UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

FORM 10-Q

QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 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 jurisdictionof incorporation or organization) |  | (I.R.S. Employer
Identification No.) | 
|                                                
|12 Skyline Drive, Hawthorne, New York 10532     
|                                                
|(Address of principal executive office)         
|                                                
|(914) 345-2620                                  
|                                                
|(Issuers telephone number, including area code)

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

Yes x     No o

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


Yes o     No o


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

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

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

Yes o     No x

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

---



SMARTPROS LTD.
FORM 10-Q REPORT

September 30, 2010

TABLE OF CONTENTS


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

2

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FORWARD-LOOKING STATEMENTS

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

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

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

3

---



PART I
FINANCIAL INFORMATION

Item 1. Condensed
Consolidated Financial Statements

SMARTPROS LTD.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | --------------------------- | - | ---------- | -
|                                                                                                                                                                                                                                |  | September 30,
2010
(Unaudited) |            | December 31,
2009
(Audited) |  
|                                                                                                                                                                                                                                |  |                                |            |                             |  
|ASSETS                                                                                                                                                                                                                          |  |                                |            |                             |   |            |  
|Current Assets:                                                                                                                                                                                                                 |  |                                |            |                             |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                       |  | $                              | 5,942,238  |                             | $ | 6,720,649  |  
|Accounts receivable, net of allowance for
doubtful accounts of $39,051 and $39,627 at September 30, 2010 and December
31, 2009, respectively                                                                                    |  |                                | 1,568,953  |                             |   | 2,700,111  |  
|Prepaid expenses and other current assets                                                                                                                                                                                       |  |                                | 348,807    |                             |   | 260,357    |  
|Note receivable                                                                                                                                                                                                                 |  |                                | 774,675    |                             |   |           |  
|Current tax benefit                                                                                                                                                                                                             |  |                                | 160,000    |                             |   |           |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Total Current Assets                                                                                                                                                                                                            |  |                                | 8,794,673  |                             |   | 9,681,117  |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Property and equipment, net                                                                                                                                                                                                     |  |                                | 667,229    |                             |   | 608,850    |  
|Goodwill                                                                                                                                                                                                                        |  |                                | 3,375,257  |                             |   | 3,375,257  |  
|Other intangibles, net                                                                                                                                                                                                          |  |                                | 3,996,060  |                             |   | 4,421,749  |  
|Other assets, including restricted cash of
$75,000 and $150,000, at September 30, 2010 and December 31, 2009,
respectively                                                                                                      |  |                                | 85,626     |                             |   | 160,626    |  
|Deferred tax asset                                                                                                                                                                                                              |  |                                | 1,320,924  |                             |   | 1,250,924  |  
|Investment in joint venture, at cost                                                                                                                                                                                            |  |                                |           |                             |   | 14,755     |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                | 9,445,096  |                             |   | 9,832,161  |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Total Assets                                                                                                                                                                                                                    |  | $                              | 18,239,769 |                             | $ | 19,513,278 |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                            |  |                                |            |                             |   |            |  
|Current Liabilities:                                                                                                                                                                                                            |  |                                |            |                             |   |            |  
|Accounts payable                                                                                                                                                                                                                |  | $                              | 384,363    |                             | $ | 776,059    |  
|Accrued expenses                                                                                                                                                                                                                |  |                                | 410,185    |                             |   | 446,929    |  
|Dividends payable                                                                                                                                                                                                               |  |                                | 49,210     |                             |   |           |  
|Deferred revenue                                                                                                                                                                                                                |  |                                | 5,386,575  |                             |   | 5,299,450  |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Total Current Liabilities                                                                                                                                                                                                       |  |                                | 6,230,333  |                             |   | 6,522,438  |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Other liabilities                                                                                                                                                                                                               |  |                                | 45,273     |                             |   | 23,187     |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                   |  |                                |            |                             |   |            |  
|Stockholders Equity:                                                                                                                                                                                                           |  |                                |            |                             |   |            |  
|Preferred stock, $.001 par value,
authorized 1,000,000 shares, 0 shares issued and outstanding                                                                                                                                  |  |                                |           |                             |   |           |  
|Common stock, $.0001 par value, authorized
30,000,000 shares, 5,561,100 issued as of September 30, 2010 and December 31,
2009: 4,921,005 and 5,075,305 outstanding as of September 30, 2010 and
December 31, 2009, respectively |  |                                | 556        |                             |   | 556        |  
|Additional paid-in capital                                                                                                                                                                                                      |  |                                | 17,607,995 |                             |   | 17,610,392 |  
|Accumulated (deficit)                                                                                                                                                                                                           |  |                                | (3,632,316 | )                           |   | (3,106,513 | )
|Common stock in treasury, at cost  640,095
and 485,795 shares at September 30, 2010 and December 31, 2009, respectively                                                                                                        |  |                                | (2,012,072 | )                           |   | (1,536,782 | )
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                      |  |                                | 11,964,163 |                             |   | 12,967,653 |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                      |  | $                              | 18,239,769 |                             | $ | 19,513,278 |  
|                                                                                                                                                                                                                                |  |                                |            |                             |   |            |  

