UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

                        Commission File Number 001-32300

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

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

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

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

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

                                 Yes |x| No | |

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

                                 Yes | | 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 1, 2006, there were 4,859,274
shares of common stock outstanding.

Transitional Small Business Disclosure Format.

                                 Yes | | No |x|


<PAGE>


                                 SMARTPROS LTD.
                               FORM 10-QSB REPORT

                               September 30, 2006

                                TABLE OF CONTENTS

                                                                            PAGE

PART I - FINANCIAL INFORMATION

         Item 1.  Condensed Consolidated Financial Statements
                  (Unaudited)

                  Balance Sheets - September 30, 2006 and December 31,
                  2005 (Audited)                                              3

                  Statements of Operations for the nine-month and
                  three-month periods ended September 30, 2006
                  and 2005                                                    4

                  Statements of Cash Flows for the nine-month periods
                  ended September 30, 2006 and 2005                           5

                  Notes to Condensed Consolidated Financial Statements        6

         Item 2.  Management's Discussion and Analysis or Plan of Operation  10

         Item 3.  Controls and Procedures                                    19

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                          20

         Item 2.  Unregistered Sales of Equity Securities and
                  Use of Proceeds                                            20

         Item 3.  Defaults Upon Senior Securities                            20

         Item 4.  Submission of Matters to a Vote of Security Holders        20

         Item 5.  Other Information                                          21

         Item 6.  Exhibits                                                   21

SIGNATURES                                                                   22

                           FORWARD-LOOKING STATEMENTS

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

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


                                       2


<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SMARTPROS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                 SEPTEMBER 30,    DECEMBER 31,
                                                                                     2006            2005
                                                                                 (UNAUDITED)       (AUDITED)
--------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>             <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                       $ 7,373,899     $ 7,505,691
   Accounts receivable, net of allowance for doubtful accounts
      of $39,179 and $40,429                                                         1,499,963         777,122
   Prepaid expenses and other current assets                                           144,515         254,176
                                                                                   ---------------------------
Total Current Assets                                                                 9,018,377       8,536,989
                                                                                   ---------------------------
Property and equipment, net                                                            432,222         493,604
Goodwill                                                                                53,434          53,434
Other intangibles, net                                                               2,334,162       2,158,593
Other assets, including restricted cash of $150,000                                    290,673         150,000
                                                                                   ---------------------------
                                                                                     3,110,491       2,855,631
                                                                                   ---------------------------
Total Assets                                                                       $12,128,868     $11,392,620
                                                                                   ===========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                                                $   425,563     $   228,629
   Accrued expenses                                                                    261,313         277,159
   Current portion of capital lease and equipment financing obligations                 33,410          38,148
   Deferred revenue                                                                  3,871,787       3,689,486
                                                                                   ---------------------------
Total Current Liabilities                                                            4,592,073       4,233,422
                                                                                   ---------------------------
Long-Term Liabilities:
   Capital lease and equipment financing obligations                                        --          25,992
   Other liabilities                                                                   130,151         160,193
                                                                                   ---------------------------
Total Long-Term Liabilities                                                            130,151         186,185
                                                                                   ---------------------------
Commitments and Contingencies
Stockholders' Equity:
   Convertible preferred stock, $.001 par value, authorized 1,000,000 shares, 0
        shares issued and outstanding                                                       --              --
                                                                                   ---------------------------
   Common stock, $.0001 par value, authorized 30,000,000 shares, 5,170,005
        issued and 4,859,274 outstanding at September 30, 2006 and 5,145,447
        issued and 5,035,716 outstanding at December 31, 2005                              517             514
   Additional paid-in capital                                                       16,489,652      16,418,034
   Accumulated (deficit)                                                            (8,117,400)     (8,785,935)
                                                                                   ---------------------------
                                                                                     8,372,769       7,632,613
   Common stock in treasury, at cost - 310,731 shares at September 30, 2006;
   109,731 shares at December 31, 2005                                                (922,625)       (384,600)
   Deferred compensation                                                               (43,500)        (75,000)
   Note receivable from stockholder                                                         --        (200,000)
                                                                                   ---------------------------
Total Stockholders' Equity                                                           7,406,644       6,973,013
                                                                                   ---------------------------
Total Liabilities and Stockholders' Equity                                         $12,128,868     $11,392,620
                                                                                   ===========================
</TABLE>

--------------------------------------------------------------------------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                                       3


<PAGE>


SMARTPROS LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>

                                                    NINE MONTHS ENDED             THREE MONTHS ENDED
                                                      SEPTEMBER 30,                 SEPTEMBER 30,
                                                --------------------------    --------------------------
                                                   2006           2005            2006           2005
--------------------------------------------------------------------------    --------------------------
<S>                                             <C>            <C>            <C>            <C>
Net Revenues                                    $ 8,630,243    $ 7,972,330    $ 3,174,771    $ 2,416,338
Cost of Revenues                                  3,584,891      3,174,468      1,379,795        933,524
                                                --------------------------    --------------------------
   Gross Profit                                   5,045,352      4,797,862      1,794,976      1,482,814
                                                --------------------------    --------------------------
Operating Expenses:
   Selling, general and administrative            4,263,962      3,952,854      1,429,570      1,242,024
   Depreciation and amortization                    480,792        434,898        164,212        148,999
                                                --------------------------    --------------------------
                                                  4,744,754      4,387,752      1,593,782      1,391,023
                                                --------------------------    --------------------------
   Operating Income                                 300,598        410,110        201,194         91,791
                                                --------------------------    --------------------------
Other Income (Expense):

   Interest income                                  239,290        134,142         84,623         57,120
   Interest expense                                  (3,604)        (6,514)          (612)        (1,384)
                                                --------------------------    --------------------------
                                                    235,686        127,628         84,011         55,736
                                                --------------------------    --------------------------

Income before benefit for income taxes              536,284        537,738        285,205        147,527

Income tax benefit                                 (132,250)            --        (45,165)            --
                                                --------------------------    --------------------------
Net Income                                      $   668,534    $   537,738    $   330,370    $   147,527
                                                ==========================    ==========================
Net Income Per Common Share:
   Basic net income per common share            $       .13    $       .11    $       .07    $       .03
                                                ==========================    ==========================
   Diluted net income per common share          $       .13    $       .11    $       .07    $       .03
                                                ==========================    ==========================

Weighted Average Number of Shares Outstanding
   Basic                                          5,039,462      5,084,240      5,017,470      5,085,546
                                                ==========================    ==========================
   Diluted                                        5,054,587      5,117,117      5,028,578      5,115,180
                                                ==========================    ==========================
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                                       4


<PAGE>


SMARTPROS LTD. AND SUBSIDIARIES
(UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                       NINE MONTHS ENDED
                                                                                         SEPTEMBER 30,
                                                                                          (UNAUDITED)
                                                                                  ---------------------------
                                                                                       2006          2005
--------------------------------------------------------------------------------- ---------------------------
<S>                                                                                <C>            <C>
Cash Flows from Operating Activities:
Net income                                                                         $   668,534    $   537,738
                                                                                   --------------------------
   Adjustments to reconcile net income to net cash provided by operating
      activities:

