UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(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, 2007

                                       or

[ ]  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       (I.R.S. Employer Identification No.)
     incorporation or organization)

                   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:

                                                     NAME OF EACH EXCHANGE
           TITLE OF EACH CLASS                       ON WHICH REGISTERED
           -------------------                      ------------------------
 Common Stock, par value $.0001 per share           American Stock Exchange
 Warrants                                           American Stock Exchange

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

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.                                               [ ]

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
                                                                Yes |X|  No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.                                              |X|

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

Issuer's revenues for its most recent fiscal year:   $15,204,506

The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): Approximately $22,232,067 as of March 19, 2008.

The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,021,422

                       DOCUMENTS INCORPORATED BY REFERENCE

         The definitive proxy statement, relating to the issuer's Annual Meeting
of Stockholders to be held on or about June 17, 2008, is incorporated by
reference in Part III to the extent described therein.

Transitional Small Business Disclosure Format (Check one):      Yes [ ]  No |X|



<PAGE>



                                 SMARTPROS LTD.

                            FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

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<CAPTION>
                                                                                                                 PAGE
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<S>               <C>                                                                                             <C>
PART I
     Item 1.......Description of Business...........................................................................2
     Item 2.......Description of Property..........................................................................21
     Item 3.......Legal Proceedings................................................................................22
     Item 4.......Submission of Matters to a Vote of Security Holders..............................................22

PART II
     Item 5.......Market for Common Equity and Related Stockholder Matters and Issuer Purchases Of
                  Equity Securities................................................................................22
     Item 6.......Management's Discussion and Analysis of Financial Condition and Results of
                  Operation........................................................................................23
     Item 7.......Financial Statements.............................................................................32
     Item 8.......Changes in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.......................................................................................33

PART III
     Item 9.......Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act................................................33
     Item 10......Executive Compensation...........................................................................34
     Item 11......Security Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters..............................................................................34
     Item 12......Certain Relationships and Related Transactions, and Director Independence........................34
     Item 13......Exhibits.........................................................................................34
     Item 14......Principal Accountant Fees and Services...........................................................35

</TABLE>
                           FORWARD-LOOKING STATEMENTS

         Certain statements made in this Annual Report on Form 10-KSB 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.

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

                                       1
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

         We provide learning and training solutions for specific professional
markets, including accounting/finance, legal, engineering, securities and
insurance--all of which have mandatory continuing education requirements--as
well as information technologY professionals. We also provide corporate
governance, ethics and compliance training for the general corporate market. We
offer off-the-shelf courses and produce custom-designed programs with delivery
methods best suited to the specific needs of our clients. Our customers include
professional firms of all sizes and many of the Fortune 500 companies and a
large number of midsize and small companies.

         Our learning solutions for professionals are designed to meet the
initial and/or the ongoing licensing and continuing professional education
requirements imposed by state licensing agencies and professional standards
organizations. Most of the courses in our accounting/finance library are
designed to meet the standards and adhere to the requirements of all state
boards of accountancy and those of various professional and certifying
organizations. In the engineering area, most of our courses have been approved
for continuing professional development credit by one or more organizations,
including the American Society of Civil Engineers, the National Society of
Professional Engineers, the American Council of Engineering Companies, the
American Society of Mechanical Engineers, and the Project Management Institute.
Our financial services library consists of courses designed to meet the
licensing or continuing education requirements for bankers and financial service
professionals, which includes 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 approved in 29 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 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. For example, our
programs may deal with issues prompted by the Sarbanes-Oxley Act of 2002, the
U.S. Federal Sentencing Guidelines, and laws addressing workplace misconduct
such as harassment. Our e-marketing and e-commerce business sells ads on our Web
site and develops customized newsletters and marketing programs for our clients.

         Our products are available in one or more of the following formats:
print, videotape and digital. Digital format can be delivered on CD-ROM, DVD or
over the Internet. The Internet is our fastest growing delivery channel,
attracting new and existing video-based subscribers. Our solutions are flexible,
cost-efficient and easy to use. They alleviate many of the inefficiencies
associated with traditional classroom training, such as travel costs, scheduling
difficulties and opportunity costs. In addition, we also offer our clients a
learning content management system, which provides the professionals and their
employers a platform to take continuing education over the Internet and the
ability to track their usage and performance.


                                       2
<PAGE>

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 2006 STATE OF
THE INDUSTRY report, estimated that in 2006 U.S. organizations spent $109
billion on employee learning and development. The accounting and finance market
includes certified public accountants, certified management accountants,
certified internal auditors and other accounting professionals, as well as
corporate accounting, finance and management professionals, most of whom have
mandatory continuing education requirements. According to the Bureau of Labor
Statistics, in 2006 there were over two million accountants and finance
professionals in the United States. Based on the fact that 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, we estimate there are currently more than 500,000 certified
public accountants and financial professionals that require continuing
professional education credit to maintain their professional accreditations and
hundreds of thousands of other financial management professionals that require
continuing professional education credit to maintain their certifications.

         To maintain their licenses, accounting professionals must satisfy the
continuing professional educational requirements mandated by the State Boards of
Accountancy of the states in which they practice. Although states may differ in
terms of specific course requirements or the cycle of the licensing period,
every state and the District of Columbia and the U.S. Territories, other than
Wisconsin and the Virgin Islands, which do not have any continuing professional
education requirement, requires at least 40 hours of continuing professional
education credit annually to maintain an accounting license. In addition, in
terms of whether a particular course will qualify for CPE credit, 45 states, the
District of Columbia, and Puerto Rico automatically accept courses offered by
the National Registry of CPE Sponsors, also known as NASBA (National Association
of State Boards of Accountancy). Two states require registration with their
licensing agencies. The remaining states, other than Wisconsin, and U.S.
Territories, other than the Virgin Islands, have standards that mirror those of
NASBA and have no formal registration requirements.

         According to the Bureau of Labor Statistics, in 2006 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 2007 over 40,000 engineers sat for the
exam and 73% passed. In addition, engineers 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, or 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 2007, 64% of the total
candidates taking the 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.


                                       3
<PAGE>

         Forty-one states require some form of continuing legal education with
requirements ranging between 10 hours per year to a total of 45 hours every
three years. All courses have to be approved by the respective bar associations
of each state. Unlike other professions, each state rather than a national
organization exercises control over the requirements and content approval of
continuing legal education courses, which makes the approval process more
difficult.

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

         Over the last few years, legislators, government and market regulators,
the investment community and the general public have become more aware of issues
involving corporate governance, ethics and compliance. This awareness resulted
in allegations of sexual harassment, accounting fraud and mismanagement,
excessive executive compensation, breach of fiduciary duties and insider trading
at some of the largest corporations, mutual funds and market specialists, and
the New York Stock Exchange. 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, 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. We
anticipate that corporate spending on compliance and ethics training programs
will increase.

         While information technology professionals are generally not subject to
continuing education requirements, they need to keep abreast of the rapidly
changing environment in which they work. We believe our WatchIT product is a
medium to provide that education.

         Although professional and corporate training has historically been
dominated by traditional classroom instruction, advances in communications
technology are changing the manner in which corporate training is developed,
delivered and tracked. In addition, competition demands that professionals spend
more of their time on revenue-generating matters. The increasing demands made on
professionals and corporate managers have led--and, we believe, will continue to
drive--the demand for continuing professional education and corporate training
solutions that are available in multiple, flexible and cost-effective formats.