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

4

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

|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|---------------------------------------------- |  | ------------------------------- | ---------- | -------------------------------- | - | ---------- | - | ---- | --------- | - | - | --------- | -
|                                               |  | Nine Months Ended
September 30, |            | Three Months Ended
September 30, |  
|                                               |  |                                 |            |                                  |  
|                                              
|                                               |  | 2010                            |            | 2009                             |   | 2010       |   | 2009 |          
|                                               |  |                                 |            |                                  |   |            |   |      |          
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Net revenues                                   |  | $                               | 12,543,209 |                                  | $ | 13,439,072 |   | $    | 3,888,217 |   | $ | 4,353,785 |  
|Cost of revenues                               |  |                                 | 5,916,283  |                                  |   | 6,314,008  |   |      | 1,672,108 |   |   | 2,131,624 |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Gross profit                                   |  |                                 | 6,626,926  |                                  |   | 7,125,064  |   |      | 2,216,109 |   |   | 2,222,161 |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Operating Expenses:                            |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Selling, general and administrative            |  |                                 | 6,597,808  |                                  |   | 6,336,450  |   |      | 2,049,364 |   |   | 2,203,537 |  
|Depreciation and amortization                  |  |                                 | 793,917    |                                  |   | 776,693    |   |      | 283,353   |   |   | 279,142   |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 | 7,391,725  |                                  |   | 7,113,143  |   |      | 2,332,717 |   |   | 2,482,679 |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Operating (loss) income                        |  |                                 | (764,799   | )                                |   | 11,921     |   |      | (116,608  | ) |   | (260,518  | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Other Income (Expense):                        |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Interest income (net)                          |  |                                 | 49,244     |                                  |   | 31,695     |   |      | 39,766    |   |   | 4,468     |  
|Equity loss from joint venture                 |  |                                 | (18,163    | )                                |   | (8,559     | ) |      | (16,475   | ) |   | (6,235    | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 | 31,081     |                                  |   | 23,136     |   |      | 23,291    |   |   | (1,767    | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|(Loss) income before income tax                |  |                                 | (733,718   | )                                |   | 35,057     |   |      | (93,317   | ) |   | (262,285  | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Benefit (provision) for income tax             |  |                                 | 207,915    |                                  |   | 30,667     |   |      | (15,585   | ) |   | 81,153    |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Net (loss) income                              |  | $                               | (525,803   | )                                | $ | 65,724     |   | $    | (108,902  | ) | $ | (181,132  | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Net (loss) income per common share:            |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Basic net (loss) income per common share       |  | $                               | (.11       | )                                | $ | .01        |   | $    | (.02      | ) | $ | (.04      | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Diluted net (loss) income per common share     |  | $                               | (.11       | )                                | $ | .01        |   | $    | (.02      | ) | $ | (.04      | )
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Weighted Average Number of Shares
Outstanding: |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Basic                                          |  |                                 | 4,963,127  |                                  |   | 5,031,484  |   |      | 4,921,005 |   |   | 5,079,351 |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  
|Diluted                                        |  |                                 | 4,963,127  |                                  |   | 5,054,075  |   |      | 4,921,005 |   |   | 5,079,351 |  
|                                               |  |                                 |            |                                  |   |            |   |      |           |   |   |           |  

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

5

---



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

|                                                                                                   |  |                                 |            |      |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                                   |  | Nine Months Ended
September 30, |           
|                                                                                                   |  |                                 |           
|                                                                                                   |  | 2010                            |            | 2009 |  
|                                                                                                   |  |                                 |            |      |  
|Cash Flows from Operating Activities:                                                              |  |                                 |            |      |   |            |  
|Net (loss) income                                                                                  |  | $                               | (525,803   | )    | $ | 65,724     |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities: |  |                                 |            |      |   |            |  
|Depreciation and amortization                                                                      |  |                                 | 793,917    |      |   | 776,693    |  
|Stock compensation expense                                                                         |  |                                 | 145,286    |      |   | 176,512    |  
|Deferred income taxes                                                                              |  |                                 | (70,000    | )    |   | (147,001   | )
|Current income tax benefit                                                                         |  |                                 | (160,000   | )    |   |           |  
|Equity loss from joint venture                                                                     |  |                                 | 18,163     |      |   | 8,559      |  
|Changes in operating assets and liabilities:                                                       |  |                                 |            |      |   |            |  
|(Increase) decrease in operating assets:                                                           |  |                                 |            |      |   |            |  
|Accounts receivable                                                                                |  |                                 | 1,131,158  |      |   | 632,421    |  
|Prepaid expenses and other current assets                                                          |  |                                 | (91,858    | )    |   | (161,661   | )
|Other assets                                                                                       |  |                                 | 75,000     |      |   | (5,013     | )
|(Decrease) increase in operating liabilities:                                                      |  |                                 |            |      |   |            |  
|Accounts payable and accrued expenses                                                              |  |                                 | (428,440   | )    |   | (46,478    | )
|Deferred revenue                                                                                   |  |                                 | 87,125     |      |   | (6,095     | )
|Other liabilities                                                                                  |  |                                 | 22,086     |      |   | 22,139     |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Total adjustments                                                                                  |  |                                 | 1,522,437  |      |   | 1,250,076  |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Net Cash Provided by Operating Activities                                                          |  |                                 | 996,634    |      |   | 1,315,800  |  
|                                                                                                   |  |                                 |            |      |   |            |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Cash Flows from Investing Activities:                                                              |  |                                 |            |      |   |            |  
|Acquisition of property and equipment                                                              |  |                                 | (214,503   | )    |   | (126,831   | )
|Capitalized software development costs                                                             |  |                                 | (182,083   | )    |   | (251,330   | )
|Capitalized course costs                                                                           |  |                                 | (30,021    | )    |   | (53,640    | )
|Note receivable                                                                                    |  |                                 | (900,000   | )    |   |           |  
|Repayment of note receivable                                                                       |  |                                 | 125,325    |      |   |           |  
|Cash paid for business acquisitions                                                                |  |                                 |           |      |   | (348,715   | )
|Adjustment to cash paid for goodwill                                                               |  |                                 |           |      |   | 19,072     |  
|Additional purchase consideration for acquisition of Skye Multimedia,
Ltd.                         |  |                                 |           |      |   | (700,000   | )
|                                                                                                   |  |                                 |            |      |   |            |  
|Net Cash (Used in) Investing Activities                                                            |  |                                 | (1,201,282 | )    |   | (1,461,444 | )
|                                                                                                   |  |                                 |            |      |   |            |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Cash Flows from Financing Activities:                                                              |  |                                 |            |      |   |            |  
|Purchase of treasury stock                                                                         |  |                                 | (475,290   | )    |   |           |  
|Dividends paid                                                                                     |  |                                 | (98,473    | )    |   |           |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Net Cash (Used in) Financing Activities                                                            |  |                                 | (573,763   | )    |   |           |  
|                                                                                                   |  |                                 |            |      |   |            |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Net (decrease) in cash and cash equivalents                                                        |  |                                 | (778,411   | )    |   | (145,644   | )
|Cash and cash equivalents, beginning of period                                                     |  |                                 | 6,720,649  |      |   | 6,626,181  |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Cash and cash equivalents, end of period                                                           |  | $                               | 5,942,238  |      | $ | 6,480,537  |  
|                                                                                                   |  |                                 |            |      |   |            |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Supplemental Disclosure of Cash Flow Information:                                                  |  |                                 |            |      |   |            |  
|Cash paid for interest                                                                             |  | $                               | 1,008      |      |   |           |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Cash paid for income taxes                                                                         |  | $                               | 80,000     |      | $ | 89,000     |  
|                                                                                                   |  |                                 |            |      |   |            |  
|                                                                                                   |  |                                 |            |      |   |            |  
|Stock issued for additional purchase consideration for acquisition of
Skye Multimedia Ltd.         |  |                                 |           |      | $ | 218,783    |  

