:

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

7

---



Notes to Condensed Consolidated
Financial Statements (Unaudited)

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

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

Use of
Estimates

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

Revenue
Recognition

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

Capitalized Course Costs

Capitalized
course costs include the direct cost of internally developing proprietary
educational products and materials that have extended useful lives.
Amortization of these capitalized course costs commences when the courses are
available for sale from the Companys catalog. The amortization period is the
estimated useful lives of the courses, which are usually five years. Other course
costs incurred in connection with any of the Companys monthly subscription
products or custom work is charged to expense as incurred. As a result of
acquisitions, the Company is amortizing $1,113,000 of course costs over a
five-year period. Included in other intangible assets at March 31, 2010, are
capitalized course costs of $258,000, net of accumulated amortization of
$90,000.

Deferred Revenue

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

8

---



Notes to Condensed Consolidated
Financial Statements (Unaudited)

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

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  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
three-month period ended March 31, 2009 was 9,191. For the three-month period
ended March 31, 2010 the inclusion of Common Stock equivalents would be
anti-dilutive.

Note 3. Stock-Based Compensation

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

As
of March 31, 2010, 405,948 options were outstanding, all of which had been
granted under our 1999 Stock Option Plan and of which 319,239 are currently
exercisable. In addition, restricted stock grants as of March 31, 2010 totaled
112,181, none of which had vested. None of the outstanding restricted stock
grants were made under the 2009 Plan. As of March 31, 2010, 257,898 shares are
available under the Plan. All stock options granted under the Plan are granted
with an exercise price equal to or greater than the fair market value of the
Common Stock at the grant date. Employee and director stock options generally
expire 10 years from the grant date and have various vesting periods.
Restricted stock awards generally vest over a period of three to five years.
Unvested shares and options are subject to forfeiture unless certain time
and/or performance requirements are satisfied.

Current
accounting 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 $48,000 and $30,000 for the three-month
periods ended March 31, 2010 and 2009, respectively.

The
assumptions used for the three-month periods ended March 31, 2010 and 2009, and
the resulting estimates of weighted-average fair value of options granted
during those periods are as follows:

|                                                          |  |                              |   |      |  |   |          |   | 
|--------------------------------------------------------- |  | ---------------------------- | - | ---- |  | - | -------- | - | 
|                                                          |  | Three months ended March 31, |  
|                                                          |  | 2010                         |   | 2009 | 
|                                                          |  |                              |   |      | 
|Expected
 life (years)                                    |  |                              |  |      |  |   | 5.5      |   | 
|Risk-free
 interest rate                                  |  |                              |  |      |  |   | 2.8%-3.0 | % | 
|Volatility                                                |  |                              |  |      |  |   | 45.0     | % | 
|Dividend
 yields                                          |  |                              |  |      |  |   |         |   | 
|Weighted-average
 fair value of options during the period |  | $                            |  |      |  | $ | 2.48     |   | 

9

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Notes to Condensed Consolidated
Financial Statements (Unaudited)

Note 3. Stock-Based Compensation (contd)

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

The
following table represents our stock options granted, exercised and forfeited
for the three months ended March 31, 2010:

|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|------------------------------- |  | ------------------ |  | --------------------------------------------- | - | ----------------------------------------------- |  | - | ---- |  |  |  |  | ---- |  | 
|Stock Options                   |  | Number 
 of Shares |  | Weighted Average 
 Exercise Price per 
 Share |   | Weighted Average 
 Remaining 
 Contractual Term | 
|                                |  |                    |  |                                               |   |                                                 | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|Outstanding at January 1,
 2010 |  |                    |  | 410,121                                       |   |                                                 |  | $ | 4.40 |  |  |  |  | 5.92 |  | 
|Granted                         |  |                    |  |                                              |   |                                                 |  |   |     |  |  |  |  |     |  | 
|Exercised                       |  |                    |  |                                              |   |                                                 |  |   |     |  |  |  |  |     |  | 
|Forfeited/expired               |  |                    |  | (4,173                                        | ) |                                                 |  | $ | 5.32 |  |  |  |  |     |  | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|Outstanding at March 31,
 2010  |  |                    |  | 405,948                                       |   |                                                 |  | $ | 4.39 |  |  |  |  | 4.25 |  | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 
|Exercisable at March 31,
 2010  |  |                    |  | 319,239                                       |   |                                                 |  | $ | 4.48 |  |  |  |  | 3.14 |  | 
|                                |  |                    |  |                                               |   |                                                 |  |   |      |  |  |  |  |      |  | 

Note 4. Income Tax Benefit

The Company
recognizes a deferred tax asset, available from its temporary differences
between the net income before taxes as reported on its financial statement and
net income for tax purposes and net operating loss carryforwards, which begin
to expire in 2023. At March 31, 2010 the Company recorded a current tax benefit
of approximately $300,000 attributable to the net loss recorded for the
three-month period ended March 31, 2010. The Company anticipates that it is
more likely than not that this benefit will be utilized over the balance of 2010
to the extent the Company generates net income during the year. The Company
does not believe that it takes any uncertain income tax positions that would
require disclosure under the Accounting Standards Codification.

