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, 2009
|                                            
|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 Small Business Issuer 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
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).

Yes o No
o

Indicate by check mark 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.

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 $13,802,360, 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, 2009, 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
19, 2010: 5,076,305

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,
2010, with respect to its 2010 Annual Meeting of Stockholders.

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SMARTPROS LTD.

Form 10-K Annual Report

TABLE OF CONTENTS

|          |              |  |                                                                                                                                         |  |      | 
|--------- | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|          |              |  |                                                                                                                                         |  | Page
|          |              |  |                                                                                                                                         |  |     
|          |              |  |                                                                                                                                         |  |      | 
|PART
 I   |              |  |                                                                                                                                         |  |     
|          | Item
 1.     |  | Description
 of Business                                                                                                                |  | 1    | 
|          | Item
 1A.    |  | Risk
 Factors                                                                                                                           |  | 18   | 
|          | Item
 1B.    |  | Unresolved
 Staff Comments                                                                                                              |  | 21   | 
|          | Item
 2.     |  | Description
 of Property                                                                                                                |  | 21   | 
|          | Item
 3.     |  | Legal
 Proceedings                                                                                                                      |  | 22   | 
|          | Item
 4.     |  | (Removed
 and Reserved)                                                                                                                 |  | 22   | 
|          |              |  |                                                                                                                                         |  |      | 
|PART
 II  |              |  |                                                                                                                                         |  |     
|          | Item
 5.     |  | Market
 for Common Equity and Related Stockholder Matters and Issuer Purchases Of
 Equity Securities                                    |  | 22   | 
|          | Item
 6.     |  | Selected
 Financial Data                                                                                                                |  | 23   | 
|          | Item
 7.     |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operation                                                   |  | 23   | 
|          | Item
 7A.    |  | Quantitative
 and Qualitative Disclosure about Market Risk                                                                              |  | 32   | 
|          | Item
 8.     |  | Financial
 Statements                                                                                                                   |  | 32   | 
|          | Item
 9.     |  | Changes
 in and Disagreements with Accountants on Accounting and Financial Disclosure                                                   |  | 32   | 
|          | Item
 9A(T). |  | Controls
 and Procedures                                                                                                                |  | 32   | 
|          | Item
 9B.    |  | Other
 Information                                                                                                                      |  | 33   | 
|          |              |  |                                                                                                                                         |  |      | 
|PART
 III |              |  |                                                                                                                                         |  |     
|          | Item
 10.    |  | Directors,
 Executive Officers, Promoters, Control Persons and Corporate Governance;
 Compliance with Section 16(a) of the Exchange Act |  | 33   | 
|          | Item
 11.    |  | Executive
 Compensation                                                                                                                 |  | 33   | 
|          | Item
 12.    |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters                                        |  | 33   | 
|          | Item
 13.    |  | Certain
 Relationships and Related Transactions, and Director Independence                                                              |  | 34   | 
|          | Item
 14.    |  | Principal
 Accountant Fees and Services                                                                                                 |  | 34   | 
|          |              |  |                                                                                                                                         |  |      | 
|PART IV   |              |  |                                                                                                                                         |  |     
|          | Item
 15.    |  | Exhibits
 and Financial Statement Schedules                                                                                             |  | 34   | 

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.

ii

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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 for information technology professionals. We also provide training in
corporate governance, ethics, finance 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 who 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 Web site 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 government 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, as well as
 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, the National Society of Professional
 Engineers, the American Council of Engineering Companies, and the American
 Society of Mechanical Engineers.                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Our
 financial services library consists of courses designed to meet the licensing
 or continuing education requirements for bankers and financial service
 professionals, including insurance brokers, bankers and licensed security
 industry professionals.                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Our entire
 continuing legal education library is approved in 12 states and the United
 Kingdom, and some or all of the continuing legal education courses are
 currently approved in 20 states. Unlike the 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 via
the Internet. The Internet continues to be our fastest growing delivery
channel, attracting new and existing subscribers. With the acquisitions of The
Selbst Group (Selbst) in 2007, Loscalzo Associates, Ltd. (Loscalzo) in 2008
and Executive Enterprise Institute (EEI) in 2009, we offer live seminars
directed to accountants, legal and financial services professionals delivered
through a number of different channels.

1

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Our
video and online solutions are flexible, cost-efficient and easy to use.
On-line training provides cost-effective alternatives to traditional classroom
training where travel costs, scheduling difficulties and lost productivity may
be avoided. 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.

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 2008 U.S. organizations spent $130 billion on employee learning
and development or approximately $1,068 per employee. 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 2008 there were over two million
accountants and finance professionals in the United States. The American
Institute of Certified Public Accountants claims it has over 330,000 members
representing approximately 60% of all the certified public accountants in the
United States. Approximately half of the membership of the AICPA is serving in
corporate positions, with the balance in professional services, education and
government. 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 thousand 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 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 of 40 hours of continuing professional
education credit annually to maintain an accounting license. In 45 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.

Engineering

According
to the Bureau of Labor Statistics, in 2008 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 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, is given twice each year, in
April and October. According to the National Council of Examiners for
Engineering and Surveying (NCEES), in 2009 approximately 40,000 engineers sat
for the exams and 73% passed the FE Exam and 63% passed the PE Civil Exam. In
addition, engineers

2

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who pass the
Fundamentals of Engineering 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 Professional Engineering exam (PE)
for civil engineering 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% of the total candidates taking the PE 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 market 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-two
states require some form of continuing legal education with requirements
ranging between 10 hours per year to 45 hours every 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 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, creating a greater need
for education and training on related issues. 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.

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

3

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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 2,700 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,
| |   |                                                          
| |  | 200 hours in
 legal training, and                        
| |   |                                                          
| |  | 200 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 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.

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Our
engineering products include courses designed to help prepare engineers for the
basic entry-level licensing exam and the civil engineering professional
licensing exam, and courses that 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 online 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.

Our
information technology training division course library, WatchIT, includes more
than 250 courses providing relevant briefings to executives, technologists and
consultants with relevant up-to-date information on 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. In 2009, EEI began offering live programs to FEI
members.

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

5

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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.

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 health care, 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,
thus 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. We recently launched our
new PEC, and also have the ability to conduct live Webinars.

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.

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. Effective
January 1, 2009, we began producing our monthly

6

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subscription
based products that are not delivered online exclusively in DVD format. This
format can be used for either group- or self-study. The online format is for
self-study only and is usually available as text only, text with audio, or in a
multimedia format that includes text, audio and streaming video. All DVD
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 in 2008,
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, associations of accounting firms, and corporations. We also have the
ability to deliver instruction through live or recorded Webinars.

Executive Enterprise Institute. With
the acquisition of EEI in 2009, we now offer 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 on these same topics to
its clients through various mediums.

SmartPros Advantage. SPA
is a skills-based learning library containing over 280 courses, varying in
length from one to eight credit hours. We produce these programs in our own
production facility, and pay the authors of these programs a royalty. This
library is marketed primarily to corporate accounting and finance professionals
and public accountants. The courses are offered individually or on a
subscription basis.

Financial Management Network. FMN
is a library of update programs dealing with current, relevant topics for
corporate accounting and finance professionals. 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. FMN courses are
offered in video or online formats.

CPA Report (CPAR). This
library of programs covers 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 most recent 44 programs, representing 88 credit hours. This
program is also offered in video or online formats.

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 and
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 video or online formats.

Hawthorne Center of Excellence (HCE). This
is a series of courses, designed to provide professionals with advanced
knowledge of critical accounting, financial, business and other related topics by

7

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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. We anticipate the first courses to be available in late 2010.

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 produce the program and convert it into a digital
format that can be distributed via the Internet or internally through the
corporate intranet. In other cases, we write and produce the entire program for
the client. We then deliver this custom content either through our proprietary
learning content management system or that of the client. These customized
products can be designed to qualify for CPE credit.

Engineering

Our
engineering library includes the following:

PE Exam Review. Our
interactive PE Exam Review course for civil engineers was developed jointly
with the American Society of Civil Engineers and the Boston Society of Civil
Engineers Section and is designed to prepare engineers for their professional
licensing exam. The PE 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, and there are
two bonus sections with Economics and Surveying review as additional resources
to help prepare for the exam. In addition, a Construction hard copy supplement
is provided to comply with new NCEES exam requirements.

In
2006, we acquired a series of self-study courses to prepare for the PE exam.
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 email, telephone or submission of mini-exams for grading.

Online Professional Development Hours. We
have a library, consisting of 65 hours, of engineering and management courses
that qualify for professional development hours. For example, in the General
Engineering: Business Management area we have over a dozen courses on various
topics relating to managing a small professional practice. Over half of the
content in this library was developed with the ASCE. Other courses in this
library were developed with the ACEC.

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 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 MGI
self-study version of this course also provides for instructor mentoring.

Supply Chain and CPIM Certification. MGI provides to members of APICS a series
of five courses that can be taken as either stand-alone coursework or 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.

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Green Engineering. In
2009 we launched a Green Engineering Web site (http://greenengineering.smartpros.com)
to provide online courses to meet the education needs in green and sustainable
engineering and clean power 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
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. These courses are eligible for
professional development credit.