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

6

---



Notes to
Condensed Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

The
unaudited condensed consolidated financial statements of SmartPros Ltd. and
subsidiaries (SmartPros or the Company), including these notes, have been
prepared by the Company in accordance with generally accepted accounting
principles (GAAP) for interim financial information and pursuant to the rules
and regulations promulgated by the U.S. Securities and Exchange Commission (the
SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with GAAP have been omitted or
condensed. However, in the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These unaudited condensed consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial
statements for the year ended December 31, 2009, and the notes thereto included
in the Companys Annual Report on Form 10-K filed with the SEC on March 26,
2010. Results of consolidated operations for the interim periods are not
necessarily indicative of a full years operating results. The unaudited
condensed consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiaries, SmartPros Legal and Ethics, Ltd.
(SLE), Skye Multimedia Ltd. (Skye) and Loscalzo Associates, Ltd.
(Loscalzo). All material inter-company accounts and transactions have been
eliminated.

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

Nature of Operations

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

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

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

7

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

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

Use of Estimates

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

Revenue Recognition

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

Capitalized
Course Costs

Capitalized
course costs include the direct cost of internally developing proprietary
educational products and materials that have extended useful lives.
Amortization of these capitalized course costs commences when the courses are
available for sale from the Companys catalog. The amortization period is the
estimated useful lives of the courses, which are usually five years. Other
course costs incurred in connection with any of the Companys monthly subscription
products or custom work is charged to expense as incurred. As a result of
acquisitions, the Company is amortizing $1,113,000 of course costs over a
five-year period. Included in other intangible assets at September 30, 2010,
are capitalized course costs of $274,000, net of accumulated amortization of
$121,000.

Deferred Revenue

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

Earnings (Loss) Per Share

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

8

---



Notes to Condensed Consolidated Financial
Statements (Unaudited)

equivalent
shares outstanding during the period. For the nine-month period ended September
30, 2010 and the three-month periods ended September 30, 2010 and 2009 the
inclusion of Common Stock equivalents would be anti-dilutive. For the
nine-month period ended September 30, 2009 Common Stock equivalent shares were
22,591.

Note 3. Stock-Based Compensation

The
Companys 2009 Stock Option Plan (the 2009 Plan) permits the grant of options
and restricted stock to employees, directors and consultants. The total number
of shares currently reserved for grants under the 2009 Plan 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
forfeited or terminated, the number of options available for grant under the
2009 Plan increase. Restricted stock grants under the 1999 Plan have no impact
on the availability of restricted stock grants under the 2009 Plan.

As
of September 30, 2010, 405,648 options were outstanding, all of which had been
granted under our 1999 Stock Option Plan and of which 319,239 are currently
exercisable. In addition, restricted stock grants as of September 30, 2010
totaled 111,038, none of which had vested. None of the outstanding restricted
stock grants were made under the 2009 Plan. As of September 30, 2010, 258,198
shares are available under the 2009 Plan. All stock options granted under the
2009 Plan are granted with an exercise price equal to or greater than the fair
market value of the Common Stock at the grant date. Employee and director stock
options generally expire 10 years from the grant date and have various vesting
periods. Restricted stock awards generally vest over a period of three to five
years. Unvested shares and options are subject to forfeiture unless certain
time and/or performance requirements are satisfied.

Current
accounting standards permit the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the BSM
option-pricing model, which incorporates various assumptions including
volatility, expected life, interest rates and dividend yields. The expected
volatility is based on the historic volatility of the Companys Common Stock
over the most recent period commensurate with the estimated expected life of
the Companys stock options, adjusted for the impact of unusual fluctuations
not reasonably expected to recur. The expected life of an award is based on
historical experience and on the terms and conditions of the stock awards
granted to employees and directors. The Company has recorded stock-based
compensation expense of $145,000 and $177,000 for the nine-month periods ended
September 30, 2010 and 2009, respectively.

The
Company has not granted any options in 2010. During the nine month period ended
September 30, 2009, it granted 55,750 options under the Plan, which are
exercisable at a price of $2.54 per share.

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

|                                                         |  |  |              
|-------------------------------------------------------- |  |  | -------------
|Expected
life (years)                                    |  |  | 4.5          
|Risk-free
interest rate                                  |  |  | 2.0% - 2.1%  
|Volatility                                               |  |  | 40.0% -
45.0%
|Dividend
yields                                          |  |  |             
|Weighted-average
fair value of options during the period |  |  | $ 1.08       

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

9

---



Notes to Condensed Consolidated Financial Statements (Unaudited)

|                                  |  |                 |         |                                           |   |                                             |  |  |      | 
|--------------------------------- |  | --------------- | ------- | ----------------------------------------- | - | ------------------------------------------- |  |  | ---- | 
|Stock Options                     |  | Numberof
Shares |         | Weighted Average
Exercise Price per
Share |   | Weighted Average
Remaining
Contractual Term | 
|                                  |  |                 |         |                                           |   |                                             | 
|                                  |  |                 |         |                                           |   |                                             |  |  |      | 
|Outstanding at January 1,
2010    |  |                 | 410,121 |                                           | $ | 4.40                                        |  |  | 5.92 | 
|Granted                           |  |                 |        |                                           |   |                                            |  |  |     | 
|Exercised                         |  |                 |        |                                           |   |                                            |  |  |     | 
|Forfeited/expired                 |  |                 | (4,473  | )                                         | $ | 5.13                                        |  |  |     | 
|                                  |  |                 |         |                                           |   |                                             |  |  |      | 
|Outstanding at September
30, 2010 |  |                 | 405,648 |                                           | $ | 4.40                                        |  |  | 3.76 | 
|                                  |  |                 |         |                                           |   |                                             |  |  |      | 
|Exercisable at September
30, 2010 |  |                 | 319,239 |                                           | $ | 4.48                                        |  |  | 2.68 | 
|                                  |  |                 |         |                                           |   |                                             |  |  |      | 

Note 4. Income Tax Benefit

The
Company recognizes a deferred tax asset available from its temporary difference
between net income before taxes as reported on its financial statement and net
income for tax purposes, increased by net operating loss carryforwards, which
begin to expire in 2023. For the nine months ended September 30, 2010, the
Company recorded an income tax benefit of approximately $208,000 principally
attributable to its net loss for the period. The Company anticipates that it is
more likely than not that $160,000 of this benefit will be recognized over the
balance of 2010. The Company does not believe that it takes any uncertain
income tax positions that would require disclosure under the Accounting
Standards Codification.