Note 5. Stockholders Equity

In
March 2010, the Company purchased 149,000 shares of its common stock for
approximately $462,000. On March 9, 2010 the Company declared a dividend of
$0.01 per common share, payable on April 11, 2010 to shareholders of record as
of April 1, 2010. During the period, 1,000 shares of common stock previously
granted under the 1999 Plan were forfeited.

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

The
following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and related notes included elsewhere in this report. Certain
statements in this discussion and elsewhere in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934. See Forward-Looking Statements following the Table
of Contents of this Form 10-Q. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.

Overview

We
provide learning solutions for accounting/finance, legal, insurance, securities
and engineering professionals  five large vertical markets with mandatory continuing
education requirements  as well as for banking and information technology
professionals. We also provide corporate governance, ethics and compliance
training for the general corporate market. We offer off-the-shelf courses and
custom-designed programs with delivery methods suited to the specific needs of
our clients. Through our wholly-owned subsidiary, Loscalzo Associates Ltd.
(Loscalzo) and Executive Enterprise Institute (EEI), 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.

10

---



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 five years, our annual revenues have grown from $10.2 million to $19.3
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 EEI, which provides continuing professional education
directed to accountants, financial professionals and attorneys through live seminars
and compliments the live training that Loscalzo provides. Both of these
divisions are highly seasonal businesses. EEIs revenues are primarily earned
in the second and fourth quarters of the year and Loscalzos revenue is
primarily earned between May and December. Marketing and related costs
associated with seminars produced by EEI are expensed in the quarter in which
the seminars take place. However, other operating costs, such as payroll and
selling, general and administrative costs are recorded as incurred. This had a
significant adverse effect on our operating results for the three months ended
March 31, 2010.

While
our subscription-based revenue has remained constant, we have experienced a
decline in some of our custom design projects for clients in various
industries. We have seen some consolidation in the pharmaceutical industry that
has had an impact on Skyes results as well as the current economic climate
that has caused many clients to either postpone or cancel some projects. However,
in other areas, such as legal training and engineering, we have seen a renewed
interest in our product.

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, 2009. These risks include seasonality of revenues, integrating the
acquired business into our existing operations and corporate structure,
retaining key employees and minimizing disruptions to our existing business. We
cannot assure that we will be able to identify appropriate acquisition
opportunities or negotiate reasonable terms or that any acquired business or
assets will deliver the shareholder value that we anticipated at the outset.

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

11

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Critical Accounting Policies and Estimates

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

Revenue
recognition

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

Revenue
from subscription services are recognized as earned; deferred at the time of
billing or payment and amortized into revenue on a monthly basis over the term
of the subscription. Engineering products are non-subscription based and
revenue is recognized upon shipment of the product or, in the case of online
sales, payment. Revenue from non-subscription services provided to customers,
such as Web site design, video production, consulting services and custom
projects is generally recognized on a proportional performance basis where
sufficient information relating to project status and other supporting documentation
is available. The contracts may have different billing arrangements resulting
in either unbilled or deferred revenue. We obtain either a signed agreement or
purchase order from our non-subscription customers outlining the terms and
conditions of the sale or service to be provided. Otherwise, these services are
recognized as revenue after completion and delivery to the customer.
Duplication and related services are generally recognized upon shipment or, if
later, when our obligations are complete and realization of receivable amounts
is assured.