OUR BUSINESS

         Since becoming a public company in 2004, our business has expanded
significantly, primarily through acquisitions. In 2004, we served principally
two large vertical markets--accounting/finance and engineering professionals.
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:

    o    professionals and their employers to comply with initial and continuing
         professional education requirements in a flexible cost-effective
         manner;

    o    businesses to provide their employees and managers with training
         programs addressing the needs of their respective industries, corporate
         governance, ethics and compliance issues; and


                                       4
<PAGE>

    o    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
that currently are available in one or more formats including print, videotape,
CD-ROM or online--approximately 1,100 in accounting/finance, 600 in engineering,
600 hours in banking, securities and financial services, 200 hours in legal
training and 200 hours in information technology, not including custom-designed
courses. We develop 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 of our courses in the accounting and finance professional libraries
are designed to meet the standards and adhere to the 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, the only
two states that have not adopted the NASBA standards. 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
continuing professional education credit in all 50 states for certified public
accountants, certified management accountants, certified internal auditors and
certified financial managers.

         Our engineering products include courses that are designed to help
prepare engineers for the basic entry-level licensing exam and the civil
engineering professional engineer licensing exam, as well as courses that are
designed to meet the ongoing professional development requirements mandated by
various states. We generally jointly develop with or license these programs from
an independent third party. Most of our engineering courses are available in
print, CD-ROM and/or online.

         Our Working Values, Ltd. subsidiary, consisting of two divisions that
often overlap, develops ethics and compliance training programs for corporations
and other organizations 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 training
techniques and strategies focusing on modular development of resources that
track specific risk areas identified by the client. Our library of customizable
communication and learning tools and templates, in digital and print formats,
enables us to develop training and communication solutions and strategies
tailored to the individual corporate cultures of each client at competitive
price points. The result is an integrated program that more closely reflects the
culture of, and the specific issues facing, the client organization while still
maintaining the cost advantages of a generic solution.

         Working Values' Cognistar division develops programs and provides
services to the legal and corporate compliance market. These solutions include
self-paced courses in a content-rich, engaging environment, that take full
advantage of the Internet, and, most importantly, can be provided at
significantly lower cost than other continuing education experiences. Cognistar
products include accredited continuing legal education programs and customized
corporate training programs.

         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 in the
ever-changing technology landscape.

         Our financial services division offers over 300 course titles covering
the insurance, banking and securities industries. These courses can be delivered
online, in a multimedia Web-based format, on video or


                                       5
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through live training. Many of these courses have been approved for credit by
different organizations for continuing education in their respective fields.

         We have relationships with a number of professional organizations and
societies that we believe are strategic either because we have co-marketing or
co-branding arrangements with them or because we jointly develop products with
them. 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. The partners and the nature of
our relationship with them are as follows:

         ASSOCIATION OF GOVERNMENT ACCOUNTANTS. AGA offers most of our
accounting/finance products to its members through a co-branded professional
education center, or PEC.

         FINANCIAL EXECUTIVES INTERNATIONAL AND INSTITUTE OF MANAGEMENT
ACCOUNTANTS. FEI and IMA both market Financial Management Network. 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 line of products
through FEI and IMA.

         INSTITUTE OF INTERNAL AUDITORS. IIA offers the online version of
Financial Management Network and SmartPros Advantage to its members through a
co-branded PEC.

         STATE SOCIETIES OF CERTIFIED PUBLIC ACCOUNTANTS. A number of state
societies offer various products of ours through their own co-branded PEC.

         CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS. CICA offers the online
version of Financial Management Network and SmartPros Advantage to its members
through a co-branded Professional Education Center.

         AMERICAN SOCIETY OF CIVIL ENGINEERS AND BOSTON SOCIETY OF CIVIL
ENGINEERS. We jointly developed our PE Exam Review course with these
organizations. In addition, with the ASCE we jointly developed 37.5 hours of
technical civil engineering courses. ASCE markets our courses to its members.

         NATIONAL SOCIETY OF PROFESSIONAL ENGINEERS. NSPE sells our courses
through a co-branded Web site and directly through their Web site.

         AMERICAN COUNCIL OF ENGINEERING COMPANIES. ACEC sells our courses on
their Web site, on a co-branded Web site and via direct mail. They co-developed
some of our business and management courses.

         AMERICAN SOCIETY OF MECHANICAL ENGINEERS.  ASME sells our products.

         ASSOCIATION OF OPERATIONS MANAGEMENT. APICS sells our supply chain,
inventory and production courses.

         AMERICAN INTELLECTUAL PROPERTY LAWYERS ASSOCIATION. We convert AIPLA's
live seminars to online format. AIPLA markets our course catalog and their
members are entitled to a discount off the list price.

         BUSINESS TRAINING LIBRARY. BTL sells our banking and information
technology course libraries to their customers on their own co-branded PEC.

OUR STRATEGY

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


                                       6
<PAGE>

         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 for our accounting, engineering, legal,
information technology, financial services and general corporate libraries.

         EXPAND WITHIN EXISTING MARKETS AND INTO NEW MARKETS. We continue to
focus on expanding our presence and to introduce new products into the markets
we currently serve--particularly engineering, legal, financial services and
information technology, where we feel our market share is relatively small, and
corporate ethics and compliance training, where we believe the opportunity is
significant. In addition, we will investigate expanding into completely new
markets that we think are potentially lucrative, such as healthcare, safety and
personal development and certificate programs for professionals in various
disciplines.

         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
seven acquisitions we made in years 2006 and 2007. We continue to seek strategic
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 for business communication will continue, making it
an increasingly important medium for distributing our products. At the same time
we recognize that new technologies may emerge that will complement our model for
flexible delivery of content. In 2007, we began work on developing a new
Learning Management System (LMS), which will have new features and
functionalities incorporating the newest technology and improve on LMSs acquired
through some of our recent acquisitions. As a result, we are now able to deliver
our content online to a greater number of Fortune 1000 and other companies. We
plan to continue to monitor the development and market acceptance of new
technologies and will make the necessary investment to adapt our products and
services to them.

         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 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 in videotape, DVD and online. The videotape and DVD formats can be
used for either group study 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 video courses come
with a hard copy of the program and are used primarily for group study. All
online courses include downloadable text materials, easy-to-follow course
outlines, interactive quizzes and the ability to track credits and print
completion certificates. Video and online self-study programs qualify for two
hours of continuing professional education credits in most states while video
group study qualifies for one hour of continuing professional education credit.
Our clients can purchase either a single program or a subscription to a series


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of programs. Prices depend on the length of the subscription, whether one, two
or three years, the number of users, and the number of libraries covered.

         SMARTPROS ADVANTAGE (SPA). 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. We pay the authors of
these programs a royalty. This library is marketed primarily to corporate
accounting and finance professionals as well as public accountants. The courses
are offered individually from $22.95 to $183.60 per course. The list price for a
one-year subscription purchased online is $409.

         FINANCIAL MANAGEMENT NETWORK (FMN). FMN is a library of update programs
dealing with currently relevant topics. Each month, we create four new programs
(segments), or a total of 48 new segments 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 independent industry professional as the interviewee. The material is
presented in a question and answer format. These programs are marketed primarily
to corporate accounting and finance professionals. The list price for a one-year
subscription to the group study video version starts at $5,495 and for the
online version is $409 per user.

         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 segments 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. The list price for a one-year subscription to CPAR starts at $1,759 and
$409 for the online version.

         THE 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 list price for
a one-year subscription to the CPAR Government and Not-for-Profit edition is
$499 for the video and $205 for the online version.

         In addition to the libraries described above, the contents of which are
available on a subscription basis, we also produce customized programs for our
clients. In some cases, the client will author the content and retain us to
videotape the program and convert it into a digital format that can be
distributed via the Internet or internally through the corporate intranet. In
other cases, we will write and produce the entire program for the client. We
then deliver this custom content either through our proprietary learning content
management system 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 that are
comparable to the problems that are found on the actual exam. The course
includes seven complete, self-contained course modules that cover the following
subjects: Transportation; Sanitary and Environmental; Hydraulics and Hydrology;
Structures; Geotechnical; Surveying; and Economics. The list price for the
review course is $645.