Note 5. Note Receivable

On
June 10, 2010, the Company entered into an agreement with an unrelated company
under which it agreed to provide up to $900,000 of credit, subject to various
conditions, to that company. The credit facility is secured by a first lien on
substantially all of the borrowers assets and borrowers obligations under the
financing agreement are guaranteed by the principles of the borrower. Interest
on the facility was the prime rate plus 8%. In August 2010, the loan went into
default and the interest rate on the loan was increased to 2% per month
pursuant to the loan agreement. In September 2010, the borrower repaid
approximately $125,000 of the principal and the balance was repaid in October
2010, together with all accrued interest and other expenses. In consideration
for extending credit, the Company obtained a ten-year right of first refusal to
purchase the assets of the borrower, commencing October 13, 2010.

Note 6. Stockholders Equity

During
the nine month period ended September 30, 2010, (i) the Company purchased
154,300 shares of its common stock for approximately $475,000, (ii) the Company
declared three quarterly dividends of $.01 per share, the latest one was
declared on August 9, 2010 which was paid on October 11, 2010 to shareholders
of record on October 1, 2010 and (iii) 1,000 shares of restricted common stock
previously granted under the 1999 Plan were forfeited.

10

---



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

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

Overview

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

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

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

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

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

While
our subscription-based revenue has remained constant, we have experienced a
decline in some of our custom design projects for clients in various
industries, which has adversely impacted our operating results. We believe that
this trend is primarily due to current economic conditions, which has caused
many of our clients to either postpone or cancel some projects, as well as
consolidation in the

11

---



pharmaceutical industry. On
the other hand, in other areas, such as legal training, financial services and
engineering, we have seen a renewed interest in our product offerings.

We
continue to believe that acquisitions are still the best strategy for us to
increase the breadth and depth of our current product offerings. Unless there
are other compelling reasons, we will only consider acquisitions that we
believe will be accretive within the first year of ownership. Ultimately,
however, our goal is to maximize shareholder value rather than short-term
profits. The size of the acquisitions will be determined, in part, by the
amount of capital available to us and the liquidity and price of our stock. We
may use debt to enhance or augment our ability to consummate larger
transactions.

There
are many risks involved with acquisitions, some of which are discussed in Item
1 of Part 1 under the caption Certain Risk Factors That May Affect Our Growth
and Profitability of our annual report on Form 10-K for the fiscal year ended
December 31, 2009. These risks include seasonality of revenues, integrating the
acquired business into our existing operations and corporate structure,
retaining key employees and minimizing disruptions to our existing business. We
cannot assure that we will be able to identify appropriate acquisition
opportunities or negotiate reasonable terms or that any acquired business or
assets will deliver the shareholder value that we anticipated at the outset.

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

Critical Accounting Policies and Estimates

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

Revenue
recognition

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

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

12

---



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

Impairment
of long-lived assets

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

Stock-based compensation

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

Segment
accounting

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

Income taxes

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

Results of Operations

Overall,
year-to-date, net revenues from our core subscription products has remained
stable while net revenues from custom work continues to reflect the general
economic conditions. In addition, an industry-wide slow down in live-training
attendance has adversely affected our live training business. To address these
market conditions, we continue to cut expenses and staff when appropriate. More
recently, we have started to see more request for proposals, leading us to be
cautiously optimistic about the future of our business and operations.

Comparison
of three months ended September 30, 2010 and 2009

We
recorded a $466,000, or 10.7%, decrease in net revenues in the 2010 period
compared to the 2009 period. This resulted in only a $6,000, or 0.3%, decrease
in gross profit for the 2010 period compared to the 2009 period. In addition,
our operating loss for the 2010 period was $144,000 lower than it was for the
2009 period, reflecting our success in reducing selling, general and
administrative costs. Our net loss also decreased from $181,000 in the 2009
period to $109,000 in 2010 period. Operating results for the 2010
period were impacted by a decline in custom work from both our SmartPros Legal and Ethics, Ltd. (SLE) and
Skye Multimedia Ltd. (Skye) subsidiaries, as well as a moderate
decline in net revenues from our live training product offerings, primarily as
a result of lower attendance at seminars. We believe these trends reflect the
current economic climate. Custom work is non-repetitive and subject to market
conditions and can vary from quarter to quarter.

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

The
following table compares our statement of operations data for the three-months
ended September 30, 2010 and 2009. The trends suggested by this table may not
be indicative of future operating results, which will depend on various factors
including the relative mix of products sold (accounting/finance, law,
engineering, financial services, sales training  product, technology or
compliance and ethics) and the method of sale (video or online) as well as the
timing of custom project

13

---



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 September 30, |          
|                                    |  |                                  |          
|                                    |  | 2010                             |           | 2009       |  |        |    |           
|                                    |  |                                  |           |            |  |        |    |           
|                                    |  | Amount                           |           | Percentage |  | Amount |    | Percentage |           | Change | 
|                                    |  |                                  |           |            |  |        |    |            |           |        | 
|Net revenues                        |  | $                                | 3,888,217 |            |  | 100.0  | %  | $          | 4,353,785 |        |  | 100.0 | %  |  | (10.7   | %)
|Cost of
revenues                    |  |                                  | 1,672,108 |            |  | 43.0   | %  |            | 2,131,624 |        |  | 49.0  | %  |  | (21.6   | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Gross profit                        |  |                                  | 2,216,109 |            |  | 57.0   | %  |            | 2,222,161 |        |  | 51.0  | %  |  | (0.3    | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Selling,
general and administrative |  |                                  | 2,049,364 |            |  | 52.7   | %  |            | 2,203,537 |        |  | 50.6  | %  |  | (7.0    | %)
|Depreciation
and amortization       |  |                                  | 283,353   |            |  | 7.3    | %  |            | 279,142   |        |  | 6.4   | %  |  | 1.5     | % 
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Total
operating expenses            |  |                                  | 2,332,717 |            |  | 60.0   | %  |            | 2,482,679 |        |  | 57.0  | %  |  | (6.0    | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Operating (loss)                    |  |                                  | (116,608  | )          |  | (3.0   | %) |            | (260,518  | )      |  | (6.0  | %) |  | (55.2   | %)
|Other
income, net                   |  |                                  | 23,291    |            |  | 0.6    | %  |            | (1,767    | )      |  |      |    |  | (1418.1 | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Net (loss)
before income tax        |  |                                  | (93,317   | )          |  | (2.4   | %) |            | (262,285  | )      |  | (6.0  | %) |  | (64.4   | %)
|(Provision)
benefit for income tax  |  |                                  | (15,585   | )          |  | (0.4   | %) |            | 81,153    |        |  | 1.8   | %  |  | (119.2  | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   
|Net (loss)                          |  | $                                | (108,902  | )          |  | (2.8   | %) | $          | (181,132  | )      |  | (4.2  | %) |  | (39.9   | %)
|                                    |  |                                  |           |            |  |        |    |            |           |        |  |       |    |  |         |   