Corporate Governance, Compliance and Ethics

SmartPros
Legal and Ethics, Ltd. (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 specific learning experiences designed to meet
 specific integrity risks. Training can be designed to meet the specific 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.                                                                                                                

Compliance
and Ethics Effectiveness Quotient (CEEQ) is a best practices and principles
benchmark designed to help organizations build ethical and engaged cultures,
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 over 150 online courses in continuing legal education
and business ethics. These courses are accredited for nearly 200 hours of CLE
credit in approximately 20 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 Sage and FinancialCampus (FC)
libraries and Selbst. Selbst and FC were acquired in March and August 2007,
respectively. Sage and FC sell online training

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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 200 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 for taking their licensing exams.
These courses are offered in a number of different mediums including Internet,
video, multimedia, and workshop formats.

Information Technology

Our
SmartIT division includes more than 250 courses from our WatchIT catalog that
are designed to update and inform technology professionals about the latest
initiatives in the 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 has also developed two 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 and is capable of delivering content to any
Flash-enabled computer. This product provides greater functionality for the
user and the clients educational administrator. Our other product,
CourseBuilder 2.0, is designed to give the end user the ability to customize
courses that are available on their PEC.

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 Web sites, 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 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.

10

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The
technology department also generates fees through Web site 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, Margaret
Loscalzo, 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, the Companys Co-Founder and
President, is a certified public accountant and oversees the development of our
accounting programs and new product development. Ms. Loscalzo is a certified
public accountant and the former owner of Loscalzo Associates, which we
acquired in July 2008. Ms. Loscalzo is responsible for developing course
materials for various state accounting societies, as well as Loscalzos own
clients. Mr. Fleming is a certified public accountant and responsible for
instructing, writing and editing Loscalzo courses. Ms. Stefano is a certified
public accountant and professor of accounting, and is currently responsible for
updating existing and introducing new courses in our SPA catalog. 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 is the president of SLE, an
attorney 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.
He 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.

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

11

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own inside
telemarketing sales force, our outside sales force, direct marketing using
catalogs, brochures, email communications and through our Web sites. 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 18 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.

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 Web site and the Web
sites of our strategic partners; participating in trade shows; and ongoing customer
communications 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
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 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 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.

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|  |                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 with 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 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.                                                                                                         

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                  
|  |                                                                                           
| | 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                                        

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|  |                                                                   
|- | ------------------------------------------------------------------
| | 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.

Our
competitors vary in size and in the scope and breadth of the products and
services they offer. They include public companies, such as SkillSoft PLC and
Saba Software, Inc., and private companies such as CPA2Biz, Inc., Bisk
Education, Inc., MicroMash and Center for Professional Education, 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 classroom instruction and remote learning solutions such as DeVry
University), and professional service 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 and
Saba are both relatively large public 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

14

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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 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 (PLI), 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.

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 more than 28 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 service 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.

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Extensive
library.Our content library consists of over 2,000
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.

Experienced
management. Our management team is comprised of
experienced and successful accounting and legal professionals, and sales,
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.

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 Web sites, including primary domains and sub-domains at: www.smartpros.com,
http://education.smartpros.com, http://accounting.smartpros.com, http://ir.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 and www.loscalzo.com.

The
SmartPros family of Web sites has over 65,000 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 Web
sites have become a destination for professionals based on the following data:

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

16

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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 and FINANCIALCAMPUS.

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 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, 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.

17

---



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.

Employees

As
of March 1, 2010, we had 100 employees of which 92 were full-time and eight
were part-time. We have 43 employees based in our executive offices in
Hawthorne, New York, and nine employees based in our Westborough,
Massachusetts, office. Skye employs 12 people in their Bridgewater, New Jersey,
office. Loscalzo has 10 employees in its Red Bank, New Jersey, office. In
addition, we have 26 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
quarterly 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.

18

---



In
2009 our net revenues, operating income and net income fluctuated due to our
acquisitions of Loscalzo and EEI, both of which are in the live-training
business. 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. As a result, in 2009 our
quarterly results from operations fluctuated. We expect this trend to continue
in 2010 and thereafter, which may cause fluctuations in the market price of our
shares.

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 like the H1N1 virus.

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 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.

19

---



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 materials 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 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.

20

---



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.

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, and confidentiality and 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.

21

---



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. This property is owned by an affiliate of Ms. Loscalzo.

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

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

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

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  | 
|                            |  |                   |   |      | 
|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 |  | 
|                            |  |                   |   |      |  |  |  |   |      |  | 
|2008                        |  |                   |   |      |  |  |  |   |      |  | 
|First
 Quarter              |  |                   | $ | 5.82 |  |  |  | $ | 4.15 |  | 
|Second Quarter              |  |                   | $ | 4.99 |  |  |  | $ | 3.30 |  | 
|Third
 Quarter              |  |                   | $ | 4.37 |  |  |  | $ | 3.18 |  | 
|Fourth
 Quarter             |  |                   | $ | 2.26 |  |  |  | $ | 2.20 |  | 

As
of March 19, 2010, the closing sale price per share for our common stock, as
reported on the Nasdaq Capital Market was $3.35.

(b)       Holders

As
of March 19, 2010, the number of record holders of our common stock was 136.

(c)       Dividends

The
holders of our common stock are entitled to receive such dividends as may be
declared by the Board of Directors. During the years ended 2009 and 2008, we
did not pay any dividends. On March 9, 2010, the Board of Directors approved a
$.01 per common share dividend payable on April 11, 2010, to shareholders of
record as of April 1, 2010. Payment of future dividends will be within the
discretion of our

22

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Board of
Directors and will depend on, among other factors, our retained earnings,
capital requirements, acquisitions and operating and financial condition.

Company
Purchases of its Equity Securities

On
November 11, 2009, 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.

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, 2009)  |  |                                                     |      |                                                |   |                                                                                                               |  |                                                                                                                                            |      |  |   |        | 
|                                 |  |                                                     |       |                                                |   |                                                                                                                |  |                                                                                                                                            |       |  |   |         | 
|Month #2 
 (November 1-30, 2009) |  |                                                     | 3,046 |                                                | $ | 3.63                                                                                                           |  |                                                                                                                                            | 3,046 |  | $ | 11,059  | 
|                                 |  |                                                     |       |                                                |   |                                                                                                                |  |                                                                                                                                            |       |  |   |         | 
|Month #3 
 (December 1-31, 2009) |  |                                                     |      |                                                |   |                                                                                                               |  |                                                                                                                                            |      |  |   |        | 
|                                 |  |                                                     |       |                                                |   |                                                                                                                |  |                                                                                                                                            |       |  |   |         | 
|                                 |  |                                                     |       |                                                |   |                                                                                                                |  |                                                                                                                                            |       |  |   |         | 
|Total                            |  |                                                     | 3,046 |                                                | $ | 3.63                                                                                                           |  |                                                                                                                                            | 3,046 |  | $ | 738,941 | 
|                                 |  |                                                     |       |                                                |   |                                                                                                                |  |                                                                                                                                            |       |  |   |         | 

In
March 2010, we purchased 149,000 shares of our common stock for $462,000.

|        |                        
|------- | -----------------------
|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.

23

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|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 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;                                    
|  |                                                                                                                                                                             
| | 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 from $10.2 million to $19.3
million. This growth is due in large part to eight acquisitions that we have
completed in this period. Our most recent acquisition was Executive Enterprise
Institute (EEI) in July 2009. EEI is a leading provider of live training to
corporate financial professionals and attorneys, and complements the live
training that Loscalzo provides to accountants. EEIs live training is marketed
directly to larger corporations and through associations, such as FEI. 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 above 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 2009 fiscal year, while
we were able to increase revenue, our expenses increased at a faster rate. The
increase in revenue was attributable primarily to our accounting/finance
division, our financial services training division, Skye and our consulting
business. All our other divisions and subsidiaries experienced a reduction in
revenue. The increase in accounting/finance revenue is attributable almost
entirely to Loscalzo, which had its first full year of operations, and EEI,
which we acquired in mid-year. The decrease in revenue experienced by our other
operating units, we believe was almost entirely attributable to general
economic conditions. As the overall business environment improves, we expect
these units to increase their level of business as well. On the expense side,
Loscalzo and EEI were significant factors in the increase as well. To offset
these increases, which were anticipated, we reduced staff in other areas of our
operations and restructured various compensation arrangements where possible.
We will continue to closely monitor our direct and general and administrative
costs and make the necessary adjustments where warranted. For example, we are
committed

24

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to installing
a new telecommunications system, at a cost of approximately $120,000, which we
believe will result in future savings in our operating costs.

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. 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 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 Web site design, software development, tape
and DVD duplication, video production, video conversion, 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 Web site 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

25

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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

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

We
have adopted the recognition and measurement requirements of Accounting
Standards Codification (ASC) (the Codification) Topic 718 that discuss stock
based compensation. As a result, 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.

Results of Operations

Comparison of the
years ended December 31, 2009, and 2008

The
following table compares our statement of operations data for the years ended
December 31, 2009, and December 31, 2008. The trends suggested by this table
may not be indicative of future operating results, which will depend on various
factors including the relative mix of products sold (accounting/finance,
engineering or corporate training) and the method of sale (video or online).