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

Impairment
of long-lived assets

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

Stock-based compensation

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

Segment
accounting

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

12

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Income
taxes

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

Results of Operations

Comparison of three months ended March 31, 2010 and
2009

We
experienced a $738,000, or 17.0%, decrease in net revenues, resulting in an
operating loss for the quarter of $807,000 as compared to an operating income
of $28,000 in the comparable quarter of 2009. Our operating results for the
quarter ended March 31, 2010 were adversely impacted by the seasonality of our
live training divisions whose revenues are primarily recognized in the second
through fourth quarters while their operating costs such as payrolls are
expensed as incurred. In addition, we also experienced a significant decrease
in net revenue from custom work in our SmartPros Legal and Ethics, Ltd. (SLE)
and Skye Multimedia Ltd. (Skye) subsidiaries as well as in our SmartPros
Interactive division. We believe this trend reflects the current economic
climate. Also, the timing of certain custom projects that are currently under
contract is completed over a period of time and the revenue is recognized as
such. However, certain divisions, while affected by general economic
conditions, have not experienced a noticeable decline in revenues.

Online
revenues, which previously were primarily derived from the sales of
accounting/finance products, continue to be an important factor contributing to
our overall revenue 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 March 31, 2010 and 2009. The trends suggested by this table may not be
indicative of future operating results, which will depend on various factors
including the relative mix of products sold (accounting/finance, law,
engineering, financial services, sales training  product, technology or
compliance and ethics) and the method of sale (video or online) as well as the
timing of custom project work, which can vary from quarter to quarter. In
addition, our operating results in future periods may also be affected by
acquisitions.

|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|------------------------------------ |  | ----------------------------- | --------- | ---------- |  | ------ | -- | ---------- | --------- | ------ |  | ----- | - |  | ------- | --
|                                     |  | Three
 months ended March 31, |          
|                                     |  |                               |          
|                                     |  | 2010                          |           | 2009       |  |        |   
|                                     |  |                               |           |            |  |        |   
|                                     |  | Amount                        |           | Percentage |  | Amount |    | Percentage |           | Change | 
|                                     |  |                               |           |            |  |        |    |            |           |        | 
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Net revenues                         |  | $                             | 3,615,496 |            |  | 100.0  | %  | $          | 4,353,603 |        |  | 100.0 | % |  | (17.0   | %)
|Cost of revenues                     |  |                               | 1,960,109 |            |  | 54.2   | %  |            | 2,000,760 |        |  | 46.0  | % |  | (2.0    | %)
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Gross profit                         |  |                               | 1,655,387 |            |  | 45.8   | %  |            | 2,352,843 |        |  | 54.0  | % |  | (29.6   | %)
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Selling, general and
 administrative |  |                               | 2,207,984 |            |  | 61.1   | %  |            | 2,078,220 |        |  | 47.7  | % |  | 6.2     | % 
|Depreciation and
 amortization       |  |                               | 254,237   |            |  | 7.0    | %  |            | 246,943   |        |  | 5.7   | % |  | 3.0     | % 
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Total operating expenses             |  |                               | 2,462,221 |            |  | 68.1   | %  |            | 2,325,163 |        |  | 53.4  | % |  | 5.9     | % 
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Operating (loss) income              |  |                               | (806,834  | )          |  | (22.3  | %) |            | 27,680    |        |  | 0.6   | % |  | (3014.9 | %)
|Other income, net                    |  |                               | 3,784     |            |  | 0.1    | %  |            | 15,835    |        |  | 0.4   | % |  | (76.1   | %)
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Net (loss) income before
 income tax |  |                               | (803,050  | )          |  | (22.2  | %) |            | 43,515    |        |  | 1.0   | % |  | (1945.5 | %)
|Benefit (provision) for
 income tax  |  |                               | 300,000   |            |  | 8.3    | %  |            | (14,000   | )      |  | 0.3   | % |  | (2242.9 | %)
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   
|Net (loss) income                    |  | $                             | (503,050  | )          |  | (13.9  | %) | $          | 29,515    |        |  | 0.7   | % |  | (1804.4 | %)
|                                     |  |                               |           |            |  |        |    |            |           |        |  |       |   |  |         |   

Net
revenues

The
decrease in net revenues reflected above was primarily due to: (i) a $9,000
decrease in net revenues in the Accounting/Finance division; (ii) a $153,000
decrease in net revenues in the Working Values Ethics and Compliance division;
(iii) a $532,000 decrease in net revenues from Skye; (iv) a $9,000 decrease in
net revenues in the Financial Services division; (v) a $79,000 decrease in net
revenues in the SmartPros Interactive division. These decreases were offset by:
(i) a $37,000 increase in net revenues in the Engineering division; and (ii) a
$5,000 increase in net revenues in the Cognistar Legal 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.

