UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|                                             |                                                                                         
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|(Mark One)                                  
|x                                            | Annual
 Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934   
|                                             |                                                                                         
|For
 the fiscal year ended December 31, 2010
|                                            
|or                                          
|                                             |                                                                                         
|o                                            | Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File Number 001-32300

|                                    |                | 
|----------------------------------- | -------------- | 
|                                    | SMARTPROS LTD. | 
|                                    |                | 
|(Name of Registrant in its Charter)

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

|                                                           
|-----------------------------------------------------------
|12 Skyline Drive, Hawthorne, New York       10532          
|                                                           
|(Address of Principal Executive Office)          (Zip Code)
|                                                           
|(914)
 345-2620                                            
|                                                           
|Issuers
 Telephone Number Including Area Code             

Securities registered under
Section 12(b) of the Exchange Act:

|                                          |                        |  |  |                                            | 
|----------------------------------------- | ---------------------- |  |  | ------------------------------------------ | 
|                                          | Title
 of Each Class   |  |  | Name
 of Each Exchange on Which Registered | 
|                                          |                        |  |  |                                            | 
|Common
 Stock, par value $.0001 per share | NASDAQ
 Capital Market

Securities registered under
Section 12(g) of the Exchange Act: NONE

|                                                                                                                                |            
|------------------------------------------------------------------------------------------------------------------------------- | -----------
|Indicate by check mark if
 the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
 Securities Act.       | Yes
 o No x
|                                                                                                                                |            
|Indicate by check mark if
 the registrant is not required to file reports pursuant to Section 13 or
 15(d) of the Exchange Act. | Yes
 o No x

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes
x No o

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

Yes o No
o

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes o No
x

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

|                                                                       |                              | 
|---------------------------------------------------------------------- | ---------------------------- | 
|Large accelerated filer o                                              | Accelerated
 filer o         | 
|Non-accelerated filer o (Do not
 check if a smaller reporting company) | Smaller
 reporting company x | 

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange
Act).                         
                        Yes
o No x

The aggregate market value of
the voting and non-voting common equity held by non-affiliates of the registrant
was $10,975,390, based on the price at which the common equity was last sold,
or the average bid and ask price of such common equity on the Nasdaq Capital
Market as of June 30, 2010, the last business day of the Companys most
recently completed second fiscal quarter.

The number of shares
outstanding of each of the registrants classes of common equity, as of March
18, 2011: 4,919,659

DOCUMENTS
INCORPORATED BY REFERENCE

The information in response
to Part III of this Report are incorporated herein by reference to the
registrants Definitive Proxy Statement, to be filed on or before April 30,
2011, with respect to its 2011 Annual Meeting of Stockholders.

---



SMARTPROS LTD.

Form 10-K Annual Report

TABLE OF CONTENTS

|          |           |  |                                                                                                                                         |  |      | 
|--------- | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|          |           |  |                                                                                                                                         |  | Page
|          |           |  |                                                                                                                                         |  |     
|          |           |  |                                                                                                                                         |  |      | 
|PART
 I   |           |  |                                                                                                                                         |  |     
|          | Item
 1.  |  | Description
 of Business                                                                                                                |  | 2    | 
|          | Item
 1A. |  | Risk
 Factors                                                                                                                           |  | 20   | 
|          | Item
 1B. |  | Unresolved
 Staff Comments                                                                                                              |  | 23   | 
|          | Item
 2.  |  | Description
 of Property                                                                                                                |  | 23   | 
|          | Item
 3.  |  | Legal
 Proceedings                                                                                                                      |  | 23   | 
|          | Item
 4.  |  | (Removed
 and Reserved)                                                                                                                 |  | 23   | 
|          |           |  |                                                                                                                                         |  |      | 
|PART
 II  |           |  |                                                                                                                                         |  |     
|          | Item
 5.  |  | Market
 for Common Equity and Related Stockholder Matters and Issuer Purchases of
 Equity Securities                                    |  | 24   | 
|          | Item
 6   |  | Selected
 Financial Data                                                                                                                |  | 25   | 
|          | Item
 7.  |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operation                                                   |  | 25   | 
|          | Item
 7A  |  | Quantitative
 and Qualitative Disclosure about Market Risk                                                                              |  | 34   | 
|          | Item
 8.  |  | Financial
 Statements                                                                                                                   |  | 34   | 
|          | Item
 9.  |  | Changes
 in and Disagreements with Accountants on Accounting and Financial Disclosure                                                   |  | 34   | 
|          | Item 9A   |  | Controls
 and Procedures                                                                                                                |  | 34   | 
|          | Item
 9B  |  | Other
 Information                                                                                                                      |  | 35   | 
|          |           |  |                                                                                                                                         |  |      | 
|PART
 III |           |  |                                                                                                                                         |  |     
|          | Item
 10. |  | Directors,
 Executive Officers, Promoters, Control Persons and Corporate Governance;
 Compliance with Section 16(a) of the Exchange Act |  | 35   | 
|          | Item
 11. |  | Executive
 Compensation                                                                                                                 |  | 35   | 
|          | Item
 12. |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters                                        |  | 35   | 
|          | Item
 13. |  | Certain
 Relationships and Related Transactions, and Director Independence                                                              |  | 35   | 
|          | Item
 14  |  | Principal
 Accountant Fees and Services                                                                                                 |  | 36   | 
|          |           |  |                                                                                                                                         |  |      | 
|PART IV   |           |  |                                                                                                                                         |  |     
|          | Item
 15. |  | Exhibits
 and Financial Statement Schedules                                                                                             |  | 36   | 

i

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FORWARD LOOKING STATEMENTS

Certain
statements made in this Annual Report on Form 10-K are forward-looking
statements within the meaning of Section 21E of the Securities and Exchange
Act of 1934 regarding the plans and objectives of management for future
operations and 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 that involve numerous risks and uncertainties.
Our plans and objectives are based, in part, on assumptions involving the
continued expansion of our business. Assumptions relating to the foregoing
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 assumptions underlying the
forward-looking statements are reasonable, any of the assumptions 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.

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

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

1

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PART I

|        |                         
|------- | ------------------------
|Item 1. | Description
 of Business

Overview

We
provide learning and training solutions for specific markets including:
accounting/finance, legal, engineering, securities, and insurance  all of
which have licensing and mandatory continuing education requirements  as well
as banking and information technology professionals. We also provide training
in corporate governance, ethics, financial and compliance for the general
corporate market. We offer off-the-shelf courses, live training and produce
custom-designed programs with delivery methods best suited to the specific
needs of our clients. Our customers include professional firms and companies of
all sizes that purchase our courses for use by their employees, and individuals
who purchase our courses, programs or subscriptions on a retail basis. Our
e-marketing and e-commerce business sells ads on our Website and develops
customized newsletters and marketing programs for our clients.

Our
learning solutions for professionals are designed to meet the initial and/or
the ongoing licensing and continuing professional education requirements
imposed by governmental agencies and professional standards organizations.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Most of the courses in our
 accounting/finance library are designed to meet the standards and adhere to
 the requirements of all state boards of accountancy and those of various
 professional and certifying organizations.                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In the engineering area,
 most of our courses have been approved for continuing professional
 development credit by one or more organizations including: the American
 Society of Civil Engineers (ASCE), the National Society of Professional
 Engineers (NSPE), the American Council of Engineering Companies (ACEC), and
 the American Society of Mechanical Engineers (ASME). In addition, we offer
 courses that help candidates prepare for licensing exams in various
 engineering disciplines.                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Our financial services
 library consists of courses designed to meet the licensing or continuing
 education requirements for bankers and financial services professionals
 including insurance brokers, bankers and licensed security industry
 professionals.                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Our entire continuing
 legal education library is approved in 13 states and the United Kingdom, and
 some of the continuing legal education courses are currently approved in an
 additional nine states. Unlike accounting and engineering professions where a
 national organization oversees the approval process for continuing education
 courses, in the legal profession each states bar, judiciary or other
 organization controls the approval process.                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In the general corporate
 market, our training solutions are designed to meet corporate learning
 objectives applicable to specific skills and issues regarding integrity,
 compliance and corporate culture. Our corporate ethics and compliance
 training programs are designed to align corporate behavior with applicable
 laws and regulations and generally accepted codes of conduct. We also provide
 training solutions for our clients sales personnel and product training for
 their clients or the general consumer.

Our
products are available in multiple formats including print, CD-ROM, DVD and
online. We continue to have our products available on the Internet as we
believe that will be our fastest growing delivery channel. As a result of
various acquisitions, we now offer live seminars directed to accountants,

2

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legal professionals, and
financial services professionals delivered through a number of different
channels including public seminars and customized in-house programs. Our video
and online solutions are flexible, cost-efficient and easy to use. They represent
cost-effective alternatives to the traditional classroom setting avoiding
travel costs, scheduling difficulties and lost productivity. In addition, we
offer clients a robust, comprehensive learning content management system known
as the SmartPros Professional Education Center (PEC). The PEC provides clients
and their employees a platform to take continuing education over the Internet
and the ability to track their usage and performance. We intend to launch our
newest version of the PEC, known as eCampus, in the spring of 2011.

Corporate History

We
were organized in April 1981 under the laws of Delaware as Center for Video
Education, Inc. In 1998 we changed our name to Creative Visual Enterprises,
Ltd. In January 2000 we changed our name to KeepSmart.com, Inc., and in June
2001 we changed our name to SmartPros Ltd.

Industry Background

The
American Society for Training and Development, in its 2009 State of the Industry report,
estimated that in 2009 U.S. organizations spent $130 billion on employee
learning and development. The accounting and finance market includes: certified
public accountants, certified management accountants, certified internal
auditors and corporate accounting, finance and management professionals, most of
whom have mandatory continuing education requirements.

Accounting and Finance

According
to the Bureau of Labor Statistics, in 2009 there were over 2.1 million
accounting and finance professionals in the United States. The American
Institute of Certified Public Accountants claims it has over 369,000 members
representing approximately 60 percent of all the certified public accountants
in the United States. Approximately 42 percent of the membership of the AICPA
is serving in corporate positions, with the balance in professional services,
education, government and other. Based on this, we estimate there are currently
more than 500,000 CPAs and financial professionals that require continuing
professional education (CPE) credit to maintain their license to provide
professional services and hundreds of thousands of other financial management
professionals that require CPE credit to keep their certifications up to date
and in good standing.

To
maintain their licenses, accounting professionals must satisfy the CPE
requirements mandated by the state boards of accountancy of the states in which
they practice. Although states may differ in terms of specific course
requirements or the cycle of the licensing period, every state (other than
Wisconsin) and the District of Columbia and the U.S. Territories (other than
the Virgin Islands) generally requires on average 40 hours of continuing
professional education credit annually to maintain an accounting license. In 40
states, the District of Columbia and Puerto Rico courses offered by the
National Registry of CPE Sponsors, a registry of sponsors approved by the
National Association of State Boards of Accountancy (NASBA), automatically
qualify for CPE credit. We are an approved NASBA sponsor.

Through
our subsidiary, Loscalzo Associates, Ltd. (Loscalzo), and our Executive
Enterprise Institute (EEI) division, we offer live training to accountants and
financial professionals in both the public accounting and corporate sectors.

Engineering

According
to the Bureau of Labor Statistics, in 2009 there were 1.5 million engineers in
the United States and over 600,000 construction managers and engineers. In
addition, there are over 475,000

3

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engineering technicians who
may need additional specialized training. All 50 states require engineers to
take and pass a certification exam to become a licensed professional engineer.
The basic entry-level exam, Fundamentals of Engineering (FE Exam), is given
twice each year, in April and October. According to the National Council of
Examiners for Engineering and Surveying (NCEES), in 2010 approximately 40,000
engineers sat for the exams and 70 percent passed the FE Exam and 62 percent
passed the Professional Engineering Civil exam (PE Civil Exam). In addition,
engineers who pass the FE Exam must then take a second exam to be licensed as a
professional engineer in a specific area, such as civil engineering or
mechanical engineering. For example, the PE Civil Exam is the highest-level
exam for civil engineers. This exam is also given twice a year, in April and
October. According to NCEES, in 2008, 60 percent of the total candidates taking
the PE Civil Exam, which covers multiple disciplines, passed.

Many
states require licensed professional engineers to complete a minimum number of
professional development hours to maintain their professional licenses. Unlike
the accounting and finance market, where there is a reasonable amount of
uniformity, in the engineering field each of the states requiring professional
development hours sets its own standards. The number of hours required by the
states varies from 16 per year to 30 every two years. In most instances, the
states rely on various professional organizations to certify whether a
particular course qualifies for professional development credit.

Legal

Forty-five
states require some form of continuing legal education with requirements
ranging between 10 hours per year to 45 hours every two or three years. All
courses have to be approved by the respective bar association, judiciary or
other organizations in each state. In the legal profession each state, rather
than a national organization, exercises control over the requirements and
content approval of continuing legal education courses. This makes the approval
process more difficult.

Financial Services

In
addition to these professions, employees of financial services firms, including
banks, brokerage houses and insurance companies, have employees who hold
various licenses granted by the federal and/or state governments or
administrative agencies that require continuing education or need training to
prepare for their various professional licensing examinations.

Ethics & Compliance

Over
the last 10 years, legislators, government and market regulators, the
investment community and the general public have become more focused on issues
involving corporate governance, ethics and compliance. Allegations of sexual
harassment, accounting fraud and mismanagement, excessive executive compensation,
breach of fiduciary duties and insider trading at some of the largest
corporations and financial institutions has fueled this new consciousness. In
some cases, corporate mismanagement and misbehavior have resulted in
substantial investor losses and fines, penalties or damages. In response to
some of these occurrences, the United States Congress passed the Sarbanes-Oxley
Act of 2002, which imposes corporate governance standards on publicly traded
companies and authorizes the national exchanges and other regulatory bodies to
impose their own strict standards. As a result, public companies, mutual funds,
market specialists and corporations in general are more accountable to their
stockholders and regulatory overseers and the public.

Information Technology

To
the best of our knowledge there are no governmental continuing education
requirements applicable to IT personnel. However, certain corporate certificate
programs do require it which makes it necessary to keep abreast of the rapidly changing
environment in which IT professionals work.

4

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Professional
and corporate training historically was dominated by traditional classroom
instruction. However, advances in communications technology are changing the
manner in which corporate training is developed, delivered and tracked.
Further, competition demands that todays professionals spend more of their
time on revenue-generating matters. The increasing demands made on
professionals and corporate managers have led  and we believe will continue
to drive  the demand for CPE and corporate training solutions available in
flexible and cost-effective formats.

Our Business

Since
becoming a public company in 2004, our business has expanded significantly,
primarily through acquisitions. Today, we serve five professional markets and
provide training solutions to a wide range of corporate clients in varying
industries. We do this through our various divisions, all of which are devoted
to providing educational services.

Our
business is designed to satisfy the growing needs of:

|  |                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | professionals and their
 employers to comply with initial and continuing professional education
 requirements in a flexible cost-effective manner;                                                         
|  |                                                                                                                                                                                                            
| | businesses to provide
 their employees and managers with training programs addressing the needs of
 their respective industries, corporate governance, ethics and compliance
 issues; and                  
|  |                                                                                                                                                                                                            
| | professionals and
 businesses to be able to track and monitor their and their employees
 compliance with continuing education requirements and to assess the effectiveness
 of their educational programs.

To
address these needs, we have approximately 2,500 hours of programs currently
available in one or more formats including print, videotape, CD-ROM, DVD or
online, consisting of the following:

| |   |                                                          
| | - | ---------------------------------------------------------
| |  | 1,100 hours in
 accounting/finance,                      
| |   |                                                          
| |  | 600 hours in engineering,                                
| |   |                                                          
| |  | 600 hours in banking,
 securities and financial services,
| |   |                                                          
| |  | 100 hours in legal
 training, and                        
| |   |                                                          
| |  | 100 hours in information
 technology.                    

These figures do not take
into account custom-designed courses or live training programs. Loscalzo and
EEI provide live training programs for accounting and financial professionals
and Selbst provides live training programs for financial services. We develop
generic programs as well as customized courses based on specifications provided
to us by our clients in both financial and non-financial industries. Most of
our courses are designed to accommodate both group and self-study.

All
the courses in our accounting and finance professional libraries are designed
to meet the standards and requirements of all state boards of accountancy and
those of the American Institute of Certified Public Accountants (AICPA),
Institute of Management Accountants (IMA), Institute of Internal Auditors (IIA),
the Association of Financial Professionals (AFP) and the Association of
Government Accountants (AGA). We are a registered sponsor of continuing
professional education with NASBA, and in New York and Texas. NASBA also
confers the status of Quality Assurance Service on organizations that offer
self-study courses that meet the requisite standards. We have met those
standards and received that

5

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status. As a result, our
designated programs qualify for CPE credit in all 50 states for certified
public accountants, certified management accountants, certified internal
auditors and certified financial managers.

Our
engineering products include courses designed to help prepare engineers for the
basic entry-level licensing exam and the engineering professional licensing
exam. This includes the civil, mechanical, electrical, chemical and
environmental specialties. Our courses are designed to meet the ongoing
professional development requirements mandated by various states. We often
jointly develop with or license these programs from an independent third party.
Our engineering courses are available in print, CD-ROM, DVD and/or online. We
also produce courses for project management, supply chain management and
green engineering.

Our
SmartPros Legal and Ethics, Ltd. (SLE) subsidiary develops ethics and
compliance training programs and provides continuing legal education. These
programs are designed to align workplace behavior with legal standards and
prevailing community expectations regarding corporate conduct. We also develop
modular training strategies that track specific risk areas identified by the
client. Our library of customizable learning tools, in digital and print
formats, enables us to develop training solutions tailored to the individual
corporate cultures of each client at competitive prices. The result is an
integrated program that closely reflects the culture of, and the issues facing,
the client while still maintaining the cost advantages of a generic solution.

SLEs
Cognistar division provides learning solutions to the legal and corporate
compliance market. These include self-paced courses in a content-rich, engaging
environment. Taking full advantage of the Internet, these solutions are
provided at significantly lower cost than other continuing education
experiences. Cognistar products include accredited continuing legal education
programs and customized corporate training programs.

Our
Skye Multimedia, Ltd. (Skye) subsidiary custom designs training programs for a
number of industries including pharmaceutical, financial services and others.
Its newest product, iReflect (a joint venture of which we own 50 percent)
provides a new solution for sales training and coaching.

Our
information technology training division course library, WatchIT, includes more
than 100 courses providing relevant briefings to executives, technologists and
consultants with relevant up-to-date information in the ever-changing
technology landscape.

Our
Financial Services division offers over 300 course titles covering the
insurance, banking and securities industries. These courses can be delivered
online, in a multimedia Web-based format or through live training. Many of
these courses have been approved for credit by different organizations for
continuing education in their respective fields.

Strategic Partners

We have strategic
relationships with a number of professional organizations and societies with
whom we co-market, co-brand or jointly develop products. While no single
relationship is material to overall business, if all of these relationships
were to terminate simultaneously, our competitive position in the marketplace
would be adversely affected. Some of our partners and the nature of our
relationship with them are as follows:

Financial
Executives International and Institute of Management Accountants. FEI and
IMA both market SmartPros Financial Management Network (FMN). We are
responsible for producing the product with FEI and IMA, assisting in topic
selection and with providing speakers. We also are primarily responsible for
selling the product. We also sell our SmartPros Advantage (SPA) line of
products through FEI and IMA. EEI also offers live programs to FEI members.