26

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|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|------------------------------------------------------- |  | ---------------------- | ---------- | ---------- |  | ------ | - | ---------- | ---------- | ------ |  | ----- | - |  | ------ | --
|                                                        |  | Year ended December 31 |           
|                                                        |  |                        |           
|                                                        |  | 2009                   |            | 2008       |  |        |   |           
|                                                        |  |                        |            |            |  |        |   |           
|                                                        |  | Amount                 |            | Percentage |  | Amount |   | Percentage |            | Change | 
|                                                        |  |                        |            |            |  |        |   |            |            |        | 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Net revenues                                            |  | $                      | 19,274,533 |            |  | 100.0  | % | $          | 18,256,328 |        |  | 100.0 | % |  | 5.6    | % 
|Cost of revenues                                        |  |                        | 9,146,145  |            |  | 47.5   | % |            | 7,811,500  |        |  | 42.8  | % |  | 17.1   | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Gross profit                                            |  |                        | 10,128,388 |            |  | 52.5   | % |            | 10,444,828 |        |  | 57.2  | % |  | -3.0   | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Selling, general and administrative                     |  |                        | 8,694,779  |            |  | 45.1   | % |            | 8,171,943  |        |  | 44.8  | % |  | 6.4    | % 
|Depreciation and
 amortization                          |  |                        | 1,052,151  |            |  | 5.5    | % |            | 945,932    |        |  | 5.2   | % |  | 11.2   | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Total operating expenses                                |  |                        | 9,746,930  |            |  | 50.6   | % |            | 9,117,875  |        |  | 49.9  | % |  | 6.9    | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Operating income (loss)                                 |  |                        | 381,458    |            |  | 2.0    | % |            | 1,326,953  |        |  | 7.3   | % |  | -71.3  | % 
|Other income, net                                       |  |                        | 24,633     |            |  | 0.1    | % |            | 204,182    |        |  | 1.1   | % |  | -87.9  | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Income before (provision for) benefit for
 income taxes |  |                        | 406,091    |            |  | 2.1    | % |            | 1,531,135  |        |  | 8.4   | % |  | -73.5  | % 
|Income tax (provision) benefit                          |  |                        | (7,048     | )          |  | 0.0    | % |            | 70,128     |        |  | 0.4   | % |  | -110.6 | %)
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   
|Net income                                              |  | $                      | 398,683    |            |  | 2.1    | % | $          | 1,601,263  |        |  | 8.8   | % |  | -75.1  | % 
|                                                        |  |                        |            |            |  |        |   |            |            |        |  |       |   |  |        |   

Net revenues

Net
revenues for 2009 increased 5.6% compared to net revenues for 2008, primarily
as a result of the acquisition of EEI and a full year of Loscalzo (acquired
July 2008). Online revenues continue to be an important factor contributing to
our overall revenue growth. In both 2009 and 2008, net revenues from online
sales of subscription-based products and other sales accounted for
approximately $7.1 and $6.8 million, or 37% of our net revenues, respectively.
Although online revenues have increased in total dollars, as a percentage of
total net revenues, it has remained flat.

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 the EEI
acquisition and a full year of operations by Loscalzo. In 2009, net revenues
from our accounting/finance and related products were $12.4 million, compared to
$11.3 million in 2008. In each of 2009 and 2008, net revenues from
accounting/finance products, including both subscription and non-subscription
based revenue, was $8 and $8.2 million, respectively. Net revenues from live
training, custom work and advertising were $4.4 million in 2009, as compared to
$3.1 million in 2008. The difference is primarily attributable to Loscalzo and
EEI.

Net
revenues from sales of our engineering products, which are not
subscription-based, were $746,000 in 2009, compared to $979,000 in 2008. The
decrease in engineering sales is due to current economic conditions, as
engineering firms and governmental agencies have reduced personnel and
curtailed spending.

Net
revenues from video production, duplication and consulting services increased
in 2009 by $94,000 to $305,000 from $211,000 in 2008, as a result of increased
consulting work. 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 jobs. 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 $1.31 million in 2008 to $705,000 in 2009. This
decrease was primarily due to a decrease of $140,000 from our Cognistar legal
division, and a decrease of $462,000 from our ethics division. The decrease in
Cognistar sales is due to the economy as many law firms have

27

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reduced 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 $2.87 million of net revenues in 2009, as compared to $2.34 million
in 2008. Skye produces customized training and educational material for the
pharmaceutical industry, professional firms, financial service companies and
others.

Our
financial services training division generated net revenues of $2.02 million in
2009, as compared to only $1.87 million in 2008. The largest portion of the
growth comes from FinancialCampus course sales, which are delivered over the
Internet.

Our
technology training product WatchIT, acquired in August 2007, generated net
revenues of $207,000 in 2009, as compared to $289,000 of revenues in 2008.

Cost of revenues

Cost
of revenues includes (i) production costs, such as the salaries, benefits and
other costs related to personnel, whether 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 2008, cost of revenues in 2009 increased by
approximately $1.3 million. This increase is a result of a full year of costs
for Loscalzo, costs directly related to EEI and business that required a
substantial amount of outsourcing in order to complete projects. Cost of
revenues in 2009 increased to 47.5% from 42.8% in 2008, resulting in a 3%
decrease in our gross profit margin. With the addition of Loscalzo and EEI,
which together represent approximately 19% 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 2008 to 2009 and the reasons for those
variations were 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 increased by $916,000 in 2009
 from 2008. 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. We are
 always exploring other areas, such as the Philippines, for outsourcing our
 technology needs. 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  increased by
 $133,000. 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 increased by approximately $290,000. The
 increase was primarily attributable to salaries and related costs from our
 recent acquisitions offset by decreases in other areas, such as video
 production/tape duplication and our technology group. While our SLE salaries
 and related costs decreased by $83,000, this was offset by increased salaries
 from Skye of approximately $111,000 in 2009 from 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Royalties. Royalty expense was relatively flat in
 2009 as compared to 2008. This was due to increased royalties in accounting
 education offset by an equal decrease in 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 2010 under these
 agreements may be either higher or lower than they were in 2009.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Other costs. Travel and entertainment and other
 miscellaneous expenses increased by $2,000, primarily related to Loscalzo,
 EEI and some custom projects. The largest component of these expenses is
 travel and entertainment that increased by $15,000 in 2009 from 2008, offset
 by a reduction in shipping costs of $12,000 as a result of converting to DVD
 from videotape. Loscalzo and Skye often bill their customers for travel.                                                                       

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
2009 were higher than they were in 2008 by $523,000. Overhead expenses directly
attributable to Loscalzo and EEI, which include marketing expenses, rent,
salaries and related costs and other costs was approximately $630,000.
Exclusive of these increases, other overhead expenses decreased approximately
$107,000 primarily due to reduced salaries and related costs. In addition, in
conformity with applicable accounting standards, we are expensing the costs
associated with the grants of option and restricted stock to employees and directors.
This non-cash expense was $223,000 in 2008 and $236,000 in 2009. We anticipate
that general and administrative expenses will increase in 2010 as we fully
absorb the EEI acquisition with its substantial marketing expenses.

Depreciationand amortization

Depreciation
and amortization expenses were $106,000 higher in 2009 than they were in 2008.
The increase is attributable to intangible assets acquired in the Loscalzo and
EEI transactions, as well as and the capitalization of intangible assets
developed internally, principally our new PEC. The total cost of the intangible
assets acquired in the Loscalzo and EEI transaction was approximately
$3,784,000, of which approximately $1,473,000 is being amortized over various
periods ranging from three to 10 years. The total capitalized cost of our new
PEC is $1,044,000, 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.

Operating income

For
2009, operating income was
$382,000 compared to $1.3 million in 2008, a decrease of 71.3%. As a percentage
of net revenues, operating income in 2009 was 2% compared to 7.3% in 2008, a
decrease of 5.3%. Our acquisition of EEI in the second half of 2009, as well as
a decrease in revenue from our legal and ethics division and our engineering
division, has contributed to the decrease in operating income.

Other income

Other
income and expense items primarily consist of interest earned on deposits. We
currently have no outstanding debt, other than normal trade payables. Net
interest income decreased by $180,000 due to

29

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the fact that interest rates
were significantly lower in 2009 compared to 2008. We do not anticipate an
increase in interest income as interest rates continue to remain very low in
2010.

Income tax (provision) benefit

In
2009, we recorded a net tax expense of $7,000, compared to a $70,000 benefit in
2008. We have analyzed all of the components of our deferred tax assets and
liabilities and have recorded a net deferred tax asset of $1.25 million after a
valuation allowance of approximately $700,000, as compared to a net deferred
tax asset of $1.10 million in the prior year. The current period expense
consisted of net federal income tax benefit of $115,000 offset by state and
local taxes of approximately $122,000. In the prior period, we recorded a tax
benefit of $70,000 after recording a net federal tax benefit of $98,000 offset
by state and local taxes of $28,000.