                                       8
<PAGE>

         In October 2006, we purchased certain assets, including the course
content of MGI, a provider of self-study courses, to prepare for the PE exam.
The MGI coursework, which covers the same set of modules as our CD-ROM or online
version, is a paper-based, self-study format that provides for instructor
mentoring via e-mail, telephone or submission of mini-exams for grading. The
list price for the MGI review course is $390.

         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. The list prices for these courses range from $30 to $445.

         PROJECT MANAGEMENT FOR ENGINEERS. This course was co-developed with URS
Corporation, one of the largest engineering firms in the United States, and is
certified by the Project Management Institute (PMI) for professional development
unit credit for certified project managers and for professional development
hours credit for civil engineers. Developed by engineers specifically for
engineers, it was one of the first completely online interactive project
management courses. The online format is enriched with audio and interactive
graphics and allows the user to proceed at his or her own pace. The program is
divided into 11 critical sections with over 60 individual learning modules. It
provides over 35 hours of continuing professional development credit. The list
price for this course is $995 for 12-month access or $695 for six-month access.

         FUNDAMENTALS OF ENGINEERING EXAM REVIEW. This is a preparatory course
for the basic entry-level licensing exam that all engineers are required to
take. It is a Flash-based, interactive review course that is being marketed
directly and through professional associations to engineers as well as to
engineering firms for their internal skill-building and competency testing
programs. It is available in CD-ROM and online. The list price for this course
is $299 for either the combination CD-ROM/online version or for the online
version. We also private label the course for our strategic partners so they can
market it to their members. The MGI self-study version of this course also
provides for instructor mentoring and has a list price of $390.

         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. The list price for
non-members for each course is $325.

     CORPORATE GOVERNANCE, COMPLIANCE AND ETHICS

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

         Working Values develops custom-built training and compliance programs
for companies based on their specific needs through its Integrity Alignment
Process. The intent is usually 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.

         Working Values has developed assessment 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.


                                       9
<PAGE>

         Working Values' "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; senior leaders, managers or all
employees.

         Working Values has created 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. Working Values Integrity Toolkit
Learning Management System (LMS) offers enterprise distribution and
administration of education content and information.

     LEGAL

         Working Values' Cognistar division offers 187 online courses in
continuing legal education and business ethics. These courses are accredited for
over 215 hours of CLE credit in approximately 29 states. Not every course is
approved in each state. In addition, Cognistar develops customized courses for
its clients on a consulting basis.

     FINANCIAL SERVICES

         Through our financial services training division, we have added 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, the
Certified Financial Planners (CFP) Board of Standards for CFP credit, and NASBA
for CPE credit. In addition, we have courses in our library to prepare various
insurance and financial services employees in taking their licensing exams.
These courses are offered in a number of different mediums including Web-based,
video, multimedia and workshop format.

     INFORMATION TECHNOLOGY

         Our SmartIT division includes more than 250 courses from our WatchIT
catalog. These courses are designed to update and inform technology
professionals about the latest initiatives in their field. Individual courses
may be purchased for $199; unlimited access to our course catalog is $1,199 per
year.

     GENERAL CORPORATE

         Through our Skye Multimedia subsidiary 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, including 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 conjunction
with another company, has recently introduced its iReflect Training Software
product. This is a training tool designed to improve personal interactive
skills.

     OTHER

         Most of our programs are generally produced in our production facility,
which also includes tape, CD-ROM and DVD duplication equipment. In addition, the
video production and duplication department generates its own revenue by leasing
the facility to third parties and by producing third-party programs.


                                       10
<PAGE>

         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 SmartPros Professional
Education Center (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 SmartPros PEC is a turnkey system designed to
manage the educational subscriptions, student accounts, e-commerce and reporting
needs of our clients. Using the SmartPros 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 SmartPros PEC is co-branded with the
client's logo and delivered using an application service provider hosted
infrastructure model that requires no client technology resources. For those
clients who have their own learning management system, we develop an interface
that allows them to access our system through their technology. These systems
are not generally marketed as stand-alone products. Rather, they are offered
together with our library of content and allow subscribers to track usage and
performance.

         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,
Allen S. Greene and Denise Stefano in the accounting/finance area; Stephen Henn
in the legal market; Jay Gregory and Michael Fowler in financial services; and
James Fallon and James Graham in information technology. David Gebler, the
former President of Working Values, developed programs on corporate governance,
compliance and ethics for the general corporate market. Mr. Gebler is leaving
March 31, 2008, and will be replaced by Catherine Henry.

         Mr. Jacobs, who is the head of product development for accounting
products and the producer of our FMN product, 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. Stefano is a certified public
accountant and a professor of accounting and is currently responsible for
updating existing and introducing new courses in our SPA catalog. Mr. Henn is an
attorney who was the former President of Cognistar and joined us when we
acquired Cognistar. He is responsible for the development of course content and
customized design in the legal area. Mr. Gregory was formerly responsible for
agent training at a large, national life insurance company and joined us as part
of the FinancialCampus acquisition. Mr. Fowler, who also joined us as part of
the FinancialCampus acquisition, was formerly the senior director of business
development at Thomson NETg. Mr. Fallon is producer of our WatchIT product and
has been developing programs for information technology professionals for over
10 years. Ms. Henry was formerly the senior director of compliance and ethics at
a large supermarket chain where she developed and maintained compliance policies
and metrics.

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

         We are planning to devote more 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


                                       11
<PAGE>

designing study guides and course material, scripts and, in some cases, visual
aids. The design and development team includes subject matter experts,
instructional designers, technical writers and developers, graphic designers,
content editors, and quality assurance reviewers. After final assembly and
integration of all course components, we test to ensure all functional
capabilities work as designed and deliver the desired learning experience and
result.

SALES AND MARKETING

         Our sales and marketing strategy is designed to attract new customers
and build brand awareness. We market our products through our alliances with
professional organizations and associations, through our own inside
telemarketing sales force, our outside sales force, 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 a Senior Vice President of
Sales, a Vice President of Marketing, and a sales staff of 19 people. The sales
staff is divided between inside, or telesales, and field sales. The field sales
force focuses on larger accounts. In addition, our senior executives, as well as
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 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
communication programs. We build brand awareness through our strategic
relationships with the leading professional associations and organizations and
the leading commercial content providers within the markets we serve. These
strategic relationships include co-branding initiatives on new and existing
products, joint advertising campaigns and e-commerce relationships.

TECHNOLOGY

         Our proprietary learning content management system, the SmartPros
Professional Education Center, employs a logical and physical architecture that
facilitates rapid development, deployment and customization of Internet-based
solutions for organizational e-learning. Our core systems use a series of
scalable application Web servers, XML and MS-SQL data sources, and utilize
industry standard Web browser and Internet technologies for content delivery to
the users. To ensure limited downtime and product lines that are free of
bandwidth limitations as they grow, our redundant server system is located at a
secure Verizon co-location data center one mile from our Hawthorne, New York,
main office. Additionally, in the fourth quarter of 2007 we began to create a
redundant data center in Denver, Colorado, that will provide enhanced service to
West Coast and Asian-based customers and serve location-redundant, load-balanced
content. This co-location allows 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 SmartPros 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 e-mail,
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."