6

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Institute
of Internal Auditors. IIA offers the online version of FMN and SPA to its
members through a co-branded PEC.

State
Societies of Certified Public Accountants. A number of state societies
offer SmartPros products through their own co-branded PEC.

Our Strategy

Our
objective is to be a leading provider of CPE and corporate training solutions
in the United States. To achieve this goal, we will pursue the following
strategies:

Expand
library of content.We believe that our future success
depends, in part, on our ability to develop and acquire new content. The new
content could either expand or supplement our existing libraries or could
constitute a new library for one or more additional vertical markets. Toward this
end, we continuously develop new courses and programs for our accounting,
engineering, legal, information technology, financial services and general
corporate libraries.

Develop
new products. We continue to develop new products that
utilize our existing content and we are always seeking avenues to develop new
content as well. Examples of new product development and new product lines
include iReflect, Hawthorne Center for Excellence, SmartPros eLP, CourseBuilder
2.0 and Green Engineering, all of which are discussed elsewhere in this Item 1.
We intend to introduce our newest version of our Web-based learning management
system in the spring of 2011. Known as eCampus, this new platform will enable
us to promote and access all of our online content and training solutions
through one seamless, user-friendly portal.

Expand
within existing markets and into new markets.We
continue to focus on expanding our market share in the verticals we currently
serve particularly engineering, legal, financial services and information
technology, where we feel our market share is relatively small. In addition, we
will investigate expanding into completely new markets that we think are
potentially lucrative such as healthcare, safety and personal development.

Make
strategic acquisitions. We believe that the most
efficient way for us to expand our libraries, increase our share of the markets
we currently serve, and penetrate new markets is through strategic acquisitions
as evidenced by the acquisitions we made in years 2006 through 2009. We
continue to seek strategic acquisition opportunities.

Keep
pace with technology.We believe that our ability to
deliver our products in multiple formats is critical to our continued success.
The broad acceptance of the Internet as a content delivery tool will continue,
making it an increasingly important medium for distributing our products. At
the same time we recognize that new technologies may emerge that will
complement our model for flexible delivery of content.

Expand
existing alliances and enter into new strategic alliances.We
believe that alliances with professional organizations and associations and
commercial content providers are important to our growth and competitive
position in the industry. We plan to try to broaden these existing
relationships and seek new ones.

7

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Our Products and Services

The
following are our products and services:

Accounting and Finance

Our
accounting and finance libraries, exclusive of Loscalzo and EEI (as described
below), contain over 1,100 credit hours of content, of which 900 are generally
available, and the balance is custom-designed for specific clients. Except for
SmartPros Advantage (discussed below), which is only available online, our
accounting and finance programs are available on DVD or online. In addition, we
can also deliver instruction through live or recorded Webinars. Our monthly
subscription-based products that are not delivered online exclusively are also
available in DVD format. This format can be used for either group or
self-study. The online format is for self-study only and is available as text
only, text with audio, or in a multimedia format that includes text, audio and
streaming video. All video courses come with a hard copy of the program and are
used primarily for group study. All online courses include downloadable text
materials, easy-to-follow course outlines, interactive quizzes and the ability
to track credits and print completion certificates. Video and online self-study
programs qualify for two hours of continuing professional education credits in
most states, while video group study qualifies for one hour of continuing
professional education credit. Our clients can purchase either a single program
or a subscription to a series of programs. Prices depend on the length of the
subscription (one, two or three years), the number of users and the number of
libraries covered.

Loscalzo.
With the acquisition of Loscalzo, we now offer a series of live seminars to
accountants on a variety of topics. These courses are offered through various
state CPA societies, to accounting firms, association of accounting firms and
corporations. We also conduct our own training seminars in two states and have
the ability to deliver instruction through live Webinars or recorded Webcasts.

Executive Enterprise Institute.EEI
offers a series of live training seminars in both the corporate and public
accountant marketplace. A few of the courses qualify for continuing legal
education credit as well. These seminars are usually one to three day events
held in various locations throughout the United States and include topics such
as international taxation as well as accounting standard updates. EEI can also
offer in-house training to meet its clients specific needs through various
mediums.

SmartPros
Advantage. SPA
is a skills-based learning library containing approximately 300 courses that
vary in length from one to eight credit hours. We produce these programs in our
own production facility and pay the authors or content providers of these
programs a royalty. This library is marketed primarily to corporate accounting
and finance professionals and public accountants. The courses are offered
either individually or on a subscription basis.

Financial
Management Network. FMN is a library of programs dealing with current, relevant
topics. We create four new courses a month for a total of 48 new segments a
year. This is equal to 48 group-study credit hours and 96 self-study credit
hours each year. We also maintain an online archive containing the most recent
72 programs representing 144 credit hours for our subscribers. The segments are
written and produced by our staff and generally involve an interview with an independent
industry professional. The material is presented in a question and answer
format. These programs are marketed primarily to corporate accounting and
finance professionals. FMN courses are offered either in video-based format or
online.

CPA
Report. CPAR is alibrary of programs covering
topics in public accounting and is distributed primarily to accountants in
public practice. Each month (except March) we add four new courses from among
the following topical areas: individual tax, business tax, estate and financial
planning, specialized tax topics, auditing and accounting and financial
reporting. We also offer an online archive containing the

8

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most recent 44
programs representing 88 credit hours. CPAR is offered either in a video-based
format or online.

CPA
Report Government and Not-for-Profit. This product is a library of programs
designed specifically for accounting
professionals employed by federal, state and local governmental agencies or
not-for-profit organizations. Each quarter we distribute four new programs: two
for government accountants and two for not-for-profit accountants. We also
publish an online archive containing 16 of the most recent programs
representing 32 credit hours. The CPAR Government and Not-for-Profit programs
are offered in either a video-based format or online.

Hawthorne
Center of Excellence. HCEis a series of courses
designed to provide professionals with advanced knowledge of critical
accounting, financial, business and other related topics by partnering with
esteemed subject matter experts and academics. By successfully completing
individual certificate courses, participants earn a distinguished designation
in subject matter areas that enhance their professional knowledge and career
track. Although we originally anticipated the first courses to be available in
late 2010, due to the state of the economy we have temporarily postponed the
launch of these products.

Custom
Products. In addition to the subscription-based
libraries above, we also produce customized programs for our clients. In some
cases, the client will author the content and retain us to videotape the
program and convert it into a digital format that can be distributed via the
Internet or internally through a corporate intranet. In other cases, we will
write and produce the entire program for the client. We then deliver this
custom content either through our proprietary learning content management
system (LMS), the clients own LMS, or through live training. These customized
products can be designed to qualify for CPE credit.

Engineering

Our
engineering library includes the following:

PE
Civil Exam Review. Our interactive PE Civil Exam
review course for civil engineers was developed jointly with the American
Society of Civil Engineers (ASCE) and the Boston Society of Civil Engineers
Section and is designed to prepare engineers for their professional licensing
exam. The PE Civil Exam review course, with over 50 hours of material, is an interactive multimedia tool that
simulates the actual professional engineering exam using demonstration problems
comparable to the problems found on the actual exam. The course includes seven
complete, self-contained course modules that cover the following subjects: geotechnical,
structural, transportation, water resources, environmental, and construction.
In addition, there are two bonus sections  economics and surveying review 
to help prepare for the exam and a construction hard copy supplement is
provided to comply with new NCEES exam requirements.

We
also offer a series of self-study PE Civil Exam preparation courses that cover
the civil, mechanical, electrical and chemical disciplines. This coursework,
which covers the same set of modules as our CD-ROM or online version, is a
paper-based, self-study format that provides for instructor mentoring via
e-mail, telephone or submission of mini-exams for grading. The environmental
course work is available on CD-ROM.

Online
Professional Development Hours. We have a library, consisting of 250
hours, of engineering and management courses that qualify for professional
development hours. For example, in the civil technical area we have over 50
hours of course material on various topics relating to technical practice. Over
half of the content in this library was developed with the ASCE. Other courses
in this library were developed with the ACEC.

9

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Project
Management for Engineers. This course was developed by, and is designed specifically
for, engineers. It was one of the first completely interactive online project
management courses. The online format is enriched with audio and interactive
graphics and allows the user to determine the pace of study. The program is
divided into 11 critical sections with over 60 individual learning modules. It
provides over 35 hours of continuing professional development credit.

Fundamentals
of Engineering Exam Review.This is a preparatory course for the
basic entry-level licensing exam that all engineers are required to take. It is
a Flash-based, interactive review course that is being marketed directly and
through professional associations to engineers and to engineering firms for
their internal skill-building and competency testing programs. It is available
in CD-ROM and online. We also private label the course so our strategic
partners can market it to their members. The self-study version of this course
also provides for instructor mentoring.

Supply
Chain and CPIM Certification.We provide to members of American Production
and Inventory Control Society (APICS) a series of five courses that can be
taken as either stand-alone coursework or together to become certified in
Production and Inventory Management (CPIM). The courses are designed to help the
user develop knowledge and skills in the essential areas of materials
management and integrated resource management. Each APICS self-study course
requires approximately 25 to 30 hours to complete.

Green
Engineering.In 2009 we launched a Green Engineering Website
(www.greenengineering.smartpros.com) to provide online courses to meet the
green and sustainable engineering and clean power education needs in the
engineering marketplace. The site includes a new series of exam preparation
courses for the LEED GA (Leadership in Energy and Environmental Design Green
Associate) certification in compliance with the U.S. Green Building Council
(USGBC) requirements. We also offer power management courses for mission
critical power and efficient sustainable energy education through a joint
distribution arrangement with Power Management Concepts, a technology company.
These courses are eligible for professional development credits.

Corporate
Governance, Compliance and Ethics

SLE develops corporate governance,
compliance and ethics programs for major corporations and other business
enterprises. SLE currently offers the following products and services:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Custom-built training and compliance programs for
 companies based on their specific needs through its Integrity Alignment
 Process. The intent is to meet the best practices standards of the Federal
 Sentencing Guidelines and other regulations. These products help create a
 culture of compliance through assessment methodologies and deployment of live
 and Web-based training and communication tools.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Tools to assess employee attitudes and awareness
 of critical integrity and antifraud risks and also an assessment that
 provides an objective snapshot of the values that underlie employee behavior,
 making it possible to translate qualitative data into quantitative data.                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Ethics training is a curriculum of learning
 experiences designed to meet specific integrity risks. Training can be
 designed to meet the individual needs of various audiences, including senior
 leaders, managers or all employees.                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Ready-to-deploy tools to help an organization
 customize its ethics program. These tools can be deployed as-is or customized
 to meet an organizations needs. The Financial Integrity Suite of Products
 offers enterprise distribution and administration of education content and
 information.                                                                                                               

10

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Compliance
and Ethics Effectiveness Quotient (CEEQ) is a best practices and principles
benchmark designed to help organizations build ethical and engaged cultures. It
does this by providing a framework for evolution into an organization whose
employees are highly aligned with the organizations values, standards, vision
and mission. It draws on industry best practices from various disciplines
including compliance, ethics, legal, risk management, human resources and
internal audit.

Legal

SLEs
Cognistar division offers approximately 100 online courses in continuing legal
education and business ethics. These courses are accredited for nearly 100 hours
of CLE credit in approximately 22 states. Not every course is approved in each
state. In addition, Cognistar develops customized courses for its clients on a
consulting basis.

Financial Services

Our
Financial Services division includes our FinancialCampus (FC) libraries and
Selbst. FC sells online training courses for the banking, insurance and
securities industries. Selbst primarily provides live training to those
industries.

This
division has over 300 courses totaling over 600 hours in the banking,
securities and insurance areas. Course offerings include: banking compliance,
general banking, general bank management, insurance, lending, retirement and
estate planning, securities, ethics, anti-money laundering, financial planning
and industry-related sales and service. Approximately 100 of these
courses have been accredited by various state departments of insurance for
continuing education credit. Many other courses have been approved by the
American College for PACE credit and the Certified Financial Planners (CFP)
Board of Standards for CFP credit. In addition, we have courses in our library
to prepare various insurance and financial services employees in taking their
licensing exams. These courses are offered in a number of different mediums
including Web-based, video, multimedia and workshop format.

Information Technology

Our
SmartIT division includes more than 100 courses from our WatchIT catalog. These
courses are designed to update and inform technology professionals about the
latest initiatives in their field.

General

Through
Skye we provide general corporate training to any number of industries
including pharmaceutical manufacturers, professional firms, brokerage and
financial services. These programs are custom produced to meet the clients
specific needs and may include product or sales training, technical proficiency
or other uses. These programs can be delivered in a variety of formats
including Web-based and give us the opportunity to cross sell our other
products and services to these companies. Skye, in a joint venture with another
company, has recently introduced its iReflect Training Software product. This
is a training tool designed to improve personal interactive skills.

Our
technology department also develops new products that can be used both
internally and are available for sale or license to our clients. Our SmartPros
eLP is a database driven eLearning delivery application capable of delivering
content to any Flash-enabled computer. This product provides greater
functionality for the user and the clients educational administrator. Our
latest offering, eCampus, combines all SmartPros properties in a single
Website and fosters better communication tools with enhanced cross-selling potential.

11

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Other

Most
of our programs are produced in our in-house production facility where we have
CD-ROM and DVD duplication equipment. In addition, the video production
department generates its own revenue by leasing the facility to third parties
and by producing third-party programs.

Our
technology department is principally a service department. Its primary function
is to convert our courses to digital format for distribution on CD-ROM, DVD and
the Internet. This department also maintains our various Websites, our learning
content management system, the PEC, for subscribers to our accounting/finance
and engineering products, and the Integrity Training Center for subscribers to
our ethics and compliance training programs. The PEC is a turnkey system
designed to manage the educational subscriptions, student accounts, e-commerce
and reporting needs of our clients. Using the PEC, our clients can review and
assess usage of our programs by their employees and their employees performance
and the effectiveness of these programs. The PEC is co-branded with the
clients logo and delivered using an application service provider hosted
infrastructure model that requires no client technology resources. For those
clients who have their own learning management system, we develop an interface
that allows them to access our system through their technology. These systems
are not generally marketed as stand-alone products. Rather, they are offered
together with our library of content.

The
technology department also generates fees through Website development and
hosting, and consulting arrangements. For example, companies that have internal
education programs have engaged us to convert those programs from workbook,
instructor-led or videotaped-based courses to an e-learning format. We also
offer our customers a broad range of support services, including technical
support for our learning content management system. We believe that providing a
high level of customer service and technical support is necessary to achieve a
high level of customer satisfaction and sustained revenue growth.

Product Development

Our
product development team includes Jeffrey Jacobs, Jack Fingerhut, John Fleming,
Denise Stefano and Glenn Shapiro in the accounting/finance area; Jay Gregory
and Michael Fowler in financial services; James Fallon in information
technology; Mark Luciano in the engineering area; and Stephen Henn in the
legal, ethics and compliance area.

Mr.
Jacobs, our vice president of product development, is an attorney and has been
developing continuing education programs for accounting and finance
professionals since 1987. Mr. Fingerhut, one of our co-founders and our
president, is a certified public accountant and oversees the development of our
accounting programs and new product development. Mr. Fleming is a certified
public accountant and president of Loscalzo. He is responsible for instructing,
writing and editing Loscalzo courses. Ms. Stefano is a certified public
accountant and a professor of accounting. She is responsible for updating
existing courses, and introducing new courses in our SPA catalog. In addition,
she is providing technical review services to Loscalzo. Mr. Shapiro is the
president of EEI, an attorney and has over 20 years experience in the
professional training industry. He is currently responsible for the development
of new courses and marketing of EEI. Mr. Henn, also an attorney, is the
president of SLE and joined us when we acquired Cognistar. He is responsible
for the development of course content and customized design in the legal area.
Mr. Luciano has been involved in corporate online education for the past 15
years and currently heads our Engineering and HCE divisions and is responsible
for developing new course content. Mr. Gregory and Mr. Fowler joined us when we
acquired FC. Mr. Fowler was formerly the senior director of business
development at Thomson NETg. Mr. Gregory was formerly vice president of
operations at Thomson NETg. Messrs. Gregory and Fowler co-head our Financial
Services division and Mr. Fowler is senior vice president of field sales. Mr.
Fallon is the producer of our WatchIT product and has been developing programs
for information technology professionals for over 10 years.

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In
addition, Seth Oberman, the president of Skye, develops and markets customized
courses and training programs for the pharmaceutical, financial services and
other industries that Skye services.

We
continue to devote our resources to developing programs. We hire independent
contractors to update, develop or assist in developing programs for us. In
those instances where we are relying on outside sources for content or where we
purchase existing content, our design and development team will develop or oversee
the development of an effective format that focuses on performance objectives,
instructional anti-practice strategies, interactivity and assessments. This
process includes creating and designing study guides and course material,
scripts and, in some cases, visual aids. The design and development team
includes subject matter experts, instructional designers, technical writers and
developers, graphic designers, content editors, and quality assurance
reviewers. After final assembly and integration of all course components, we
test to ensure all functional capabilities work as designed and deliver the
desired learning experience and result.

Sales and Marketing

Our
sales and marketing strategy is designed to attract new customers and build
brand awareness. We market our products through our alliances with professional
organizations and associations, through our own inside telemarketing sales
force, our outside sales force, direct marketing using catalogs, brochures,
email blasts and through ourWebsites. We believe that this strategy allows us
to focus our resources on the largest sales opportunities while simultaneously
leveraging our strategic relationships.

Our
sales and marketing department includes our president, a senior vice president
of sales, a vice president of marketing, and a sales staff of 19 people. The
sales staff is divided between inside (telesales) and field sales. The field
sales force focuses on larger accounts. In addition, our senior executives and
the heads of various divisions dedicate varying portions of their time and
efforts to sales and marketing activities. Our chief technology officer spends
a portion of his time selling and marketing our technology services. The
president of our EEI division also supports the marketing of strategic
initiatives being introduced to our customers.

To
market directly and to supplement the efforts of our sales staff, we use
comprehensive, targeted marketing programs, including: direct mail to our
customers and to members of the professional organizations with which we
partner; public relations activities; advertising on our Website and the
Websites of our strategic partners; participating in trade shows; and ongoing
customer communication programs. We build brand awareness through our strategic
relationships with the leading professional associations and organizations and
the leading commercial content providers within the markets we serve. These
strategic relationships include co-branding initiatives on new and existing
products, joint advertising campaigns and e-commerce relationships.

Technology

Our
current proprietary learning content management system, the PEC, employs a
logical and physical architecture that facilitates rapid development,
deployment and customization of Internet-based solutions for organizational
e-learning. Our core systems use a series of scalable application Web servers,
XML and MS-SQL data sources, and utilize industry standard Web browser and
Internet technologies for content delivery to the users. To ensure limited
downtime and product lines that are free of bandwidth limitations as they grow,
our redundant server system is located at secure Verizon co-location data
centers in Elmsford, New York and Denver, Colorado. These co-locations grant us
the freedom to completely control our server infrastructure while providing us
with 24/7 monitoring, support, redundant Internet connectivity and full
generator power backup.

The
PEC includes a scalable suite of applications and features that can be streamed
via the Internet or a corporate intranet. The basic features of the system
allow asynchronous streaming of video and audio

13

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courses
combined with media-timed synchronization of supplemental material, online
quizzes and final exams. Student interaction is enhanced through the use of
real-time questions to content experts with quick response. This full-service
solution includes a complementary array of communication tools such as email,
chat, message boards and learner tracking. The tracking of educational needs
both internal to the system and external education opportunities, such as
stand-up and leader-led training, are maintained using a student-managed course
tracking feature called My Courses.