In
2008 and 2009 we recorded a net tax benefit after evaluating our estimated
taxable income for each ensuing five-year period. Our estimates were based on a
number of factors including prevailing economic conditions and the effect of
recent acquisitions on future earnings. We have estimated that our net income
will increase by 2% in 2010 and by 5% per year for each of 2011-2014 taking
into account various factors including the pace of the recovery from the recent
recession and the impact of differences between financial and tax accounting on
our taxable income during the years in question.

Net income

For
2009, we recorded net income of
$398,000, compared to $1.6 million for 2008.Our net profit margin for 2009 was 2.1%, compared to 8.8% in 2008, a
decrease of 75.1%. The decrease in net income is primarily due to a decrease in
gross profit, higher general and administrative expenses, as well as lower
interest income. In addition, we recognized a net tax expense in 2009, as
compared to a tax benefit in 2008.

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, 2009, was approximately $3.2 million,
compared to a $2.3 million working capital as of December 31, 2008. The
increase is attributable to positive cash flow from operations offset by cash
used to pay the former shareholders of Skye their contingent payment. Our
current ratio at December 31, 2009, is 1.48 to 1, compared to 1.31 to 1 at
December 31, 2008. The current ratio is derived by dividing current assets by
current liabilities and is a measure used by lending sources to assess our
ability to repay short-term liabilities. The largest component of our current liabilities,
approximately $5.3 million and $5.6 million at December 31, 2009, and 2008
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, 2009, we had a net increase in cash of $94,000. We
generated $1.8 million in cash from operations, offset by $1.7 million in
investing activities, including $700,000 for additional purchase consideration
paid for the acquisition of Skye, $349,000 for EEI, and the balance for
purchases or internal development of various capital assets. In addition, we
expended $11,000 for the purchase of treasury shares. 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.

30

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In
comparison, for the year ended December 31, 2008, we had a $3.4 million
decrease in cash. That decrease was a result of cash generated by operations of
$2.3 million offset by cash expended for investing activities of $5.1 million, primarily
for acquisitions of $4.2 million and $878,000 for various asset acquisitions or
internal capitalization of intangibles. We also expended $574,000 in financing
activities primarily for the purchase of treasury shares of $603,000 offset by
cash generated from the exercise of options and warrants and other of $29,000.

Capital
expenditures for the year ended December 31, 2009, were approximately $661,000,
of which $216,000 consisted
primarily of computer equipment, most of which was for our off-site backup
center, a requirement of SOX compliance. We capitalized $100,000 of costs for
the production of various courses and $344,000 for capitalizing the costs of
our new PEC and other products. We are constantly reviewing and upgrading our
technology. For fiscal 2010, we have budgeted approximately $275,000 for
capital expenditures (other than software and course development costs),
including $120,000 budgeted to upgrade our telecommunications platform.

In
March 2009, we purchased 149,000 shares of our common stock for approximately
$462,000. In addition, we declared a dividend of $.01 per common share payable
April 11, 2010, to shareholders of record on April 1, 2010.

Contractual Obligation, Commitments and Contingencies

As
of December 31, 2009, 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 $3.4
million through January 2019. SLE recently entered into a new lease that
expires in January 2012 with monthly rent of approximately $2,500. The Skye
lease was recently extended to January 2014 at a base monthly rent of $3,200,
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.

31

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

In
May 2009, The FASB issued ACS 855, the Subsequent Events topic that provides
guidance on managements assessment of subsequent events. This standard
establishes the accounting and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. This section is
effective for interim and annual periods ending after June 15, 2009. In
accordance with the Codification, we reviewed the events for inclusion in the
financial statements through the filing date of this Form 10-K. The
implementation of this standard did not have a material impact on our
consolidated financial statements.

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

We are a smaller reporting company, as
defined by Regulation S-K, and, as such, we 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(T). | 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 (the 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

32

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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.

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, 2009. 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, 2009, our internal control over financial reporting is effective
based on these criteria. This annual report does not include an attestation
report of our registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that permit
us to provide only managements report in this annual report.

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
2010 annual meeting of stockholders, scheduled to be held in June 2010, 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
Web site at http://ir.smartpros.com. Amendments to and waivers from the Code of
Ethics will also be posted on our Web site.

|         |                       
|-------- | ----------------------
|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
2010 annual meeting of stockholders, scheduled to be held in June 2010, 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
2010 annual meeting of stockholders, scheduled to be held in June 2010, which
information is incorporated by reference herein.

33

---



|         |                                                                           
|-------- | --------------------------------------------------------------------------
|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
2010 annual meeting of stockholders, scheduled to be held in June 2010, which
information is incorporated by reference herein.

|         |                                       
|-------- | --------------------------------------
|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
2010 annual meeting of stockholders, scheduled to be held in June 2010, 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-1.
| |     |                                                            |                                                                                             
| | (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 P. 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 extension agreement, dated December 11, 2009, for
 premises at 12 Skyline Drive, Hawthorne, New York*                                                                 
|             
|10.7          |  | **Letter
 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*                                                                                                                                                               
|             
|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*                                                                      

34

---



|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|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 Web site at http://ir.smartpros.com.                                                                                            
|                                                                                                                                                                                     |                                                                                                                                                                       | 
|(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.

35

---



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 26,
 2010 |                 |                         

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 26, 2010.

|                             |                          |           |                                     |  |       | 
|---------------------------- | ------------------------ | --------- | ----------------------------------- |  | ----- | 
|                             |                          | 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         |           |                                    

36

---



| |                                       
| | --------------------------------------
| | ITEM (A)(1)                           
| |                                       
| |                                       
| |                                       
| |                                       
| |                                       
| |                                       
| | SMARTPROS LTD.
 AND SUBSIDIARIES      
| |                                       
| | REPORT
 ON AUDITS OF CONSOLIDATED     
| | FINANCIAL STATEMENTS                  
| |                                       
| | Years Ended December 31, 2009 and 2008

F-1

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                         |  |           
|-------------------------------------------------------- |  | ----------
|Contents                                                 |  |           
|                                                         |  |           
|Years Ended
 December 31, 2009 and 2008                  |  | Pages     
|                                                         |  |           
|                                                         |  |           
|Financial Statements                                     |  |           
|                                                         |  |           
|Report of
 Independent Registered Public Accounting Firm |  | F-3       
|                                                         |  |           
|Consolidated
 Balance Sheets                             |  | F-4       
|                                                         |  |           
|Consolidated
 Statements of Income                       |  | F-5       
|                                                         |  |           
|Consolidated
 Statements of Stockholders Equity         |  | F-6       
|                                                         |  |           
|Consolidated
 Statements of Cash Flows                   |  | F-7       
|                                                         |  |           
|Notes to
 Consolidated Financial Statements              |  | F-8 - F-19

|   
|---
|   
|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, 2009 and 2008, and the related
consolidated statements of income, 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, 2009 and 2008, 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 26, 2010