      Depreciation and amortization                                                    480,792        434,898
      Reduction in deferred compensation                                                31,500         42,000
      Stock compensation expense                                                        18,821             --
      Deferred income tax benefit                                                     (136,000)            --
   Changes in operating assets and liabilities:
      (Increase) decrease in operating assets:
         Accounts receivable                                                          (456,782)       147,128
         Prepaid expenses and other current assets                                     109,661         33,936
         Other assets                                                                       --         17,196
      (Decrease) increase in operating liabilities:
         Accounts payable and accrued expenses                                         125,752       (245,047)
         Deferred revenue                                                              182,301       (354,902)
         Other liabilities                                                             (30,042)        (3,540)
                                                                                   --------------------------
   Total adjustments                                                                   326,003         71,669
                                                                                   --------------------------
Net Cash Provided by Operating Activities                                              994,537        609,407
                                                                                   --------------------------
Cash Flows from Investing Activities:
   Reduction in investment securities available-for-sale                                    --      3,000,000
   Acquisition of property and equipment                                               (45,485)      (171,087)
   Capitalized course costs                                                            (45,358)            --
   Cash paid for acquisitions                                                         (719,530)            --
                                                                                   --------------------------
Net Cash (Used in) Provided by Investing Activities                                   (810,373)     2,828,913
                                                                                   --------------------------
Cash Flows from Financing Activities:
   Payment of note receivable from stockholder                                         200,000             --
   Purchase of treasury stock                                                         (538,025)            --
   Exercise of stock options                                                            52,799         10,540
   Payments under capital lease obligations                                            (30,730)       (45,840)
                                                                                   --------------------------
Net Cash  (Used in) Financing Activities                                              (315,956)       (35,300)
                                                                                   --------------------------
Net (Decrease) Increase in Cash and Cash equivalents                                  (131,792)     3,403,020
Cash and Cash Equivalents, beginning of period                                       7,505,691      1,756,991
                                                                                   --------------------------
Cash and Cash equivalents, end of period                                           $ 7,373,899    $ 5,160,011
                                                                                   ==========================
Supplemental Disclosure:
Cash paid for interest                                                             $     3,604    $     6,514
                                                                                   ==========================
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                                       5


<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
of SmartPros Ltd. ("SmartPros" or the "Company") included herein have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 2005 and the notes thereto
included in the Company's Annual Report on Form 10-KSB filed with the United
States Securities and Exchange Commission on March 30, 2006. 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, Working Values, Ltd and Skye Multimedia Ltd. (Skye),
although in the latter case only as of March 1, 2006. All material inter-company
accounts and transactions have been eliminated.

NOTE 2.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The Company, a Delaware corporation, was organized in 1981 as Center
for Video Education, Inc. for the purpose of producing educational videos
primarily directed to the accounting profession. SmartPros' primary products
today are periodic video and Internet subscription services directed to
corporate accountants, financial managers and accountants in public practice. In
addition, the Company produces a series of continuing education courses directed
to the engineering profession as well as a series of courses designed for
candidates for the professional engineering exam. Through its Working Values
subsidiary, the Company develops programs on governance, compliance and ethics
for corporations. As a result of its acquisitions of Sage Online and Skye
Multimedia, Inc. in February 2006, the Company now also offers educational
products for the banking and pharmaceutical industries. SmartPros also produces
custom videos and rents out its studios.

         SmartPros is located in Hawthorne, New York, where it maintains its
corporate offices, new media lab, video production studios and tape duplication
facilities. While the Company's management monitors the revenue streams of the
various products and services, operations are managed and financial performance
is evaluated on a company wide basis. Accordingly, all of the Company's
operations are considered by management to be aggregated in one reportable
segment.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the 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 revenues from its subscription services as
earned. Video and on-line subscriptions are generally billed on an annual basis,
while individual on-line subscriptions predominately are paid by credit card at
point of sale. Both of these types of sales are deferred at the time of billing
or payment and amortized into revenue on a monthly basis over the term of the
subscription, which is generally one year. Engineering products are
non-subscription based and revenue is recognized upon shipment or, in the case
of individual on-line sales, payment. Revenues from non-subscription services
provided to customers, such as website design, video production, consulting
services and custom projects are 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. The
Company obtains either signed agreements or purchase orders from its
non-subscription customers outlining the terms and conditions of


                                       6


<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
         (CONT'D)

the sale or service to be provided. Otherwise, such services are recognized as
revenues after completion and delivery to the customer. Duplication and related
services are generally recognized upon shipment or, if later, when the Company's
obligations are complete and realization of receivable amounts is assured.

         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. For the nine-month
period ended September 30, 2006, the Company has expended approximately $45,000
on such costs. The amortization period is five years, except for the
Sarbanes-Oxley courses which have a three year amortization period. 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 the
acquisition of the assets of Sage On-Line, the Company acquired an additional
$250,000 of course costs which are being amortized over a five-year period as
well. Included in other intangible assets at September 30, 2006, are capitalized
course costs of $584,519, net of accumulated amortization of $227,181.

         DEFERRED REVENUE

         Deferred revenue related to subscription services represents the
portion of unearned subscription revenue, which is amortized on a monthly,
straight-line basis, as earned. Deferred revenue related to website design,
video production or technology services represents that portion of amounts
billed by the Company, or cash collected by the Company, for which services have
not yet been provided or earned in accordance with the Company's revenue
recognition policy.

         EARNINGS 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 common shares outstanding
during the year. Basic earnings or loss per share exclude any dilutive effects
of options, warrants and convertible securities. Diluted earnings per common
share include the dilutive effect of shares of Common Stock issuable under stock
options and warrants. Diluted earnings per share are computed using the weighted
average number of Common Stock and Common Stock equivalent shares outstanding
during the period. Common Stock equivalent shares of 15,125 and 32,877 for the
nine month periods ended September 30, 2006 and 2005, respectively, and 11,108
and 29,634 shares for the three-month periods ended September 30, 2006 and 2005,
respectively, include the Company's stock options and warrants that are
dilutive.

         STOCK-BASED COMPENSATION

         The Company's 1999 Stock Option Plan (the "Plan") permits the grant of
options and restricted stock to employees, directors and consultants. The total
number of shares reserved for grants under the plan is 882,319, provided that
restricted stock grants may not exceed 200,000 shares. As of September 30, 2006
there were 350,357 options outstanding, of which 311,901 are currently
exercisable and 502,502 options are available for future grants. To date, 29,460
options have been exercised. All stock options under the Plan are granted at the
fair market value of the common stock at the grant date. Employee stock options
vest ratably over a four-year period and generally expire 10 years from the
grant date. Stock options granted to non-employee directors vest in the same
manner. Restricted stock awards are subject to forfeiture unless certain time
and/or performance requirements are satisfied. To date, no restricted stock
awards have been issued under this plan.