                                       12
<PAGE>

         Some key features of the SmartPros PEC include:

    o    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.

    o    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.

    o    STANDARD RELATIONAL DATABASE SERVER. We use standard relational
         database servers. 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.

    o    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.

    o    ELECTRONIC COMMERCE ENABLED. The core foundation includes interfaces to
         external electronic payment services, enabling real-time electronic
         commerce. This allows the instant purchase of both one-off and
         subscription-based e-learning courseware.

    o    INTERNET MULTIMEDIA CONTENT DELIVERY. We deliver high quality, low
         bandwidth video and audio via the Internet, intranets and extranets.
         This multimedia content enhances and personalizes the learning
         experience. We use Flash Media as the primary delivery mechanism for
         this content.

    o    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:

    o    The expected growth of this market, as demand for highly skilled
         professionals increases;

    o    The increased scrutiny on corporate culture, ethics and compliance; and

    o    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 service industry has various


                                       13
<PAGE>

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
the following;

    o    Breadth, depth and relevancy of the course content;

    o    Performance support and other features of the training solution;

    o    Reputation of presenter;

    o    Adaptability, flexibility and scalability of the products offered;

    o    Liquidity and capital resources;

    o    Deployment options offered to customers;

    o    Customer service and support;

    o    Price;

    o    Industry and professional certifications;

    o    Brand identity; and

    o    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., and MicroMash in the accounting market;
RedVector.com, Inc., AEC Direct and NetGen Learning Systems in the engineering
market; and LRN, The Legal Knowledge Company, Integrity Interactive Corporation,
MIDI, Inc. 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 large diversified publishing companies, such as
The Washington Post Company, Thomson Financial and Pearson Education, other
education companies, including traditional providers of in-classroom instruction
and remote learning solutions, such as DeVry


                                       14
<PAGE>

University, as well as professional service companies, such as 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 that
have enabled or will enable them to establish a stronger competitive position
than we have. We sometimes compete directly with CPA2Biz. In addition, our
competitors include SkillSoft and Saba, who are both relatively large companies.
However, SkillSoft's primary focus is e-learning content and software products
for business and information technology professionals. Saba principally provides
software solutions that are used to manage people in large organizations,
although they do sell content as well. Since we currently do not market our
learning management system as a stand-alone product, we do not compete presently
with Saba in this area. However, many of our larger clients use the Saba system
or another system for their learning content management. In those cases, we will
interface with the learning management system and allow the client to access our
courseware while cross-posting student progress between ours and the client's
learning management system.

         The largest solutions providers to the general corporate compliance
training market are Integrity Interactive and LRN. We rarely face either of
these companies in the marketplace since they both focus principally on Fortune
100 companies and have extensive off-the-shelf libraries. However, their
products tend to be more expensive than ours, and we believe that our ability to
adapt programs to address unique cultures of different organizations is greater
than theirs. Our more frequent competitors are PLI-Corpedia, a joint venture
between the Practising Law Institute (PLI) and Corpedia Education, two leaders
in the field of compliance education, and Midi, Inc. 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 the area of providing 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 this goal.

         HISTORY AND REPUTATION. We have been providing learning solutions for
accounting and finance professionals for more than 26 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, and general corporate markets, and also into new markets.


                                       15
<PAGE>

         We have been providing learning solutions for engineering professionals
since 1997. Our recently acquired legal and financial service divisions have
been in business for eight and 25 years, respectively, prior to our acquiring
these various companies.

         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:

    o    give us instant credibility in the marketplace;

    o    provide us with a distribution channel for our products;

    o    are a source for programs; and

    o    provide us with access to a faculty around which to build other
         programs.


         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 and marketing and
administrative executives. This has enabled us to develop high quality programs,
enter into strategic relationships with the major professional organizations in
the markets we serve, attract well-known personalities around whom we develop
new programs, cut costs and make strategic acquisitions.

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

         LARGE AND DIVERSIFIED CUSTOMER BASE. We have over 3,000 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, tapes as well as 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.


                                       16
<PAGE>

         ONLINE RESOURCE AND CONTENT PROVIDER. We own and operate multiple Web
sites, including primary domains and subdomains 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.ireflectraining.com,
www.pro2net.com, www.accountingnet.com, and www.smartprosinteractive.com.

         Our SmartPros Web site has over 20,000 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 this Web
site has become a destination for professionals based on the following data:

    o    As a result of maintaining the Web site, we have built a database with
         over 500,000 profiled users.

    o    The Web site logs over 450,000 visits per month.

    o    Through our Web sites, we serve over one million ads and 200,000 opt-in
         e-mails per month.

INTELLECTUAL PROPERTY

         We own a variety of intellectual property, including trademarks, trade
names, copyrights, proprietary software, technical know-how and expertise,
designs, process techniques and inventions. We believe that the trademarks and
trade names we use to identify our products and services are material to our
business. We own all of the following trademarks, trade names and/or service
marks, which have either been federally registered or applications have been
filed with the United States Patent and Trademark Office seeking federal
registration: SMARTPROS, PRO2NET, 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 FOR 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
larger 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 our learning content management systems, our license
agreement restricts use of the system and prohibits users from copying or
sharing the system without our express written consent. Our learning content
management systems incorporate products and systems and technology that we
license and


                                       17
<PAGE>

purchase from third parties. We cannot assure that we will be able to continue
to license or support this technology on terms that we consider reasonable, if
at all. If these licenses or maintenance agreements expire and we cannot renew
them, they are substantially modified or if they were terminated for any reason,
we would have to purchase, license or internally develop comparable products and
systems. Any one of these options may be expensive and/or time consuming, which
could have a material adverse effect on our business and financial performance.

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

GOVERNMENT REGULATION

         Government regulation is important to our business. Every state sets
its own continuing professional education requirements, in terms of the number
of credits needed and the cycle in which those credits need to be earned, for
its licensed professionals. In addition, specific content will only qualify for
continuing professional education credit if it meets specific criteria, which
varies from state to state. In the accounting/finance area, most states have
adopted the NASBA standards to address the quality of course content. We are a
certified NASBA sponsor, meaning that the courses we offer to the general public
on a subscription basis qualify for continuing professional education credits in
those states that have either adopted the NASBA standards or 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 the
state bar association, 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 National Council of Examiners for Engineering and
Surveying (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 either federal and/or state licensing and continuing education
requirements.

EMPLOYEES

         As of March 1, 2008, we had 99 employees of which 90 were full-time and
nine were part-time. We have 52 employees based in our executive offices in
Hawthorne, New York, and 13 employees based in our office in our Westborough,
Massachusetts office. Skye employs 12 people in their Bridgewater, New Jersey,
office. In addition, we have an aggregate of 22 employees that work out of their
homes in various states. We believe that our relationship with all of our
employees is generally good.


                                       18
<PAGE>

          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:

         THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND HAS
RELATIVELY LOW BARRIERS TO ENTRY. INCREASED COMPETITION COULD RESULT IN MARGIN
EROSION AS WELL AS LOSS OF MARKET SHARE AND BRAND RECOGNITION.

         Our competitors include professional firms, public and privately held
companies, universities (traditional and online) 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 will be impaired.

         In 2007, we made three strategic acquisitions in the financial services
and information technology markets.

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

    o    identifying appropriate targets in an efficient and timely fashion;

    o    negotiating terms that we believe are reasonable;

    o    failing to accurately assess the true cost of entering new markets or
         marketing new products;

    o    integrating the operations, technologies, products, personnel and
         customers of the acquired enterprise;

    o    maintaining our focus on our existing business;

    o    losing key employees; and

    o    reducing earnings because of disproportionately large depreciation and
         amortization deductions relating to the acquired assets.

We may not be able to identify any appropriate targets or acquire them on
reasonable terms. Even if we make strategic acquisitions, we may not be able to
integrate these businesses into our existing operations in a cost-effective and
efficient manner.

         IF WE FAIL TO KEEP UP WITH CHANGES AFFECTING THE MARKETS THAT WE SERVE,
WE WILL BECOME LESS COMPETITIVE, ADVERSELY AFFECTING OUR FINANCIAL PERFORMANCE.