Net
revenues

The
decrease in net revenues reflected above was primarily due to: (i) a $55,000
decrease in net revenues in the Accounting/Finance division; (ii) a $74,000
decrease in net revenues in the Financial Services division; (iii) a $54,000
decrease in net revenues in SLE; (iv) a $237,000 decrease in net revenues from
Skye; and (iv) a $53,000 decrease in revenues from our Watch IT products and
other products decreased by $7,000. These decreases were offset, by a $15,000
increase in net revenues in the Engineering division. Under our
long-standing policy, revenue is credited to the originating department
regardless of the type of service that is performed. For example, a contract to
convert videotapes to digital format is credited to the Accounting/Finance
division if that is where the sale originated, even if the project has nothing
to do with accounting.

In
the third quarter of 2010, net revenues from the Accounting/Finance division
were $2.93 million, or 75% of net revenues, compared to $2.99 million, or 69%
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 $2.03 million in the 2009
period to $2.05 million in the corresponding 2010 period. Net revenues from
other projects in our Accounting/Finance division that are not subscription
based decreased $37,000 from 2009 to 2010. Non-subscription-based revenues
fluctuate from period to period and are not indicative of any trends. In the 2010 period, net revenues from online
sales of accounting products accounted for approximately $1.08 million, or 28%
of net revenues, compared to $1.03 million, or 24% of net revenues, in the
comparable 2009 period. Net revenues from our Loscalzo live training subsidiary
decreased $143,000 in the 2010 period compared to the 2009 period due to
current economic conditions as various professional organizations that sponsor
live training are experiencing lower enrollments. However, our EEI live
training division generated $112,000 in revenue in the current period as
compared to $11,000 in 2009 period.

For
the three months ended September 30, 2010, Skye generated net revenues of
$205,000 compared to $442,000 in the third quarter of 2009. Skyes income is
derived primarily from designing custom training projects and, as such, varies
from quarter to quarter. We believe the decrease in Skyes net revenue reflects
general economic conditions as business organizations are deferring these types
of products in order to cut costs.

Our
Financial Services Training division generated $422,000 of net revenues in the
quarter ended September 30, 2010. For the quarter ended September 30, 2009,
this division generated $496,000 of net revenues. This decrease is due
primarily from a reduction in custom work.

Our
SmartIt Information Technology division generated $26,000 of net revenues in
the 2010 period, as compared to $79,000 in the third quarter of 2009, due to a
decrease in consulting work.

For
the quarter ended September 30, 2010, SLE had net revenues of $101,000 compared
to net revenues of $155,000 for the comparable 2009 quarter. For the 2010
period, $17,000 of SLEs net revenues was generated by the Working Values
ethics and compliance division, and $84,000 was generated by the Cognistar
legal division, as compared to $55,000 and $100,000, respectively, in the 2009
period. Net revenues generated by the Working Values ethics and compliance
division are derived primarily from

14

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custom
consulting work. The Cognistar legal division derives its revenue primarily
from prepaid usage and direct sales of its courses.

Our
Engineering division generated $163,000 of net revenues in the third quarter of
2010 compared to $148,000 in the third quarter of 2009. The increase is
primarily a result of timing differences in the placement of orders from
customers. Sales of our engineering products are not subscription based.

Net
revenues generated by the SmartPros Interactive division in the third quarter
of 2010 were $39,000 of which $29,000 was attributable to video production and
related services and $10,000 was attributable to consulting services. In
comparison, this division recorded $46,000 of net revenue for the third quarter
of 2009, $28,000 from video production and related services and $1,000 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; (iv) costs related to live training; and (v)
shipping and other costs. There are many different types of expenses that are
characterized as production costs and many of them vary from period to period
depending on many factors. Generally, subscription based products have higher
profit margins than non-subscription based products and online sales have
higher profit margins than sales involving physically delivery of DVDs and
written materials.

Our
gross profit margin increased for the three months ended September 30, 2010 to
57% compared to 51% for the three months ended September 30, 2009, even with a decline
in sales revenues. This increase is attributable, in part, to cost reductions
made during the year, primarily in staffing and outsourcing and the
capitalization of certain costs related to new technology. We also devote a
significant amount of internal and external resources to develop new products
and to re-tool existing products and technology.

Cost
of revenues decreased by $460,000 in the 2010 period compared to the 2009
period. Outsourced labor related to both live training and other products
decreased $217,000. Payroll and related costs decreased $136,000 in the 2010
period as compared to the 2009 period. In addition, royalty expense decreased
by $19,000.

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 $199,000 after capitalizing a
portion of these costs. This decrease is directly related to the reduced
revenue from custom projects and the completion of some technology upgrades.
Direct production costs, which are costs related to producing videos,
courses, custom projects or live instruction and includes such costs as
renting equipment and locations and the use of live instructors for either
teaching or developing the courses decreased $24,000. The decrease is again
primarily attributable to the reduction in the custom projects. The variation
in direct production costs are related to the type of production and other
projects and do not reflect any trends in our business. As our business grows
we may be required to hire additional production personnel, increasing our
cost of revenues. Our course libraries are constantly requiring updates as
there are always changes such as the Codification of Accounting Standards
that replaced the FASB accounting pronouncements.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Royalties. Royalty expense decreased in the three
months ended September 30, 2010, compared to the corresponding 2009 period by
$19,000. 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

15

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | our accounting royalties
based on a number of factors as we only pay these royalties twice per year.
In addition, we pay royalties to some of our partners and the information to
calculate those royalties is not always readily available and requires
estimates as well.                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Salaries. Overall, payroll and related costs attributable
to production personnel decreased by $136,000 after capitalizing a portion of
these costs during the current quarter. Almost all of the decrease is
attributable to reduced personnel costs as a result of decreased business. We
have also replaced some payroll with outsourced technology services, where
and when needed.                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Other production related
costs. These are
other costs directly related to the production of our products or the costs
related to live training such as purchases of materials, travel, shipping,
and other. These costs were $137,000 for the third quarter of 2010 as
compared to $178,000 for the third quarter of 2009. The decrease of $41,000
is primarily related to reduced costs such as travel associated with custom
projects.