         Effective January 1, 2006, the grants under the Plan are accounted for
in accordance with the recognition and measurement provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)), which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. SFAS No. 123(R) requires compensation costs related to
share-based payment transactions, including employee stock options, to be
recognized in the financial statements. In addition, the Company adheres to the
guidance set forth within Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 107, which


                                       7


<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
         (CONT'D)

provides the Staff's views regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations with respect to
the valuation of share-based payments for public companies.

         Prior to January 1, 2006, the Company accounted for similar
transactions in accordance with APB No. 25 which employed the intrinsic value
method of measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option equaled
or exceeded the fair value of the underlying stock at the grant date.

         While SFAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting period,
companies were permitted to continue to apply the intrinsic value-based method
of accounting prescribed by APB No. 25 and disclose certain pro-forma amounts as
if the fair value approach of SFAS No. 123 had been applied. In December 2002,
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure,
an amendment of SFAS No. 123, was issued, which, in addition to providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation, required more
prominent pro-forma disclosures in both the annual and interim financial
statements. The Company complied with these disclosure requirements for all
applicable periods prior to January 1, 2006.

         In adopting SFAS No. 123(R), the Company applied the modified
prospective approach to transition. Under the modified prospective approach, the
provisions of SFAS No. 123(R) are to be applied to new awards and to awards
modified, repurchased, or cancelled after the required effective date of
December 15, 2005. Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered that are outstanding as of the
required effective date shall be recognized as the requisite service is rendered
on or after the required effective date. The compensation cost for that portion
of awards shall be based on the grant-date fair value of those awards as
calculated for either recognition or pro-forma disclosures under SFAS No. 123.

         As a result of the adoption of SFAS No. 123(R), the Company's results
for the nine-month period ended September 30, 2006 include share-based
compensation expense totaling approximately $19,000. Such amounts have been
included in the Condensed Consolidated Statements of Operations within general
and administrative expenses. Stock compensation expense recorded under APB No.
25 in the Consolidated Statements of Operations for the nine months ended
September 30, 2005 totaled $0.

         Stock option compensation expense in 2006 is the estimated fair value
of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award.

         The weighted average estimated fair value of stock options granted in
the nine months ended September 30, 2006 and 2005 was $1.20 and $0,
respectively. The fair value of options at the date of grant was estimated using
the Black-Scholes option pricing model. During 2006, the Company took into
consideration guidance under SFAS No. 123(R) and SAB 107 when reviewing and
updating assumptions. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected term is
based upon observation of actual time elapsed between date of grant and exercise
of options for all employees. Previously such assumptions were determined based
on historical data.

         The assumptions made in calculating the fair values of options for the
nine month period ended September 30, 2006 is as follows:

              Contractual term (in years)                10
              Expected volatility                        33%
              Expected dividend yield                     0%
              Risk-free interest rate                  4.75%
              Expected term (in years)                  5.5


                                       8


<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONT'D)

         The following table addresses the additional disclosure requirements of
SFAS No. 123(R) in the period of adoption. The table illustrates the effect on
net income and earnings per share as if the fair value recognition provisions of
SFAS No. 123 had been applied to all outstanding and unvested awards in the
prior year comparable period.
<TABLE>
<CAPTION>

                                                               NINE MONTHS ENDED  THREE MONTHS ENDED
                                                              SEPTEMBER 30, 2005  SEPTEMBER 30, 2005
                                                              ------------------  ------------------
<S>                                                             <C>                 <C>
Net income as reported                                          $      537,738      $   147,527
Add:  Stock-based compensation included in reported net
income
Deduct:  Total stock-based compensation expense determined
under fair value-based method for all awards (no tax
effect)                                                                (22,818)          (7,606)
                                                                --------------      -----------
Pro forma net income                                            $      514,920      $   139,921
                                                                ==============      ===========

Net income per share:
Basic - as reported                                             $          .11      $       .03
                                                                ==============      ===========
Basic  - pro forma                                              $          .11      $       .03
                                                                ==============      ===========

Diluted - as reported                                           $          .10      $       .03
                                                                ==============      ===========
Diluted - pro forma                                             $          .10      $       .03
                                                                ==============      ===========
</TABLE>


         The Company granted 15,100 options under the Plan during the nine
months ended September 30, 2006 at exercise prices ranging from $3.00 per share
to $3.05 per share, 24,558 options were exercised at a price of $2.15 and 46,716
shares were forfeited. In addition, on October 12, 2006 the Company granted
26,000 options to three officers. These options have an exercise price of $2.75
and vest ratably over a three-year period commencing one year from date of
issue.

         The following table represents our stock options granted, exercised and
forfeited for the nine months ended September 30, 2006:
<TABLE>
<CAPTION>

                                                  WEIGHTED AVERAGE       WEIGHTED AVERAGE
                                  NUMBER OF        EXERCISE PRICE           REMAINING
       STOCK OPTIONS               SHARES             PER SHARE          CONTRACTUAL TERM
----------------------------    --------------    ------------------    -------------------
<S>                                <C>                  <C>                    <C>
Outstanding at January 1,
  2006                             406,531              $4.67                  5.8
Granted                             15,100              $3.03
Exercised                          (24,558)             $2.15
Forfeited/expired                  (46,716)             $5.08
                                --------------
Outstanding at September
30, 2006                           350,357              $4.72                  6.0
                                ==============    ==================    ===================
Exercisable at September
30, 2006                           311,901              $4.84                  6.0
                                ==============    ==================    ===================
</TABLE>

         INCOME TAX EXPENSE

         Commencing January 1, 2006, the Company is recognizing the benefit of
its deferred income tax asset available from its net operating loss
carryforward. This resulted in an income tax benefit of $136,000 for the nine
months ended September 30, 2006, which is offset by an adjustment for an accrual
of estimated alternative income tax of approximately $3,800.


                                       9


<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 THE "FORWARD LOOKING STATEMENT" IMMEDIATELY
FOLLOWING THE TABLE OF CONTENTS. BECAUSE THIS DISCUSSION INVOLVES RISK AND
UNCERTAINTIES, OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.

         We provide learning solutions for accounting/finance and engineering
professionals. We also provide learning solutions and training materials for
people who work in the banking and pharmaceutical industries. In addition, we
provide ethics and compliance training for the general corporate community.

         We commenced operations in 1981. Our initial product line was
educational videos for accounting and finance professionals that were designed
to meet the continuing professional education requirements of the various state
licensing agencies and professional associations. Since then, we have gradually
expanded our product offerings to address the ongoing educational needs of other
professional groups and corporate executives.