                                       19
<PAGE>

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

         OUR FUTURE GROWTH AND COMPETITIVENESS DEPENDS ON OUR ABILITY TO ADAPT
TO NEW TECHNOLOGIES AND CHANGES TO EXISTING TECHNOLOGIES AND NEW APPLICATIONS TO
MEET MARKET DEMAND.

         One of our principal competitive advantages is our ability to deliver
content in multiple formats. This flexibility has enabled us to keep pace with
changes in technology and has contributed to our growth. For example, we
recently converted our entire course content to a Flash-based format because a
Windows-based format could not get through the firewall of many potential
clients. 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 our customers' needs and
preferences, and to adapt to those 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
seven acquisitions that have helped us refocus 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 and banking
products and video production business. 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. 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. For example, in early 2006 the head of
our video production division left and we have not yet been able to find a
permanent replacement for him. As a result revenues in that division have
declined significantly.

         OUR SALES CYCLE CAN BE LONG AND UNPREDICTABLE, WHICH COULD DELAY OUR
GROWTH AND MAKE IT DIFFICULT FOR US TO PREDICT EARNINGS. THIS COULD LEAD TO
STOCK PRICE VOLATILITY.

         Our sales cycle is unpredictable and can last as long as 24 months for
large, enterprise-wide or custom-designed programs. Most of our revenue is
derived from corporate customers. Identifying the decision maker in these
enterprises is often time consuming. Also, sales of online products, which we
believe are essential to our future growth and success, take longer than sales
of video or CD-ROM products. Other variables also complicate the purchasing
process, including the timing of disbursement of funds and the person-to-person
sales contact process. Sales may take much longer than anticipated, may fall
outside


                                       20
<PAGE>

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, NONEXCLUSIVE
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, as well as 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.

         EFFECTS OF RECESSION ON BUSINESS.

         Our customer base consists primarily of large corporations,
professional service and other firms, many of whose employees are required to
take continuing education on a periodic basis. However, in the event of a
recession, some of our clients could seek a cheaper provider of these courses
and could curtail the development of customized products.

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 February 28, 2010. We lease 1,800
square feet in Westborough, Massachusetts, where Working Values and Cognistar
are


                                       21
<PAGE>

based. The lease expires January 31, 2009. Finally, Skye Multimedia leases 2,320
square feet in Bridgewater, New Jersey, at which the lease expires in August
2008.

ITEM 3.  LEGAL PROCEEDINGS

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

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

         None.

                                    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 American Stock Exchange
under the symbol "PED." We recently submitted an application for listing on the
NASDAQ Capital Market.

         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
                                          ---------------     ------------------
2007
----
First Quarter                                 $6.00                 $3.42
Second Quarter                                $7.00                 $4.56
Third Quarter                                 $9.27                 $5.19
Fourth Quarter                                $6.43                 $4.46

2006
----
First Quarter                                 $3.55                 $2.75
Second Quarter                                $3.35                 $2.25
Third Quarter                                 $3.20                 $2.47
Fourth Quarter                                $4.21                 $2.50



         As of March 19, 2008, the closing sale price per share for our common
stock, as reported on the American Stock Exchange was $4.79.

         (b)  HOLDERS

         As of March 3, 2008, the number of record holders of our common stock
was 129.

         (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 2006 and
2007, we did not pay any dividends. Payment of


                                       22
<PAGE>

future dividends will be within the discretion of our Board of Directors and
will depend on, among other factors, our retained earnings, capital requirements
and operating and financial condition.

RECENT SALES OF UNREGISTERED SECURITIES

         None.

USE OF PROCEEDS

         On October 19, 2004, our registration statement on Form SB-2,
commission file number 333-115454 (the "Registration Statement") registering the
offer and sale of units (each a "Unit" and collectively the "Units"), each Unit
consisting of three shares of our common stock, par value $.0001 per share, and
one and one-half common stock purchase warrants, was declared effective by the
U.S. Securities and Exchange Commission. The warrants included in the Units have
a term of five years and an exercise price of $7.125 per share. We sold all
600,000 Units covered by the Registration Statement. The gross proceeds to us
from the offering were $7,650,000. Paulson Investment Company, Inc., was the
representative of the underwriters of the offering. The net proceeds to us after
underwriting discounts and other expenses were approximately $6,000,000. As of
December 31, 2007, we used approximately $500,000 of the net proceeds to repay
certain long-term debt. Through December 31, 2007, we used $1.6 million of the
proceeds for acquisitions.

COMPANY PURCHASES OF ITS EQUITY SECURITIES

         There were no company purchases of its equity securities in 2007.

         On November 8, 2007, the 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.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

         THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS FORM 10-KSB. 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-KSB.
BECAUSE THIS DISCUSSION INVOLVES RISK AND UNCERTAINTIES, OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

OVERVIEW

         We provide learning solutions for accounting/finance, legal, insurance,
banking, brokerage and engineering professionals, six large vertical markets
with mandatory continuing education requirements. In addition, we provide
training solutions for the pharmaceutical, banking, securities, insurance and
technology industries. We also provide information technology, corporate
governance, ethics and compliance training for the general corporate market. We
offer off-the-shelf courses and custom-designed programs with delivery methods
suited to the specific needs of our clients. Our customers include professional
firms of all sizes, many of the Fortune 500 companies and a large number of
midsize and small companies.

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


                                       23
<PAGE>

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

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

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

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

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

         In 2004 we successfully completed our initial public offering. The net
proceeds from the offering were approximately $6 million. To date, we have
expended approximately $2.1 million of those proceeds, $500,000 to repay debt
and the balance for acquisitions. We intend to use the remaining $3.9 million
net proceeds from the offering and our publicly traded common stock to execute
our growth strategy, which contemplates acquiring other companies (or their
assets) that provide learning solutions. We intend to focus on acquisitions that
will allow us to increase the breadth and depth of our current product
offerings, including the general corporate market for compliance, governance and
ethics. We will also consider acquisitions that will give us access to new
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
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.

RECENT ACQUISITIONS

         On March 1, 2007, we acquired substantially all of the assets and
assumed certain liabilities of The Selbst Group Inc. for approximately $93,000.
The Selbst Group, founded in 1974, is a specialized consulting firm providing
sales, sales management training, product training and marketing support for the
financial services industry. In conjunction with the acquisition we entered into
a two-year employment agreement with the President of Selbst, with an option to
extend the contract annually for three years. In addition, the seller may be
entitled to an incentive bonus if certain sales targets are reached.

         On August 2, 2007, we acquired substantially all of the assets and
assumed certain liabilities of Bright Ideas Group d/b/a WatchIT (BIG). BIG
develops information technology education and training programs for business and
information technology professionals. The assets we acquired included
approximately 300 courses and customer contracts. We operate the WatchIT product
line under the Company's SmartIT business division. James Graham, BIG's Founder
and President, and other key employees of BIG, have become our employees.

         The purchase price for the assets was $175,000 plus the assumption of
BIG's obligations under certain customer agreements. In addition, BIG is
entitled to an incentive payment of $200,000 if SmartIT's


                                       24
<PAGE>

revenues for the six month period beginning August 1, 2007, and ending January
31, 2008, exceed $1,000,000. If SmartIT's revenues for this period are between
$875,000 and $1,000,000, the incentive payment will be a prorated portion of the
$200,000. If revenues are less than $875,000, no incentive payment is due. None
of these contingent payments were earned.