13

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In
the first quarter of 2010, net revenues from the Accounting/Finance division
were $2.18 million, or 60% of net revenues, compared to $2.19 million, or 50%
of net revenues, in the comparable 2009 period. Net revenues from subscription-based
products and direct sales of course material on a non-subscription basis,
increased slightly from $1.92 million in the 2009 period to $1.97 million in
the corresponding 2010 period. Net revenues from other projects in our
Accounting/Finance division that are not subscription based decreased $60,000
from 2009 to 2010. Non-subscription-based revenues fluctuate from period to
period and are not indicative of any trends. In the 2010 period, net revenues
from online sales of accounting products accounted for approximately $975,000,
or 27% of net revenues, compared to $911,000, or 21% of net revenues, in the
comparable 2009 period. Net revenues from live training were constant between
the two periods.

For
the three months ended March 31, 2010, Skye generated net revenues of $511,000
compared to $1.04 million in the first quarter of 2009. Skyes income is
derived primarily from consulting projects that vary from quarter to quarter.
Therefore, quarterly results will vary and revenues are not necessarily
indicative of long-term trends.

Our
Financial Services Training division generated $514,000 of net revenues in the
quarter ended Match 31, 2010. For the quarter ended March 31, 2009, this
division generated $523,000 of net revenues. This is primarily from a decrease
in consulting work from the 2009 period. The decrease in consulting work is
again a result of current economic conditions as companies postpone
expenditures.

Our
SmartIt Information Technology division generated $30,000 of net revenues in
the 2010 period, as compared to $29,000 in the first quarter of 2009.

For
the quarter ended March 31, 2010, SLE had net revenues of $124,000 compared to
net revenues of $272,000 for the quarter ended March 31, 2009. For the 2010
period, $8,000 of SLEs net revenues was generated by the Ethics and Compliance
division and $116,000 was generated by the Cognistar Legal division. Net
revenues generated by the Working Values Ethics and Compliance division are
derived primarily from custom consulting work. Custom work is non-repetitive
and subject to market conditions and can vary from quarter to quarter. The
Cognistar Legal division derives its revenue primarily from prepaid usage and
direct sales of its courses.

Our
Engineering division generated $238,000 of net revenues in the first quarter of
2010 compared to $201,000 in the first quarter of 2009. The increase is a
result of timing differences in the placement of orders from customers and the
introduction of new products. Sales of our engineering products are not
subscription based.

Net
revenues generated by the SmartPros Interactive division in the first quarter
of 2010 were $21,000 of which $18,000 was attributable to video production and
related services and $3,000 was attributable to consulting services. In
comparison, this division recorded $100,000 of net revenue for the first
quarter of 2009, $25,000 from video production and related services and $75,000
from consulting services. This decrease is indicative of the continual decline
in the duplication business and fluctuations in revenues from consulting
services.

Cost
of revenues

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

Our
gross profit margin decreased for the three months ended March 31, 2010 to 46%
compared to 54% for the three months ended March 31, 2009. This decrease is
attributable, in part, to costs related to EEI and Loscalzo, as we incur
payrolls and other costs on an annual non-deferred basis. 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.

14

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Cost
of revenues decreased by $41,000 in the current quarter from the comparable
period last year. The net decrease is attributable to a number of factors: (i)
salaries and related costs attributable to EEI were approximately $58,000, for
which we did not have a comparable expense in the 2009 period, as EEI was
acquired in July 2009; (ii) royalty expense increased by $58,000; (iii) outside
labor and productions costs related to custom projects decreased approximately
$77,000; (iv) payroll and related costs other than EEI and other costs
decreased by approximately $65,000. We outsource a substantial amount of
technology projects to countries where labor costs are lower than they are in
the United States. Our outsourcing strategy has been driven, in part, by
business generated from Skye and internal projects. We have determined that it
is more efficient to outsource certain projects rather than hire additional
personnel.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Outside
 labor and direct production costs. Outside labor
 includes the cost of hiring actors and production personnel such as
 directors, producers and cameramen and the outsourcing of non-video
 technology. The cost of such outside labor, which is primarily video
 production and technology personnel, decreased $178,000 after capitalizing a
 portion of these costs. This decrease is directly related to the completion
 of a number of custom projects and internal work and a reduction in the use
 of outsourced vendors. Direct production costs, which are costs related to
 producing videos, courses, custom projects or live instruction and includes
 such costs as renting equipment and locations and the use of live instructors
 for either teaching or developing the courses increased $22,000. 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 March 31, 2010, compared
 to the corresponding 2009 period by $58,000. Royalty expense will vary from
 period to period based on sales and usage of our various products. Royalty
 expense is primarily driven by our accounting course catalog and our
 engineering product sales. We estimate a substantial portion of our
 accounting royalties on a number of factors as we only pay these royalties
 twice per year. In addition, we pay royalties to some of our partners and the
 information to calculate those royalties is not always readily available and
 requires estimates as well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Salaries.
 Overall, payroll and related costs attributable to production personnel
 increased by $69,000 after capitalizing a portion of these costs during the
 current quarter. Almost all of the increase is attributable to EEI and
 reduced capitalization of internal payroll as we have completed some of the
 projects that began in prior years. We have also reduced some personnel costs
 as a result of decreased business and replaced it with outsourced technology
 services, where and when needed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Other
 production related costs. These are other costs
 directly related to the production of our products such as purchases of
 materials, travel, shipping and other. These costs decreased by $7,000 from
 2009 to 2010. 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 March 31, 2010 increased $130,000, or 6.2%, compared to the three
months ended March 31, 2009. The increase in selling, general and
administrative expenses is primarily attributable to EEI and Loscalzo payrolls
as well as increases in some costs and services such as health insurance
premiums.