         Initially, our accounting/finance programs were delivered on videotape.
In 1998, we recognized that, to remain competitive, we would have to make our
products available in digital format for distribution over the Internet and
corporate intranets. Towards that end we hired information technology
professionals to build a new media department that, among other things, would
convert our programs to digital format for online delivery. Today, online
subscription sales are the fastest growing part of our business. In addition, as
part of the Pro2Net acquisition, we acquired a learning management system,
marketed under the name SmartPros' Professional Education Center(TM). Our
ability to provide value-added services through this platform, we believe, is
key to our revenue growth and future success.

         In 2000 we acquired Virtual Education Corporation, or VEC, a provider
of license preparation and continuing professional development programs for
engineers. In May 2001, we acquired substantially all of the assets of Pro2Net.
In so doing, we acquired a library of "how to" accounting and finance programs
to augment our existing accounting courses, a functional learning content
management system that we could market with our programs, customer lists, trade
names and computer hardware.

         In April 2003, we acquired a library of custom-designed integrity-based
courses and other assets from Working Values Group Ltd., a company that
specialized in building custom-designed learning solutions for the general
corporate community using traditional and alternative instructional techniques.
As part of the transaction, we also hired the development team from Working
Values Group. Working Values continues to focus on doing custom design work for
its clients while building a library of off-the-shelf ethics courses.

         In February 2006, we acquired substantially all of the operating assets
and assumed certain liabilities of Skye Multimedia Inc. for approximately
$520,000. In addition, the selling shareholders of Skye Multimedia are entitled
to an additional payment based on the average earnings of Skye Multimedia
between March 1, 2006 and December 31, 2008 less adjustments for use of capital
and other costs. In no event will the total additional payment exceed $1.2
million. The additional payment may be paid 50% in cash and 50% in shares of our
common stock at our discretion. If the additional payment is paid partly in
stock, the price of the stock will be determined by the average price for the
twenty business days subsequent to December 31, 2008. Skye Multimedia's sales
for the year 2005 were in excess of $1 million.

         As a result of this acquisition, through our new subsidiary, Skye
Multimedia Ltd. (Skye), we develop custom interactive marketing and training
applications for CD, DVD, Internet and learning management systems. Skye offers
a broad range of services including content design, animation, and audio/video
production and application development. Skye's clients are a diverse group of
companies from pharmaceutical, financial, technology and other industries. Since
the acquisition, Skye has generated approximately $875,000 in revenues.


                                       10


<PAGE>


         Also in February 2006, we acquired substantially all of the operating
assets and assumed certain liabilities from Sage International Group, Inc.
(Sage). As a result, we acquired a library of 58 nationally certified online
training solutions for the banking, securities and insurance industries. Sage's
"off-the-shelf" courses and custom designed programs employ delivery methods
suited to the specific needs of its clients which include professional firms of
all sizes as well as many of the Fortune 500 companies and a large number of
midsize and small companies.

         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) on-line sales, (iii) cash flows and (iv) EBITDA.

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

         o        The increasing recognition by professionals and corporations
                  that they must continually improve their skills and those of
                  their employees in order to remain competitive.

         o        The plethora of new laws and regulations affecting the conduct
                  of business and the relationship between a corporation and its
                  employees.

         o        The increased competition in today's economy for skilled
                  employees and the recognition that effective training can be
                  used to recruit and train employees.

         o        The development and acceptance of the Internet as a delivery
                  channel for the types of products and services we offer.

         In 2004, we raised approximately $6 million of net proceeds in an
initial public offering. Through September 30, 2006, we have used approximately
$1.2 million of those proceeds; $500,000 to repay debt and $720,000 in
connection with the acquisitions of Sage and Skye. On October 20, 2006, we
purchased substantially all of the tangible and intangible assets of MGI
Management Institute, Inc. (MGI) that were used by MGI in its business. The
purchase price was $100,000, payable in cash. MGI designed, developed and
conducted distance education courses covering a wide range of professional
topics for engineers, legal administrators, manufacturers and others. MGI will
be integrated into our existing engineering sales division. We intend to use the
remaining $4.7 million net proceeds from the offering, cash flow from operations
and our publicly-traded common stock to execute our growth strategy, which
contemplates acquiring other companies that provide learning solutions or their
assets. We continue to look for acquisition opportunities. We intend to focus on
acquisitions that will allow us to increase the breadth and depth of our current
product offerings, including the general corporate market for compliance,
governance and ethics. We will also consider acquisitions that will give us
access to new market segments such as law, insurance, health care and financial
services. We prefer acquisitions that are accretive, as opposed to those that
are dilutive, but ultimately the decision will be based on maximizing
shareholder value rather than short-term profits. The size of the acquisitions
will be determined, in part, by our size, the capital available to us and the
liquidity and price of our stock. We may use debt to enhance or augment our
ability to consummate larger transactions.

         There are many risks involved with acquisitions. These risks include
integrating the acquired business into our existing operations and corporate
structure, retaining key employees and minimizing disruptions to our existing
business. We cannot assure you that we will be able to identify appropriate
acquisitions opportunities or negotiate reasonable terms or that any acquired
business or assets will deliver the shareholder value that we anticipated at the
outset.

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


                                       11


<PAGE>


or conditions. We consider the following accounting policies to be the most
important to the portrayal of our financial condition.

     REVENUES

         Most of our revenue is in the form of subscription fees for our monthly
accounting update programs or our course library. Other sources of revenue
include direct sales of programs on a non-subscription basis, fees for various
services, including website design, software development, tape duplication,
video production, video conversion, course design and development, ongoing
maintenance of our clients' online learning content management system and
licensing fees. Subscriptions are billed on an annual basis, payable in advance
and deferred at the time of billing. Individual sales made over the Internet are
by credit card only. Renewals are usually sent out 60 days before the
subscription period ends. We usually obtain either a signed agreement or
purchase orders from our non-subscription customers outlining the terms and
conditions of the sale or service to be provided. Larger transactions are
usually dealt with by contract, the financial terms of which depend on the
services being provided. The contracts may have different billing arrangements
resulting in either unbilled or deferred revenue. 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.

         Revenues 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
on-line sales, payment. Revenues from non-subscription services provided to
customers, such as website design, video production, consulting services and
custom projects, are generally recognized on a proportional performance basis
where sufficient information relating to project status and other supporting
documentation is available. Otherwise, these services are recognized as revenues
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. Both Working Values
and Skye recognize revenue on a proportional performance basis.

     EQUIPMENT, INTANGIBLE ASSETS AND LEASEHOLD IMPROVEMENTS

         Fixed and intangible assets are carried at cost less their respective
accumulated depreciation/amortization and are depreciated/amortized using the
straight-line method over their estimated useful lives, which range from three
to ten years. Leasehold improvements are amortized over the lesser of their
estimated lives or the life of the lease. Major expenditures for renewals and
improvements are capitalized and amortized over their useful lives.