F-3

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Consolidated
 Balance Sheets                                                                                                                                                                                                                         |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|December 31,                                                                                                                                                                                                                                         |  | 2009 |            | 2008 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Assets                                                                                                                                                                                                                                               |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current
 Assets:                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                            |  | $    | 6,720,649  |      | $ | 6,626,181  |  
|Accounts receivable, net of allowance for
 doubtful accounts of $39,627 and $39,677 at December 31, 2009 and 2008,
 respectively                                                                                                                     |  |      | 2,700,111  |      |   | 3,114,139  |  
|Prepaid expenses and other current assets                                                                                                                                                                                                            |  |      | 260,357    |      |   | 249,281    |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total
 Current Assets                                                                                                                                                                                                                                |  |      | 9,681,117  |      |   | 9,989,601  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Property and
 Equipment, net                                                                                                                                                                                                                         |  |      | 608,850    |      |   | 607,988    |  
|Goodwill                                                                                                                                                                                                                                             |  |      | 3,375,257  |      |   | 3,394,329  |  
|Other
 Intangibles, net                                                                                                                                                                                                                              |  |      | 4,421,749  |      |   | 4,500,639  |  
|Other
 Assets, including restricted cash of $150,000                                                                                                                                                                                                 |  |      | 160,626    |      |   | 155,613    |  
|Deferred Tax
 Asset                                                                                                                                                                                                                                  |  |      | 1,250,924  |      |   | 1,103,923  |  
|Investment
 in Joint Venture, at cost                                                                                                                                                                                                                |  |      | 14,755     |      |   | 23,890     |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Assets                                                                                                                                                                                                                                         |  | $    | 19,513,278 |      | $ | 19,775,983 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current
 Liabilities:                                                                                                                                                                                                                                |  |      |            |      |   |            |  
|Accounts payable                                                                                                                                                                                                                                     |  | $    | 776,059    |      | $ | 779,870    |  
|Accrued expenses                                                                                                                                                                                                                                     |  |      | 446,929    |      |   | 1,294,042  |  
|Deferred revenue                                                                                                                                                                                                                                     |  |      | 5,299,450  |      |   | 5,576,607  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total
 Current Liabilities                                                                                                                                                                                                                           |  |      | 6,522,438  |      |   | 7,650,519  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Long-Term
 Liabilities:                                                                                                                                                                                                                              |  |      |            |      |   |            |  
|Other liabilities                                                                                                                                                                                                                                    |  |      | 23,187     |      |   |           |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Long-Term Liabilities                                                                                                                                                                                                                          |  |      | 23,187     |      |   |           |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Liabilities                                                                                                                                                                                                                                    |  |      | 6,545,625  |      |   | 7,650,519  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|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, 5,562,100 and 5,324,316 shares issued as of December 31,
 2009 and 2008, respectively, and 5,076,305 and 4,841,567 shares outstanding
 as of December 31, 2009 and 2008, respectively |  |      | 556        |      |   | 532        |  
|Common stock in treasury, at cost - 485,795
 and 482,749 shares as of December 31, 2009 and 2008, respectively                                                                                                                                       |  |      | (1,536,782 | )    |   | (1,525,723 | )
|Additional paid-in capital                                                                                                                                                                                                                           |  |      | 17,610,392 |      |   | 17,155,851 |  
|Accumulated deficit                                                                                                                                                                                                                                  |  |      | (3,106,513 | )    |   | (3,505,196 | )
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                                           |  |      | 12,967,653 |      |   | 12,125,464 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                           |  | $    | 19,513,278 |      | $ | 19,775,983 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                       |  |   |            |   |   |            |  
|------------------------------------------------------ |  | - | ---------- | - | - | ---------- | -
|Consolidated
 Statements of Income                     |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Years Ended
 December 31,                              |  |   | 2009       |   |   | 2008       |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Net Revenues                                           |  | $ | 19,274,533 |   | $ | 18,256,328 |  
|Cost of Revenues                                       |  |   | 9,146,145  |   |   | 7,811,500  |  
|                                                       |  |   |            |   |   |            |  
|Gross Profit                                           |  |   | 10,128,388 |   |   | 10,444,828 |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Operating Expenses:                                    |  |   |            |   |   |            |  
|Selling, general and administrative                    |  |   | 8,694,779  |   |   | 8,171,943  |  
|Depreciation and amortization                          |  |   | 1,052,151  |   |   | 945,932    |  
|                                                       |  |   |            |   |   |            |  
|Total Operating Expenses                               |  |   | 9,746,930  |   |   | 9,117,875  |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Operating Income                                       |  |   | 381,458    |   |   | 1,326,953  |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Other Income (Expense):                                |  |   |            |   |   |            |  
|Interest and dividend income, net                      |  |   | 33,768     |   |   | 215,292    |  
|Loss from joint venture                                |  |   | (9,135     | ) |   | (11,110    | )
|                                                       |  |   |            |   |   |            |  
|Total Other Income                                     |  |   | 24,633     |   |   | 204,182    |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Income before Income Taxes                             |  |   | 406,091    |   |   | 1,531,135  |  
|(Provision for) Benefit from Income Taxes              |  |   | (7,408     | ) |   | 70,128     |  
|                                                       |  |   |            |   |   |            |  
|Net Income                                             |  | $ | 398,683    |   | $ | 1,601,263  |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Net Income per Common Share:                           |  |   |            |   |   |            |  
|Basic net income per common share                      |  | $ | 0.08       |   | $ | 0.32       |  
|                                                       |  |   |            |   |   |            |  
|Diluted net income per common share                    |  | $ | 0.08       |   | $ | 0.32       |  
|                                                       |  |   |            |   |   |            |  
|                                                       |  |   |            |   |   |            |  
|Weighted Average Number of Common Shares
 Outstanding: |  |   |            |   |   |            |  
|Basic                                                  |  |   | 5,043,045  |   |   | 4,938,548  |  
|                                                       |  |   |            |   |   |            |  
|Diluted                                                |  |   | 5,101,668  |   |   | 4,975,198  |  
|                                                       |  |   |            |   |   |            |  

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

---



|                                               
|-----------------------------------------------
|SMARTPROS LTD.
 AND SUBSIDIARIES               
|                                               
|Consolidated Statements of Stockholders Equity
|                                               
|Years
 Ended December 31, 2009 and 2008        
|                                               

|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |         |   |   |            |   |   |            |  
|---------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | ---------------------------- | --------- | -------------------- | - | ---------------------- |  | --------------- | ---------- | ---------------------------- | - | ---------- | - | - | ------- | - | - | ---------- | - | - | ---------- | -
|                                                                             |  | Preferred Stock |  | Common Stock |   | Additional
 Paid-in
 Capital |           | Accumulated
 Deficit |   | Deferred
 Compensation |  | Treasury
 Stock |            | Total
 Stockholders
 Equity |  
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                       
|                                                                             |  | Shares          |  | Amount       |   | Shares                       |           | Amount               |   |                        |  |                 |            |                             
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |        
|                                                                            
|Balance, January 1, 2008                                                     |  |                |  | $            |  |                              | 5,304,698 |                      | $ | 530                    |  | $               | 16,925,314 |                              | $ | (5,106,459 | ) | $ | (22,220 | ) | $ | (922,625   | ) | $ | 10,874,540 |  
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |         |   |   |            |   |   |            |  
|Exercise of Stock Options                                                    |  |                |  |              |  |                              | 12,716    |                      |   | 1                      |  |                 | 29,339     |                              |   |           |   |   |        |   |   |           |   |   | 29,340     |  
|Issuance of Shares from Restricted Stock Plan                                |  |                |  |              |  |                              | 6,902     |                      |   | 1                      |  |                 | 126,076    |                              |   |           |   |   |        |   |   |           |   |   | 126,077    |  
|Amortization of Deferred Compensation                                        |  |                |  |              |  |                              |          |                      |   |                       |  |                 |           |                              |   |           |   |   | 22,220  |   |   |           |   |   | 22,220     |  
|Stock Option Expense                                                         |  |                |  |              |  |                              |          |                      |   |                       |  |                 | 75,122     |                              |   |           |   |   |        |   |   |           |   |   | 75,122     |  
|Purchase of Treasury Shares                                                  |  |                |  |              |  |                              |          |                      |   |                       |  |                 |           |                              |   |           |   |   |        |   |   | (603,098   | ) |   | (603,098   | )
|Net Income                                                                   |  |                |  |              |  |                              |          |                      |   |                       |  |                 |           |                              |   | 1,601,263  |   |   |        |   |   |           |   |   | 1,601,263  |  
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |         |   |   |            |   |   |            |  
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |         |   |   |            |   |   |            |  
|Balance, December 31, 2008                                                   |  |                |  |              |  |                              | 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 Option 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 |  
|                                                                             |  |                 |  |              |   |                              |           |                      |   |                        |  |                 |            |                              |   |            |   |   |         |   |   |            |   |   |            |  

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                                                                                |  |   |            |   |   |            |  
|----------------------------------------------------------------------------------------------- |  | - | ---------- | - | - | ---------- | -
|Consolidated
 Statements of Cash Flows                                                          |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Years Ended December 31,                                                                        |  |   | 2009       |   |   | 2008       |  
|                                                                                                |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Cash Flows from Operating
 Activities:                                                          |  |   |            |   |   |            |  
|Net income                                                                                      |  | $ | 398,683    |   | $ | 1,601,263  |  
|                                                                                                |  |   |            |   |   |            |  
|Adjustments to reconcile net income to net cash provided by operating
 activities:              |  |   |            |   |   |            |  
|Depreciation and amortization                                                                   |  |   | 1,052,151  |   |   | 945,932    |  
|Stock compensation expense                                                                      |  |   | 235,782    |   |   | 201,199    |  
|Deferred compensation                                                                           |  |   |           |   |   | 22,220     |  
|Deferred income tax benefit                                                                     |  |   | (120,000   | ) |   | (125,923   | )
|Loss from joint venture                                                                         |  |   | 9,135      |   |   | 11,110     |  
|Gain on sale of equipment                                                                       |  |   |           |   |   | (3,616     | )
|Deferred rent                                                                                   |  |   | 23,187     |   |   | (80,081    | )
|Changes in operating assets and liabilities:                                                    |  |   |            |   |   |            |  
|(Increase)
 decrease in operating assets:                                                       |  |   |            |   |   |            |  
|Accounts receivable                                                                             |  |   | 414,028    |   |   | (390,466   | )
|Prepaid expenses and other current assets                                                       |  |   | 42,828     |   |   | 35,155     |  
|Other assets                                                                                    |  |   | (5,013     | ) |   |           |  
|(Decrease)
 increase in operating liabilities:                                                  |  |   |            |   |   |            |  
|Accounts payable and accrued expenses                                                           |  |   | 67,872     |   |   | (168,231   | )
|Deferred revenue                                                                                |  |   | (322,606   | ) |   | 226,458    |  
|                                                                                                |  |   |            |   |   |            |  
|Total adjustments                                                                               |  |   | 1,397,364  |   |   | 673,757    |  
|                                                                                                |  |   |            |   |   |            |  
|Net Cash Provided by
 Operating Activities                                                      |  |   | 1,796,047  |   |   | 2,275,020  |  
|                                                                                                |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Cash Flows from Investing
 Activities:                                                          |  |   |            |   |   |            |  
|Acquisition of property and equipment                                                           |  |   | (216,461   | ) |   | (215,784   | )
|Capitalized course costs                                                                        |  |   | (100,212   | ) |   | (43,932    | )
|Capitalized software development                                                                |  |   | (344,204   | ) |   | (617,961   | )
|Proceeds from sale of equipment                                                                 |  |   |           |   |   | 12,000     |  
|Investment in joint venture                                                                     |  |   |           |   |   | (35,000    | )
|Cash paid for business acquisitions                                                             |  |   | (348,715   | ) |   | (4,246,742 | )
|Adjustment to cash paid for goodwill                                                            |  |   | 19,072     |   |   |           |  
|Additional purchase consideration for acquisition of Skye Multimedia
 Ltd.                      |  |   | (700,000   | ) |   |           |  
|                                                                                                |  |   |            |   |   |            |  
|Net Cash Used in Investing
 Activities                                                          |  |   | (1,690,520 | ) |   | (5,147,419 | )
|                                                                                                |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Cash Flows from Financing
 Activities:                                                          |  |   |            |   |   |            |  
|Purchase of treasury shares                                                                     |  |   | (11,059    | ) |   | (603,098   | )
|Net proceeds from exercise of stock options, warrants and other                                 |  |   |           |   |   | 29,340     |  
|                                                                                                |  |   |            |   |   |            |  
|Net Cash Used in Financing
 Activities                                                          |  |   | (11,059    | ) |   | (573,758   | )
|                                                                                                |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Net Increase (Decrease) in
 Cash and Cash Equivalents                                           |  |   | 94,468     |   |   | (3,446,157 | )
|Cash and Cash Equivalents,
 beginning of year                                                   |  |   | 6,626,181  |   |   | 10,072,338 |  
|                                                                                                |  |   |            |   |   |            |  
|Cash and Cash Equivalents,
 end of year                                                         |  | $ | 6,720,649  |   | $ | 6,626,181  |  
|                                                                                                |  |   |            |   |   |            |  
|                                                                                                |  |   |            |   |   |            |  
|Supplemental Disclosure
 and Non-cash Investing and Financing Activities:                       |  |   |            |   |   |            |  
|Cash paid for interest                                                                          |  | $ | 700        |   | $ | 300        |  
|                                                                                                |  |   |            |   |   |            |  
|Cash paid for income taxes                                                                      |  | $ | 85,000     |   | $ | 28,000     |  
|                                                                                                |  |   |            |   |   |            |  
|Stock issued as additional purchase consideration paid for
 acquisition of Skye Multimedia Ltd. |  | $ | 218,783    |   | $ |           |  
|                                                                                                |  |   |            |   |   |            |  
|Additional purchase consideration payable for acquisition of Skye
 Multimedia Ltd.              |  | $ |           |   | $ | 925,000    |  
|                                                                                                |  |   |            |   |   |            |  