Selling, general and
administrative expenses

Selling,
general and administrative expenses include corporate overhead, such as
compensation and benefits for administrative, sales and marketing and finance
personnel, rent, insurance, professional fees, travel and entertainment and
office expenses. Selling, general and administrative expenses for the 2010
period decreased $154,000, or 7.0%, compared to the 2009 period. This decrease
is primarily attributable to reduced payroll and related costs.

Compensation
expense in the 2010 period decreased by $130,000 compared to the 2009 period.
Full-time general and administrative employees at September 30, 2010 were 69
compared to 75 at September 30, 2009, which accounted for a significant portion
of this decrease. Compensation expense includes stock based compensation
expense of $49,000 for the 2010 period and $42,000 for the 2009 period.

Our
other selling, general and administrative costs, exclusive of compensation
costs, decreased $24,000. Although, we make every effort to control our costs,
we anticipate that selling, general and administrative expenses will continue
to increase as a result of general increases in costs such as rent, insurance,
travel and recent acquisitions.

Depreciationand amortization

Depreciation
and amortization expenses increased by $4,000 in the third quarter of 2010
compared to the third quarter of 2009 primarily from the amortization of
acquired intangibles assets and from capitalized costs relating to
internally-developed assets. We expect our depreciation and amortization
expense on our fixed and intangible assets
to continue to increase as we replace computer equipment, capitalize internal
costs for the development of new courses and other technology and amortize
intangibles acquired through acquisitions. We continually replace and add to
our computer and other equipment as it ages and as additional equipment is
needed to accommodate growth.

Operating loss

For
the three months ended September 30, 2010, the operating loss was $117,000
compared to an operating loss of $261,000 in the corresponding 2009 period.

Other income/expense, net

Other
income and expense items consist of interest earned on deposits and the net
loss from our iReflect joint venture. We have no debt other than trade payables
and accrued liabilities. For the third quarter of 2010 we had other income of
$23,000 compared to other loss of $2,000 in the third quarter of 2009. Other
income for the 2010 period included interest of 2% per month on the note
receivable, offset by a $16,475 loss from the iReflect joint venture. The loss
from our 50% interest in the iReflect joint venture was principally as a result
of our share of expenses relating to the development of a new version of the
software.

16

---



Income taxes

For
the current period, we recorded an income tax expense of $86,000 partially
offset by a deferred tax benefit of $70,000, resulting in a net income tax
expense of $16,000 attributable primarily to state and local income taxes. For
the third quarter of 2009, we recorded an income tax provision of $81,000.

Net loss

For
the three months ended September 30, 2010, we
recorded a net loss of $109,000, or $0.2 per share, basic and diluted, compared
to a net loss of $181,000 or $0.04 per share, basic and diluted, for the three
months ended September 30, 2009.

Comparison of nine-months ended September 30, 2010 and
2009

Comparing
the nine months ended September 30, 2010 to the nine months ended September 30,
2009, we experienced a $896,000, or 6.7%, decrease in net revenues, a $498,000,
or 7.0%, reduction in gross profit, a $777,000 reduction in operating income
and a $591,000 reduction in net income. Our operating results for the
nine-months ended September 30, 2010 were adversely impacted by the decrease in
revenues from Skye, SLE and SmartPros Interactive, all of which is primarily
derived from custom work.

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

The
following table compares our statement of operations data for the nine-months
ended September 30, 2010 and 2009. The trends suggested by this table may not
be indicative of future operating results, which will depend on various factors
including the relative mix of products sold (accounting/finance, law,
engineering, financial services, sales training  product, technology or
compliance and ethics) and the method of sale (video or online) as well as the
timing of custom project work, which can vary from quarter to quarter. In
addition, our operating results in future periods may also be affected by
acquisitions.

|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|----------------------------------- |  | ------------------------------- | ---------- | ---------- |  | ------ | -- | ---------- | ---------- | ------ |  | ----- | - |  | ------- | --
|                                    |  | Nine months ended September 30, |           
|                                    |  |                                 |           
|                                    |  | 2010                            |            | 2009       |  |        |    |           
|                                    |  |                                 |            |            |  |        |    |           
|                                    |  | Amount                          |            | Percentage |  | Amount |    | Percentage |            | Change | 
|                                    |  |                                 |            |            |  |        |    |            |            |        | 
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Net revenues                        |  | $                               | 12,543,209 |            |  | 100.0  | %  | $          | 13,439,072 |        |  | 100.0 | % |  | (6.7    | %)
|Cost of revenues                    |  |                                 | 5,916,283  |            |  | 47.2   | %  |            | 6,314,008  |        |  | 47.0  | % |  | (6.3    | %)
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Gross profit                        |  |                                 | 6,626,926  |            |  | 52.8   | %  |            | 7,125,064  |        |  | 53.0  | % |  | (7.0    | %)
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Selling, general and
administrative |  |                                 | 6,597,808  |            |  | 52.6   | %  |            | 6,336,450  |        |  | 47.1  | % |  | 4.1     | % 
|Depreciation and amortization       |  |                                 | 793,917    |            |  | 6.3    | %  |            | 776,693    |        |  | 5.8   | % |  | 2.2     | % 
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Total operating expenses            |  |                                 | 7,391,725  |            |  | 58.9   | %  |            | 7,113,143  |        |  | 52.9  | % |  | 3.9     | % 
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Operating (loss) income             |  |                                 | (764,799   | )          |  | (6.1   | %) |            | 11,921     |        |  | 0.1   | % |  | (6516.6 | %)
|Other income, net                   |  |                                 | 31,081     |            |  | 0.2    | %  |            | 23,136     |        |  | 0.2   | % |  | 34.3    | % 
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Net (loss) income before
income tax |  |                                 | (733,718   | )          |  | (5.8   | %) |            | 35,057     |        |  | 0.3   | % |  | (2192.9 | %)
|Benefit (provision) for
income tax  |  |                                 | 207,915    |            |  | 1.7    | %  |            | 30,667     |        |  | 0.2   | % |  | 578.0   | % 
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   
|Net (loss) income                   |  | $                               | (525,803   | )          |  | (4.2   | %) | $          | 65,724     |        |  | 0.5   | % |  | (900.0  | %)
|                                    |  |                                 |            |            |  |        |    |            |            |        |  |       |   |  |         |   