         Finally, BIG is also entitled to an earnout equal to three times BIG's
average annual earnings for the three year period ending July 31, 2010. Annual
earnings is income before taxes less all inter-company charges and an amount for
the use of capital the Company provides BIG. In no event may the earnout exceed
$3,000,000. Any payment under the earnout will be reduced by the sum of (i)
$115,000 and (ii) any incentive payments made with respect to the six-month
period ending January 31, 2008. The earnout amount may be paid at our discretion
either entirely in cash or 50% in cash and 50% in shares of our common stock
provided that at that time payment is due (i) our common stock is traded on the
New York Stock Exchange, the American Stock Exchange or the NASDAQ Capital
Market and (ii) we have filed all periodic reports we were required to file
under the Securities Act of 1934. Any payment in shares of common stock will be
valued based on the average closing price of the common stock for the 20
business days after July 31, 2010.

         On August 21, 2007, we acquired substantially all of the assets and
assumed certain liabilities of FinancialCampus (FC) from SkillSoft Corporation.
FC produces and maintains a library of training courses designed for the
security, insurance and other financial services industries. FC also produces
customized training courses for its customers. This product line is included in
SmartPros Financial Services Training division. SkillSoft is entitled to an
additional annual earnout for three years equal to 10% of sales exceeding $2
million per annum. In no event shall the total cumulative earnout for the
three-year period exceed $750,000. The earnout is payable entirely in cash.
Should the Company sell the FC business prior to the end of the earnout period,
the seller will be entitled to $750,000 less any payments made against the
earnout. Certain key employees of FC have become employees of SmartPros.

         The Selbst Group and FinancialCampus assets and liabilities were
incorporated into our Financial Services Training division, which also includes
our Sage course library.

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.


                                       25
<PAGE>

     REVENUES

         A large portion of our revenues is in the form of subscription fees for
one 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,
fees for various services, including Web design, software development, tape
duplication, video production, video conversion, course design and development,
ongoing maintenance of a SmartPros Professional Education Center, 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. Contracts for development and
production services typically provide for a significant upfront payment and a
series of payments based on deliverables specifically identified in the
contract.

         Revenues from subscription services are recognized as earned; deferred
at the time of billing or payment and amortized into revenue on a monthly basis
over the term of the subscription. Engineering products are non-subscription
based and revenue is recognized upon shipment of the product or, in the case of
online sales, payment. 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 proportional performance basis
where sufficient information relating to project status and other supporting
documentation is available. The contracts may have different billing
arrangements resulting in either unbilled or deferred revenue. We usually obtain
either a signed agreement or purchase orders from our non-subscription customers
outlining the terms and conditions of the sale or service to be provided.
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. Working Values and Skye recognize
revenue on a proportional performance basis.

     IMPAIRMENT OF LONG-LIVED ASSETS

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

     STOCK-BASED COMPENSATION

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

     SEGMENT ACCOUNTING

         We treat operating results as one segment, that of educational
services. Revenues from non-educational services such as video production are
not a material part of the Company's operating income.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2007, AND 2006

         The following table compares our statement of operations data for the
years ended December 31, 2007, and December 31, 2006. The trends suggested by
this table may not be indicative of future operating


                                       26
<PAGE>

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).

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31
                                           -----------------------------------------------------------------------------------
                                                        2007                                2006
                                           --------------------------------    -------------------------------
                                               AMOUNT           PERCENTAGE         AMOUNT          PERCENTAGE        CHANGE
                                           --------------     -------------    ---------------    ------------    ------------
<S>                                        <C>                      <C>         <C>                   <C>              <C>
Net revenues                               $ 15,204,506             100.0%      $ 12,462,086          100.0%           22.0%
Cost of revenues                              5,962,788              39.2%         5,176,525           41.5%           15.2%
                                           ------------       -----------      -------------      ---------       ---------
Gross profit                                  9,241,718              60.8%         7,285,561           58.4%           26.8%
                                           ------------       -----------      -------------      ---------       ---------
General and administrative                    7,326,308              48.2%         5,820,403           46.7%           25.9%
Depreciation and amortization                   749,272               4.9%           653,091            5.2%           14.7%
                                           ------------       -----------      -------------      ---------       ---------
Total operating expenses                      8,075,580              53.1%         6,473,494           51.9%           24.7%
                                           ------------       -----------      -------------      ---------       ---------
Operating income                              1,166,138               7.7%           812,067            6.5%           43.6%
                                           ------------       -----------      -------------      ---------       ---------
Interest income                                 412,749               2.7%           330,843            2.6%           25.0%
Interest expense                                 (1,044)                0%            (4,299)             0%          (75.7%)
                                           ------------       -----------      -------------      ---------       ---------
Net interest income                             411,435               2.7%           326,544            2.6%           26.0%
                                           ------------       -----------      -------------      ---------       ---------
Income before benefit for income taxes        1,577,573              10.4%         1,138,611            9.1%           38.6%
Income tax benefit                              590,792               3.9%           372,500           (3.0%)          58.9%
                                           --------------------------------    -----------------------------------------------
Net income                                  $ 2,168,365              14.3%       $ 1,511,111           12.1%           43.5%
                                           ============       ===========      =============      =========       =========
</TABLE>

NET REVENUES

         Net revenues for 2007 increased 22% compared to net revenues for 2006.
Online sales continue to be an important factor contributing to our overall
revenue growth. In 2007, net revenues from online sales of subscription-based
products and other sales accounted for approximately $5.2 million, or 34%, of
our net revenues. In 2006, online sales accounted for $3.2 million, or 24%, of
our net revenues. This is a result of recent acquisitions of financial services
products and a general conversion by many companies to online training.

         Net revenues from sales of our accounting/finance products grew in
absolute terms but decreased as a percentage of net revenues due to the increase
in revenues resulting from our acquisitions. In 2007, net revenues from our
accounting/finance and related products were $9.3 million compared to $8.4
million in 2006. This increase was due in part to annual subscription price
increases and an increased level of sales. For 2007 net revenues from
accounting/finance products include subscription-based revenue of $8.2 million
and direct sales of course material on a non-subscription basis, net revenues
from custom work and advertising of $1.1 million. For 2006, subscription-based
revenue was $7.4 million and direct sales of course material on a
non-subscription basis, custom work and advertising was $1 million.

         Net revenues from sales of our engineering products, which are not
subscription-based products, were $858,000 in 2007 compared to $703,000 in 2006.
This increase is primarily attributable to an increase in sales from our MGI
product line, which was $434,000 in 2007 as compared to $77,000 in 2006. MGI was
acquired in the fourth quarter of 2006. Sales from existing products decreased
from $626,000 in 2006 to $424,000 in 2007 as a result of a shift in the hiring
practices of many engineering firms away from civil engineers to other fields.
We are developing new products for other engineering disciplines to address this
trend

         Net revenues from video production, duplication and consulting services
decreased in 2007 by $442,000 to $290,000 from $732,000 in 2006. Net revenues
from video duplication services decreased by $449,000 while net revenues from
consulting services increased by $7,000. Factors contributing to the decrease in
revenues from video duplication services include:


                                       27
<PAGE>

    o    In 2006, the former head of our video department resigned. He was
         subsequently replaced and the person who replaced him was unable to
         generate adequate sales. That person subsequently resigned as well. As
         a result, the focus of our video division has shifted from working on
         its own accounts to producing videos for other divisions.

    o    The general decline in the videotape industry reflecting the popularity
         of digital formats such as CD-ROM and DVD resulting in a substantial
         decrease in our tape duplication business.

    o    Inconsistency of consulting contracts.

    o    Sales are credited to the department from where they originate and not
         to the department where the work is performed.