Some
key features of the PEC include:

|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                            | Scalability.Scalability is accomplished
 using a combination of load-balancing hardware and software. Multiple,
 redundant servers are deployed to handle peak periods when the largest
 numbers of concurrent users are expected on the system.                                                                                                                                                               
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | SCORM/AICC Connectivity Layer.Where
 required, we use both Shareable Content Object Reference Model (SCORM) and
 Aviation Industry CBT Committee (AICC) Connectivity layers to ensure our
 content is deliverable through a variety of enterprise e-learning systems
 other than the PEC. Additionally, the core foundation is capable of
 exchanging data with third-party legacy systems with minimal effort.
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | Standard Relational Database Server.To
 enhance performance and ensure that users are served efficiently, the core
 foundation executes database-stored procedures to optimize intense database
 processing. The core foundation currently supports Microsoft SQL Server
 databases.                                                                                                                           
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | ASP-based Application Server.The business
 and application logic resides on an ASP.NET-based application server. This
 architecture allows us to deploy a site across multiple servers using
 Microsoft Windows 2000 and 2003 servers.                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | Electronic Commerce Enabled.The core
 foundation includes interfaces to external electronic payment services,
 enabling real-time electronic commerce. This allows the instant purchase of
 both one-off and subscription-based e-learning courseware.                                                                                                                                                         
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | Internet Multimedia Content Delivery.We
 deliver high quality, low bandwidth video and audio via the Internet, intranets
 and extranets. This multimedia content enhances and personalizes the learning
 experience. We use Flash Media as the primary delivery mechanism for this
 content.                                                                                                                   
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                            | Low Bandwidth/High Impact Animations.Using
 Macromedias Flash technology, we deliver both animated and spoken
 educational material with minimal load on corporate networks.                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                
|The
 Company intends to introduce its newest version of its proprietary learning
 management, known as eCampus, in the spring of this year. This new LMS will
 allow us to put all our content into one platform, which will permit greater
 accessibility to our entire library of content.

Competition

The
market for continuing professional education and corporate learning solutions
is large, fragmented and highly competitive. We expect these characteristics to
persist for the foreseeable future based on the following factors:

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
| | the expected
 growth of this market, as demand for highly skilled professionals increases;
|  |                                                                                           
| | the
 increased scrutiny on corporate culture, ethics and compliance; and                  

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|  |                                   
|- | ----------------------------------
| | relatively
 low barriers to entry.

Of
the markets we currently serve, we believe that all of our professional
education markets have some barrier to entry plus a multitude of regulatory
compliance requirements. It would be extremely difficult to compete in the
accounting education market without NASBA sponsor designation. Obtaining this
designation requires an investment of time and a modest amount of capital.
Nevertheless, for companies with even modest resources in terms of talent and
capital, these barriers may not be significant. In the legal profession, the
approval process for continuing education courses varies by state, unlike
accounting. In the engineering market, each state sets its own standards, as
does each engineering specialty. In the corporate education market, the
barriers to entry are virtually non-existent. The financial services industry
has various barriers to entry as employees requiring continuing education are
subject to federal and/or state regulations. In addition, customers expect
courses covering a broad range of topics related to regulatory concerns. The
course library and its delivery platform must meet very rigid controls in order
to be pre-approved. Information technology education has limited barriers to
entry as there are no regulatory requirements.

We
believe that the principal competitive factors in our industry are:

|  |                                                                   
|- | ------------------------------------------------------------------
| | Breadth,
 depth and relevancy of the course content               
|  |                                                                   
| | Performance
 support and other features of the training solution  
|  |                                                                   
| | Reputation
 of presenter                                          
|  |                                                                   
| | Adaptability,
 flexibility and scalability of the products offered
|  |                                                                   
| | Liquidity
 and capital resources                                  
|  |                                                                   
| | Deployment
 options offered to customers                          
|  |                                                                   
| | Customer
 service and support                                     
|  |                                                                   
| | Price                                                             
|  |                                                                   
| | Industry and
 professional certifications                         
|  |                                                                   
| | Brand
 identity                                                   
|  |                                                                   
| | Strategic
 relationships                                          

We
believe that we compete favorably on most of these issues. While price is
always a competitive factor, we do not believe that we should compete solely on
that basis and, in fact, many of our competitors sell their products for less
than we sell ours. Particularly, in the accounting, legal, financial services
and information technology markets, we believe that our reputation and the quality
of our offerings  as well as our other competitive advantages, including the
breadth, depth and relevancy of our libraries, strategic relationships, our
learning content management system, our customer service and support and the
flexibility of our delivery options  allow us to price our products
accordingly. In the engineering and general corporate markets where we have not
established our reputation to the same extent, we have less flexibility when it
comes to price. In the corporate compliance area we believe that what will
ultimately differentiate us from our competitors will be our ability to create
programs that are designed to meet the specific corporate cultures of our
clients.

15

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Our
competitors vary in size and in the scope and breadth of the products and
services they offer. They include public companies such as Saba Software, Inc.,
and private companies such as Skillsoft, CPA2Biz, Inc., Bisk Education, Inc.,
MicroMash, Center for Professional Education, Inc. and Western Publishing,
Inc., in the accounting market; RedVector.com, Inc., Professional Publications
Inc. and various professional organizations in the engineering market; and LRN,
The Legal Knowledge Company, Integrity Interactive Corporation, SAI Global,
Ltd. and PLI-Corpedia in the corporate compliance and ethics market. In the
financial services market our competitors include Kaplan Financial, RegEd,
WebCE, BVS, Sheshunoff, and various trade associations. In addition, we also
compete with universities, professional and other not-for-profit organizations
and associations, some of whom are also our strategic partners and/or clients.
Potential competitors include professional organizations such as The American
Institute of Certified Public Accountants as well as each states society of
certified public accountants. Other competitors include large diversified
publishing companies such as The Washington Post Company, Thomson Financial and
Pearson Education, other education companies (including traditional providers
of in-classroom instruction and remote learning solutions such as DeVry
University), and professional services companies, including accounting firms
who are looking for alternative sources of revenue. Competition may also come
from technology and e-commerce solutions providers. Internet-based learning
solutions have become increasingly popular in recent years along with the
increased demand for flexible, cost-effective alternatives.

Some
of our existing and potential competitors have greater resources, financial
capabilities, market penetration, and more extensive libraries providing
potential to establish a stronger competitive position than us. For example,
one of our competitors is CPA2Biz, an affiliate of the AICPA. SkillSoft, which
recently went private, and Saba are both relatively large companies. However,
SkillSofts primary focus is e-learning content and software products for
business and information technology professionals. Saba principally provides
software solutions that are used to manage people in large organizations,
although they do sell content as well. Since we currently do not market our
learning management system as a stand-alone product, we do not compete
presently with Saba in this area. However, many of our larger clients use the
Saba system or another learning management system. In those cases, we will
interface with the learning management system and allow the client to access
our courseware while cross-posting student progress between ours and the
clients learning management system.

The
largest solutions providers to the general corporate compliance training market
are Integrity Interactive and LRN. We rarely face either of these companies in
the marketplace since they both focus principally on Fortune 100 companies and
have extensive off-the-shelf libraries. However, their products tend to be more
expensive than ours, and we believe that our ability to adapt programs to
address unique cultures of different organizations is greater than theirs. Our
more frequent competitors are PLI-Corpedia, a joint venture between the
Practising Law Institute (PLI) and Corpedia Education, two leaders in the field
of compliance education, and SAI Global, Ltd. Both market off-the-shelf and
customized programs to mid- and large-cap public companies. PLI-Corpedia has
the advantage of access to PLIs vast library. Midi uses video-based modules
and tends to attract customers that like its particular training technique. We
believe that we have more diverse tools and can offer an integrated ethics and
compliance program that contains live, video and Web-based communication and
learning elements.

Our
principal competitors in continuing legal education are the Practising Law
Institute, West LegalEdCenter, ALI-ABA, CLEonline, and various state bar
associations.

Our
principal competitors in the area of financial services compliance training and
continuing education for bankers include Bankers Edge, Bankers Academy (The
Edcomm Group) and banking associations such as BAI, Bankers Training &
Certification Center, and various banking trade organizations.

Our
principal competitors in the area of engineering education are RedVector.com,
Inc., university-based extension programs, individual trainers and professional
organizations.

16

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Our
principal competitors in the area of information technology include SkillSoft
and Global Knowledge.

Our Competitive Advantages

We
believe that the following competitive advantages will help us achieve our goal
of becoming a leading provider of learning solutions for the professional and
business communities.

History
and reputation.We have been providing learning
solutions for accounting and finance professionals for almost 30 years. We
believe that in the accounting/finance market we have the reputation of being a
leading provider of continuing professional education programs, as evidenced by
our continued growth in that market and a high renewal rate. We believe that
our reputation in the accounting/finance market will assist us as we expand our
presence in the engineering, legal, financial services, information technology,
corporate ethics and governance, general corporate markets and also into new
markets.

We
have been providing learning solutions for engineering professionals since
1997. Our legal and financial services divisions have been in business for nine
and 26 years, respectively.

Professional
designations and strategic alliances.We believe that
our relationships with some of the largest and most respected professional
organizations and associations in the accounting and engineering professions
give us instant credibility in the marketplace, provide us with a distribution
channel for our products and are a source for programs and faculty.

Extensive
library.Our content library consists of over 2,500
hours of proprietary education content including skills-based and update
programs. We believe that our libraries are among the most extensive in the
industry and help attract new subscribers. In the market for continuing legal
education, we offer national courses; comparatively, those offered by the local
bar associations usually deal with issues particular to that state. We also
believe that our content and delivery technology is better than that of our
competitors.

Discussion
leaders with extensive experience in their practice areas. Loscalzo and EEI have over 25 years
experience in live training and have a large base of discussion leaders who are
considered experts in their respective fields.

Experienced
management. Our management team is comprised of
experienced and successful accounting and legal professionals and sales and
marketing and administrative executives. This has enabled us to develop high
quality programs, enter into strategic relationships with the major
professional organizations in the markets we serve, attract well-known
personalities around whom we develop new programs, cut costs and make strategic
acquisitions.

Value-added
services.In addition to our extensive library of
courseware, we also offer our customers a proprietary learning content
management system, an administrative tool that enables organizations to monitor
the use and efficacy of our programs.

Large
and diversified customer base.We have over 3,000
corporate customers. Our customers include Fortune 500 companies, professional
firms, small- and medium-sized companies and individuals. In the aggregate, we
estimate that our corporate clients employ tens of thousands of accounting and
finance professionals, representing a substantial universe of potential users.
In addition, our corporate customers are a diversified group in terms of the
industries and markets in which they operate. For example, our customers are
some of the leading businesses in the following industries: accounting, banking
and finance, law, insurance, technology, telecommunications, retail, aerospace,
natural resources, construction and chemicals.

17

---



End-to-end
service.All of our accounting/finance, legal,
information technology and corporate training programs are produced, filmed,
edited, duplicated and converted in-house. Our engineering and financial
services programs are usually licensed from or developed in conjunction with an
independent third party but are filmed, edited, duplicated and/or converted
into digital format in-house. Finally, we have a fulfillment center from which
we ship our course materials, DVDs and hard copies, to our customers. We
believe our vertically integrated operation results in a more efficient
production process and enhances the quality of our products.

Online
resource and content provider. We own and operate
multiple Websites, including primary domains and subdomains at: www.smartpros.com,
http://education.smartpros.com, http://accounting.smartpros.com, http://corporate.smartpros.com,
http://ir.smartpros.com, http://engineering.smartpros.com, http://greenengineering.smartpros.com,
http://marketing.smartpros.com, www.workingvalues.com, www.skyemm.com,
www.cognistar.com, www.mgi.org, www.pelicense.org, www.sageonlinelearning.com.,
www.financialcampus.com, www.watchit.com, www.financejobs.com,
www.fmnonline.com, www.ireflecttraining.com, www.pro2net.com,
www.accountingnet.com, www.smartprosinteractive.com, www.loscalzo.com and www.eeiconferences.com..

The
SmartPros family of Websites has over 70,000 pages of proprietary content and
links to professional organizations, associations and institutions, and is a
marketing and distribution channel for our products. We believe that these
Websites have become a destination for professionals based on the following
data:

|  |                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------
| | As a result
 of maintaining the Websites, we have built a database with over one million
 profiled users.           
|  |                                                                                                                     
| | The Websites
 log over 800,000 visits per month.                                                                    
|  |                                                                                                                     
| | Through our
 Websites, we serve approximately one million ad banners and send over 200,000
 opt-in emails per month.

Intellectual Property

We
own a variety of intellectual property, including trademarks, trade names,
copyrights, proprietary software, technical know-how and expertise, designs,
process techniques and inventions. We believe that the trademarks and trade
names we use to identify our products and services are material to our
business. We own all of the following trademarks, trade names and/or service
marks, which have either been federally registered or applications have been
filed with the United States Patent and Trademark Office seeking federal
registration: SMARTPROS, PRO2NET, LOSCALZO, KEEPSMART, WORKING VALUES,
PROFESSIONAL EDUCATION CENTER (PEC), FINANCIAL MANAGEMENT NETWORK (FMN), CPA
REPORT (CPAR), INTEGRITY TOOLKIT, INTEGRITY ALIGNMENT, COGNISTAR, SAGE,
ACCOUNTINGNET, FINANCE JOBS, WATCHIT, SMARTIT, HAWTHORNE CENTER OF EXCELLENCE,
iREFLECT, FINANCIALCAMPUS, FINANCEJOBS, SMARTPROS ECAMPUS, SMARTPROS ELP and
SMARTPROS ELPLIVE.

Despite
our efforts to protect our proprietary rights, unauthorized persons may attempt
to copy aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is extremely difficult
and the means we use to protect our proprietary rights may be inadequate. We
believe that, ultimately, our success depends to a greater extent on the
innovative skills, know-how, technical competence and abilities of our
personnel.

All of our
internally developed content is protected by copyright. While this may offer
some protection against unauthorized persons copying the material, it does not
prevent anyone from independently

18

---



developing
material on the same topic or in the same format. Regarding content created,
owned or licensed by third parties, we enter into license agreements that
permit us to market, use and distribute that content. These licenses may be
exclusive or non-exclusive. We usually obtain a representation from the
licensor that he or she has the right to license the content to us, that the
license granted to us does not violate the terms of any other license, that the
license granted does not violate any applicable law, rule or regulation or the
proprietary rights of any third party, including, without limitation, patents,
copyrights, trade secrets, or any license or sublicense, covenant or contract
with any third party and that there is currently no actual or threatened suit
by any such third party based upon an alleged violation by such licensor of any
such proprietary rights. However, we do not make any independent investigation
to verify if these representations are accurate. If the representation is not
true, we may be enjoined from using that content further and may also be liable
for damages to the true owner of the content or the exclusive licensee.

In
connection with the PEC, our license agreement restricts use of the system and
prohibits users from copying or sharing the system without our express written
consent. The PEC incorporates products and systems and technology that we
license and purchase from third parties. We cannot assure that we will be able
to continue to license or support this technology on terms that we consider
reasonable, if at all. If these licenses or maintenance agreements expire and
we cannot renew them, they are substantially modified or if they were
terminated for any reason, we would have to purchase, license or internally
develop comparable products and systems. Any one of these options may be
expensive and/or time consuming, which could have a material adverse effect on
our business and financial performance.

We
cannot prevent third parties from independently developing similar or competing
systems, software and content that do not infringe on our rights. In addition,
we cannot prevent third parties from asserting infringement claims against us
relating to these systems and software. These claims, even if they are
frivolous, could be expensive to defend and could divert managements
attention from our operations. If we are ultimately found to be liable to third
parties for infringing on their proprietary rights, we may be required to pay
damages, which may be significant, and to either pay royalties to the owner or
develop non-infringing technology, the cost of which may be significant.

Government Regulation

Government
regulation is important to our business. Every state sets its own continuing
professional education requirements, in terms of the number of credits needed
and the cycle in which those credits need to be earned, for its licensed
professionals. In addition, specific content will only qualify for continuing
professional education credit if it meets specific criteria, which varies from
state to state. In the accounting/finance area, most states have adopted the
NASBA standards to address the quality of
course content. We are a certified NASBA sponsor, meaning that the
courses we offer to the general public on a subscription basis qualify for
continuing professional education credits in those states that have either
adopted the NASBA standards or set their own standards similar to NASBAs, the
District of Columbia and Puerto Rico. In the engineering area, there is less
uniformity and each of our courses must be certified by the particular
professional organization that oversees that particular specialty.

The
market for continuing legal education programs is regulated by state bar
associations, state courts or other organizations in each state. The regulatory
landscape is complex and varies from state to state.

The
market for continuing education for the engineering professional is regulated
by each state. The NCEES provides the guidelines and testing for engineers to
obtain their professional licenses in all 50 states and various United States
possessions.

In
addition, various professionals in the insurance and security industries have
federal and/or state licensing as well as continuing education requirements.

19

---



Employees

As
of March 1, 2011, we had 89 employees of which 80 were full-time and nine were
part-time. We have 37 employees based in our executive offices in Hawthorne,
New York, and seven employees based in our Westborough, Massachusetts, office.
Skye employs nine people in their Bridgewater, New Jersey, office. Loscalzo has
eight employees in its Red Bank, New Jersey, office. In addition, we have 28
employees that work out of their homes in various states. We believe that our
relationship with all of our employees is generally good.

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

CERTAIN
RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY

The
following factors may affect our growth and profitability and should be considered
by any prospective purchaser of our securities:

Investing
in our common stock has a high degree of risk. Before making an investment in
our common stock, you should carefully consider the following risks, as well as
the other information contained in this annual report, including our
consolidated financial statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations. Any
of the risk factors described below could significantly and adversely affect
our business, prospects, financial condition and results of operations. As a
result, the trading price of our common stock could decline and you may lose
all or part of your investment.

Our
operating results may fluctuate significantly, limiting the ability to evaluate
historical financial results and increasing the likelihood that our results
will fall below investors expectations, which could cause the price of our
shares to drop.

In
2010 our net revenues, operating loss and net loss fluctuated quarterly
primarily due to our Loscalzo subsidiary and EEI division, both of which are in
the live training business and we expect this trend to continue in 2011 and
thereafter. EEIs revenue is primarily recognized in the second and fourth
quarters of the year and Loscalzo has virtually no revenue in the first
quarter. In both cases we expense payroll and other costs as incurred
regardless of when the revenue is recognized.

Our
operations may be adversely impacted by general economic conditions and other
factors.

Our
customer base consists primarily of large corporations, professional services
and other firms, many of whose employees are required to take continuing
education on a periodic basis. During economic downturns, some of our clients
attempt to do without training as a cost-saving measure, and others seek a less
costly provider of the type of training services we offer. They may also
curtail the demand for customized products and the number of users may diminish
as a result of reduced staff. In addition to budgetary constraints caused by
economic conditions, attendance at live seminars can be affected by other
factors such as health scares.

The
industry in which we operate is highly competitive and has relatively low
barriers to entry. Increased competition could result in margin erosion and
loss of market share and brand recognition.