     IMPAIRMENT OF LONG-LIVED ASSETS

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

     STOCK-BASED COMPENSATION

         Effective January 1, 2006, we adopted SFAS No. 123R. As a result,
compensation costs are now recognized for stock options granted to employees.
Options and warrants granted to employees and non-employees are recorded as an
expense at the date of grant based on the then estimated fair value of the
security in question.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

         The third quarter of 2006 was our eighth consecutive quarter of
profitability. The following table compares our statement of operations data for
the three months ended September 30, 2006 and 2005. The trends suggested by this
table may not he indicative of future operating results, which will depend on
various factors including the relative mix of products sold (accounting/finance,
engineering, banking/insurance securities or corporate training) and the method
of sale (video or online) as well as the


                                       12


<PAGE>

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.

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED SEPTEMBER 30,
                                          ----------------------------------------------------------------------------
                                                     2006                            2005
                                          ----------------------------   -----------------------------
                                            AMOUNT        PERCENTAGE        AMOUNT         PERCENTAGE       CHANGE
                                          ------------    ------------   --------------    -----------    ------------
<S>                                        <C>               <C>           <C>                <C>               <C>
Net revenues                               $3,174,771        100.0%        $2,416,338         100.0%            31.4%
Cost of revenues                            1,379,795         43.5%           933,524          38.6%            47.8%
                                          ------------    ------------   --------------    -----------
Gross profit                                1,794,976         56.5%         1,482,814          61.4%            21.1%
                                          ------------    ------------   --------------    -----------
Selling, general and administrative         1,429,570         45.0%         1,242,024          51.4%            15.1%
Depreciation and amortization                 164,212          5.2%           148,999           6.2%            10.2%
                                          ------------    ------------   --------------    -----------
Total operating expenses                    1,593,782         50.2%         1,391,023          57.6%            14.6%
                                          ------------    ------------   --------------    -----------
Operating income                              201,194          6.3%            91,791           3.8%           119.2%
Other income, net                              84,011          2.6%            55,736           2.3%            50.7%
                                          ------------    ------------   --------------    -----------
Net income before income tax benefit          285,205          9.0%        $  147,527           6.1%            93.3%
Income tax benefit                             45,165          1.4%              --                            100.0%
                                          ------------    ------------   --------------    -----------
Net income                                 $  330,370         10.4%        $  147,527           6.1%           123.9%
                                          ============    ============   ==============    ===========
</TABLE>


     NET REVENUES

         Net revenues for the quarter ended September 30, 2006 increased
approximately $758,000, or 31.4%, compared to net revenues for the three months
ended September 30, 2005. This was primarily due to revenues of $445,000
generated by Skye in the quarter. Online sales continue to be an important
factor contributing to our overall revenue growth, a trend that began in 2003.
In the 2006 period, net revenues from online sales accounted for approximately
$811,000, or 25% of net revenues, compared to $688,000, or 28% of net revenues
in the comparable 2005 period. This represents an 18% increase in absolute
dollars even though as a percentage of net revenues online sales declined
because most of Skye's sales are not over the Internet.

         In the third quarter of 2006, net revenues from our accounting/finance
and related products were $2.2 million or 68% of sales, compared to $1.8 million
or 75% of sales in the comparable 2005 period. Sales of our subscription-based
products which include both subscription based revenue and direct sales of
course material on a non-subscription basis increased from $1.83 million in 2005
to $1.93 million in 2006. This increase is due to our continued marketing
efforts to increase sales. Revenues from other projects in our accounting
division that are not subscription-based, increased from $179,000 in 2005 to
$236,000 in 2006. These sales fluctuate from period to period are not indicative
of any trends.

         In the third quarter of 2006, Skye generated $445,000 of revenue. Also,
sales from our Sage Online course catalogue generated $47,000 of revenue during
the quarter.

         For the third quarter of 2006, Working Values contributed $178,000 to
net revenues compared to $101,000 in the third quarter of 2005. This income is
derived primarily from custom consulting work. Custom work is non-repetitive and
subject to market conditions and can vary from quarter to quarter. We expect
Working Values to continue its revenue growth for the balance of 2006 due to a
number of custom consulting projects currently in progress.

         Net revenues from sales of our engineering products, which are not
subscription-based, were $114,000 in the third quarter of 2006 compared to
$95,000 in the third quarter of 2005. This increase is not indicative of any
trends, but is a result of timing differences in the placement of orders from
customers and greater marketing efforts.

         Net revenues from video production, duplication and consulting services
for the third quarter of 2006 were $224,000 compared to $365,000 for the third
quarter of 2005. In general, we believe this decline reflects an overall trend
in the video production and duplication business and is also due in part to the
fact that the previous head of this department left in January 2006, which
resulted in lost business, and we did not hire his replacement until March 2006.
Since then, there has been a steady increase in net revenues from this
department as well as an increase in the number of new customers. Consulting
revenue declined as a result of the completion of large contracts in the first
half of 2005. 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 education department if that is where the sale originated, even if
the project has nothing to do with accounting.


                                       13


<PAGE>


     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; (ii) royalties paid to third parties; (iii)
the cost of materials, such as videotape and packaging supplies; and (iv)
shipping and other costs. There are many different types of expenses that are
characterized as production costs and many of them vary from period to period
depending on many factors. Skye and our other non-subscription based divisions
operate on a lower gross profit percentage than that of our subscription-based
products. Our gross profit percentage decreased from 61.4% for the three months
ended September 30, 2005 to 56.5% in the current period. In addition, we have
devoted a significant amount of internal resources in developing new products
and re-tooling existing products, and technology that have not been capitalized
and are therefore included in our cost of revenues.

         Compared to the third quarter of 2005, cost of revenues in the third
quarter of 2006 increased by $446,000. The increase was primarily attributable
to payroll and related costs from our newly acquired subsidiary and other
production related costs. Due to the increased direct costs as a result of our
acquisitions, our product mix has changed resulting in lower gross profit.

         o        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
                  out-sourcing of non-video technology. The cost of such outside
                  labor, which is primarily video production and technology
                  personnel, increased $397,000. This increase is directly
                  related to the outsourcing of technology personnel for jobs in
                  Skye. The decrease in video production revenue also resulted
                  in lower personnel costs. Direct production costs, which are
                  costs related to producing videos other than labor costs, such
                  as the cost of renting equipment and locations, and the use of
                  outsourced labor in the technology area, increased $29,000.
                  The variation in direct production costs are related to the
                  type of video 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.

         o        ROYALTIES. Royalty expense decreased in the three months ended
                  September 30, 2006 compared to the comparable 2005 period by
                  $25,000. This is a result of product mixes in the engineering
                  sector and royalties due to our organizational partners in the
                  accounting education area.

         o        SALARIES. Overall, payroll and related costs attributable to
                  production personnel increased by $21,000. We have reduced
                  salaries and related costs in our video production department
                  by $43,000 as a result of decreased business. We have also
                  reduced salaries and related costs in our technology and
                  Working Values divisions by approximately $31,000. However,
                  these savings are offset by salaries and related costs in the
                  Skye's subsidiary of approximately $93,000.

         o        OTHER PRODUCTION RELATED COSTS. These are other costs directly
                  related to the production of our products such as purchases of
                  materials, travel, shipping and other. These costs increased
                  by $24,000 from 2005 to 2006. This is a direct result of
                  increased business from Working Values, of which a substantial
                  portion was billed to their clients.