Compensation
expense in the 2010 period increased $80,000 over compensation expense for the
corresponding 2009 period. Our total number of full time general and
administrative employees at March 31, 2010 was 55 compared to 58 at March 31,
2009. Although we reduced our overall headcount, the salary increases were due
to additional payroll primarily from EEI and Loscalzo, where we added two
senior level executives as well as normal salary increases that were granted in
the first quarter of 2009.

15

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Compensation
expense includes stock based compensation expense of $48,000 for the 2010
period and $30,000 for the 2009 period.

Our
other selling, general and administrative costs, exclusive of compensation
costs, increased $50,000. These costs include customer service, insurance,
office expenses, professional fees, non-income based taxes and other expenses.
Although, we make every effort to control our costs, we anticipate that
selling, general and administrative expenses will continue to increase as a
result of general increases in costs such as rent, insurance, travel and recent
acquisitions.

Depreciationand
amortization

Depreciation
and amortization expenses increased by $7,000 in the first quarter of 2010
compared to the first quarter of 2009 primarily from the amortization of
intangibles acquired in the Loscalzo and EEI acquisitions and from our
capitalized costs, while older intangibles are now fully amortized. We expect our
depreciation and amortization expense on our fixed and intangible assets to continue to increase as we
replace computer equipment, capitalize internal costs for the development of
new courses and other technology and amortize intangibles acquired through
acquisitions. We continually replace and add to our computer and other
equipment as it ages and as additional equipment is needed to accommodate
growth.

Operating
(loss) income

For
the three months ended March 31, 2010,
the operating loss was $807,000 compared to operating income of $28,000
in the corresponding 2009 period.

Other
income, net

Other
income and expense items consist of interest earned on deposits and the net
loss from our iReflect joint venture. We have no debt other than trade payables
and accrued liabilities. However, interest rates are substantially lower than
they were in 2009. For the first quarter of 2010 we had other income of $4,000
compared to other income of $16,000 in the first quarter of 2009, mostly as a
result of substantially lower interest on our cash balances invested in money
market funds, offset by a loss from the iReflect joint venture. The loss from
our iReflect joint venture for the quarter ended March 31, 2010 was $550. We
anticipate comparable interest income rates in future periods.

Income tax
benefit (provision)

We
account for deferred tax assets available principally from our net operating
loss carryforward in accordance with the Accounting Standards Codification. As
of December 31, 2009 we had recognized approximately $1,250,000 in such assets.
We recorded a tax benefit of $300,000 for the first quarter of 2010 from the
utilization of the current period net loss. We anticipate that this benefit
will be absorbed over the balance of the current year as we generate net
income. For the first quarter of 2009, we incurred an income tax expense of
$14,000.

Net
(loss) income

For
the three months ended March 31, 2010, we
recorded a net loss of $503,000, or ($0.10) per share, basic and diluted,
compared to a net income of $30,000 or $0.1 per share, basic and diluted, for
the three months ended March 31, 2009.

Liquidity and Capital Resources

At
March 31, 2010, we had no indebtedness for borrowed money.

Our
working capital as of March 31, 2010 was approximately $2.4 million compared to
$3.2 million at December 31, 2009. Our current ratio at March 31, 2010 was 1.39
to 1 compared to 1.48 to 1 at December 31, 2009. The current ratio is derived by
dividing current assets by current liabilities and is a measure used by lending
sources to assess our ability to repay short-term liabilities. The largest
component of our current liabilities is deferred revenue, which was $5.3
million at March 31, 2010 and at December 31, 2009.