Our
competitors include professional firms, public and privately held companies,
universities (traditional and online), other live training companies and
professional and not-for-profit organizations and associations. Many of our
existing and potential competitors have greater financial resources, larger
market share, broader and more varied libraries, technology and delivery
systems that are more flexible or cost-effective, stronger alliances, and/or
lower cost structures than we do  which may enable them to establish a

20

---



stronger
competitive position than we have, in part through greater marketing opportunities.
If we fail to address competitive developments quickly and effectively, we will
not be able to grow.

Our
growth strategy assumes that we will make targeted strategic acquisitions.

A
key feature of our growth strategy is strategic acquisitions. We may not be
able to maintain our current rate of growth. If we fail to execute on this
strategy, our revenues may not increase and our ability to sustain
profitability may be impaired.

An
acquisition strategy is inherently risky. Some of the risks we may face in
connection with acquisitions include:

|  |                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------
| | identifying
 appropriate targets in an efficient and timely fashion;                                                             
| 
| | negotiating
 terms that we believe are reasonable;                                                                               
| 
| | failing to
 accurately assess the true cost of entering new markets or marketing new
 products;                                  
| 
| | integrating
 the operations, technologies, products, personnel and customers of the
 acquired enterprise;                        
| 
| | maintaining
 our focus on our existing business;                                                                                 
| 
| | losing key
 employees; and                                                                                                       
| 
| | reducing
 earnings because of disproportionately large depreciation and amortization
 deductions relating to the acquired assets.

We may not be
able to identify any appropriate targets or acquire them on reasonable terms.
Even if we make strategic acquisitions, we may not be able to integrate these
businesses into our existing operations in a cost-effective and efficient
manner. In addition, we may not achieve the benefits that we anticipated when
we made these acquisitions, causing a negative impact on our results of operations.

If
we fail to keep up with changes affecting the markets that we serve, we will
become less competitive, adversely affecting our financial performance.

In
order to remain competitive and serve our customers effectively, we must respond
on a timely and cost-efficient basis to changes in technology, industry
standards and procedures and customer preferences. We need to continuously
develop new course material that addresses new developments, laws, regulations,
rules, standards, guidelines, releases and other pronouncements that are
periodically issued by legislatures, government agencies, courts, professional
associations and other regulatory bodies. In some cases these changes may be
significant and the cost to comply with these changes may be substantial. We
cannot assure that we will be able to adapt to any changes in the future or
that we will have the financial resources to keep up with changes in the
marketplace. Also, the cost of adapting our products and services may have a material
and adverse effect on our operating results.

Our
future growth and competitiveness depends on our ability to adapt to new
technologies and changes to existing technologies and new applications to meet
market demand.

One
of our principal competitive advantages is our ability to deliver content in
multiple formats. This flexibility has enabled us to keep pace with changes in
technology and has contributed to our growth. Keeping pace with technological
developments can be difficult and expensive, adversely impacting our

21

---



operating
results. However, our continued growth depends on our ability to anticipate and
adapt to our customers needs and preferences. If we fail to do that, the
potential adverse impact could be significant to our business, operating
results and financial condition. We cannot assure that we will be able to keep
pace and adapt to changes in technology or customer preferences.

Our
future success depends on retaining our existing key employees and hiring and
assimilating new key employees. The loss of key employees or the inability to
attract new key employees could limit our ability to execute our growth
strategy, resulting in lost sales and a slower rate of growth.

Our
success depends in part on our ability to retain our key employees including
our chief executive officer, Allen S. Greene, and our president, Jack
Fingerhut. Mr. Greene is an experienced senior corporate executive who has been
instrumental in cutting costs, raising capital and negotiating and consummating
the acquisitions that have helped us focus on our core competencies while at
the same time expand into new markets. Mr. Fingerhut is one of our founders and
is actively involved in sales and marketing and identifying acquisition targets.
Mr. Fingerhut also has overall responsibility for the accounting products. He
has extensive contacts within  and knowledge of  the accounting profession.
Although we have employment agreements with both of these executives, each
executive can terminate his agreement at any time. Also, we do not carry, nor
do we anticipate obtaining, key man insurance on either Mr. Greene or Mr.
Fingerhut. It would be difficult for us to replace either one of these
individuals should they resign or become incapacitated. In addition, as we grow
we may need to hire additional key personnel. We may not be able to identify
and attract high quality employees or successfully assimilate new employees
into our existing management structure. In addition, if any of our division
heads were to leave, it could affect our revenues adversely.

Our
sales cycle can be long and unpredictable, which could delay our growth and
make it difficult for us to predict earnings. This could lead to stock price
volatility.

Our
sales cycle is unpredictable and depends on various factors including the type
and size of the customer and the nature of the product being sold. Generally,
sales to larger entities and sales of custom-designed products take longer to
close. Most of our revenue is derived from corporate customers. Identifying the
decision maker in these enterprises is often time consuming. Other variables in
the purchasing process include the timing of disbursement of funds and the
person-to-person sales contact process. Sales may take much longer than
anticipated, may fall outside the approved budget cycle and, therefore, may not
occur due to the loss of funding. This unpredictability has in the past caused,
and may in the future cause, our net revenue and financial results to vary
significantly from quarter to quarter.

Our
strategic relationships are usually short-term, non-exclusive arrangements and
our strategic partners may provide the same or similar services to our
competitors, diluting any competitive advantage we get from these
relationships.

We
rely on our strategic partners to provide us with access to content and to sell
our content. Our strategic partners may enter, and some have entered, into
identical or similar relationships with our competitors, which could diminish
the value of our products. Our relationships with our strategic partners are
primarily covered by annual agreements that are subject to renewal. While we do
not depend on any single strategic relationship for a significant amount of
revenue or to develop content, if a number of these organizations were to
terminate their relationships with us at the same time, our ability to develop
new content on a timely basis and our ability to distribute content would be
impaired. We may not be able to maintain our existing relationships or enter
into new strategic relationships.

22

---



We
may be unable to protect our intellectual property adequately or cost
effectively, which may cause us to lose market share or reduce our prices.

Our
success depends in part on our brand identity and our ability to protect and
preserve our proprietary rights. We cannot assure that we will be able to
prevent third parties from using our intellectual property rights and
technology without our authorization. We do not own any patents on our
technology. Rather, to protect our intellectual property, we rely on trade
secrets, common law trademark rights, trademark registrations, copyright
notices, copyright registrations, as well as confidentiality, work for hire,
development, assignment and license agreements with our employees, consultants,
third-party developers, licensees and customers. However, these measures afford
only limited protection and may be flawed or inadequate. Also, enforcing our intellectual
property rights could be costly and time consuming and could distract
managements attention from operating business matters.

If
we were deemed an investment company under the Investment Company Act of 1940,
applicable restrictions could make it impractical for us to continue our
business as contemplated and could have an adverse effect on our business.

We
are not an investment company under the Investment Company Act of 1940 and we
intend to conduct our operations so that we will not be deemed an investment
company. However, if we were to be deemed an investment company, restrictions
imposed by the Investment Company Act of 1940, including limitations on our
capital structure and our ability to transact with affiliates, could make it
impractical for us to continue our business as contemplated and would harm our
business and the price of our common stock.

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

None.

|        |                        
|------- | -----------------------
|Item 2. | Description of Property

Our
executive offices, production facility, technology center and fulfillment
center are located on Route 9A in Hawthorne, New York, where we lease 17,850
square feet. The lease expires January 31, 2019. We lease 2,000 square feet in
Westborough, Massachusetts, where SLE is based. The lease expires January 31,
2012. Skye leases 2,320 square feet in Bridgewater, New Jersey, at which the
lease expires in January 2014. Finally, we lease 2,600 square feet in Red Bank,
New Jersey, for our Loscalzo subsidiary, which expires on June 30, 2011.

|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

At
the present time, we are not a party to any material legal proceedings.

|        |                       
|------- | ----------------------
|Item 4. | (Removed and Reserved)

23

---



PART II

|        |                                                                                                    
|------- | ---------------------------------------------------------------------------------------------------
|Item 5. | Market for Common Equity and Related Stockholder Matters and Issuer
 Purchases of Equity Securities

| |     |                   
| | --- | ------------------
| | (a) | Market Information

Our
common stock is currently traded on the NASDAQ Capital Market under the symbol
SPRO.

The
following table sets forth, for the periods indicated, the high and low sales
information for our Common Stock. Such quotations reflect inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.

|                            |  |                    |   |      |  |  |  |   |      |  | 
|--------------------------- |  | ------------------ | - | ---- |  |  |  | - | ---- |  | 
|Price Range of Common Stock
|                           
|                            |  | Sales
 Information |  
|                            |  |                    |  
|                            |  | High               |   | Low  | 
|                            |  |                    |   |      | 
|2010                        |  |                    |   |      |  |  | 
|First Quarter               |  |                    | $ | 3.43 |  |  |  | $ | 3.05 |  | 
|Second Quarter              |  |                    | $ | 3.09 |  |  |  | $ | 2.39 |  | 
|Third Quarter               |  |                    | $ | 2.83 |  |  |  | $ | 2.27 |  | 
|Fourth Quarter              |  |                    | $ | 2.54 |  |  |  | $ | 2.27 |  | 
|                            |  |                    |   |      |  |  |  |   |      |  | 
|2009                        |  |                    |   |      |  |  |  |   |      |  | 
|First Quarter               |  |                    | $ | 2.83 |  |  |  | $ | 2.50 |  | 
|Second Quarter              |  |                    | $ | 3.70 |  |  |  | $ | 2.62 |  | 
|Third Quarter               |  |                    | $ | 5.06 |  |  |  | $ | 3.50 |  | 
|Fourth Quarter              |  |                    | $ | 4.65 |  |  |  | $ | 3.11 |  | 

As
of March 18, 2011, the closing sale price per share for our common stock, as
reported on the NASDAQ Capital Market was $2.18.

| |     |        
| | --- | -------
| | (b) | Holders

As of March
18, 2011, the number of record holders of our common stock was 127.

| |     |          
| | --- | ---------
| | (c) | Dividends

The
holders of our common stock are entitled to receive dividends as may be
declared by the Board of Directors. During the years ended 2009 and 2008, we did
not pay any dividends. During 2010, the Board of Directors approved four
quarterly dividend payments of $.01 per common share, for a total of $.04 per
common share. Payment of future dividends will be within the discretion of our
Board of Directors and will depend on, among other factors, our retained
earnings, capital requirements, acquisitions, operating and financial
condition. In March 2011, the Board of Directors approved a dividend payment of
a $.0125 per common share payable on April 4, 2011, to shareholders of record
on March 24, 2011.

Company Purchases of its Equity Securities

On
November 11, 2010, our Board of Directors approved an extension of the stock
buy back program under which $750,000 of company funds is allocated to purchase
shares of our common stock.

24

---



ISSUER PURCHASES OF EQUITY SECURITIES

|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|---------------------- |  | --------------------------------------------------- | ------ | ---------------------------------------------- | - | ------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | ------ |  | - | ------- | 
|Period                 |  | (a)
 Total Number
 of Shares
 (or Units)
 Purchased |        | (b)
 Average
 Price Paid
 per Share
 (or Unit) |   | (c)
 Total Number
 of Shares (or
 Units)
 Purchased as
 Part of Publicly
 Announced
 Plans or
 Programs |  | (d)
 Maximum Number
 (or Approximate
 Dollar Value) of
 Shares (or Units)
 that May Yet Be
 Purchased Under
 the Plans or
 Programs |       
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |       
|Month #1               |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|(October
 1-31, 2010)  |  |                                                     |       |                                                |   |                                                                                                        |  |                                                                                                                                     |       |  |   |        | 
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|Month #2               |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|(November
 1-30, 2010) |  |                                                     | 47,179 |                                                | $ | 2.34                                                                                                    |  |                                                                                                                                     | 47,179 |  | $ | 639,582 | 
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|Month #3               |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|(December
 1-31, 2010) |  |                                                     |       |                                                |   |                                                                                                        |  |                                                                                                                                     |       |  |   |        | 
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 
|Total                  |  |                                                     | 47,179 |                                                | $ | 2.34                                                                                                    |  |                                                                                                                                     | 47,179 |  | $ | 639,582 | 
|                       |  |                                                     |        |                                                |   |                                                                                                         |  |                                                                                                                                     |        |  |   |         | 

|        |                         
|------- | ------------------------
|Item 6. | Selected
 Financial Data

We
are a smaller reporting company as defined by Regulation S-K and, as such,
are not providing the information contained in this item pursuant to Regulation
S-K.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements
 Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

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

|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | Some of the most
 significant trends affecting our business are the following:                                                                                              
|  |                                                                                                                                                                             
| | the increasing
 recognition by professionals and corporations that they must continually
 improve their skills and those of their employees in order to remain
 competitive;
|  |                                                                                                                                                                             
| | continuing and expanding
 professional education requirements by governing bodies, including states and
 professional associations;                                         
|  |                                                                                                                                                                             
| | the plethora of new laws
 and regulations affecting the conduct of business and the relationship
 between employers and their employees;                                    

25

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|  |                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the increased competition
 in todays economy for skilled employees and the recognition that effective
 training can be used to recruit and train employees;
|  |                                                                                                                                                             
| | the development and
 acceptance of the Internet as a delivery channel for the types of products
 and services we offer; and                                 
|  |                                                                                                                                                             
| | current economic
 conditions.                                                                                                                               

Over
the last five years, our annual revenues have grown by approximately 40 percent
from $12.5 million in 2006 to $17.6 million this year. This growth is due in
large part to the acquisitions that we have completed in this period. We intend
to continue focusing 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 markets and products. 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, some of which
are discussed in Item 1 of Part 1 of this report under the caption Certain
Risk Factors That May Affect Our Growth and Profitability. These risks include
identifying appropriate acquisition candidates, successfully negotiating the
business, legal and financial terms of the acquisitions, integrating the
acquired business into our existing operations and corporate structure,
retaining key employees and minimizing disruptions to our existing business. We
cannot assure that we will be able to identify appropriate acquisition
opportunities or negotiate reasonable terms or that any acquired business or
assets will deliver the shareholder value that we anticipated at the outset.

With
respect to our performance for the recently completed 2010 fiscal year, the
downturn in the economy affected us as well, resulting in decreased revenues
and an operating loss. While we reduced our operating costs wherever possible,
including headcount, we were unable to increase prices. We also experienced a
dramatic decrease in custom work and decreased attendance in our live seminar
business. Our core subscription-based business was able to remain relatively
flat and we saw a small increase in revenues from our financial services
division. All our other divisions and subsidiaries experienced a reduction in
revenue for various reasons. Overall, revenue from our accounting/finance
division increased, primarily attributable to our EEI division, which had its
first full year of operations. As the overall business environment improves, we
expect to recognize an increase in revenues from our major business units. On
the expense side, EEI was a significant factor in the increase of operating
expenses, as we absorbed a full year of its overhead costs, offset by
reductions in staff and overhead from other divisions. We have reduced our
overhead costs and continually monitor our direct and general and
administrative costs and make the necessary adjustments where warranted. We are
also constantly looking for new avenues for our existing products and we
continue to expend a significant amount of money to upgrade our library, create
new products and develop new technology.

Seasonality and Cyclicality

Historically,
our operating results have fluctuated from quarter to quarter, primarily
because a portion of our business is non-subscription based. Custom jobs and
consulting work are subject to both the general business climate and clients
needs. Our engineering revenue is subject to staffing levels in both the
private and public sector and the timing of various licensing exams. In
economic downturns, staff reductions result in fewer people taking professional
engineering licensing exams. Our subscription-based revenue is spread over the
life of the subscription which is generally one year and can be effected by
staff reductions as well. With our acquisition of Loscalzo and EEI, these
quarterly fluctuations have become more evident and we expect this trend to
continue for the foreseeable future. Both Loscalzo and EEI

26

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generate most of their
revenue from live training programs. In EEIs case, the revenue is recognized
almost exclusively in the second and fourth quarters, when the sessions take
place. In Loscalzos case, the revenue tends to be recognized over the second,
third and fourth quarters, with the fourth quarter revenue being the greatest.
While the costs that are directly related to the production of this revenue are
expensed over the same period, both Loscalzo and EEI have general and
administrative expenses that are incurred ratably over the year, creating the
fluctuations in our operating results.

Critical Accounting Policies and Estimates

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

Revenues

A
large portion of our revenues is in the form of subscription fees for any of
our monthly accounting update programs or access to our library of accounting,
financial services training and legal courses. Other sources of revenue include
direct sales of programs or courses on a non-subscription basis or from various
forms of live training, fees for Website design, software development, video
production, course design and development, ongoing maintenance of the PEC, and
licensing fees. Subscriptions are billed on an annual basis, payable in advance
and deferred at the time of billing. Sales made over the Internet are by credit
card only. Renewals are usually sent out 60 days before the subscription period
ends. Larger transactions are usually dealt with by contract, the financial
terms of which depend on the services being provided.

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 online
sales, payment. Revenues from live training are recognized when earned, usually
upon the completion of the seminar or conference. Revenues from
non-subscription services provided to customers, such as Website design, video
production, consulting services and custom projects are generally recognized on
a percentage of completion basis where sufficient information relating to
project status and other supporting documentation is available. The contracts
may have different billing arrangements resulting in either unbilled or
deferred revenue. We obtain either a signed agreement or purchase order from
our non-subscription customers outlining the terms and conditions of the sale
or service to be provided. Otherwise, these services are recognized as 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.

Impairment of long-lived assets

The
Company evaluates the carrying value of goodwill and the recoverability of
identifiable intangible assets and other long-lived tangible assets during the
fourth quarter of each year and or whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be recovered
or are impaired.

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Goodwill
is evaluated by comparing the value of the reporting unit to the reporting
units carrying amount including goodwill. The fair value of the reporting unit
is estimated using a combination of discounted cash flows approach and the
market approach, which utilizes comparable companys data. If the carrying amount
of a reporting unit exceeds its fair value, then the amount of impairment loss
must be measured. The impairment would be calculated by comparing the implied
fair value of the reporting unit goodwill to its carrying amount. Any
impairment loss would be recognized when the carrying amount of goodwill
exceeds its implied fair value.

The
evaluation of the recoverability of identifiable intangible assets is measured
by comparing the carrying amount of the asset against estimated undiscounted
cash flows associated with it. Impairment may be caused by a number of factors,
including a significant decrease in the market value of an asset or a
significant adverse change in the manner in which the asset is being used. The
evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and
estimated amounts.

Upon
completing our review and testing for the current period we believe that we
have not incurred any impairment to such assets.

Stock-based compensation

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

Segment reporting

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

Income taxes

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

Results of Operations

Comparison of the years ended December 31,
2010, and 2009

The
following table compares our statement of operations data for the years ended
December 31, 2010, and 2009. The trends suggested by this table may not be
indicative of future operating results, which will depend on various factors
including the relative mix of products sold (accounting/finance, engineering or
corporate training) and the method of sale (video or online).