     GENERAL AND ADMINISTRATIVE EXPENSES

         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. General and administrative expenses increased by $188,000 in
the third quarter of 2006 from the comparable period in 2005. This represents a
15% increase from the comparable 2005 period. This increase is primarily
attributable to the inclusion of Skye's operating expenses in the current
period. General and administrative costs consist of a number of different types
of expenses, including salaries and related costs. The increase in salaries is a
result of a number of factors including additional personnel costs of
approximately $252,000 as a result of our recent acquisitions, offset by savings
in salary due to the resignation of our president in the first quarter. Selling
costs, which include advertising, promotion, travel and entertainment, increased
by $3,000. Our other operating costs decreased by approximately $3,000,
including a $3,300 charge for recording the expense of stock options as now
required by SFAS 123R, and lowering our investor relations expense by $15,000
from the prior year. We continue to look for other opportunities to reduce our
overhead. Although, we make every effort to control


                                       14


<PAGE>


our costs, we anticipate that general and administrative expenses will continue
to increase primarily as a result of our recent acquisitions and a general
increase in such costs as health insurance and travel.

     DEPRECIATION and AMORTIZATION

         Depreciation and amortization expenses increased by $15,000 in the
third quarter of 2006 compared to the third quarter of 2005 as a result of
increased amortization expense from our recent acquisitions and capitalized
course costs. We expect our depreciation and amortization expenses on our fixed
assets to continue to increase. Although many of our older assets are either
fully or almost fully depreciated and we do not anticipate replacing them at the
same rate, this is offset by the amortization of the intangibles acquired in
these acquisitions.

     INCOME FROM OPERATIONS

         For the three months ended September 30, 2006, net income from
operations was $201,000 compared to $92,000 in the comparable period of 2005.
This increase is primarily attributable to the performance of Skye, and
increased sales of our accounting and engineering products, as well as increased
sales from Working Values. Our quarterly earnings are affected by the mix of
custom projects compared to subscription and education-based sales.

     OTHER INCOME/EXPENSES

         Other income and expense items consist of interest paid on indebtedness
and interest earned on deposits. As a result of the successful completion of our
initial public offering, we were able to retire all of our debt (other than
capital lease obligations), reducing our interest expense. At the same time,
since we have not yet used the balance of the net proceeds from our initial
public offering, our interest income has increased. As a result, for the third
quarter of 2006 we had net interest income of $84,000 compared to net interest
income of $56,000 in the third quarter of 2005 after expending approximately
$720,000 for acquisitions in February 2006 and $538,000 during the quarter for
the purchase of treasury stock. The additional income is to due to the increase
in interest rates from 2005 to 2006.

     PROVISION FOR INCOME TAXES

         The Company has begun to account for deferred tax benefits available
from its net operating loss carryforward pursuant to SFAS No. 109. It is
anticipated that the Company will recognize approximately $200,000 in such
benefits this year, offset by any charges for the corporate alternative minimum
tax.

     NET INCOME

         For the three months ended September 30, 2006, we recorded a net profit
of $330,000, or $.07 per share, basic and diluted, compared to a net income of
$148,000 or $.03 per share, basic and diluted, for the three months ended
September 30, 2005. The increase in net profit is attributable to growth in
sales and the income tax benefit being recognized in the current period.
Earnings per share before the benefit of the deferred tax asset would have been
$.06 per share.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

         The following table compares our statement of operations data for the
nine months ended September 30, 2006 and 2005. The trends suggested by this
table may not he indicative of future operating results, which will depend on
various factors including the relative mix of products sold (accounting/finance,
engineering, banking/insurance/securities or corporate training) 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.


                                       15


<PAGE>

<TABLE>
<CAPTION>

                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                          ----------------------------------------------------------------------------
                                                     2006                            2005
                                          ----------------------------   -----------------------------
                                            AMOUNT        PERCENTAGE        AMOUNT         PERCENTAGE       CHANGE
                                          ------------    ------------   --------------    -----------    ------------
<S>                                       <C>                <C>          <C>               <C>             <C>
Net revenues                              $ 8,630,243        100.0%       $ 7,972,330       100.0%            8.3%
Cost of revenues                            3,584,891         41.5%         3,174,468        39.8%           12.9%
                                          ------------    ------------   --------------    -----------
Gross profit                                5,045,352         58.5%         4,797,862        60.2%            5.2%
                                          ------------    ------------   --------------    -----------
Selling, general and administrative         4,263,962         49.4%         3,952,854        49.6%            7.9%
Depreciation and amortization                 480,792          5.6%           434,898         5.5%           10.6%
                                          ------------    ------------   --------------    -----------
Total operating expenses                    4,744,754         55.0%         4,387,752        55.0%            8.1%
                                          ------------    ------------   --------------    -----------
Operating income                              300,598         3.5%            410,110         5.1%          (26.7%)
Other (expense), net                          235,686         6.6%            127,628         1.6%           84.7%
                                          ------------    ------------   --------------    -----------
Net income before income tax benefit          536,284         6.2%         $  537,738         6.7%            (.3%)
Income tax benefit                            132,250         1.5%              --             --          100.00%
                                          ------------    ------------   --------------    -----------
Net income                                $   668,534         7.7%         $  537,738         6.7%           24.3%
                                          ============    ============   ==============    ===========
</TABLE>

     NET REVENUES

         Net revenues for the nine months ended September 30, 2006 increased
approximately $658,000, or 8.3%, compared to net revenues for the nine months
ended September 30, 2005. This was primarily due to revenues from our new Skye
subsidiary of approximately $875,000, growth in our accounting education
division of approximately $230,000 offset by a decline in our video production
and duplication division of $433,000. Online sales continue to be an important
factor contributing to our overall revenue growth, a trend that began in 2003.
In the 2006 and 2005 periods, net revenues from online sales were approximately
$2,217,000 and $2,125,000 or 26% and 27% of net revenues respectively. In the
2005 period online sales included a non-repetitive development fee and usage
charge for a course designed for one customer in excess of approximately
$200,000.

         In the nine months ended September 30, 2006, net revenues from our
accounting/finance and related products were $6.2 million or 72% of sales,
compared to $6.0 million or 75% of sales in the comparable 2005 period. Sales of
our subscription based products increased from $5.2 million in 2005 to $5.5
million in 2006. This increase is due to various factors, including converting a
number of our existing video customers to our online services, partnering with
more professional organizations and our continued marketing efforts to increase
sales. Revenue from other projects in our accounting division which are not
subscription based, decreased from $743,000 in 2005 to $702,000 in 2006. These
sales fluctuate from period to period are not indicative of any trends.