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years
 Ended December 31, 2009 and 2008   
|                                          

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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s primary
 products are periodic video and internet subscription services directed to
 corporate accountants and financial managers, accountants in public practice
 and CPA exam candidates. In conjunction with the acquisition of Loscalzo
 Associates, Ltd. (Loscalzo), in 2008 and Executive Enterprises Institute
 (EEI) in July 2009, the Company is now a leading provider of live training
 to accountants, 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 the pharmaceutical, 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 studios. SmartPross 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
 expense in the quarter in which the seminar is held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|   
|---
|   
|   
|F-8

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2009 and 2008    
|                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, operations are managed and financial
 performance is evaluated on a Company-wide basis. Accordingly, all of the
 Companys operations are considered by management to be aggregated in one
 reportable segment, 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 depository insurance coverage limit of $250,000. The
 Companys cash balances are deposited with high credit quality financial
 institutions. No single customer represents a significant concentration (over
 10%) of sales or receivables. With the recent economic problems 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 expense. 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, 2009 or 2008.                                                                                                                    

|   
|---
|   
|   
|F-9

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2009 and 2008    
|                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2009 or 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Intangible assets- Certain intangible assets are being
 amortized on a straight-line basis over their estimated useful lives, which
 vary from 3 to 19 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 $100,000 and $44,000 on
 such costs for the years ended December 31, 2009 and 2008, 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
 expense as incurred. Included in other intangible assets are course costs net
 of accumulated amortization of $491,000 and $611,000 at December 31, 2009 and
 2008, respectively.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Capitalized software development- The Company has developed a new Learning
 Management System (LMS) as wells as other products and has capitalized
 those costs permissible under ASC Topic 985,Software.Total capitalized costs are $1,339,000 and $994,000 as
 of December 31, 2009 and 2008, respectively. The Company began amortizing
 certain of these costs over a five-year period commencing when the LMS was
 placed in service in the fourth quarter of 2008. Amortization expense for
 2009 and 2008 was approximately $207,000 and $50,000, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2009 and 2008    
|                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net
 income per share -Basic
 net income per share is computed by dividing income available to common
 shareholders 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | The reconciliation is as
 follows:                                                                                                                                                                                                                                                                                                                                                              

| |                                                                                                |  |      |           |      |  |           | 
| | ---------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | --------- | 
| | Years Ended December 31,                                                                       |  | 2009 |           | 2008 | 
| |                                                                                                |  |      |           |      | 
| |                                                                                                |  |      |           |      |  |           | 
| | Weighted
 Average Number of Shares Outstanding                                                 |  |      | 5,043,045 |      |  | 4,938,548 | 
| | Effect
 of Dilutive Securities, common stock equivalents                                       |  |      | 58,623    |      |  | 36,650    | 
| |                                                                                                |  |      |           |      |  |           | 
| | Weighted
 Average Number of Shares Outstanding, used for computing diluted earnings per
 share |  |      | 5,101,668 |      |  | 4,975,198 | 
| |                                                                                                |  |      |           |      |  |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $125,000 and$116,000 for the years ended December 31,
 2009 and 2008, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Reclassifications- Certain prior year balances have been
 reclassified to conform with current year classifications. The
 reclassifications have no effect on the Companys financial position or results
 of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | New accounting pronouncements-In July 2009, the Financial Accounting
 Standards Board adopted The FASB
 Accounting Standards Codification and the Hierarchy of Generally Accepted
 Accounting Principles, (the Codification). The Codification will
 be the single source of authoritative U.S. nongovernmental generally accepted
 accounting principles. The Codification does not change generally accepted
 accounting principles, but is intended to make it easier to find and research
 issues and will change the way generally accepted accounting principles
 (GAAP) is referenced. The Codification is effective for interim and annual
 periods ending after September 15, 2009. The Company began to use the new
 Codification when referring to GAAP in its financial statements for the third
 quarter of 2009.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In May 2009, the FASB
 issued ASC 855, Subsequent Events,
 that provides guidance on managements assessment of subsequent events. This
 standard establishes the accounting and disclosure of events that occur after
 the balance sheet date but before financial statements are issued. It
 requires the disclosure of the date through which an entity has evaluated
 subsequent events and the basis for that date. This section is effective for
 interim and annual periods ending after June 15, 2009. In accordance with the
 ASC, the Company reviewed the events for inclusion in the consolidated
 financial statements through the filing date of its financial statements. The
 implementation of this standard did not have a material impact on the
 Companys consolidated financial statements.               

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2009 and 2008    
|                                           

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In December 2007, the FASB
 revised the guidance on Business
 Combinations, which is now codified into ASC Topic 805 (formerly
 SFAS No. 141R). ASC Topic 805 requires the acquiring entity in a business
 combination to recognize all the assets acquired and liabilities assumed in
 the transaction and establishes the acquisition-date fair value as the
 measurement objective for all assets acquired and liabilities assumed in a
 business combination. Certain provisions of this standard will, among other
 things, impact the determination of acquisition-date fair value of consideration
 paid in a business combination (including contingent consideration); exclude
 transaction costs from acquisition accounting; and change accounting
 practices for acquired contingencies, acquisition-related restructuring
 costs, in-process research and development, indemnification assets, and tax
 benefits. This standard was effective for business combinations occurring
 after December 15, 2008. The adoption of this standard did not have a
 material impact effect on the financial statements and disclosures for the
 year ended December 31, 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 of $349,000
 was allocated to course costs for $313,000 which is being amortized over a
 five-year period, and prepaid expenses of $81,000, offset by deferred revenue
 of $45,000. EEI provides live training to accountants, financial
 professionals and attorneys through seminars conducted throughout the United
 States. It can also conduct live classroom-style training for its clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In July 2008, the Company
 acquired all of the outstanding shares of Loscalzo for approximately
 $4,400,000. Loscalzo is a leading provider of in-house training for
 accounting firms. It also conducts live classroom style training for both its
 own account and numerous state accounting societies. The Companys core
 products have been focused on self-study and online learning, whereas, Loscalzo
 is a leading provider of live training offered through a number of different
 mediums. With Loscalzo, the Company now offers a complete, blended learning
 environment for accounting and finance professionals and organizations on a
 national level. In conjunction with the acquisition, Loscalzos President was
 given a two-year employment agreement. The purchase price of the acquisition
 exceeded the fair value of the tangible assets and liabilities acquired by
 approximately $3,489,000.                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The allocation of the
 excess of the purchase price over the carrying value was classified as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                                 |  |   |           | 
| | ----------------------------------------------- |  | - | --------- | 
| | Restrictive Covenant                            |  | $ | 200,000   | 
| | Trade Name                                      |  |   | 350,000   | 
| | Customer Lists                                  |  |   | 400,000   | 
| | Course Costs                                    |  |   | 200,000   | 
| | Other Intangible Assets                         |  |   | 15,000    | 
| | Goodwill and Other
 Non-Amortizable Intangibles |  |   | 2,323,645 | 
| |                                                 |  |   |           | 
| |                                                 |  | $ | 3,488,645 | 
| |                                                 |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The course content is
 being amortized over a three-year period; the restrictive covenant and client
 lists are being amortized over a ten-year period.                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2009 and 2008     
|                                           