28

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|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|----------------------------------- |  | ---------------------- | ---------- | ---------- |  | ------ | -- | ---------- | ---------- | ------ |  | ----- | - |  | ------ | --
|                                    |  | Year ended December 31 |           
|                                    |  |                        |           
|                                    |  | 2010                   |            | 2009       |  |        |    |           
|                                    |  |                        |            |            |  |        |    |           
|                                    |  | Amount                 |            | Percentage |  | Amount |    | Percentage |            | Change | 
|                                    |  |                        |            |            |  |        |    |            |            |        | 
|Net revenues                        |  | $                      | 17,623,417 |            |  | 100.0  | %  | $          | 19,274,533 |        |  | 100.0 | % |  | (8.6   | %)
|Cost of revenues                    |  |                        | 8,047,614  |            |  | 45.7   | %  |            | 9,146,145  |        |  | 47.5  | % |  | (12.0  | %)
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|Gross profit                        |  |                        | 9,575,803  |            |  | 54.3.  | %  |            | 10,128,388 |        |  | 52.5  | % |  | (5.5   | %)
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|General and administrative          |  |                        | 8,594,296  |            |  | 48.8   | %  |            | 8,694,779  |        |  | 45.1  | % |  | (1.2   | %)
|Depreciation and
 amortization      |  |                        | 1,127,439  |            |  | 6.4    | %  |            | 1,052,151  |        |  | 5.5   | % |  | 7.2    | % 
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|Total operating expenses            |  |                        | 9,721,735  |            |  | 55.2   | %  |            | 9,746,930  |        |  | 50.6  | % |  | (0.3   | %)
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|Operating (loss) income             |  |                        | (145,932   | )          |  | (0.8   | %) |            | 381,458    |        |  | 2.0   | % |  | (138.3 | %)
|Other income, net                   |  |                        | 36,149     |            |  | 0.2    | %  |            | 24,633     |        |  | 0.1   | % |  | 46.8   | % 
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|(Loss) income before provision
 for |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|income taxes                        |  |                        | (109,783   | )          |  | (0.6   | %) |            | 406,091    |        |  | 2.1   | % |  | (127.0 | %)
|Income tax (provision)              |  |                        | (19,509    | )          |  | (0.1   | %) |            | (7,408     | )      |  | 0.0   | % |  | 163.4  | % 
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   
|Net (loss) income                   |  | $                      | (129,292   | )          |  | (0.7   | %) | $          | 398,683    |        |  | 2.1   | % |  | (132.4 | %)
|                                    |  |                        |            |            |  |        |    |            |            |        |  |       |   |  |        |   

Net revenues

Net
revenues for 2010 decreased 8.6 percent, compared to net revenues for 2009,
primarily as a result of the decrease in custom work from Skye and decreases in
other product lines. Our live training businesses now represent approximately
25 percent of our net revenues. Revenues from online sales of
subscription-based products and other related sales accounted for approximately
$7.1 million, or 40 percent, of our revenues.

Net
revenues from sales of our accounting/finance products grew in both absolute
dollars and as a percentage of total revenues, primarily as a result of a full
year of operations by EEI. In 2010, net revenues from our accounting/finance
and related products were $13 million, compared to $12.4 million in 2009. In
each of 2010 and 2009 net revenues from accounting/finance products including
both subscription and non-subscription based revenue was $8.1 million. Net
revenues from live training, custom work and advertising were $5 million in
2010, as compared to $4.4 million in 2009. The difference is primarily
attributable to EEI.

Net
revenues from sales of our engineering products, which are not
subscription-based, were $714,000 in 2010, compared to $746,000 in 2009. The
decrease in engineering sales is due to the general economic climate as there
are less exam candidates. However, this is not indicative of any long-term
trends, as we are seeing renewed interest in some of our course material.

Net
revenues from video production, duplication and consulting services decreased
in 2010 to $121,000 from $305,000 in 2009, as a result of decreased consulting
work and a reduction in video work as well. Video production and duplication
income fluctuates annually, but overall they continue to decline. The
duplication business has declined because tape is no longer used and we do not
have the capability of doing very large DVD duplication projects. Our video
production facility is primarily used for internal work and income results from
the renting of our facilities and/or our equipment. Consulting work varies from
year to year and sales are credited to the department from which they originate
and not to the department where the work is performed.

Net
revenues from SLE decreased from $705,000 in 2009 to $529,000 in 2010. This
decrease was primarily due to a decrease of $33,000 from our Cognistar legal
division, and a decrease of $143,000 from our ethics division. The decrease in
Cognistar sales is due to the economy as many law firms have reduced

29

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staff and cut budgets. The
ethics divisions income is from custom consulting jobs and economic conditions
have curtailed spending in that area as well.

Skye
generated $1.08 million of net revenues in 2010, compared to $2.87 million in
2009. Skye produces customized training and educational material for the
pharmaceutical industry, professional firms, financial services companies and
others. It took Skye a much longer time to feel the effects of the economic
downturn as it completed projects in early 2010 that began in 2009. Many
companies have cut back on custom work or are assessing alternatives methods of
production in an effort to reduce their costs.

Our
financial services training division generated net revenues of $2.02 million in
2010, compared to only $1.97 million in 2009. The largest portion of the growth
comes from FinancialCampus course sales, which are delivered over the internet.

Our
technology training division, WatchIT, generated net revenues of $121,000 in
2010, compared to $207,000 of revenues in 2009, due to a decrease in custom
projects.

Cost of revenues

Cost
of revenues includes (i) production costs, such as the salaries, benefits and
other costs related to personnel, whether our employees or independent
contractors, who are used directly in connection with producing or conducting
our educational programs, (ii) royalties paid to third parties, (iii) the cost
of materials, such as DVDs, printed matter and packaging materials and (iv)
shipping costs. Compared to 2009, cost of revenues in 2010 decreased by
approximately $1.1 million. This decrease is primarily due to decreased revenue
from Skye, who employs a large amount of outsourced labor in completing their
projects. Cost of revenues in 2010 decreased to 45.7 percent from 47.5 percent
in 2009, resulting in a 4 percent increase in our gross profit margin. With the
addition of Loscalzo and EEI, which together represent approximately 25 percent
of our current net revenues, we anticipate a lower gross profit percentage as
these businesses are more labor and cost intensive than our subscription-based
products.

There
are many different types of expenses that are characterized as production costs
and they vary from period to period depending on many factors. The expenses
that showed the greatest variations from 2009 to 2010 and the reasons for those
variations are as follows:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Outside labor and direct
 production costs.
 Outside labor includes the cost of hiring actors and production personnel
 such as directors, producers and cameramen and the outsourcing of non-video
 technology. It also includes the costs of instructors for live training and
 the production of those courses. These costs decreased by approximately $1
 million in 2010 from 2009. Both Skye and our consulting/technology
 departments employ a number of consultants to write scripts, edit course
 material and provide technology services. Loscalzo and EEI employ a number of
 consultants to develop course material, in addition to hiring instructors to
 deliver programs throughout the United States. We have been outsourcing some
 of the programming and content development functions that were previously
 done by our employees to firms in India and China at a substantial savings.
 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 purchase of materials  decreased by $99,000. These variations are
 related to the type of video production and custom projects and do not
 reflect any trends in our business.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Salaries. Overall payroll
and related costs attributable to production personnel decreased by
approximately $286,000. The decrease was primarily attributable to a
reduction in head count in our Skye and SLE subsidiaries, as well as
reductions in some of our other divisions, offset by a full year of related
costs from our EEI acquisition. Our SLE and Skye salaries and related costs
decreased by $267,000, this was offset by increased salaries from EEI of
approximately $117,000. Reduction in salaries and related costs from our
Loscalzo subsidiary accounted for approximately $67,000 in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | savings and our
 FinancialCampus division accounted for an additional $82,000 in savings,
 offset by an increase of $13,000 in our technology division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Royalties. Royalty expense
increased in 2010, as compared to 2009, by approximately $30,000. Royalty
expense is directly related to sales of certain products in our accounting
and engineering catalogs, and as usage fluctuates so does our royalty
expense. This increase was due to increased royalties in accounting education
from one of our partners, offset by a decrease in royalties related to our
engineering products. We often have to estimate the royalty expense due our
partners, as the information may not be available. If volume increases or if
we enter into new agreements or modify existing agreements, the actual
royalty payments in 2011 under these agreements may be either higher or lower
than they were in 2010.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Other costs. This includes
the cost of venues for our live training business, travel for instructors and
others, shipping costs and other miscellaneous expenses. These other costs
increased by $255,000, primarily related to EEIs live training business. The
largest component of these expenses are venue, travel and course
administration costs that increased by $221,000 in 2010 from 2009. The
remaining increase was from increased shipping costs of $35,000 related to
shipping instructional materials to the various venues, a substantial portion
of which are charged to the clients. Travel costs incurred by Skye and
Loscalzo are often billed to their respective clients.                                                    

As our business grows we may
be required to hire additional production personnel, increasing our cost of
revenues.

Selling general and administrative expenses

General
and administrative expenses include corporate overhead such as (i) compensation
and benefits for administrative, sales and marketing and finance personnel,
(ii) rent, (iii) insurance, (iv) professional fees, (v) travel and
entertainment and (vi) office expenses. General and administrative expenses in
2010 decreased from 2009 by $100,000; but as a percentage of net revenue it
increased 3.7 percent. The decrease in terms of actual expenses is primarily
from reductions in payroll and related costs as headcounts have been reduced.
Reductions in compensation expense totaled $345,000 after recognizing a full
year of EEI compensation expenses. Overhead expenses for advertising, promotional
material and other selling expenses increased by approximately $203,000. This
increase was primarily attributable to a full year of such costs for EEI.
Exclusive of these increases, other overhead expenses increased approximately
$42,000 primarily due to increases in our communication costs, the general
increase in use of credit cards for payments and other miscellaneous costs. In
addition, in conformity with applicable accounting standards, we are expensing
the costs associated with the grants of options and restricted stock to
employees and directors. This non-cash expense in 2010 was $193,000 and
$236,000 in 2009. We anticipate that general and administrative expenses will
remain constant in 2011 as we have now fully absorbed the EEI acquisition with
its substantial marketing expenses and our costs remain constant.

Depreciationand amortization

Depreciation
and amortization expenses were $75,000 higher in 2010 than they were in 2009.
The increase is attributable to intangible assets acquired in the Loscalzo and
EEI transactions, as well as from the capitalization of intangible assets
developed internally  principally our new PEC, known as eCampus. The total
cost of the intangible assets acquired in the Loscalzo and EEI transaction,
exclusive of goodwill, was approximately $1,473,000, which is being amortized
over various periods ranging from three to 10 years. The total capitalized cost
of eCampus is $1,366,000 and is being amortized over five years. As we are
always upgrading our computer hardware and systems, and because we have a
number of projects in development, we expect our depreciation and amortization
expenses on our fixed and intangible assets to increase.

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Operating (loss) income

For
2010, our operating loss was
$146,000, compared to an operating profit of $381,000 in 2009. The decrease in
net revenues from our Skye subsidiary and our legal and ethics division are the
primary reasons for the decrease in operating income.

Other income, net

Other
income and expense items primarily consist of interest earned on deposits,
offset by the loss from our joint venture in iReflect, LLC. We currently have
no outstanding debt, other than normal trade payables. Net interest income
increased by $23,000 due to the collection of interest from a note receivable
that was repaid during the year. We do not anticipate an increase in interest
income as interest rates continue to remain very low in 2010 and 2011. In
addition, our joint venture in iReflect resulted in a loss of $21,000 in 2010,
compared to a loss of $9,000 in 2009.

Income tax expense

In
2010, we recorded a net tax expense of $19,500, compared to a $7,400 expense in
2009. We have analyzed all of the components of the deferred tax assets and
liabilities and have recorded a net benefit of $1.29 million after taking a
valuation allowance of approximately $742,000, as compared to a net deferred
tax asset of $1.25 million in the prior year. The 2010 tax expense consists of
net federal income tax benefit of $44,000 offset by state and local income tax
expense of approximately $63,500. In the prior year we recorded a net tax
expense of $7,400 after recording a net federal tax benefit of $115,000 offset
by state and local income tax expense of approximately $122,400.

Net (loss) income

For
2010, we recorded a net loss of
$129,000, compared to a net income of $399,000 for 2009.The decrease in net income is primarily
due to a decrease in gross profit and higher depreciation and amortization
expenses offset by a decrease in general and administrative expenses.

Liquidity and Capital Resources

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. At year-end, we had no indebtedness for borrowed money.

Our
working capital as of December 31, 2010, was approximately $ 2.9 million
compared to a $3.2 million working capital as of December 31, 2009. The decrease
is attributable to a number of factors including the payment of approximately
$200,000 in dividends, and the repurchase of our common stock for approximately
$585,000. Our current ratio at December 31, 2010, is 1.44 to 1, compared to
1.48 to 1 at December 31, 2009. The current ratio is derived by dividing
current assets by current liabilities and is a measure used by lending sources
to assess our ability to repay short-term liabilities. The largest component of
our current liabilities, approximately $5.5 million and $5.3 million at
December 31, 2010, and 2009 respectively, is 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 this obligation as the material is
already in our library.

For
the year ended December 31, 2010, we had a net increase in cash of $287,000. We
generated $1.8 million in cash from operations, offset by $716,000 used in
investing activities including $350,000 for

32

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asset acquisitions and
$357,000 for the capitalization of software and courses. In addition, we
expended $585,000 for the purchase of treasury shares and $196,000 for the
payment of dividends. The primary components of our operating cash flows are
our net income adjusted for non-cash expenses, such as depreciation and
amortization, and the changes in accounts receivable, accounts payable and
deferred revenues.

In
comparison, for the year-ended December 31, 2009, we had a $94,000 increase in
cash. That increase was a result of cash generated by operations of $1.8
million, offset by cash expended for investing activities of $1.7 million
primarily for acquisitions of $4.1 million and $700,000 for various asset acquisitions
or internal capitalization of intangibles.

Capital
expenditures for the year ended December 31, 2010, were approximately $706,000,
of which $349,000 consisted
primarily of telecommunication equipment, computer equipment and software, most
of which was for our off-site hosting facility, a requirement of SOX
compliance. We capitalized $48,000 of costs for the production of various
courses and $309,000 for capitalizing the costs of eCampus and other products.
We are constantly reviewing and upgrading our technology. For fiscal 2011, we
have budgeted approximately $275,000 for capital expenditures (other than
software and course development costs)

In
March 2011, our Board of Directors declared a dividend of $.0125 per common
share payable on April 4, 2011, to shareholders of record on March 24, 2011.

Contractual Obligation, Commitments and Contingencies

As
of December 31, 2010, we had commitments under various leases for our offices
in Hawthorne, New York, the SLE office in Westborough, Massachusetts, Skyes
offices in Bridgewater, New Jersey, and Loscalzos office in Red Bank, New
Jersey. The total aggregate commitment under these leases is approximately $3
million through January 2019. SLE recently entered into a new lease that
expires in January 2012 and calls for a monthly rent of approximately $2,500.
The Skye lease was recently extended to January 2014 at a monthly rental of
$3,190 and the lease for the Loscalzo office expires on June 30, 2011, at a
monthly rent of $5,000.

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 rate 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 that we will be successful in
generating sufficient capital to adequately fund our liquidity needs.

Interest Rate Risk

Interest
rate risk represents the potential loss from adverse changes in market interest
rates. As we may hold U.S. Treasury securities or money market funds, we may be
exposed to interest rate risk arising from changes in the level and volatility
of interest rates and in the shape of the yield curve.

Credit Risk

Most
of our cash is held in deposit accounts, U.S. Treasury and non-Treasury money
market funds. Our bank deposit accounts are insured by the U.S. government but
only up to a maximum of $250,000 at any one bank. Our money market funds are
held in a brokerage account that is insured by the Security Industry Protection
Corp up to $500,000 and various brokerage firms may carry additional insurance
from commercial insurance companies. Our cash balances vary from time to time
based on a variety of factors but in most cases are significantly in excess of
the insurable limit. As a result, we have exposure on these accounts in the
event these financial institutions become insolvent.

33

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In
addition, we may have credit risk with respect to customers who default on
custom orders or who default on subscription payments.

Recent Accounting Pronouncements

In
December 2010, the Financial Accounting Standards Board (FASB) issued an
amendment to Topic 350, which provides further guidance on when to perform Step
2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Basis. This amendment affect all entities that have recognized goodwill and
have one or more reporting units whose carrying amount for purposes of
performing Step 1 of the goodwill impairment test is zero or negative. This
amendment is effective for years ending after December 15, 2010. The
implementation of this amendment did not have a material impact on our
consolidated financial statements.

In
December 2010, the FASB also issued an amendment to Topic 805, Business
Combinations. The amendment describes the requirements for issuing pro-forma
information related to business combinations that occurred in the current
accounting period. This amendment is effective for periods ending after
December 15, 2010. We believe that this amendment has no current impact on our
consolidated financial statements as no acquisitions were made in 2010.

|         |                                                           
|-------- | ----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk

We are a
smaller reporting company, as defined by Regulation S-K, and, as such, are
not providing the information contained in this item pursuant to Regulation
S-K.

|        |                     
|------- | --------------------
|Item 8. | Financial Statements

See
the index to Financial Statements below, beginning on page F-1.

|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within SmartPros Ltd. have been detected.

34

---



b)
Managements
Report on Internal Control over Financial Reporting. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in rule 13a-15(f) under the Exchange Act). Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2010. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Our management
has concluded that, as of December 31, 2010, our internal control over
financial reporting is effective based on these criteria.

c)
Changes in Internal Control over Financial
Reporting. There were no changes in our internal controls over
financial reporting that occurred during our fiscal fourth quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

|         |                  
|-------- | -----------------
|Item 9B. | Other Information

None.

PART III

|         |                                                                                                                                       
|-------- | --------------------------------------------------------------------------------------------------------------------------------------
|Item 10. | Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.

Information
relating to our directors and executive officers that is responsive to Item 10
of Form 10-K will be included in our Proxy Statement in connection with our
2011 annual meeting of stockholders, scheduled to be held in June 2011, which
information is incorporated by reference herein.

Code
of Ethics

We
have adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer and other persons performing similar functions, and
all of our other employees and directors. The Code of Ethics is posted on our
Website at http://ir.smartpros.com. Amendments to and waivers from the
Code of Ethics will also be posted on our Website.

|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information
relating to our directors and executive officers that is responsive to Item 11
of Form 10-K will be included in our Proxy Statement in connection with our
2011 annual meeting of stockholders, scheduled to be held in June 2011, which
information is incorporated by reference herein.

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Information
relating to our directors and executive officers that is responsive to Item 12
of Form 10-K will be included in our Proxy Statement in connection with our 2011
annual meeting of stockholders, scheduled to be held in June 2011, which
information is incorporated by reference herein.

|         |                                                                         
|-------- | ------------------------------------------------------------------------
|Item 13. | Certain Relationships and Related Transactions,and Director Independence

Information
relating to our directors and executive officers that is responsive to Item 13
of Form 10-K will be included in our Proxy Statement in connection with our
2011 annual meeting of stockholders, scheduled to be held in June 2011, which
information is incorporated by reference herein.

35

---



|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

Information
relating to our directors and executive officers that is responsive to Item 14
of Form 10-K will be included in our Proxy Statement in connection with our
2011 annual meeting of stockholders, scheduled to be held in June 2011, which
information is incorporated by reference herein.