Net revenues

The
decrease in net revenues reflected above was primarily due to: (i) a $167,000
decrease in net revenues in SLE; (ii) a $1,204,000 decrease in net revenues in
Skye; (iii) a $153,000 decrease in net revenues in the SmartPros Interactive
division; and (iv) a $83,000 decrease in net revenues in our SmartIt
Information Technology division. These decreases were offset by: (i) a $664,000
increase in our Accounting/Finance division; (ii) a $32,000 increase in net
revenues from our Financial Services division and (iii) a $15,000 increase in
net revenues from our Engineering division.

For
the first nine-months of 2010, net revenues from the Accounting/Finance
division were $9.02 million, or 72% of net revenues, compared to $8.36 million,
or 62% of net revenues, in the comparable 2009 period. Net revenues from
subscription-based products and direct sales of course material on a non-

17

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subscription basis, were
relatively constant over the two periods at $6 million. Net revenues from other
projects in our Accounting/Finance division that are not subscription based
decreased $124,000 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 $3.11 million, or 25% of net revenues, compared to $3.05 million,
or 23% of net revenues, in the comparable 2009 period. Net revenues from live
training programs increased by $805,000 in the 2010 period compared to the 2009
period as result of the acquisition of EEI. EEI was acquired in July 2009.

For
the nine-months ended September 30, 2010, Skye generated net revenues of
$907,000 compared to $2.11 million in the first nine months of 2009. Skyes
income is derived primarily from consulting projects that vary from quarter to
quarter. Therefore, quarterly results will vary and revenues are not
necessarily indicative of long-term trends.

Our
Financial Services Training division generated $1.48 million of net revenues in
the nine-month period ended September 30, 2010 compared to $1.45 million for
the nine-months ended September 30, 2009. The increase is primarily from
increased utilization of our course libraries, offset by a decrease in custom
projects.

Our
SmartIt Information Technology division generated $86,000 of net revenues in the
2010 period, compared to $139,000 in the first nine-months of 2009, due to a
decrease in consulting work.

For
the nine-months ended September 30, 2010, SLE had net revenues of $409,000
compared to net revenues of $576,000 for the nine-months ended September 30,
2009. For the 2010 period, $125,000 of SLEs net revenues was generated by the
Working Values ethics and compliance division and $284,000 was generated by the
Cognistar legal division, compared to $272,000 and $304,000 respectively for the
comparable 2009 period. Net revenues generated by the Working Values ethics and
compliance division are derived primarily from custom consulting work. Custom
work is non-repetitive and subject to market conditions and can vary from
quarter to quarter. The Cognistar legal division derives its revenue primarily
from prepaid usage and direct sales of its courses.

Our
Engineering division generated $512,000 and $497,000 of net revenues
respectively, in the 2010 and 2009 periods. The revenues in this division
fluctuate as a result of timing differences in the placement of orders from
customers and the dates of the licensing exams. Sales of our engineering
products are not subscription based.

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

Cost of revenues

Our
gross profit margin for the nine-months ended September 30, 2010 was 52.8%
compared to 53% for the nine-months ended September 30, 2009. This slight
decrease is primarily attributable to the decrease in revenues. As there were
decreased revenues from certain divisions with some decreases in payroll and
other costs, the gross profit will vary as resources are expended for internal
purposes, such as product upgrades or technology development, for which we
expect to derive future benefits. We are constantly updating our course
libraries and technology that requires the use of both internal and outsourced
labor.

Our
cost of revenues are comprised of a number of components, including salaries
and related costs, the use of outside consultants, instructors, and the cost of
associated with live training. Cost of revenues decreased by $398,000 in the
first nine-months of 2010 compared to the first nine-months of 2009 primarily
due to a reduction in the need to use outsourced labor, reflecting the decrease
in consulting work in certain divisions. Since EEI was acquired in July 2009,
we have no EEI expenses included in our operational results for the first six
months of the 2009 period. Although, royalty expense increased by $73,000, outside
labor and productions costs related to custom projects and internal use
decreased approximately $711,000. We outsource a substantial amount of
technology projects to countries where

18

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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.
The cost of outside labor, which is primarily video production and technology
personnel, decreased $760,000 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 $446,000. The variation in
direct production costs are related to the type of production and other
projects and do not reflect any trends in our business. As our business grows
we may be required to hire additional production personnel, increasing our
cost of revenues. In addition, our course libraries are constantly requiring
updates, as there are always changes.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Royalties. Royalty expense increased in the
nine-month period ended September 30, 2010, compared to the corresponding
2009 period by $73,000. Royalty expense will vary from period to period based
on sales and usage of our various products and the addition of any partners.
Royalty expense is primarily driven by our accounting course catalog and our
engineering product sales. We estimate a substantial portion of our
accounting royalties based on a number of factors as we only pay these
royalties twice per year. In addition, we pay royalties to some of our
partners and the information to calculate those royalties is not always
readily available and requires estimates as well.                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Salaries. Overall, payroll and related costs
attributable to production personnel decreased by $93,000 after capitalizing
a portion of these costs. Although we have reduced payroll costs in certain
divisions, these savings are offset by the full nine months of payroll costs
attributable to EEI. We have also reduced the capitalization of internal
payroll as we have completed some of the projects that began in prior years.
We have also reduced some personnel costs as a result of decreased business
and replaced it with outsourced technology services, where and when needed.                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Other production related
costs. These are
other costs directly related to the production of our products such as
purchases of materials, travel, shipping, and other. These costs decreased by
$63,000 from 2009 to 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Selling, general and
administrative expenses

Selling,
general and administrative expenses for the nine-months ended September 30,
2010 increased $261,000, or 4.1%, compared to the nine-months ended September
30, 2009. The increase in selling, general and administrative expenses is
primarily attributable to EEI and Loscalzo payrolls as well as marketing and
promotional expenses for EEI.