         Skye, which commenced operations on March 1, 2006, generated $875,000
in net revenue for the period. Also, sales from our Sage Online course catalogue
acquired in March 2006 generated $66,000 of revenue.

         For the first nine months of 2006, Working Values contributed $483,000
to net revenues compared to $287,000 in the comparable period of 2005. This
income is derived primarily from custom consulting work. Custom work is
non-repetitive and subject to market conditions and can vary from quarter to
quarter.

         Net revenues from sales of our engineering products, which are not
subscription-based, were $401,000 in the first nine months of 2006 compared to
$418,000 in the first nine months of 2005. This decrease is not indicative of
any trends in this division, but is a result of timing differences in the
placement of orders from customers.

         Net revenues from video production and duplication for the first nine
months of 2006 were $535,000 compared to $969,000 for the first nine months of
2005. This decrease is primarily attributable to the general decline in the
video duplication business, as well as a result a result of the change in
management in that department. In March 2006 we hired a new vice president of
video production. Consulting revenues decreased by $259,000 from $327,000 in the
2005 period to $69,000 in the 2006 period. This decrease is in not indicative of
any trends but based on the completion of certain custom projects. Our
consulting/technology division performs various services for the Company and its
various divisions which are not reflected in these financial statements.


                                       16


<PAGE>


     COST OF REVENUES

         For the period, we maintained our gross profit percentage, even after
including the operating results of Skye that operates on a lower gross profit
percentage. This is typical of non-subscription based products.

         Compared to the nine months of 2005, cost of revenues in the first nine
months of 2006 increased by $410,000. The increase is primarily attributable to
both personnel and sub-contracted labor costs related to various projects of
Skye. Costs of revenues for the 2006 period included approximately $10,000 of
costs directly related to developing Working Values' ethics courses and
approximately $21,000 related to integrating Sage's banking courses into our
technology systems. Of the latter amount, $13,000 was personnel costs and $8,000
reflects payments to third party consultants and other expenses. We are also
expending significant resources on updating our course catalog. The expenses
that showed the greatest variations from 2005 to 2006 and the reasons for those
variations were as follows:

         o        OUTSIDE LABOR AND DIRECT PRODUCTION COSTS. The cost of such
                  outside labor, which is primarily video production and
                  technology personnel, increased $281,000. This increase is
                  again directly related to the completion of a number of custom
                  projects of Skye and includes the outsourcing of certain
                  technology projects overseas where the labor rates are
                  reduced. Direct production costs, which are costs related to
                  producing videos or custom technology projects other than
                  labor costs, such as the cost of renting equipment and
                  locations and any outside costs related to technology or Skye
                  projects, increased $68,000. These variations are related to
                  the type of video 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.

         o        ROYALTIES. Royalty expense increased for the nine months ended
                  September 30, 2006 compared to the comparable 2005 period by
                  $11,000. This increase is due to a growth of sales in our
                  accounting products and the mix of products in the engineering
                  area that have various royalty arrangements.

         o        SALARIES. Overall, payroll and related costs attributable to
                  production personnel increased by $87,000. Although we have
                  reduced salaries and related costs in our video production
                  department by $115,000 as a result of decreased business, that
                  savings is offset by the salaries and related costs in our
                  Skye subsidiary of approximately $231,000. Salaries in the
                  combined areas of technology and Working Values decreased by
                  approximately $30,000 in the 2005 period as compared to the
                  2005 period.

         o        OTHER PRODUCTION RELATED COSTS. These are other costs directly
                  related to the production of our products such as purchases of
                  materials, travel, shipping and other. These costs increased
                  by $32,000 from $156,000 in 2005 to $188,000 in 2006,
                  primarily as a result of travel costs related to custom
                  projects.

     GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative expenses for the first nine months of 2006
were $4.3 million as compared to $4.0 million or an increase of $311,000, over
the comparable period in 2005. As a percentage of net revenues these costs were
relatively flat. Personnel costs increased by $365,000 from 2005 to 2006. This
increase is primarily a result of additional personnel costs as a result of our
recent acquisitions. Although we have increased salaries and personnel in our
sales and marketing and finance departments, these were offset by reductions in
other personnel costs. Our other operating costs decreased by approximately
$49,000, including a $19,000 charge for recording the expense of stock options
required by SFAS No. 123R. We have reduced the costs of our being a public
company by lowering our investor relations expense by $45,000 from the prior
year, and we continue to look for opportunities to reduce our overhead further.
Although, we make every effort to control our costs, we anticipate that general
and administrative expenses will continue to increase primarily as a result of
our recent acquisitions.

     DEPRECIATION and AMORTIZATION

         Depreciation and amortization expenses increased by $46,000 in the
first nine months of 2006 compared to the comparable period in 2005 as a result
of increased amortization expense from our recent acquisitions and capitalized
course costs. We expect our depreciation and amortization expenses on our


                                       17


<PAGE>


fixed assets to continue to increase. Although many of our older assets are
either fully or almost fully depreciated and we do not anticipate replacing them
at the same rate, this is offset by the amortization of the intangibles acquired
in these acquisitions.

     INCOME FROM OPERATIONS

         For the nine months ended September 30, 2006, net income from
operations was $301,000 compared to $410,000 in the comparable period of 2005.
This decrease is primarily attributable to the decline in revenues from our
video production and consulting divisions; internal costs incurred in
integrating our new product acquisitions; and from increased general and
administrative costs. Our quarterly earnings are affected by the mix of custom
projects compared to subscription and education-based sales.

     OTHER INCOME/EXPENSES

         For the first nine months of 2006, we had net interest income of
$236,000 compared to net interest income of $128,000 in the nine months of 2005
after expending approximately $720,000 for acquisitions in February 2006 and
$538,000 for the purchase of treasury stock in the third quarter. This is to due
to the increase in interest rates from 2005 to 2006.

     PROVISION FOR INCOME TAXES

         The Company has begun to account for deferred tax benefits available
from its net operating loss carryforward pursuant to SFAS No. 109. It is
anticipated that the Company will recognize approximately $200,000 in such
benefits this year, offset by any charges for the corporate alternative minimum
tax.

     NET INCOME

         For the nine months ended September 30, 2006, we recorded a net profit
of $669,000, or $.13 per share, basic and diluted, compared to a net income of
$538,000 or $.11 per share, basic and diluted, for the nine months ended
September 30, 2005. The increase in net profit is attributable to the benefit of
the deferred tax asset. Earnings per share before the benefit of the deferred
tax asset would have been $.11 per share.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

         Historically, we have financed our working capital requirements through
internally generated funds, sales of equity and debt securities and proceeds
from short-term bank borrowings. In October 2004, we completed our initial
public offering, which resulted in net proceeds to us of approximately $6
million. Through September 30, 2006, we have used approximately $720,000 of
these funds to make acquisitions.