PART IV

|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

| |     |                                                           |                                                                                           
| | --- | --------------------------------------------------------- | ------------------------------------------------------------------------------------------
| | (a) | The
following documents are filed as part of this report:
| |     |                                                           |                                                                                           
| |     | (1)                                                       | Financial
Statements  See the Index to the consolidated financial statements on page
F-2.
| |     |                                                           |                                                                                           
| | (b) | Exhibits:                                                

|            |  |                                                                                                                                                                           |             | 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | 
|Exhibit
No. |  |                                                                                                                                                                           | Description | 
|            |  |                                                                                                                                                                           |             | 
|3.1         |  | Certificate of
Incorporation, as amended (1)                                                                                                                             
|            |  |                                                                                                                                                                          
|3.2         |  | Amended and Restated
By-Laws, as amended (1)                                                                                                                             
|            |  |                                                                                                                                                                          
|4.1         |  | Specimen stock certificate
(1)                                                                                                                                           
|            |  |                                                                                                                                                                          
|10.1        |  | **2009 Incentive
Compensation Plan (2)                                                                                                                                   
|            |  |                                                                                                                                                                          
|10.2        |  | **Employment Agreement,
dated as of February 1, 2007, between Allen S. Greene and SmartPros, Ltd. (3)                                                                    
|            |  |                                                                                                                                                                          
|10.3        |  | **Seconded Amended
Employment Agreement, dated as of October 1, 2008, between SmartPros Ltd. and
Jack Fingerhut (4)                                                      
|            |  |                                                                                                                                                                          
|10.4        |  | **Amended Employment
Agreement, dated as of July 1, 2008, between SmartPros Ltd. and Stanley
Wirtheim (4)                                                                
|            |  |                                                                                                                                                                          
|10.5        |  | **First Amendment to
Employment Agreement, dated as of October 1, 2008, between SmartPros Ltd. and
Joseph Fish (4)                                                       
|            |  |                                                                                                                                                                          
|10.6        |  | Lease for premises at 12
Skyline Drive, Hawthorne, New York (6)                                                                                                          
|            |  |                                                                                                                                                                          
|10.7        |  | **Letter of Agreement
between SmartPros Ltd. and Allen S. Greene re: restricted stock (1)                                                                                
|            |  |                                                                                                                                                                          
|10.9        |  | **Final form of Restricted
Stock Agreement, dated as of January 29, 2007, executed by Allen S. Greene,
Jack Fingerhut, Stanley Wirtheim, Joseph Fish and David Gebler (3)
|            |  |                                                                                                                                                                          
|14.1        |  | Code of Ethics (5)                                                                                                                                                       
|            |  |                                                                                                                                                                          
|21.1        |  | Subsidiaries(6)                                                                                                                                                          
|            |  |                                                                                                                                                                          
|23.1        |  | Consent of Holtz Rubenstein
Reminick LLP*                                                                                                                                
|            |  |                                                                                                                                                                          
|31.1        |  | Principal Executive
Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002*                                                                     
|            |  |                                                                                                                                                                          
|31.2        |  | Principal Financial
Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002*                                                                     
|            |  |                                                                                                                                                                          
|32.1        |  | Principal Executive
Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002*                                                                     

36

---



|     |  |                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------
|32.2 |  | Principal Financial
Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002*

---

|                                                                                                                                                                                  |                                                                                                                                                                     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                                  | Notes to exhibits                                                                                                                                                  
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|*                                                                                                                                                                                 | Filed herewith                                                                                                                                                     
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|**                                                                                                                                                                                | This exhibit is a
management contract or compensatory plan or arrangement.                                                                                         
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(1)                                                                                                                                                                               | Filed
as an exhibit to our Registration Statement on Form SB-2 (No. 333-115454),
effective as of October 19, 2004, and incorporated herein by reference.           
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(2)                                                                                                                                                                               | Filed on April
27, 2009, as Appendix A to our Definitive Proxy Statement, DEF14A, for the
2009 annual meeting of stockholders and incorporated herein by reference.
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(3)                                                                                                                                                                               | Filed
on February 2, 2007, as an exhibit to our Current Report on Form 8-K and
incorporated herein by reference.                                                   
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(4)                                                                                                                                                                               | Filed as an
exhibit to our Annual Report on Form 10-K for the fiscal year ended December
31, 2008, and incorporated herein by reference.                           
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(5)                                                                                                                                                                               | The Code of Ethics is
posted on our Website at http://ir.smartpros.com.                                                                                            
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(6)                                                                                                                                                                               | Filed as an exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and
incorporated herein by reference.                           
|                                                                                                                                                                                  |                                                                                                                                                                     | 
|(c)          Information
required by schedules called for under Regulation S-X is either not
applicable or is included in the consolidated financial statements or notes
thereto.

37

---



SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|      |                |                |                         | 
|----- | -------------- | -------------- | ----------------------- | 
|      |                | SmartPros
Ltd. |                        
|      |                |                |                         | 
|      |                | By:            | /s/ Allen S.
Greene     | 
|      |                |                |                         | 
|      |                |                | Allen S.
Greene        
|      |                |                | Chief
Executive Officer
|      |                |                |                        
|Date: | March 29,
2011 |                |                        

In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on March 29, 2011.

|                            |                         |           |                                    |  |       | 
|--------------------------- | ----------------------- | --------- | ---------------------------------- |  | ----- | 
|                            |                         | Signature |                                    |  | Title | 
|                            |                         |           |                                    |  |       | 
|                            |                         |          
|Principal
Executive Officer |                         |          
|                            |                         |          
|                            | /s/ Allen S.
Greene     |           | Chief
Executive Officer           
|                            |                         |           |                                   
|                            | Allen
S. Greene         |           |                                   
|                            |                         |           |                                   
|Principal
Financial Officer |                         |          
|                            |                         |           |                                   
|                            | /s/ Stanley
P. Wirtheim |           | Chief
Financial Officer           
|                            |                         |           |                                   
|                            | Stanley
P. Wirtheim     |           |                                   
|                            |                         |           |                                   
|Directors                   |                         |          
|                            |                         |           |                                   
|                            | /s/ Allen S.
Greene     |           | Chairman of
the Board of Directors
|                            |                         |           |                                   
|                            | Allen
S. Greene         |           |                                   
|                            |                         |           |                                   
|                            | /s/ John J.
Gorman      |           | Director                          
|                            |                         |           |                                   
|                            | John
J. Gorman          |           |                                   
|                            |                         |           |                                   
|                            | /s/ Jack
Fingerhut      |           | Director                          
|                            |                         |           |                                   
|                            | Jack
Fingerhut          |           |                                   
|                            |                         |           |                                   
|                            | /s/ Leonard
J. Stanley  |           | Director                          
|                            |                         |           |                                   
|                            | Leonard
J. Stanley      |           |                                   
|                            |                         |           |                                   
|                            | /s/ Martin
H. Lager     |           | Director                          
|                            |                         |           |                                   
|                            | Martin
H. Lager         |           |                                   

38

---



| |                                       
| | --------------------------------------
| | SMARTPROS LTD.
 AND SUBSIDIARIES      
| |                                       
| | REPORT ON AUDITS OF CONSOLIDATED      
| | FINANCIAL STATEMENTS                  
| |                                       
| | Years Ended December 31, 2010 and 2009

F-1

---



SMARTPROS LTD. 
AND SUBSIDIARIES

|                                                         |  |            
|-------------------------------------------------------- |  | -----------
|Contents                                                 |  |            
|                                                         |  |            
|Years Ended December 31, 2010 and 2009                   |  | Pages      
|                                                         |  |            
|Financial Statements                                     |  |            
|                                                         |  |            
|Report of Independent Registered Public
 Accounting Firm |  | F-3        
|                                                         |  |            
|Consolidated Balance Sheets                              |  | F-4        
|                                                         |  |            
|Consolidated Statements of Operations                    |  | F-5        
|                                                         |  |            
|Consolidated Statements of Stockholders Equity          |  | F-6        
|                                                         |  |            
|Consolidated Statements of Cash Flows                    |  | F-7        
|                                                         |  |            
|Notes to Consolidated Financial Statements               |  | F-8
  F-18

|   
|---
|   
|F-2

---



Report of
Independent Registered Public Accounting Firm

Board of Directors 
SmartPros Ltd. 
Hawthorne, New York

We have audited the
accompanying consolidated balance sheets of SmartPros Ltd. and Subsidiaries
(the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
years then ended. The consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SmartPros Ltd. and
Subsidiaries as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Holtz Rubenstein
Reminick LLP

New York, New York March 29, 2011

F-3

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Consolidated Balance Sheets                                                                                                                                                                                                                          |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|December 31,                                                                                                                                                                                                                                         |  | 2010 |            | 2009 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Assets                                                                                                                                                                                                                                               |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current Assets:                                                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                            |  | $    | 7,007,541  |      | $ | 6,720,649  |  
|Accounts receivable, net of allowance for doubtful accounts of
 approximately $39,000 at December 31, 2010 and 2009                                                                                                                                  |  |      | 2,149,067  |      |   | 2,700,111  |  
|Prepaid expenses and other current assets                                                                                                                                                                                                            |  |      | 391,136    |      |   | 260,357    |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Current Assets                                                                                                                                                                                                                                 |  |      | 9,547,744  |      |   | 9,681,117  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Property and Equipment, net                                                                                                                                                                                                                          |  |      | 717,428    |      |   | 608,850    |  
|Goodwill                                                                                                                                                                                                                                             |  |      | 3,375,257  |      |   | 3,375,257  |  
|Other Intangibles, net                                                                                                                                                                                                                               |  |      | 3,891,858  |      |   | 4,421,749  |  
|Other Assets, including restricted cash of $75,000 and $150,000 at
 December 31, 2010 and 2009, respectively                                                                                                                                         |  |      | 85,626     |      |   | 160,626    |  
|Deferred Tax Asset                                                                                                                                                                                                                                   |  |      | 1,290,000  |      |   | 1,250,924  |  
|Investment in Joint Venture, at cost                                                                                                                                                                                                                 |  |      | 3,867      |      |   | 14,755     |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Assets                                                                                                                                                                                                                                         |  | $    | 18,911,780 |      | $ | 19,513,278 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current Liabilities:                                                                                                                                                                                                                                 |  |      |            |      |   |            |  
|Accounts payable                                                                                                                                                                                                                                     |  | $    | 722,683    |      | $ | 776,059    |  
|Accrued expenses                                                                                                                                                                                                                                     |  |      | 391,626    |      |   | 446,929    |  
|Deferred revenue                                                                                                                                                                                                                                     |  |      | 5,514,388  |      |   | 5,299,450  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Current Liabilities                                                                                                                                                                                                                            |  |      | 6,628,697  |      |   | 6,522,438  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Long-Term Liabilities:                                                                                                                                                                                                                               |  |      |            |      |   |            |  
|Other liabilities                                                                                                                                                                                                                                    |  |      | 32,901     |      |   | 23,187     |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Long-Term Liabilities                                                                                                                                                                                                                          |  |      | 32,901     |      |   | 23,187     |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Liabilities                                                                                                                                                                                                                                    |  |      | 6,661,598  |      |   | 6,545,625  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Commitments and Contingencies                                                                                                                                                                                                                        |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Stockholders Equity:                                                                                                                                                                                                                                |  |      |            |      |   |            |  
|Preferred stock, $.001 par value; 1,000,000 shares authorized, no
 shares issued and outstanding                                                                                                                                                     |  |      |           |      |   |           |  
|Common stock, $.0001 par value; 30,000,000 shares authorized,
 5,561,100 and 5,562,100 shares issued as of December 31, 2010 and 2009,
 respectively, and 4,873,826 and 5,076,305 shares outstanding as of December
 31, 2010 and 2009, respectively |  |      | 556        |      |   | 556        |  
|Common stock in treasury, at cost - 687,274 and 485,795 shares as of
 December 31, 2010 and 2009, respectively                                                                                                                                       |  |      | (2,122,490 | )    |   | (1,536,782 | )
|Additional paid-in capital                                                                                                                                                                                                                           |  |      | 17,607,921 |      |   | 17,610,392 |  
|Accumulated deficit                                                                                                                                                                                                                                  |  |      | (3,235,805 | )    |   | (3,106,513 | )
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                                           |  |      | 12,250,182 |      |   | 12,967,653 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                           |  | $    | 18,911,780 |      | $ | 19,513,278 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  

|                                                
|------------------------------------------------
|                                                
|See
 notes to consolidated financial statements.
|F-4                                             

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                      |  |      |            |      |   |            |  
|----------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Consolidated
 Statements of Operations                |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Years Ended December 31,                              |  | 2010 |            | 2009 |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Net Revenues                                          |  | $    | 17,623,417 |      | $ | 19,274,533 |  
|Cost of Revenues                                      |  |      | 8,047,614  |      |   | 9,146,145  |  
|                                                      |  |      |            |      |   |            |  
|Gross Profit                                          |  |      | 9,575,803  |      |   | 10,128,388 |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Operating Expenses:                                   |  |      |            |      |   |            |  
|Selling, general and administrative                   |  |      | 8,594,296  |      |   | 8,694,779  |  
|Depreciation and amortization                         |  |      | 1,127,439  |      |   | 1,052,151  |  
|                                                      |  |      |            |      |   |            |  
|Total Operating Expenses                              |  |      | 9,721,735  |      |   | 9,746,930  |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Operating (Loss) Income                               |  |      | (145,932   | )    |   | 381,458    |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Other Income (Expense):                               |  |      |            |      |   |            |  
|Interest and dividend income, net                     |  |      | 57,037     |      |   | 33,768     |  
|Loss from joint venture                               |  |      | (20,888    | )    |   | (9,135     | )
|                                                      |  |      |            |      |   |            |  
|Total Other Income                                    |  |      | 36,149     |      |   | 24,633     |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|(Loss) Income before Provision for Income Taxes       |  |      | (109,783   | )    |   | 406,091    |  
|Provision for Income Taxes                            |  |      | (19,509    | )    |   | (7,408     | )
|                                                      |  |      |            |      |   |            |  
|Net (Loss) Income                                     |  | $    | (129,292   | )    | $ | 398,683    |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Net (loss) income per Common Share:                   |  |      |            |      |   |            |  
|Basic net (loss) income per common share              |  | $    | (0.03      | )    | $ | 0.08       |  
|                                                      |  |      |            |      |   |            |  
|Diluted net (loss) income per common share            |  | $    | (0.03      | )    | $ | 0.08       |  
|                                                      |  |      |            |      |   |            |  
|                                                      |  |      |            |      |   |            |  
|Weighted Average Number of Common Shares Outstanding: |  |      |            |      |   |            |  
|Basic                                                 |  |      | 4,946,058  |      |   | 5,043,045  |  
|                                                      |  |      |            |      |   |            |  
|Diluted                                               |  |      | 4,946,058  |      |   | 5,101,668  |  
|                                                      |  |      |            |      |   |            |  

|                                               
|-----------------------------------------------
|                                               
|See notes to consolidated financial statements.
|F-5                                            

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                               
|-----------------------------------------------
|Consolidated Statements of Stockholders Equity
|                                               
|Years Ended December 31, 2010 and 2009         
|                                               

|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  
|---------------------------------------------------------------------------- |  | --------------- | - | ------------ | - | ---------------------------- |  | --------------------- | --------- | --------------- | - | ---------------------------- |  | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                             |  | Preferred Stock |   | Common Stock |   | Additional
 Paid-in
 Capital |  | Accumulated 
 Deficit |           | Treasury
 Stock |   | Total
 Stockholders
 Equity | 
|                                                                             |  |                 |   |              |   |                              |  |                       |          
|                                                                             |  | Shares          |   | Amount       |   | Shares                       |  | Amount                |           |                 |   |                              | 
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |  
|Balance, January 1, 2009                                                     |  |                 |  |              | $ |                             |  |                       | 5,324,316 |                 | $ | 532                          |  | $ | 17,155,851 |   | $ | (3,505,196 | ) | $ | (1,525,723 | ) | $ | 12,125,464 |  
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  
|Issuance of Shares from Restricted Stock Plan                                |  |                 |  |              |   |                             |  |                       | 153,959   |                 |   | 16                           |  |   | 151,959    |   |   |           |   |   |           |   |   | 151,975    |  
|Stock Compensation Expense                                                   |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   | 83,807     |   |   |           |   |   |           |   |   | 83,807     |  
|Shares Issued as Additional Purchase Consideration for Skye Multimedia, Ltd. |  |                 |  |              |   |                             |  |                       | 83,825    |                 |   | 8                            |  |   | 218,775    |   |   |           |   |   |           |   |   | 218,783    |  
|Purchase of Treasury Shares                                                  |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   |           |   |   |           |   |   | (11,059    | ) |   | (11,059    | )
|Net Income                                                                   |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   |           |   |   | 398,683    |   |   |           |   |   | 398,683    |  
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  
|Balance, December 31, 2009                                                   |  |                 |  |              |   |                             |  |                       | 5,562,100 |                 |   | 556                          |  |   | 17,610,392 |   |   | (3,106,513 | ) |   | (1,536,782 | ) |   | 12,967,653 |  
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  
|Dividends Paid                                                               |  |                 |  |              |   |                             |  |                       |           |                 |   |                              |  |   | (196,421   | ) |   |           |   |   |           |   |   | (196,421   | )
|Stock Compensation Expense                                                   |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   | 61,200     |   |   |           |   |   |           |   |   | 61,200     |  
|Surrender of Shares from Restricted Stock Plan                               |  |                 |  |              |   |                             |  |                       | (1,000    | )               |   |                             |  |   |           |   |   |           |   |   |           |   |   |           |  
|Purchase of Treasury Shares                                                  |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   | (585,708   | ) |   | (585,708   | )
|Stock Grant Expense                                                          |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   | 132,750    |   |   |           |   |   |            |   |   | 132,750    |  
|Net Loss                                                                     |  |                 |  |              |   |                             |  |                       |          |                 |   |                             |  |   |           |   |   | (129,292   | ) |   |           |   |   | (129,292   | )
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  
|Balance, December 31, 2010                                                   |  |                 |  |              | $ |                             |  |                       | 5,561,100 |                 | $ | 556                          |  | $ | 17,607,921 |   | $ | (3,235,805 | ) | $ | (2,122,490 | ) | $ | 12,250,182 |  
|                                                                             |  |                 |   |              |   |                              |  |                       |           |                 |   |                              |  |   |            |   |   |            |   |   |            |   |   |            |  

|                                                
|------------------------------------------------
|                                                
|                                                
|See
 notes to consolidated financial statements.
|                                                
|F-6                                             