16

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At
March 31, 2010, we had cash and cash equivalents of $6.4 million. For the three
months ended March 31, 2010, we reported a net decrease in cash of $332,000,
which includes $222,000 of cash provided by operating activities offset by
$92,000 of cash used in investing activities and $462,000 used in financing
activities. The primary components of our operating cash flows are net income
adjusted for non-cash expenses, such as depreciation and amortization
stock-based compensation and deferred compensation, and the changes in our
operating assets and liabilities, such as accounts receivable, accounts payable
and deferred revenues.

For
the 2010 period, net cash used in investing activities was $92,000, which
included capital expenditures of $67,000, consisting primarily of computer
equipment and software purchases, $11,000 for software development costs
relating to new products and $14,000 for course development. We continually
upgrade our technology hardware and, as such, we anticipate additional capital
expenditures relating to equipment purchases over the next 12 months.

Cash
used in financing activities reflects the purchase of our shares in open market
transaction pursuant to our stock buy-back program.

On
March 9, 2010, we declared a dividend of $.01 per common share payable on April
11, 2010 to shareholder of record as of April 1, 2010.

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

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

Item 3. Quantitative and Qualitative Risk Disclosures
About Market Risk

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

Item 4. Controls and Procedures

Evaluation
of Disclosure Controls and Procedures. Management, with the participation of our principal executive
officer and principal financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934, as amended (the Exchange Act) Rules
13a-15(e) and 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.

17

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PART
II
OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Recent
Sales of Unregistered Securities

None

Company Purchases of
its Equity Securities

On
November 11, 2009, the Board of Directors approved an extension of the stock
buy back program and replenished the funds reserved to purchase shares of our
common stock on the NASDAQ Capital Market to $750,000. During the three month
period ended March 31, 2010, 149,000 shares were repurchased at a cost of
approximately $462,000, and as of such date approximately $277,000 was
available under this program.

ISSUER
PURCHASES OF EQUITY SECURITIES

|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 
|------------------------------ |  | --------------------------------------------------- | ------- | ---------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ | ------- |  | - | ------- | 
|Period                         |  | (a)
 Total Number
 of Shares
 (or Units)
 Purchased |         | (b)
 Average
 Price Paid
 per Share
 (or Unit) |   | (c)
 Total Number 
 of Shares (or 
 Units) 
 Purchased as 
 Part of Publicly 
 Announced 
 Plans or 
 Programs |  | (d)
 Maximum Number 
 (or Approximate 
 Dollar Value) of 
 Shares (or Units) 
 that May Yet Be 
 Purchased Under 
 the Plans or 
 Programs |        
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |        
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 
|Month #1(January 1-31,
 2010)  |  |                                                     |        |                                                |   |                                                                                                               |  |                                                                                                                                            |        |  |   |        | 
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 
|Month #2(February 1-28,
 2010) |  |                                                     |        |                                                |   |                                                                                                               |  |                                                                                                                                            |        |  |   |        | 
|                               |  |                                                     |        |                                                |   |                                                                                                               |  |                                                                                                                                            |        |  |   |        | 
|Month #3(March 1-31, 2010)     |  |                                                     | 149,000 |                                                | $ | 3.10                                                                                                           |  |                                                                                                                                            | 149,000 |  | $ | 277,000 | 
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 
|Total                          |  |                                                     | 149,000 |                                                | $ | 3.10                                                                                                           |  |                                                                                                                                            | 149,000 |  | $ | 277,000 | 
|                               |  |                                                     |         |                                                |   |                                                                                                                |  |                                                                                                                                            |         |  |   |         | 

Item 3. Defaults Upon Senior Securities

None.

Item 4. [REMOVED AND RESERVED.]

Item 5. Other Information

None.

18

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Item 6. Exhibits

Exhibits:

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

SIGNATURES

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

|                    |  |                               
|------------------- |  | ------------------------------
|                    |  | SmartPros
 Ltd.               
|                    |  |                               
|                    |  | (Registrant)                  
|                    |  |                               
|Date: May
 11, 2010 |  | /s/ Allen S.
 Greene          
|                    |  |                               
|                    |  | Chief
 Executive Officer      
|                    |  | (Principal
 Executive Officer)
|                    |  |                               
|Date: May
 11, 2010 |  | /s/ Stanley
 P. Wirtheim      
|                    |  |                               
|                    |  | Chief
 Financial Officer      
|                    |  | (Principal
 Financial Officer)

19

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