         Our working capital as of September 30, 2006 was approximately $4.43
million compared to $4.3 million at December 31, 2005. Our current ratio at
September 30, 2006 was 1.96 to 1 compared to 2.02 to 1 at December 31, 2005. 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, $3.9 million at
September 30, 2006 compared to $3.7 million at December 31, 2005, was deferred
revenue, which is revenue collected or billed but not yet earned under the
principles of revenue recognition. Most of this revenue is in the form of
subscription fees and will be earned over the next 12 months. The cost of
fulfilling our monthly subscription obligation does not exceed this revenue and
is booked to expense as incurred. For some of our products, there are no
additional costs, other than shipping costs, required to complete our
obligations, as the material already exists.

         The primary components of our operating cash flows are net income
adjusted for non-cash expenses, such as depreciation and amortization, and the
changes in accounts receivable, accounts payable and deferred revenues. For the
nine months ended September 30, 2006, net cash provided by operating activities
was $995,000 and we had a net cash decrease of $132,000, which included an
outlay of approximately $720,000 for acquisitions, $538,025 for the purchase of
treasury stock and the receipt of $245,000 for the repayment of the note
receivable and accrued interest from stockholder. Included in the decrease is
approximately $91,000 for asset purchases and course capitalization. We also
received $53,000 from the exercise of stock options. Our accounts receivable and
deferred revenue have increased by


                                       18


<PAGE>


approximately $905,000 from the beginning of the year, indicating a growth in
sales that will be recognized in subsequent periods.

         Capital expenditures for the nine months ended September 30, 2006 were
approximately $91,000, which consisted primarily of computer equipment purchases
and the capitalization of internally produced courses for Working Values and our
SmartPros Advantage library of courses. Although, we continually upgrade our
technology hardware, we do not anticipate any significant capital expenditures
relating to equipment purchases over the next 12 months.

         At September 30, 2006, our only indebtedness consisted of capital lease
obligations, the balance of which was $33,000 compared to $64,000 at December
31, 2005. We have two outstanding leases with IDB Leasing, which had an
aggregate outstanding balance at September 30, 2006 of $17,000. One lease has a
48-month term that expires in 2007, an imputed interest rate of 7.0% and monthly
payments of $2,055. The second lease has a 36-month term that expires in 2007,
an imputed interest rate of 6.05% and a monthly payment of $313. In August 2004,
we financed the purchase of a van. The loan is for a term of 36 months, bears
interest at 4.99% per annum and requires 35 monthly payments of $358 and a final
payment of approximately $13,800 due in August 2007. The lender has agreed to
repurchase the vehicle at our option for the amount of the final payment less
any applicable expenses, at the end of the term. At September 30, 2006, the
balance on the loan was $17,000.

         As of September 30, 2006, we had commitments under three operating
leases - the leases for our executive offices in Hawthorne, New York, the
Working Values executive offices in Sharon, Massachusetts and Skye's executive
offices in Bridgewater, New Jersey - aggregating $1.2 million through February
2010.

         On October 20, 2006, we purchased substantially all of the tangible and
intangible assets of MGI Management Institute, Inc. (MGI) that were used by MGI
in its business. The purchase price was $100,000, payable in cash. MGI designed,
developed and conducted distance education courses covering a wide range of
professional topics for engineers, legal administrators, manufacturers and
others. MGI will be integrated into our existing engineering sales division.

         We believe that the remaining net proceeds of our initial public
offering in October 2004 together with cash flow from operations will be
sufficient to meet our working capital and capital expenditure requirements from
the next 12 months.

         In the future, we may issue additional debt or equity securities to
satisfy our cash needs. Any debt incurred or issued may be secured or unsecured,
at a fixed or variable interest rates and may contain other terms and conditions
that our board of directors deems prudent. 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.  CONTROLS AND PROCEDURES

         EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Management, with the
participation of the chief executive officer and the chief financial officer,
carried out an evaluation of the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period
covered by this quarterly report (the "Evaluation Date"). Based upon that
evaluation, the chief executive officer and the chief 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 chief executive and chief 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.


                                       19


<PAGE>


                                     PART II
                                OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS.

         We are not currently a party to any legal proceeding that we deem
material.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

RECENT SALES OF UNREGISTERED SECURITIES

         There were no sales of unregistered securities during the period
covered by this Report.

USE OF PROCEEDS

         On October 19, 2004, our registration statement on Form SB-2,
commission file number 333-115454 (the "Registration Statement") registering the
offer and sale of units (each a "Unit" and collectively the "Units"), each Unit
consisting of three shares of our common stock, par value $.0001 per share, and
one and one-half common stock purchase warrants, was declared effective by the
U.S. Securities and Exchange Commission. The warrants included in the Units have
a term of five years and an exercise price of $7.125 per share. We sold all
600,000 Units covered by the Registration Statement. Paulson Investment Company,
Inc. was the representative of the underwriters of the offering. The gross
proceeds to us from the offering were $7.65 million and the net proceeds were
$6.0 million. As of the date hereof, we used $490,000 of the net proceeds to
repay indebtedness and approximately $700,000 for acquisitions. The remaining
$4.8 million will be used for working capital and general corporate purposes,
including acquisitions.

COMPANY PURCHASES OF ITS EQUITY SECURITIES

         On November 8, 2005, the Board of Directors approved a stock buy back
program under which $750,000 of our funds was allocated to purchase shares of
our common stock on the American Stock Exchange commencing December 1, 2005 and
ending November 7, 2006. During the quarter ended September 30, 2006, we
purchased 201,000 shares at a total cost of $538,025. Cumulatively, we have
purchased 252,725 shares for a total cost of $702,625.

              SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
<TABLE>
<CAPTION>
                                                                           (c)                      (d)
                                                                     TOTAL NUMBER OF        APPROXIMATE DOLLAR
                                  (a)                (b)            SHARES PURCHASED       VALUE OF SHARES THAT
                              TOTAL NUMBER         AVERAGE             AS PART OF          MAY YET BE PURCHASED
                               OF SHARES         PRICE PAID        PUBLICLY ANNOUNCED       UNDER THE PLANS OR
       PERIOD                  PURCHASED          PER SHARE         PLANS OR PROGRAMS            PROGRAMS
--------------------------    -------------    ----------------    --------------------    ----------------------
<S>                              <C>               <C>                   <C>                     <C>
Month #1
(July 1-31, 2006)                  --                --                    --                    $ 585,400

Month #2
(August 1-31, 2006)                1,000           $  3.03                 1,000                 $ 582,375

Month #3
(September 1-30, 2006)           200,000           $  2.68               200,000                 $  46,375
                              -------------    ----------------    --------------------

Total                            201,000           $  2.68               201,000
                              =============    ================    ====================
</TABLE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                       20


<PAGE>


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.


                                       21


<PAGE>


                                   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 7, 2006                     /s/ Allen S. Greene
                                             -------------------
                                             Chief Executive Officer

Date:   November 7, 2006                     /s/ Stanley P. Wirtheim
                                             -----------------------
                                             Chief Financial Officer
                                             (Principal Financial Officer)


                                       22