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                     
|-------------------------------------
|Consolidated Statements of Cash Flows
|                                     

|                                                                                                |  |      |           |      |   |            |  
|----------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------- | -
|Years Ended December 31,                                                                        |  | 2010 |           | 2009 |  
|                                                                                                |  |      |           |      |  
|                                                                                                |  |      |           |      |   |            |  
|Cash Flows from Operating
 Activities:                                                          |  |      |           |      |   |            |  
|Net (loss) income                                                                               |  | $    | (129,292  | )    | $ | 398,683    |  
|                                                                                                |  |      |           |      |   |            |  
|Adjustments to reconcile net (loss) income to net cash provided by
 operating activities:       |  |      |           |      |   |            |  
|Depreciation and amortization                                                                   |  |      | 1,127,439 |      |   | 1,052,151  |  
|Stock compensation expense                                                                      |  |      | 193,950   |      |   | 235,782    |  
|Deferred income tax benefit                                                                     |  |      | (39,076   | )    |   | (120,000   | )
|Loss from joint venture                                                                         |  |      | 20,888    |      |   | 9,135      |  
|Deferred rent                                                                                   |  |      | 9,714     |      |   | 23,187     |  
|Changes in operating assets and liabilities:                                                    |  |      |           |      |   |            |  
|(Increase)
 decrease in operating assets:                                                       |  |      |           |      |   |            |  
|Accounts receivable                                                                             |  |      | 551,044   |      |   | 414,028    |  
|Prepaid expenses and other current assets                                                       |  |      | (130,779  | )    |   | 42,828     |  
|Other assets                                                                                    |  |      | 75,000    |      |   | (5,013     | )
|(Decrease)
 increase in operating liabilities:                                                  |  |      |           |      |   |            |  
|Accounts payable and accrued expenses                                                           |  |      | (108,679  | )    |   | 67,872     |  
|Deferred revenue                                                                                |  |      | 214,938   |      |   | (322,606   | )
|                                                                                                |  |      |           |      |   |            |  
|Total adjustments                                                                               |  |      | 1,914,439 |      |   | 1,397,364  |  
|                                                                                                |  |      |           |      |   |            |  
|Net Cash Provided by
 Operating Activities                                                      |  |      | 1,785,147 |      |   | 1,796,047  |  
|                                                                                                |  |      |           |      |   |            |  
|                                                                                                |  |      |           |      |   |            |  
|Cash Flows from Investing
 Activities:                                                          |  |      |           |      |   |            |  
|Acquisition of property and equipment                                                           |  |      | (349,299  | )    |   | (216,461   | )
|Capitalized course costs                                                                        |  |      | (47,801   | )    |   | (100,212   | )
|Capitalized software development                                                                |  |      | (309,026  | )    |   | (344,204   | )
|Investment in joint venture                                                                     |  |      | (10,000   | )    |   |           |  
|Cash paid for business acquisitions                                                             |  |      |          |      |   | (348,715   | )
|Adjustment to cash paid for goodwill                                                            |  |      |          |      |   | 19,072     |  
|Additional purchase consideration for acquisition of Skye Multimedia Ltd.                       |  |      |          |      |   | (700,000   | )
|                                                                                                |  |      |           |      |   |            |  
|Net Cash Used in Investing
 Activities                                                          |  |      | (716,126  | )    |   | (1,690,520 | )
|                                                                                                |  |      |           |      |   |            |  
|                                                                                                |  |      |           |      |   |            |  
|Cash Flows from Financing
 Activities:                                                          |  |      |           |      |   |            |  
|Purchase of treasury shares                                                                     |  |      | (585,708  | )    |   | (11,059    | )
|Dividends paid                                                                                  |  |      | (196,421  | )    |   |           |  
|                                                                                                |  |      |           |      |   |            |  
|Net Cash Used in Financing
 Activities                                                          |  |      | (782,129  | )    |   | (11,059    | )
|                                                                                                |  |      |           |      |   |            |  
|                                                                                                |  |      |           |      |   |            |  
|Net Increase in Cash and
 Cash Equivalents                                                      |  |      | 286,892   |      |   | 94,468     |  
|Cash and Cash Equivalents,
 beginning of year                                                   |  |      | 6,720,649 |      |   | 6,626,181  |  
|                                                                                                |  |      |           |      |   |            |  
|Cash and Cash Equivalents,
 end of year                                                         |  | $    | 7,007,541 |      | $ | 6,720,649  |  
|                                                                                                |  |      |           |      |   |            |  
|                                                                                                |  |      |           |      |   |            |  
|Supplemental Disclosures:                                                                       |  |      |           |      |   |            |  
|Cash paid for interest                                                                          |  | $    | 2,199     |      | $ | 700        |  
|                                                                                                |  |      |           |      |   |            |  
|Cash paid for income taxes                                                                      |  | $    | 60,000    |      | $ | 85,000     |  
|                                                                                                |  |      |           |      |   |            |  
|Stock issued as additional purchase consideration paid for
 acquisition of Skye Multimedia Ltd. |  | $    |          |      | $ | 218,783    |  
|                                                                                                |  |      |           |      |   |            |  

|                                               
|-----------------------------------------------
|                                               
|See notes to consolidated financial statements.
|                                               
|F-7                                            

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2010 and 2009    
|                                           

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Description
 of Business and Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Nature of operations - SmartPros Ltd. and Subsidiaries
 (SmartPros or 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 are periodic video and internet subscription services directed to
 corporate accountants and financial managers, and accountants in public
 practice. In conjunction with the acquisitions of Loscalzo Associates, Ltd.
 (Loscalzo), and Executive Enterprises Institute (EEI), the Company is now
 a leading provider of live training to accounting, legal, and financial
 services professionals. In addition, the Company produces a series of
 continuing education courses directed to the engineering profession, a series
 of courses designed for candidates for the professional engineering exam, and
 training for information technology professionals. Its wholly-owned subsidiary,
 SmartPros Legal and Ethics, Ltd. (SLE) produces ethics, governance, and
 compliance programs for corporate clients and, through its Cognistar
 division, produces online and customized training courses for the legal
 profession. Through its wholly-owned subsidiary, Skye Multimedia Ltd.
 (Skye), the Company produces customized training solutions for a number of
 industries, including pharmaceuticals, professional services, and others. The
 Company has also acquired a library of nationally certified online training
 solutions for the banking, securities, and insurance industries, and courses
 designed for live training. SmartPros also produces custom videos and rents
 out its video production studio for a fee. SmartPros corporate headquarters
 is located in Hawthorne, New York, where it maintains its corporate offices,
 new media lab, and video production studio.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Basis of presentation - The consolidated financial statements of
 SmartPros include the accounts of SmartPros and its wholly-owned
 subsidiaries, SLE, Skye, and Loscalzo. All significant intercompany balances
 and transactions have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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
 disclosure of contingent assets and liabilities at the dates of financial
 statements and the reported amounts of revenues and expenses during the
 reporting period. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Revenue recognition - The Company recognizes revenue from its
 subscription services as earned. Subscriptions are generally billed in
 advance on an annual basis, deferred at the time of billing and amortized
 into revenue on a monthly basis over the term of the subscription, generally
 one year. Engineering products are non-subscription based and revenue is
 recognized upon shipment or, in the case of online sales, upon receipt of
 payment. Revenues from other non-subscription services, such as website
 design, video production, consulting services, and custom projects, are
 recognized on a percentage of completion method where sufficient information
 relating to project status and other supporting documentation is available.
 The contracts may have different billing arrangements resulting in either
 unbilled or deferred revenue. The Company obtains either signed agreements or
 purchase orders from its non-subscription customers outlining the terms and
 conditions of the products or services to be provided. Otherwise, revenues
 are recognized after completion and/or delivery of services to the customer.
 Revenues from live training programs are recognized upon completion of the
 conference or seminar, which usually last one to three days. Expenses
 directly related to the seminars, including marketing costs, are charged to
 operations in the period in which the seminar is held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|   
|---
|   
|   
|F-8

---



SMARTPROS
LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to Consolidated Financial
 Statements
|                                           
|Years
 Ended December 31, 2010 and 2009    
|                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Segment reporting -The Company has evaluated the requirements
 under Topic 280, Segment Reporting, of the Accounting Standards
 Codification (ASC). The Companys management monitors the revenue streams
 of its various products and services; however, operations are managed and
 financial performance is evaluated on a Company-wide basis. Accordingly, all
 of the Companys operations are considered to be aggregated in one reportable
 segment, educational services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Cash and cash equivalents - All highly liquid instruments with an
 original maturity of three months or less are considered cash equivalents.
 From time to time, the Company invests a portion of its excess cash in money
 market accounts that are stated at cost and approximate market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Concentration of credit risk - Financial instruments that subject the
 Company to concentrations of credit risk consist primarily of cash and cash
 equivalents, and accounts receivable. From time to time, the cash balances
 exceed the Federal Deposit Insurance Corporation (FDIC) coverage limit of
 $250,000. The Companys cash balances are deposited with high credit quality
 financial institutions to mitigate this risk. No single customer represents a
 significant concentration (over 10%) of sales or receivables. With the recent
 economic downturn in the banking sector, the Company closely monitors its
 cash investments in money market funds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Accounts receivable - Accounts receivable are recorded at net
 realizable value which is the original invoice amount less an allowance that
 management believes will be adequate to absorb estimated losses on existing
 accounts receivable. The allowance is established through a provision for bad
 debts charged to operations. Accounts receivable are charged against the
 allowance for doubtful accounts when management believes that collectibility
 is unlikely. The allowance is an amount that management believes will be
 adequate to absorb estimated losses on existing accounts receivable, based on
 an evaluation of the collectibility of accounts receivable and prior bad debt
 experience. This evaluation also takes into consideration such factors as
 changes in the nature and volume of the accounts receivable, overall accounts
 receivable quality, review of specific problem accounts receivable, and
 current economic conditions that may affect the customers ability to pay.
 While management uses the best information available to make its evaluation,
 future adjustments to the allowance may be necessary if there are significant
 changes in economic conditions.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Accounts receivable are
 generally considered to be past due if any portion of the receivable balance
 is outstanding for more than 90 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Property and equipment - Property and equipment are stated at cost and
 are depreciated using the straight-line method over their estimated useful
 lives, ranging from three to ten years. Leasehold improvements are amortized
 over the lesser of their estimated useful lives or the life of the lease.
 Expenditures for maintenance and repairs are charged to operations as
 incurred and major expenditures for renewals and improvements are capitalized
 and depreciated over their useful lives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Impairment of long-lived assets - The Company accounts for long-lived assets
 in accordance with the provisions of Topic 350 of the ASC, Intangibles-Goodwill and Other. This
 topic establishes financial accounting and reporting standards for the
 impairment of long-lived assets and certain intangibles related to those
 assets to be held and used, and for long-lived assets and certain intangibles
 to be disposed of. The topic requires, among other things, that the Company
 review its long-lived assets and certain related intangibles for impairment
 whenever changes in circumstances indicate that the carrying amount of an
 asset may not be fully recoverable. If this review indicates that the
 long-lived asset will not be recoverable, as determined based on the
 estimated undiscounted cash flows of the Company over the remaining
 amortization period, the carrying amount of the asset is reduced by the
 estimated shortfall of cash flows. The Company believes that none of the
 long-lived assets were impaired as of December 31, 2010 and 2009.                                                                                                                       

|   
|---
|   
|   
|F-9

---



SMARTPROS
LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to Consolidated Financial
 Statements
|                                           
|Years
 Ended December 31, 2010 and 2009    
|                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill - Goodwill represents the excess of the purchase price over the fair
 value of acquired tangible assets and liabilities and identified intangible
 assets. Goodwill is assessed at least annually for impairment and any such
 impairment is recognized in the period identified. The Company performed its
 assessment and determined that goodwill is not impaired as of December 31,
 2010 and 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Intangible assets - Intangible assets are amortized on a
 straight-line basis over their estimated useful lives, which vary from 3 to
 19 years. The Company performs an annual assessment of its intangible assets
 and found no impairments as of December 31, 2010 and 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Capitalized course costs -Capitalized course costs include the direct
 cost of internally developing proprietary educational products and materials
 that have extended useful lives. Amortization of these capitalized course
 costs commences when the courses are available for sale from the Companys
 catalog. The Company has capitalized approximately $48,000 and $100,000 on
 such costs for the years ended December 31, 2010 and 2009, respectively. The
 amortization period is generally five years for courses either purchased or
 developed internally. Other course costs incurred in connection with any of
 the Companys monthly subscription products or custom work is charged to
 operations as incurred. Included in other intangible assets are course costs
 net of accumulated amortization of $307,000 and $491,000 at December 31, 2010
 and 2009, respectively.                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Capitalized software development - The Company has developed a new Learning
 Management System (LMS) as well as other products and has capitalized those
 costs in accordance with the provisions of Topic 985 of the ASC, Software.Total capitalized costs were
 $1,627,000 and $1,339,000 as of December 31, 2010 and 2009, respectively. The
 Company began amortizing certain of these costs over a five-year period
 commencing when the LMS was placed in service during 2008. Amortization
 expense for 2010 and 2009 was approximately $297,000 and $207,000,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Deferred revenue - Deferred revenue related to subscription
 services represents the portion of unearned subscription revenue, which is
 amortized on a straight-line basis, as earned. Deferred revenue related to
 web site design and video production 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Income taxes -Deferred tax assets and liabilities are
 recognized for the future tax consequences attributable to temporary
 differences between the financial statement carrying amounts of existing
 assets and liabilities and their respective tax bases. Deferred tax assets,
 including tax loss carryforwards, and liabilities are measured using enacted
 tax rates expected to apply to taxable income in the years in which those temporary
 differences are expected to be recovered or settled. The effect on deferred
 tax assets and liabilities of a change in tax rates is recognized in income
 in the period that includes the enactment date. Deferred income tax expense
 represents the change during the period in the deferred tax assets and
 deferred tax liabilities. The components of the deferred tax assets and
 liabilities are individually classified as current and non-current based on
 their characteristics. Deferred tax assets are reduced by a valuation
 allowance when, in the opinion of management, it is more likely than not that
 some portion or all of the deferred tax assets will not be realized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company measures and
 recognizes the tax implications of positions taken or expected to be taken in
 its tax returns on an ongoing basis. The Company had no unrecognized tax
 benefits or liabilities, and no adjustment to its financial position, results
 of operations, or cash flows relating to uncertain tax positions taken on all
 open tax years. The Company is no longer subject to federal, state or local
 income tax examinations by tax authorities for the years before 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|    
|----
|    
|    
|F-10

---



SMARTPROS
LTD.
AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years
 Ended December 31, 2010 and 2009   
|                                          

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net income (loss) per share -Basic net income (loss) per share is
 computed by dividing income (loss) available to common stockholders by the
 weighted-average number of common shares outstanding. Diluted earnings per
 share reflect, in periods in which they have a dilutive effect, the impact of
 common shares issuable upon exercise of stock options and warrants and
 non-vested shares of common stock. For the year ended December 31, 2010, the
 inclusion of common stock equivalents would be anti-dilutive.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The reconciliation is as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                                              |  |      |           |      |  |           | 
|--------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | --------- | 
|Years Ended December 31,                                                                      |  | 2010 |           | 2009 | 
|                                                                                              |  |      |           |      | 
|                                                                                              |  |      |           |      |  |           | 
|Weighted Average Number of Shares Outstanding                                                 |  |      | 4,946,058 |      |  | 5,043,045 | 
|Effect of Dilutive Securities, common stock equivalents                                       |  |      |          |      |  | 58,623    | 
|                                                                                              |  |      |           |      |  |           | 
|                                                                                              |  |      |           |      |  |           | 
|Weighted Average Number of Shares Outstanding, used for computing
 diluted earnings per share |  |      | 4,946,058 |      |  | 5,101,668 | 
|                                                                                              |  |      |           |      |  |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock-based compensation -The Company accounts for stock-based
 compensation in accordance with ASC Topic 718, Stock Compensation. Under the fair value recognition
 provisions of this statement, stock-based compensation cost is measured at
 the grant date based on the fair value of the award and is recognized as
 expense on a straight-line basis over the vesting period. Determining the
 fair value of share-based awards at the grant date requires assumptions and
 judgments about expected volatility and forfeiture rates, among other
 factors.                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Advertising costs -Advertising costs are expensed as incurred
 and were approximately $115,000 and $125,000 for the years ended December 31,
 2010 and 2009, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Reclassifications - Certain prior year balances have been
 reclassified to conform with the current years presentation. The reclassifications
 have no effect on the Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | New accounting pronouncements - In December 2010, the Financial Accounting
 Standards Board (FASB) issued an amendment to Topic 350 that provides
 further guidance on when to perform Step 2 of the Goodwill Impairment Test
 for Reporting Units with Zero or Negative Basis. This amendment affect all
 entities that have recognized goodwill and have one or more reporting units
 whose carrying amount for purposes of performing Step 1 of the goodwill
 impairment test is zero or negative. This amendment is effective for years
 ending after December 15, 2010. The implementation of this amendment did not
 have a material impact on our consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In December 2010, the FASB
 also issued an amendment to Topic 805, Business
 Combinations. The amendment describes the requirements for issuing
 pro-forma information related to business combinations that occurred in the
 current accounting period. This amendment is effective for periods ending
 after December 15, 2010. The Company believes that this amendment has no
 current impact on its consolidated financial statements as no acquisitions
 were made in 2010.                                                                                                                                                                                                            

|    
|----
|    
|    
|F-11

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Acquisitions
 and Joint Venture                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In
 July 2009, the Company acquired substantially all of the operating assets and
 assumed certain liabilities of EEI for approximately $349,000. The purchase price was allocated to course
 costs of $313,000 which is being amortized over a five-year period, prepaid
 expenses of $81,000, and deferred revenue of $45,000. EEI provides live training to accountants, financial professionals, and
 attorneys through seminars conducted throughout the United States. It also
 conducts live classroom-style training for its clients.                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In 2008, our Skye subsidiary formed a joint venture with Education
 and Training Systems International (ETSI) for the purpose of marketing its
 iReflect product and invested $35,000 in this joint venture. iReflect is an
 interactive, web-based tool used for the development of marketing and
 presentation skills. The investment in the joint venture is accounted for
 using the equity method and Skye has reduced the carrying amount of its
 investment by its share of losses in the joint venture, net of any additional
 capital contributions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3. | Property and Equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The components
 of property and equipment are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                    |  |      |           |      |   |           | 
| | ---------------------------------- |  | ---- | --------- | ---- | - | --------- | 
| | December 31,                       |  | 2010 |           | 2009 |  
| |                                    |  |      |           |      |   |           | 
| |                                    |  |      |           |      |   |           | 
| | Furniture,
 Fixtures and Equipment |  | $    | 4,577,624 |      | $ | 4,228,325 | 
| | Leasehold
 Improvements            |  |      | 189,709   |      |   | 189,709   | 
| |                                    |  |      |           |      |   |           | 
| |                                    |  |      | 4,767,333 |      |   | 4,418,034 | 
| | Less
 Accumulated Depreciation     |  |      | 4,049,905 |      |   | 3,809,184 | 
| |                                    |  |      |           |      |   |           | 
| |                                    |  | $    | 717,428   |      | $ | 608,850   | 
| |                                    |  |      |           |      |   |           | 

|   |                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------
|   | Depreciation
 expense for the years ended December 31, 2010 and 2009 was approximately
 $241,000 and $216,000, respectively.
|   |                                                                                                                             
|4. | Goodwill and Other Intangible Assets, net                                                                                   
|   |                                                                                                                             
|   | The
 components of other intangible assets are as follows:                                                                  

| |                                   |  |      |            |      |   |            | 
| | --------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
| | December 31,                      |  | 2010 |            | 2009 |  
| |                                   |  |      |            |      |   |            | 
| |                                   |  |      |            |      |   |            | 
| | Engineering
 Courses              |  | $    | 2,766,837  |      | $ | 2,766,837  | 
| | Rights to
 CPA Report (CPAR)    |  |      | 1,700,000  |      |   | 1,700,000  | 
| | Pro2 Net
 Courses (P2N)         |  |      | 837,504    |      |   | 837,504    | 
| | Course Costs                      |  |      | 1,145,001  |      |   | 1,097,200  | 
| | Customer Lists                    |  |      | 1,041,746  |      |   | 1,041,746  | 
| | Restrictive Covenant              |  |      | 200,000    |      |   | 200,000    | 
| | Trade Name                        |  |      | 350,000    |      |   | 350,000    | 
| | Capitalized Software
 Development |  |      | 1,647,727  |      |   | 1,338,701  | 
| | Financial Campus                  |  |      | 340,894    |      |   | 340,894    | 
| | Other Intangible Assets           |  |      | 803,330    |      |   | 803,330    | 
| |                                   |  |      |            |      |   |            | 
| |                                   |  |      | 10,833,039 |      |   | 10,476,212 | 
| | Less
 Accumulated Amortization    |  |      | 6,941,181  |      |   | 6,054,463  | 
| |                                   |  |      |            |      |   |            | 
| |                                   |  | $    | 3,891,858  |      | $ | 4,421,749  | 
| |                                   |  |      |            |      |   |            | 

| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The
 aggregate amortization expense for the years ended December 31, 2010 and 2009
 was approximately $887,000 and $836,000, respectively.