         Net revenues from our Working Values subsidiary increased 64% from
$812,000 in 2006 to $1,331,000 in 2007. This increase was primarily due to sales
from the Cognistar legal division that was acquired in the fourth quarter of
2006. Net revenues from custom and ethics courses from Working Values were
relatively flat from 2006 to 2007 with sales of $729,000 and $738,000
respectively. The Cognistar division generated $593,000 in net revenues in 2007
as compared to $83,000 in 2006. Cognistar concentrates on delivering online
continuing legal education.

         Skye generated $2.2 million of net revenues in 2007 as compared to $1.7
million in 2006. Skye was acquired in February 2006. Skye produces customized
training and educational material for the pharmaceutical industry, professional
firms, financial service companies and others.

         Our financial services training division consists of our Sage course
library that was acquired in February 2006, Selbst, which we acquired in March
2007, and the FinancialCampus (FC) library of courses, which we acquired in
August 2007. Sage and FC sells online training courses for the banking,
insurance and securities industries. Selbst primarily provides live training to
those industries. Our financial services training division generated net
revenues of $1.2 million in 2007 as compared to only $72,000 in 2006. The
largest portion of the growth comes from the FC course sales.

         Our technology training division, WatchIT, which was also acquired in
August 2007, generated net revenues of $92,000 in 2007.

COST OF REVENUES

         Cost of revenues includes (i) production costs, such as the salaries,
benefits and other costs related to personnel, whether our employees or
independent contractors, who are used directly in connection with producing our
educational programs; (ii) royalties paid to third parties; (iii) the cost of
materials, such as videotape and packaging supplies; and (iv) shipping costs.
Compared to 2006, cost of revenues in 2007 increased by approximately $800,000.
The increase was primarily attributable to our recent acquisitions and increased
business from Skye which requires a substantial amount of outsourcing in order
to complete its projects. However, as a percentage of net revenues, cost of
revenues in 2007 decreased to 39.2% from 41.5%, resulting in a 4.1% increase in
our gross profit margin primarily as a result of increased Internet-based sales
that have a lower cost of delivery and higher margins than custom work.

         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 2006 to 2007 and the
reasons for those variations were as follows:

    o    OUTSIDE LABOR AND DIRECT PRODUCTION COSTS. Outside labor includes the
         cost of hiring actors and production personnel such as directors,
         producers and cameramen and the outsourcing of non-video


                                       28
<PAGE>

         technology. The cost of actors decreased by $66,000 offset by the
         increased cost of video production and outside technology personnel of
         $245,000. Both Skye and our consulting/technology departments employ a
         number of consultants to write scripts, edit course material and
         provide technology services. In 2006 we began outsourcing some of the
         programming and content development functions that were previously done
         by our employees to two firms in India. In order to control costs, we
         are currently exploring areas such as China and 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--decreased by $83,000. These variations are related to the
         type of video production and custom projects and do not reflect any
         trends in our business.

    o    SALARIES. Overall payroll and related costs attributable to production
         personnel increased by approximately $317,000. The increase was
         primarily attributable to salaries and related costs from our recent
         acquisitions of approximately $264,000, while our technology group's
         salaries and related costs decreased by $215,000, and our video group's
         salaries and related costs decreased by $98,000. Working Values
         salaries and related costs increased by $256,000, primarily due to the
         Cognistar acquisition. Skye's salaries increased approximately $110,000
         in 2007 from 2006.

    o    ROYALTIES. Royalty expense increased in 2007 as compared to 2006 by
         $42,000. Increased sales of our accounting products resulted in
         substantially the entire increase. However, if volume increases or if
         we enter into new agreements or modify existing agreements, the actual
         royalty payments in 2008 under these agreements may be either higher or
         lower than they were in 2007.

    o    OTHER COSTS. Travel and entertainment expenses increased by $50,000,
         primarily related to the increase in Working Values and Skye projects.
         Our shipping costs increased by $6,000 as a result of price increases
         and increased volume.

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

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 2007 were higher than they were in 2006 by $1,482,000, primarily due
to the acquisitions we made, resulting in increased rents, administrative
payrolls and other costs. Approximately $1,050,000 of the increase in general
and administrative expenses was attributable to increases in salaries and
related costs less the savings from outsourcing our customer service, as
outlined below. In addition, in conformity with SFAS No. 123R we are now
expensing the cost of issuing stock options. This expense in 2006 was $35,000
and $41,000 in 2007. Our professional fees increased in 2007 increased by
$65,000 primarily due to the cost of complying with the Sarbanes-Oxley Act of
2002. In 2007, we expended approximately $50,000 for such costs. In addition, in
2007 we began to outsource our customer service, a function that was formerly
done by employees. The cost was approximately $152,000, which was offset by a
savings of compensation expense. We anticipate that general and administrative
expenses will increase in 2008 as we fully absorb our recent acquisitions and
increased marketing expenses.


                                       29
<PAGE>

DEPRECIATION and AMORTIZATION

         Depreciation and amortization expenses were $96,000 higher in 2007 than
they were in 2006. The increase is attributable to certain intangible assets
acquired in 2006 and 2007 and the purchase of additional computer hardware. We
are also amortizing the capitalized costs related to the Sarbanes-Oxley toolkit
product and related course content and development of new courses in our SPA
library. We expect our depreciation and amortization expenses on our current
assets to increase as we begin to amortize the costs related to these
acquisitions and the development of our new LMS and SPA courses.

OPERATING INCOME

         For 2007 operation income was $1,166,000 compared to $812,000 in 2006,
an increase of 44%. As a percentage of net revenues, operating income in 2007
was 7.7% compared to 6.5% in 2006, an increase of 18.5%. Some of our recent
acquisitions of online subscription-based products have contributed to the
increase in operating income.

OTHER INCOME

         Other income and expense items consist of interest paid on indebtedness
and interest earned on deposits. As of the end of 2007 we have repaid all of our
outstanding indebtedness. Net interest income increased by $85,000 due to
increased cash from operations and the general rise in interest rates during
2007. We anticipate a decrease in interest income as interest rates continue to
decrease in 2008.

INCOME TAX BENEFIT

         We have begun to recognize the benefits of its net operating loss
carryforwards pursuant to SFAS No. 109. This has resulted in a $591,000 benefit
for the current year. We have taken an allowance for recognizing the full value
of the benefit because of the short-term history of profits.

NET INCOME

         For 2007, we recorded net income of $2,168,000 compared to $1,511,000
for 2006. Our net profit margin for 2007 was 14.3% compared to 12.1%, an
increase of 18.2%. The increase in net income is primarily due to the increased
operating profit of $354,000, interest income of $85,000, and the income tax
benefits available through our net operating loss carryforwards.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

         Historically, we have financed our working capital requirements through
internally generated funds, sales of equity and debt securities, and proceeds
from short-term bank borrowings. In October 2004 we consummated an initial
public offering of our common stock. The net proceeds to us from the offering
were approximately $6.0 million.

         Our working capital as of December 31, 2007, was approximately $5.7
million compared to a $4.7 million working capital as of December 31, 2006. The
increase is attributable to positive cash flow from operations and earnings. Our
current ratio at December 31, 2007, is 1.87 to 1. 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, $5.30 million at December 31,
2007, 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.


                                       30
<PAGE>

         For the year ended December 31, 2007, net cash generated by operating
activities was approximately $3.54 million. We had a net increase in cash of
$2.68 million, primarily from operations and the exercise of stock options and
warrants, offset by cash expended for assets and business acquisitions. 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.

         Capital expenditures for the year ended December 31, 2007, were
approximately $793,000, of which $324,000 consisted of equipment purchases and
$92,000 in capitalizing the cost of producing various courses and $377,000 for
capitalizing the costs of developing the new LMS. Although we are constantly
upgrading our technology, we do not anticipate any significant increase in
capital expenditures relating to equipment purchases over the next 12 months.