|   |                                                          
|-- | ---------------------------------------------------------
|3. | Property and Equipment, net                              
|   |                                                          
|   | The
 components of property and equipment are as follows:

|                                   |  |      |           |      |   |           | 
|---------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|December 31,                       |  | 2009 |           | 2008 |  
|                                   |  |      |           |      |  
|                                   |  |      |           |      |   |           | 
|Furniture,
 Fixtures and Equipment |  | $    | 4,228,325 |      | $ | 4,011,864 | 
|Leasehold
 Improvements            |  |      | 189,709   |      |   | 189,709   | 
|                                   |  |      |           |      |   |           | 
|                                   |  |      | 4,418,034 |      |   | 4,201,573 | 
|Less
 Accumulated Depreciation     |  |      | 3,809,184 |      |   | 3,593,585 | 
|                                   |  |      |           |      |   |           | 
|                                   |  | $    | 608,850   |      | $ | 607,988   | 
|                                   |  |      |           |      |   |           | 

|   |                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------
|   | Depreciation
 expense for the years ended December 31, 2009 and 2008 was approximately
 $216,000 and $230,000, respectively.
|   |                                                                                                                             
|4. | Goodwill and Other Intangible Assets, net                                                                                   
|   |                                                                                                                             
|   | The
 components of intangible assets are as follows:                                                                        

|                                  |  |      |            |      |   |           | 
|--------------------------------- |  | ---- | ---------- | ---- | - | --------- | 
|Years Ended December 31,          |  | 2009 |            | 2008 |  
|                                  |  |      |            |      |  
|                                  |  |      |            |      |   |           | 
|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                      |  |      | 1,088,105  |      |   | 996,988   | 
|Customer Lists                    |  |      | 1,041,746  |      |   | 728,500   | 
|Restrictive Covenant              |  |      | 200,000    |      |   | 200,000   | 
|Trade Name                        |  |      | 350,000    |      |   | 350,000   | 
|Capitalized Software
 Development |  |      | 1,347,796  |      |   | 994,497   | 
|Financial Campus                  |  |      | 340,894    |      |   | 340,894   | 
|Other Intangible Assets           |  |      | 803,330    |      |   | 803,330   | 
|                                  |  |      |            |      |   |           | 
|                                  |  |      | 10,476,212 |      |   | 9,718,550 | 
|Less
 Accumulated Amortization    |  |      | 6,054,463  |      |   | 5,217,911 | 
|                                  |  |      |            |      |   |           | 
|                                  |  | $    | 4,421,749  |      | $ | 4,500,639 | 
|                                  |  |      |            |      |   |           | 

| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The
 aggregate amortization expense for the years ended December 31, 2009 and 2008
 was approximately $836,000 and $716,000, respectively.
| |                                                                                                                                           
| | Estimated amortization expense for the five years subsequent to December 31, 2009 is as follows:                                          

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Years Ending December 31, |  |   |         | 
|                          |  |   |         | 
|                          |  |   |         | 
|2010                      |  | $ | 839,000 | 
|2011                      |  |   | 703,000 | 
|2012                      |  |   | 555,000 | 
|2013                      |  |   | 475,000 | 
|2014                      |  |   | 304,000 | 

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2009 and 2008     
|                                           

| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 following table presents the changes in the carrying amount of goodwill and
 other intangibles during the years ended December 31, 2009 and 2008:

|                                   |  |          |           |                           |   |           |  
|---------------------------------- |  | -------- | --------- | ------------------------- | - | --------- | -
|                                   |  | Goodwill |           | Other
 Intangible
 Assets |  
|                                   |  |          |           |                           |  
|                                   |  |          |           |                           |   |           |  
|Balance,
 January 1, 2008          |  | $        | 145,684   |                           | $ | 3,296,538 |  
|Amortization
 Expense              |  |          |          |                           |   | (716,133  | )
|Goodwill and
 Intangibles Acquired |  |          | 3,248,645 |                           |   | 1,920,234 |  
|                                   |  |          |           |                           |   |           |  
|Balance,
 December 31, 2008        |  |          | 3,394,329 |                           |   | 4,500,639 |  
|Amortization
 Expense              |  |          |          |                           |   | (836,552  | )
|Goodwill and
 Intangibles Acquired |  |          | (19,072   | )                         |   | 757,662   |  
|                                   |  |          |           |                           |   |           |  
|Balance,
 December 31, 2009        |  | $        | 3,375,257 |                           | $ | 4,421,749 |  
|                                   |  |          |           |                           |   |           |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The
 reduction in goodwill of $19,072 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, 2009 and 2008, the Company has a net deferred tax asset of approximately
 $1,251,000 and $1,104,000 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 $2,800,000 which expires through 2023.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The
 components of the (provision for) benefit from income taxes are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                         |  |      |          |      |   |         |  
|------------------------ |  | ---- | -------- | ---- | - | ------- | -
|Years Ended December 31, |  | 2009 |          | 2008 |  
|                         |  |      |          |      |  
|                         |  |      |          |      |  
|Current:                 |  |      |          |      |   |         |  
|Federal                  |  | $    | (5,000   | )    | $ | (27,485 | )
|State                    |  |      | (122,408 | )    |   | (28,310 | )
|                         |  |      |          |      |   |         |  
|Total
 Current           |  |      | (127,408 | )    |   | (55,795 | )
|                         |  |      |          |      |   |         |  
|                         |  |      |          |      |   |         |  
|Deferred:                |  |      |          |      |   |         |  
|Federal                  |  |      | 102,000  |      |   | 106,923 |  
|State                    |  |      | 18,000   |      |   | 19,000  |  
|                         |  |      |          |      |   |         |  
|Total
 Deferred          |  |      | 120,000  |      |   | 125,923 |  
|                         |  |      |          |      |   |         |  
|                         |  | $    | (7,408   | )    | $ | 70,128  |  
|                         |  |      |          |      |   |         |  

| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in
 current state income tax expense for the year ended December 31, 2009 is
 approximately $65,000 of income tax under accruals related to the 2008 tax
 year.

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

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2009 and 2008     
|                                           

| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | The
 temporary differences and net operating loss carryforward give rise to the
 following deferred tax assets:

|                                                                      |  |      |           |      |   |           | 
|--------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|Years Ended December 31,                                              |  | 2009 |           | 2008 |  
|                                                                      |  |      |           |      |  
|                                                                      |  |      |           |      |  
|Net
 Operating Loss                                                   |  | $    | 1,247,000 |      | $ | 1,414,000 | 
|Depreciation
 and Amortization of Property, Equipment and Intangibles |  |      | 569,000   |      |   | 592,000   | 
|Stock Option
 and Restricted Stock Compensation Expense               |  |      | 116,000   |      |   | 60,000    | 
|Other                                                                 |  |      | 9,000     |      |   |          | 
|                                                                      |  |      |           |      |   |           | 
|                                                                      |  |      | 1,941,000 |      |   | 2,066,000 | 
|Less Valuation
 Allowance                                             |  |      | 690,000   |      |   | 962,000   | 
|                                                                      |  |      |           |      |   |           | 
|Deferred Tax
 Asset                                                   |  | $    | 1,251,000 |      | $ | 1,104,000 | 
|                                                                      |  |      |           |      |   |           | 

| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | 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,                       |  | 2009 |        | 2008 | 
|                                               |  |      |        |      | 
|                                               |  |      |        |      | 
|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                       |  |      | 3.00   | %    |  | 0.80   | % 
|Prior year true-ups                            |  |      | 14.50  | %    |  | 0.00   | % 
|Change in
 Valuation Allowance                 |  |      | (67.00 | )%   |  | (49.00 | )%
|Other                                          |  |      | 7.70   | %    |  | 12.80  | % 
|                                               |  |      |        |      |  |        |   
|Income Tax (Expense) Benefit                   |  |      | (1.80  | )%   |  | 4.60   | % 
|                                               |  |      |        |      |  |        |   

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | Stock
 Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The
 Companys 2009 Incentive Compensation Plan (the Plan), as approved by the
 Shareholders at the annual meeting held in June 2009, replaced the expired
 1999 Stock Option Plan. The new 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, 2009, there are 410,121 options
 outstanding, of which 305,080 are currently exercisable and there were
 136,010 restricted stock grants outstanding. As of December 31, 2009, the
 Plan had a net balance of 253,869 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, 2009 and 2008 was $2.69 and $2.29, 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 actual time elapsed between
 date of grant and exercise of options for all employees. Previously such
 assumptions were determined based on historical data.                                                                                                                                                                                                                                                                                                                  

|    
|----
|    
|F-15

---



SMARTPROS LTD.
AND SUBSIDIARIES

|                                           
|-------------------------------------------
|Notes
 to Consolidated Financial Statements
|                                           
|Years Ended December 31, 2009 and 2008     
|                                           