|    
|----
|    
|    
|F-12

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Estimated amortization expense for each of the five years subsequent
 to December 31, 2010 is as
 follows:

| |                          |  |   |         | 
| | ------------------------ |  | - | ------- | 
| | Year Ending December 31, |  |   |         | 
| |                          |  |   |         | 
| |                          |  |   |         | 
| | 2011                     |  | $ | 754,000 | 
| | 2012                     |  |   | 631,000 | 
| | 2013                     |  |   | 514,000 | 
| | 2014                     |  |   | 340,000 | 
| | 2015                     |  |   | 307,000 | 

| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 following table presents the changes in the carrying amount of goodwill and
 other intangible assets during the years ended December 31, 2010 and 2009:

| |                                          |  |          |           |                          |   |           |  
| | ---------------------------------------- |  | -------- | --------- | ------------------------ | - | --------- | -
| |                                          |  | Goodwill |           | Other
 Intangible Assets |  
| |                                          |  |          |           |                          |   |           |  
| |                                          |  |          |           |                          |   |           |  
| | Balance,
 January 1, 2009                |  | $        | 3,394,329 |                          | $ | 4,500,639 |  
| | Amortization
 Expense                    |  |          |          |                          |   | (836,552  | )
| | Goodwill and
 Intangible Assets Acquired |  |          | (19,072   | )                        |   | 757,662   |  
| |                                          |  |          |           |                          |   |           |  
| | Balance,
 December 31, 2009              |  |          | 3,375,257 |                          |   | 4,421,749 |  
| | Amortization
 Expense                    |  |          |          |                          |   | (886,718  | )
| | Intangible
 Assets Acquired              |  |          |          |                          |   | 356,827   |  
| |                                          |  |          |           |                          |   |           |  
| | Balance,
 December 31, 2010              |  | $        | 3,375,257 |                          | $ | 3,891,858 |  
| |                                          |  |          |           |                          |   |           |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The
 reduction in goodwill of $19,072 in 2009 represents an adjustment to the
 additional post closing consideration paid to Skye and an adjustment to the
 Loscalzo purchase price.                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|5. | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | At December
 31, 2010 and 2009, the Company has a net deferred tax asset of approximately
 $1,290,000 and $1,251,000 respectively, primarily resulting from the expected
 future benefit of available net operating loss carryforwards and other
 temporary differences. Realization of deferred tax assets depends on
 sufficient future taxable income during the period that deductible temporary
 differences and loss carryforwards are expected to be available to offset
 future taxable income of approximately $3,000,000 which expire through 2025.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
 components of the provision for income taxes are as follows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                          |  |      |         |      |   |          |  
| | ------------------------ |  | ---- | ------- | ---- | - | -------- | -
| | Years Ended December 31, |  | 2010 |         | 2009 |  
| |                          |  |      |         |      |  
| |                          |  |      |         |      |   |          |  
| | Current:                 |  |      |         |      |   |          |  
| | Federal                  |  | $    |        |      | $ | (5,000   | )
| | State                    |  |      | (58,585 | )    |   | (122,408 | )
| |                          |  |      |         |      |   |          |  
| | Total
 Current           |  |      | (58,585 | )    |   | (127,408 | )
| |                          |  |      |         |      |   |          |  
| |                          |  |      |         |      |   |          |  
| | Deferred:                |  |      |         |      |   |          |  
| | Federal                  |  |      | 33,216  |      |   | 102,000  |  
| | State                    |  |      | 5,860   |      |   | 18,000   |  
| |                          |  |      |         |      |   |          |  
| | Total
 Deferred          |  |      | 39,076  |      |   | 122,000  |  
| |                          |  |      |         |      |   |          |  
| |                          |  | $    | (19,509 | )    | $ | (7,408   | )
| |                          |  |      |         |      |   |          |  

|    
|----
|    
|    
|F-13

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in
 current state income tax expense for the years ended December 31, 2010 and
 2009 are approximately $24,000 and $65,000, respectively, of income tax under
 accruals from the prior year.
| |                                                                                                                                                                                                      
| | The
 temporary differences and net operating loss carryforward give rise to the
 following deferred tax assets:                                                                                      

| |                                                                       |  |      |           |      |   |           | 
| | --------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
| | December 31,                                                          |  | 2010 |           | 2009 |  
| |                                                                       |  |      |           |      |  
| |                                                                       |  |      |           |      |   |           | 
| | Net
 Operating Loss                                                   |  | $    | 1,370,000 |      | $ | 1,247,000 | 
| | Depreciation
 and Amortization of Property, Equipment and Intangibles |  |      | 504,000   |      |   | 569,000   | 
| | Stock Option
 and Restricted Stock Compensation Expense               |  |      | 145,000   |      |   | 116,000   | 
| | Other                                                                 |  |      | 13,000    |      |   | 8,924     | 
| |                                                                       |  |      |           |      |   |           | 
| |                                                                       |  |      | 2,032,000 |      |   | 1,940,924 | 
| | Less
 Valuation Allowance                                             |  |      | 742,000   |      |   | 690,000   | 
| |                                                                       |  |      |           |      |   |           | 
| | Deferred Tax
 Asset                                                   |  | $    | 1,290,000 |      | $ | 1,250,924 | 
| |                                                                       |  |      |           |      |   |           | 

| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | These
 amounts have been classified on the accompanying consolidated balance sheets
 as non current.                                       
| |                                                                                                                                            
| | A
 reconciliation of income tax expense at the federal statutory rate to income
 tax expense at the Companys effective rate is as follows:

| |                                                |  |      |        |      |  |        |   
| | ---------------------------------------------- |  | ---- | ------ | ---- |  | ------ | --
| | Years Ended December 31,                       |  | 2010 |        | 2009 | 
| |                                                |  |      |        |      | 
| |                                                |  |      |        |      |  |        |   
| | U.S. Federal
 Statutory Income Tax Rate        |  |      | (34.00 | )%   |  | 34.00  | % 
| | State Income
 Tax Rate, net of federal benefit |  |      | (6.00  | )%   |  | 6.00   | % 
| | Travel and
 Entertainment                      |  |      | (9.30  | )%   |  | 3.00   | % 
| | Prior Years
 True-ups                         |  |      | (12.00 | )%   |  | 14.50  | % 
| | Change in
 Valuation Allowance                 |  |      | 41.00  | %    |  | (67.00 | )%
| | Other                                          |  |      | 5.20   | %    |  | 7.70   | % 
| |                                                |  |      |        |      |  |        |   
| | Effective Income Tax Rate                      |  |      | (15.10 | )%   |  | (1.80  | )%
| |                                                |  |      |        |      |  |        |   

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | Stock
 Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The
 Companys 2009 Incentive Compensation Plan (the Plan), as approved by the
 stockholders at the annual meeting held in June 2009, replaced the expired
 1999 Stock Option Plan. The Plan provides for the grant of up to 800,000 shares
 of non-qualified stock options and restricted stock awards to employees,
 directors and consultants. Future restricted stock grants may not exceed
 200,000 shares. The Plan incorporated the outstanding shares at the time of
 adoption. As of December 31, 2010, there were 409,798 options outstanding, of
 which 321,239 are currently exercisable and there were 111,038 restricted
 stock grants outstanding. As of December 31, 2010, the Plan had a net balance
 of 183,388 shares reserved for the issuance of future grants. The Plan is
 administered by the Compensation Committee of the Board of Directors of the
 Company. The administrator of the Plan determines the terms of options,
 including the exercise price, expiration date, number of shares, and vesting
 provisions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The weighted
 average estimated fair value of stock options granted for the year ended
 December 31, 2010 and 2009 was $2.34 and $2.69, respectively. The fair value
 of options at the date of grant was estimated using the Black-Scholes Option
 Pricing Model. The Company takes into consideration guidance under ASC Topic 718, Stock Compensation when
 reviewing and updating assumptions. The expected volatility is based upon
 historical volatility of the Companys stock and other contributing factors.
 The expected term is based upon observation of the actual time elapsed
 between the date of grant and the exercise of options for all employees.
 Previously, such assumptions were determined based on historical data.                                                                                                                                                                                                                                                                                                 

|    
|----
|    
|    
|F-14

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

| |                                                                                
| | -------------------------------------------------------------------------------
| | The assumptions made in
 calculating the fair values of options are as follows:

| |                          |  |      |           |      |  |             | 
| | ------------------------ |  | ---- | --------- | ---- |  | ----------- | 
| | Years Ended December 31, |  | 2010 |           | 2009 | 
| |                          |  |      |           |      |  |             | 
| |                          |  |      |           |      |  |             | 
| | Contractual Term         |  |      | 10 years  |      |  | 10 years    | 
| | Expected Volatility      |  |      | 40%       |      |  | 40%-45%     | 
| | Expected Dividend Yield  |  |      | 0%        |      |  | 0%          | 
| | Risk-Free Interest Rate  |  |      | 1.27%     |      |  | 2.0% - 2.1% | 
| | Expected Term            |  |      | 5.0 years |      |  | 4.5 years   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2010 and 2009, stock-based
 compensation expense related to stock options granted was approximately
 $61,000 and $84,000, respectively. As of December 31, 2010, the fair value of
 unamortized compensation cost related to unvested stock option awards was
 approximately $33,000. Unamortized compensation cost as of December 31, 2010
 is expected to be recognized over a remaining weighted-average vesting period
 of three years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As of December 31, 2010, the options had no intrinsic value, which is
 the difference between the exercise price and closing price of the Companys
 common stock of options outstanding and exercisable.                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In November 2010, the Company granted 5,000 stock options,
 exercisable over ten years from the date of grant at $2.34 per share. These
 options vest over a three-year period.                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In February 2009, the Company granted stock options and restricted
 stock awards to certain officers, senior management, and employees. All of
 the awards were granted at $2.54. Included in the grant are 55,750 stock
 options and 116,616 restricted stock grants, all of which have various
 vesting schedules ranging from February 2009 through February 2013.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In July 2009, the Company granted 10,000 fully vested stock options
 immediately exercisable at a price of $3.50 in conjunction with the
 acquisition of EEI.                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | A
 summary of all stock option activity is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                        |  |                     |         |                                     |   |      | 
| | -------------------------------------- |  | ------------------- | ------- | ----------------------------------- | - | ---- | 
| | Years Ended December 31, 2010 and 2009 |  | Number
 of
 Options |         | Weighted 
 Average 
 Exercise Price |  
| |                                        |  |                     |         |                                     |   |      | 
| |                                        |  |                     |         |                                     |   |      | 
| | Outstanding, January 1, 2009:          |  |                     | 365,144 |                                     | $ | 4.71 | 
| | Options granted                        |  |                     | 65,750  |                                     |   | 2.69 | 
| | Options forfeited/expired              |  |                     | (20,773 | )                                   |   | 4.32 | 
| | Options exercised                      |  |                     |        |                                     |   |     | 
| |                                        |  |                     |         |                                     |   |      | 
| | Outstanding, December 31, 2009         |  |                     | 410,121 |                                     |   | 4.40 | 
| | Options granted                        |  |                     | 5,000   |                                     |   | 2.34 | 
| | Options forfeited/expired              |  |                     | (5,323  | )                                   |   | 4.95 | 
| | Options exercised                      |  |                     |        |                                     |   |     | 
| |                                        |  |                     |         |                                     |   |      | 
| | Outstanding, December 31, 2010         |  |                     | 409,798 |                                     |   | 4.37 | 
| |                                        |  |                     |         |                                     |   |      | 
| | Exercisable, December 31, 2010         |  |                     | 321,239 |                                     |   | 4.49 | 
| |                                        |  |                     |         |                                     |   |      | 

|    
|----
|    
|    
|F-15

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

| |                |  |                     |         |                                                 |  |                              |  |                      |      |                                                             |  |         |  |  |      | 
| | -------------- |  | ------------------- | ------- | ----------------------------------------------- |  | ---------------------------- |  | -------------------- | ---- | ----------------------------------------------------------- |  | ------- |  |  | ---- | 
| |                |  | Options Outstanding |         | Options Exercisable                             | 
| |                |  |                     |         |                                                 | 
| | Exercise Price |  | NumberOutstanding   |         | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |  | Number 
 Exercisable |      | Weighted 
 Average 
 Remaining 
 Contractual 
 Life (Years) | 
| |                |  |                     |         |                                                 |  |                              |  |                      |      |                                                             | 
| | $2.00-$2.99    |  |                     | 101,650 |                                                 |  | 5.68                         |  | $                    | 2.53 |                                                             |  | 58,516  |  |  | 4.41 | 
| | $3.00-$3.99    |  |                     | 35,150  |                                                 |  | 5.98                         |  |                      | 3.34 |                                                             |  | 35,150  |  |  | 5.98 | 
| | $4.00-$4.99    |  |                     | 36,642  |                                                 |  | 4.64                         |  |                      | 4.19 |                                                             |  | 36,642  |  |  | 4.64 | 
| | $5.00-$5.99    |  |                     | 236,356 |                                                 |  | 1.97                         |  |                      | 5.35 |                                                             |  | 190,931 |  |  | 0.75 | 
| |                |  |                     |         |                                                 |  |                              |  |                      |      |                                                             |  |         |  |  |      | 
| |                |  |                     | 409,798 |                                                 |  | 3.47                         |  |                      | 4.37 |                                                             |  | 321,239 |  |  | 2.43 | 
| |                |  |                     |         |                                                 |  |                              |  |                      |      |                                                             |  |         |  |  |      | 

| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | A
 summary of the non-vested options and activity for the year ended December
 31, 2010 is as follows:

| |                                |  |         |         |                                            |  |      | 
| | ------------------------------ |  | ------- | ------- | ------------------------------------------ |  | ---- | 
| |                                |  | Options |         | Weighted 
 Average Grant 
 Date Fair Value | 
| |                                |  |         |         |                                            | 
| |                                |  |         |         |                                            | 
| | Non-vested,
 January 1, 2010   |  |         | 105,041 |                                            |  | 1.62 | 
| | Granted                        |  |         | 5,000   |                                            |  | 2.34 | 
| | Vested                         |  |         | (20,582 | )                                          |  | 3.07 | 
| | Forfeited                      |  |         | (900    | )                                          |  | 3.25 | 
| |                                |  |         |         |                                            |  |      | 
| | Non-vested,
 December 31, 2010 |  |         | 88,559  |                                            |  | 1.62 | 
| |                                |  |         |         |                                            |  |      | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. | Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In 2009, the Company Compensation Committee granted certain officers
 and key employees 98,500 shares of restricted common stock, of which 48,500
 shares vest three years from issuance and 50,000 shares vest one-quarter each
 year commencing one year from issuance. In addition, as part of their 2008
 bonus, certain employees were issued 18,116 shares of restricted common
 stock, of which one-third vested immediately and one-third will vest each
 year thereafter.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In addition, in 2009, the Company purchased 3,046 shares of common
 stock from a key employee for $11,059.                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In 2010 the Company purchased 201,479 shares of its common stock for
 $589,708.                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|8. | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Operating leases-The
 Company leases office space and production and warehouse facilities in
 Hawthorne, New York; Westborough, Massachusetts; Bridgewater, New Jersey; and
 Red Bank, New Jersey. The office in Red Bank, New Jersey is owned by an
 affiliate of the President of Loscalzo. Future minimum lease payments are as
 follows:                                                                                                                                       

|    
|----
|    
|    
|F-16

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

| |                          |  |   |           | 
| | ------------------------ |  | - | --------- | 
| | Year Ending December 31, |  |   |           | 
| |                          |  |   |           | 
| |                          |  |   |           | 
| | 2011                     |  | $ | 422,000   | 
| | 2012                     |  |   | 379,000   | 
| | 2013                     |  |   | 377,000   | 
| | 2014                     |  |   | 342,000   | 
| | 2015                     |  |   | 339,000   | 
| | Thereafter               |  |   | 1,099,000 | 
| |                          |  |   |           | 
| |                          |  | $ | 2,958,000 | 
| |                          |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense
 is recorded on a straight-line basis over the lease term. Rent expense for
 the years ended December 31, 2010 and 2009 was approximately $439,000 and
 $450,000, respectively.                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | Rent to
 Loscalzo was $60,000 for each of the years ended December 31, 2010 and 2009.                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | The Company
 arranged for a $75,000 letter of credit representing a security deposit for
 the Hawthorne, New York lease. The Company has pledged a $75,000 certificate
 of deposit to the bank, issuing the letter of credit as collateral for the
 letter of credit and the restricted cash account is included in other assets.                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | Employment
 agreements- The
 Company has entered into employment agreements with its key senior
 executives.                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                      |  | The
 employment agreement with the Companys chief executive officer was renewed
 in February 2007, and is for a term of three years. The agreement renews
 automatically for a new three-year term at the end of the first year of each
 three-year term, unless either party gives notice of their intent not to
 renew before the end of the first year of each three-year term.         
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                      |  | The chief
 financial officers agreement was renewed in July 2008 and expires in June
 2011.                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                      |  | The
 employment agreement with the President was renewed on October 1, 2008 for a
 period of three years.                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                      |  | The chief
 technology officers agreement was renewed on March 1, 2010 for a period of
 two years.                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                      |  | The
 agreement with the President of Skye was renewed on February 1, 2010 for a
 two-year period. The agreement requires an annual base salary plus incentives
 if certain goals are met. The previous agreement, which expired on January
 31, 2010, also required certain incentive payments and approximately $15,000
 in such payments was accrued for the year ended December 31, 2009.
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | Each
 employment agreement provides for specified annual base salaries, subject to
 increases at the discretion of the Companys board of directors. Under
 certain agreements, if the Company terminates any executives employment
 without cause, or if an executive terminates his employment for good reason,
 the executive is entitled to receive certain severance benefits.
| |                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | The
 aggregate commitments under the employment agreements for the senior
 executives described above approximated $888,000 payable in 2011 and $369,000
 payable in 2012.                                                                                                                                                                                                          

|    
|----
|    
|    
|F-17

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2010 and 2009     
|                                           

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | Litigation -
 The Company is involved in litigation through the normal course of business.
 The Company believes that the resolution of these matters will not have a
 material adverse effect on the financial position or results of operations of
 the Company. Currently, there are no pending litigations.                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|9.   | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The methods
 and assumptions used to estimate the fair value of the following classes of
 financial instruments were:                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | Current assets and current liabilities - The
 fair values of cash, accounts receivables, payables, and certain other
 short-term financial instruments approximate their carrying values due to
 their short-term maturities.                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | In March 2011, the Companys compensation
         committee granted 55,833 shares of its common stock from its 2009 Plan
         to certain key officers, employees, and directors. Of these grants,
         42,333 vest one-third on each one-year anniversary from date of issuance.
         The remaining 13,500 grants vest three years from date of issuance.
         The price of the stock at the grant date was $2.35.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | In February 2011, the Company granted 5,000 stock options, which vest
 one-third on each one-year anniversary from date of issuance and are
 exercisable over a ten-year period. The stock options are exercisable at a
 price of $2.34.                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | In January 2011, the Company purchased 10,000 shares of common stock
 from a key employee for $24,100.                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | The Company reviewed
 events for inclusion in the consolidated financial statements through the
 filing date of its financial statements.                                                                                                                                                                                                                                                                                          
|    
|    
|    
|F-18

---