Compensation
expense in the 2010 period decreased $64,000 compared to the 2009 period. While
we have reduced our overall headcount, this decrease would have been greater
had it not been offset by the additional salaries from EEI, which we acquired
in July 2009, and from Loscalzo. Compensation expense for the 2010 period
includes EEI for the entire nine months, while compensation expense for the
2009 period only includes EEI for three months. Similarly, in August 2009 we
hired an additional executive for Loscalzo so the 2009 period only reflects two
months of her salary while the 2010 period reflects nine months of her salary.
This additional salary was offset in part by the retirement of Marge Loscalzo,
the former president of Loscalzo, effective July 1, 2010. Compensation expense
includes stock based compensation expense of $146,000 for the 2010 period and
$177,000 for the 2009 period.

Other
selling, general and administrative costs, exclusive of compensation costs,
increased $325,000. The increase is primarily attributable to marketing and
selling expenses related to EEI. Certain other costs such as customer service,
professional fees, non-income based taxes and other expenses also increased.
Although, we make every effort to control our costs, we anticipate that
selling, general and administrative expenses will continue to increase as a
result of general increases in costs such as rent, insurance, travel and from
costs related to recent acquisitions.

19

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Depreciation
and amortization

Depreciation
and amortization expense increased by $17,000 in the first nine-months of 2010
compared to the first nine-months of 2009 primarily from the amortization of
acquired intangible assets and from capitalized costs relating to internally
developed assets. We expect our depreciation and amortization expense on our
fixed and intangible assets to
continue to increase as we replace computer equipment, capitalize internal
costs for the development of new courses and other technology and amortize
intangibles acquired through acquisitions. We continually replace and add to
our computer and other equipment as it ages and as additional equipment is
needed to accommodate growth.

Operating loss/income

For
the nine-months ended September 30, 2010, the operating loss was $765,000
compared to operating income of $12,000 in the corresponding 2009 period.

Other income, net

Other
income and expense items consist of interest earned on deposits, the interest
earned on our note receivable and the net loss from our iReflect joint venture.
We have no debt other than trade payables and accrued liabilities. For the
first nine-months of 2010 we had other income of $31,000 compared to other
income of $23,000 in the first nine-months of 2009, mostly as a result of
substantially higher interest on our note receivable, offset by a loss from the
iReflect joint venture. In August 2010 the note went into default and the
interest rate was increased to 2% per month. In September 2010, the borrower
repaid $125,000 of principal and the balance, together with all accrued
interest and reimbursable expenses was repaid in October 2010. The loss from
our 50% interest in the iReflect joint venture for the nine-months ended
September 30, 2010 was $18,163 principally as a result of our share of expenses
relating to the development of a new version of the software.

Income taxes

For
the nine months ended September 30, 2010, we recorded a net tax benefit of $208,000.
We believe that approximately $160,000 of this benefit will be absorbed in the
fourth quarter of this year as we anticipate that we will substantially reduce
our loss. For the first nine-months of 2009, we recorded an income tax benefit
of $31,000. At September 30, 2010, we increased the deferred tax asset by
$70,000 based on projected future utilization.

Net
loss/income

For
the nine-months ended September 30, 2010, we recorded a net loss of $526,000,
or $0.11 per share, basic and diluted, compared to net income of $66,000 or
$0.01 per share, basic and diluted, for the nine-months ended September 30,
2009.

Liquidity and Capital
Resources

At
September 30, 2010, we had no long-term debt.

Our
working capital as of September 30, 2010 was approximately $2.6 million
compared to $3.2 million at December 31, 2009. Our current ratio at September
30, 2010 was 1.41 to 1 compared to 1.48 to 1 at December 31, 2009. The current
ratio is derived by dividing current assets by current liabilities and is a
measure used by lending sources to assess our ability to repay short-term
liabilities. The largest component of our current liabilities is deferred
revenue, which was $5.4 million at September 30, 2010 and $5.3 million at
December 31, 2009.

At
September 30, 2010, we had cash and cash equivalents of $5.94 million. For the
nine months ended September 30, 2010, we reported a net decrease in cash of
$778,000 that includes $997,000 of cash used in operating activities, $1.2
million of cash used in investing activities and $574,000 used in financing
activities. The primary components of our operating cash flows are net income
adjusted for non-cash expenses, such as depreciation and amortization
stock-based compensation and deferred and current income taxes, and the changes
in our operating assets and liabilities, such as accounts receivable, accounts
payable and deferred revenues.

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For
the 2010 period, net cash used in investing activities was $1.2 million, which
included capital expenditures of $214,000, consisting primarily of computer
equipment and software purchases, $182,000 for software development costs
relating to new products and $30,000 for course development. In addition, we
funded a $900,000 secured loan to a non-affiliated company of which $125,000
was repaid during the period and the balance, together with all accrued
interest and reimbursable expenses was repaid in October 2010. 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. During the nine-month period
ended September 30, 2010, we purchased 154,300 shares of our common stock for
approximately $475,000. In addition, in May and July 2010 we paid dividends of
approximately $98,000.

As
of December 31, 2009, we had recognized approximately $1,251,000 of deferred
tax assets, net of a valuation allowance of $690,000. In the third quarter of
2010, we increased this asset to $1,321,000 based on projected future
utilization.

On
November 9, 2010, we declared a dividend of $.01 per common share payable on
December 31, 2010 to shareholders of record as of December 15, 2010.

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

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

Item 3. Quantitative and Qualitative Risk
Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

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PART IIOTHER INFORMATION

Item 1. Legal
Proceedings

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

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

Recent
Sales of Unregistered Securities

None

Company Purchases of its Equity Securities

On
November 11, 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 September 30, 2010, no shares were repurchased and as of such date
approximately $264,000 was available under this program.

Item 3. Defaults Upon
Senior Securities

None.

Item 4. [REMOVED AND
RESERVED.]

Item 5. Other
Information

None.

Item
6. Exhibits

Exhibits:

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

22

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SIGNATURES

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

|                       |                                                      
|---------------------- | -----------------------------------------------------
|                       | SmartPros
Ltd.                                       
|                       |                                                      
|                       | (Registrant)                                         
|                       |                                                      
|Date:
November 9, 2010 | /s/ Allen S.
Greene                                  
|                       |                                                      
|                       | Chief
Executive Officer                              
|                       | (Principal
Executive Officer)                        
|                       |                                                      
|Date:
November 9, 2010 | /s/ Stanley
P. Wirtheim                              
|                       |                                                      
|                       | Chief
Financial Officer
(Principal Financial Officer)

23

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