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

|                         |  |      |             |      |  |             | 
|------------------------ |  | ---- | ----------- | ---- |  | ----------- | 
|Years Ended December 31, |  | 2009 |             | 2008 | 
|                         |  |      |             |      | 
|                         |  |      |             |      | 
|Contractual Term         |  |      | 10 years    |      |  | 10 years    | 
|Expected Volatility      |  |      | 40%-45%     |      |  | 45%         | 
|Expected Dividend Yield  |  |      | 0%          |      |  | 0%          | 
|Risk-Free Interest Rate  |  |      | 2.0% - 2.1% |      |  | 2.8% - 3.0% | 
|Expected Term            |  |      | 4.5 years   |      |  | 5.5 years   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2009 and 2008, stock-based
 compensation expense related to stock options granted was approximately
 $84,000 and $75,000, respectively. As of December 31, 2009, the fair value of
 unamortized compensation cost related to unvested stock option awards was
 approximately $90,000. Unamortized compensation cost as of December 31, 2009
 is expected to be recognized over a remaining weighted-average vesting period
 of three years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As of December 31, 2009, the total intrinsic value, which is the
 difference between the exercise price and closing price of the Companys
 common stock of options outstanding and exercisable, was $96,000 and $44,000,
 respectively.                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In February 2008, the Company granted 34,025 options to various
 employees. These options vest in three years. Of these options, 31,025 have
 an exercise price of $5.10 and 3,000 have an exercise price of $5.16.                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In February 2009, the Company granted 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 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, 2009 and 2008 |  | Number
 of
 Options |         | Weighted 
 Average 
 Exercise Price |  
|                                       |  |                     |         |                                     |  
|                                       |  |                     |         |                                     |  
|Outstanding, January 1, 2008:          |  |                     | 386,280 |                                     | $ | 4.62 | 
|Options granted                        |  |                     | 34,025  |                                     |   | 5.11 | 
|Options forfeited/expired              |  |                     | (42,445 | )                                   |   | 4.89 | 
|Options exercised                      |  |                     | (12,716 | )                                   |   | 2.31 | 
|                                       |  |                     |         |                                     |   |      | 
|Outstanding, December 31, 2008:        |  |                     | 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 | 
|                                       |  |                     |         |                                     |   |      | 
|Exercisable, December 31, 2009         |  |                     | 305,080 |                                     |   | 4.59 | 
|                                       |  |                     |         |                                     |   |      | 

|    
|----
|    
|F-16

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|                                            |                                 
|------------------------------------------- | --------------------------------
|                                            | SMARTPROS LTD.
 AND SUBSIDIARIES
|                                            |                                 
|Notes to
 Consolidated Financial Statements |                                 
|                                            |                                 
|Years
 Ended December 31, 2009 and 2008     |                                 
|                                            |                                 

|               |  |                     |         |                                                         |  |                                    |  |                     |      |                                                         |  |         |  |  |      | 
|-------------- |  | ------------------- | ------- | ------------------------------------------------------- |  | ---------------------------------- |  | ------------------- | ---- | ------------------------------------------------------- |  | ------- |  |  | ---- | 
|               |  | Options Outstanding |         | Options Exercisable                                     | 
|               |  |                     |         |                                                         | 
|Exercise Price |  | Number
 Outstanding |         | Weighted
 Average
 Remaining
 Contractual
 Life (Years) |  | Weighted
 Average
 Exercise
 Price |  | Number
 Exercisable |      | Weighted
 Average
 Remaining
 Contractual
 Life (Years) | 
|               |  |                     |         |                                                         |  |                                    |  |                     |      |                                                         |  |         |  |  |      | 
|$2.00-$2.99    |  |                     | 97,300  |                                                         |  | 6.94                               |  | $                   | 2.54 |                                                         |  | 41,850  |  |  | 4.13 | 
|$3.00-$3.99    |  |                     | 35,400  |                                                         |  | 6.98                               |  |                     | 2.64 |                                                         |  | 35,400  |  |  | 7.16 | 
|$4.00-$4.99    |  |                     | 36,642  |                                                         |  | 5.64                               |  |                     | 4.19 |                                                         |  | 34,976  |  |  | 5.82 | 
|$5.00-$5.99    |  |                     | 240,779 |                                                         |  | 2.22                               |  |                     | 5.35 |                                                         |  | 192,854 |  |  | 0.78 | 
|               |  |                     |         |                                                         |  |                                    |  |                     |      |                                                         |  |         |  |  |      | 
|               |  |                     | 410,121 |                                                         |  | 5.92                               |  |                     | 4.40 |                                                         |  | 305,080 |  |  | 5.87 | 
|               |  |                     |         |                                                         |  |                                    |  |                     |      |                                                         |  |         |  |  |      | 

A
summary of the nonvested options and activity for the year is as follows:

|                              |  |         |         |                                          |  |      | 
|----------------------------- |  | ------- | ------- | ---------------------------------------- |  | ---- | 
|December 31, 2009             |  | Options |         | Weighted
 Average Grant
 Date Fair Value | 
|                              |  |         |         |                                          |  |      | 
|                              |  |         |         |                                          |  |      | 
|Nonvested, January 1, 2009    |  |         | 67,890  |                                          |  | 2.11 | 
|Granted                       |  |         | 65,750  |                                          |  | 2.69 | 
|Vested                        |  |         | (25,686 | )                                        |  | 1.46 | 
|Forfeited                     |  |         | (2,913  | )                                        |  | 2.12 | 
|                              |  |         |         |                                          |  |      | 
|Nonvested, December 31,
 2009 |  |         | 105,041 |                                          |  | 1.62 | 
|                              |  |         |         |                                          |  |      | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. | Stockholders
 Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In January 2008, the Companys compensation committee granted certain
 officers and key employees of the Company a total of 18,072 shares of
 restricted common stock. The grant vests one-third immediately and one-third
 each year, thereafter. The grants were part of a bonus paid for 2007 and were
 considered issued as of December 31, 2007 and included in the total outstanding
 shares as of that date. The stock is unregistered and was subject to certain
 forfeiture provisions if the employee left the Company prior to January 29,
 2009.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In 2008, the Company
 recorded an additional 6,902 shares as issued and outstanding. These shares
 were awarded as part of prior years employees stock grants. In 2009, the
 Company considered as issued and outstanding 37,643 shares also awarded from
 prior years employee stock grants. The shares awarded to employees under the
 then existing Plan are eligible to vote and to receive dividends. The costs
 of any stock grants awarded to employees under the Plan are amortized over
 the service period.                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In 2008, one employee and
 two former consultants to the Company exercised their vested stock options
 for the purchase of 12,716 shares of common stock at prices ranging between
 $2.15 and $2.75.                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | 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 the 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.                                                                           

|    
|----
|    
|F-17

---



|                                           |                                 
|------------------------------------------ | --------------------------------
|                                           | SMARTPROS LTD.
 AND SUBSIDIARIES
|                                           |                                 
|Notes to Consolidated Financial Statements |                                 
|                                           |                                 
|Years Ended December 31, 2009 and 2008     |                                 
|                                           |                                 

|   |                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In addition, in 2009, the
 Company purchased 3,046 shares of common stock from a key employee for
 $11,059.                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                             
|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:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year Ending December 31, |  |   |           | 
|                         |  |   |           | 
|                         |  |   |           | 
|2010                     |  | $ | 451,000   | 
|2011                     |  |   | 422,000   | 
|2012                     |  |   | 379,000   | 
|2013                     |  |   | 377,000   | 
|2014                     |  |   | 342,000   | 
|Thereafter               |  |   | 1,438,000 | 
|                         |  |   |           | 
|                         |  | $ | 3,409,000 | 
|                         |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense is recorded
 on a straight-line basis over the lease term. Rent expense for the years
 ended December 31, 2009 and 2008 was approximately $450,000 and $431,000,
 respectively.                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                   
| | 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 $150,000 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.
| |                                                                                                                                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                    |  | The agreement with the
 President of Loscalzo is for two years, expiring in June 2010.                                                                                                                                                                                                                                                                                                      

|    
|----
|    
|F-18

---



|                                           |                                 
|------------------------------------------ | --------------------------------
|                                           | SMARTPROS LTD.
 AND SUBSIDIARIES
|                                           |                                 
|Notes to Consolidated Financial Statements |                                 
|                                           |                                 
|Years Ended December 31, 2009 and 2008     |                                 
|                                           |                                 

|    |                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                     
|    | At February 28, 2010, the
 aggregate commitments under the employment agreements for the senior
 executives described above approximated $2,350,000.                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                     
|    | 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                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                     
|    | On March 9, 2010, the
 Companys Board of Directors approved the payment of a cash dividend of $.01
 per common share to shareholders of record on April 1, 2010, payable on April
 11, 2010.                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                     
|    | On March 12, 2010, the
 Company purchased 149,000 shares of its common stock for $462,000. These
 shares are not retired and will be placed into treasury.                                                                                                                                                                                                                          

|    
|----
|    
|F-19

---