         For the year ended December 31, 2007, we had capital lease expenditures
of approximately $12,000. At year-end, we had no indebtedness.

         In addition to the foregoing, as of December 31, 2007, we had
commitments under the lease for executive offices in Hawthorne, New York, the
Working Values and Cognistar executive offices in Westborough, Massachusetts,
and Skye's executive offices in Bridgewater, New Jersey, aggregating $831,000
through February 2010. The Cognistar lease expires in January 2009 and calls for
monthly rent of $3,089. The Skye lease was recently extended to August 2008 at a
monthly rental of $3,670.

         The shareholders of Skye are also entitled to a contingent payment
based on certain levels of sales through December 31, 2008, less adjustments for
use of capital and other costs. The total additional payment cannot exceed
$1,200,000. The additional payment may be paid 50% in cash and 50% in our common
stock at our discretion. If the additional payment is made in stock, it will be
determined by the average price for the 20 business days subsequent to December
31, 2008.

          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.


                                       31
<PAGE>

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 $100,000 at any one bank. Our money
market funds are held in a brokerage account that is insured by the Security
Industry Protection Corp (SIPC) 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.

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

SEASONALITY AND CYCLICALITY

         Historically, the fourth quarter has been our strongest in terms of
revenue generation. This is due to the fact that most of our subscriptions
follow the calendar year and renewals are mailed out 60 days before the end of
the year. Also, for internal budgeting reasons, corporate clients tend to defer
their decisions to the end of the year.

         In general, since most of our business relates to continuing
professional education and is non-discretionary, we do not believe that business
cycles have a material impact on our financial performance. Adverse business
conditions and developments, however, would negatively affect the performance of
Working Values and the ability of our video production and consulting
departments to generate revenues independently.

RECENT ACCOUNTING PRONOUNCEMENTS

         In February 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities." We believe that this pronouncement has a material impact on our
financial statements.

         In December 2007, the FASB issued SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements." We believe that this
pronouncement will not have a material impact on our financial statements.

         Also in December 2007, the FASB issue SFAS No. 141R, "Business
Combinations." SFAS No. 141R is effective for periods beginning after December
15, 2008, and may not be applied retroactively. We believe that this
pronouncement may affect the way we treat any contingent purchase price on
future acquisitions, as the pronouncement requires establishing an estimate of
that amount at the time of acquisition.

ITEM 7.  FINANCIAL STATEMENTS

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


                                       32
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


CONTENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006                                  PAGES
--------------------------------------------------------------------------------

FINANCIAL STATEMENTS

  Report of Independent Registered Public Accounting Firm                F-1

  Consolidated Balance Sheet                                             F-2

  Consolidated Statements of Income                                      F-3

  Consolidated Statement of Stockholders' Equity                         F-4

  Consolidated Statements of Cash Flows                                  F-5

  Notes to Consolidated Financial Statements                         F-6 - F-17





--------------------------------------------------------------------------------
<PAGE>



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
SmartPros Ltd.
 and Subsidiaries
Hawthorne, New York

We have audited the  accompanying  consolidated  balance sheet of SmartPros Ltd.
and  Subsidiaries  as  of  December  31,  2007,  and  the  related  consolidated
statements  of  income,  stockholders'  equity  and cash flows for the two years
ended  December  31,  2007.  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, 2007,  and the results of
their operations and their cash flows for the two years ended December 31, 2007,
in conformity with accounting principles generally accepted in the United States
of America.



By: /s/ Holtz Rubenstein Reminick LLP
-------------------------------------------
        Holtz Rubenstein Reminick LLP

Melville, New York
February 28, 2008

                                                                             F-1

<PAGE>

<TABLE>
                                                                                                                      SMARTPROS LTD.
                                                                                                                    AND SUBSIDIARIES

<CAPTION>
CONSOLIDATED BALANCE SHEET
====================================================================================================================================
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                                                                    <C>
ASSETS

Current Assets:
 Cash and cash equivalents                                                                                             $ 10,072,338
 Accounts receivable, net of allowance for
  doubtful accounts of $39,842                                                                                            1,964,483
 Prepaid expenses and other current assets                                                                                  237,097
                                                                                                                       ------------
Total Current Assets                                                                                                     12,273,918
                                                                                                                       ------------

Property and Equipment, net                                                                                                 630,857
Goodwill                                                                                                                    145,684
Other Intangibles, net                                                                                                    3,296,538
Other Assets, including restricted cash of $150,000                                                                         154,673
Deferred Tax Asset                                                                                                          978,000
                                                                                                                       ------------
                                                                                                                          5,205,752
                                                                                                                       ------------
Total Assets                                                                                                           $ 17,479,670
                                                                                                                       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
 Accounts payable                                                                                                      $    786,781
 Accrued expenses                                                                                                           419,886
 Other liabilities                                                                                                           40,040
 Deferred revenue                                                                                                         5,318,382
                                                                                                                       ------------
Total Current Liabilities                                                                                                 6,565,089
                                                                                                                       ------------

Long-Term Liabilities:
 Other liabilities-net of current portion                                                                                    40,041
                                                                                                                       ------------
Total Long-Term Liabilities                                                                                                  40,041
                                                                                                                       ------------

Commitments and Contingencies

Stockholders' Equity:
 Preferred stock, $.001 par value, authorized 1,000,000 shares,
  0 shares issued and outstanding                                                                                                 -
 Common stock, $.0001 par value, authorized 30,000,000 shares,
  5,304,698 issued and 4,993,967 outstanding                                                                                    530
 Common stock in treasury, at cost - 310,731 shares                                                                        (922,625)
 Additional paid-in-capital                                                                                              16,925,314
 Accumulated deficit                                                                                                     (5,106,459)
                                                                                                                       ------------
                                                                                                                         10,896,760
 Deferred compensation                                                                                                      (22,220)
                                                                                                                       ------------
Total Stockholders' Equity                                                                                               10,874,540
                                                                                                                       ------------
Total Liabilities and Stockholders' Equity                                                                             $ 17,479,670
                                                                                                                       ============
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                              F-2

<PAGE>

<TABLE>
                                                                                                                      SMARTPROS LTD.
                                                                                                                    AND SUBSIDIARIES

<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
===================================================================================================================================
YEARS ENDED DECEMBER 31,                                                                               2007                2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>                 <C>
Net Revenues                                                                                       $ 15,204,506        $ 12,462,086
Cost of Revenues                                                                                      5,962,788           5,176,525
                                                                                                   --------------------------------
Gross Profit                                                                                          9,241,718           7,285,561
                                                                                                   --------------------------------

Operating Expenses:
 Selling, general and administrative                                                                  7,326,308           5,820,403
 Depreciation and amortization                                                                          749,272             653,091
                                                                                                   --------------------------------
                                                                                                      8,075,580           6,473,494
                                                                                                   --------------------------------
Operating Income                                                                                      1,166,138             812,067
                                                                                                   --------------------------------

Other Income (Expense):
 Interest and dividend income                                                                           412,479             330,843
 Interest expense                                                                                        (1,044)             (4,299)
                                                                                                   --------------------------------
                                                                                                        411,435             326,544
                                                                                                   --------------------------------

Net Income before Benefit for Income Taxes                                                            1,577,573           1,138,611
Income Tax Benefit                                                                                      590,792             372,500
                                                                                                   --------------------------------
Net Income                                                                                         $  2,168,365        $  1,511,111
                                                                                                   ================================

Net Income Per Common Share:
 Basic net income per common share                                                                 $       0.44        $       0.30
                                                                                                   ================================
 Diluted net income per common share                                                               $       0.43        $       0.30
                                                                                                   ================================

Weighted Average Number of Shares Outstanding:
 Basic                                                                                                4,924,098           4,994,090
                                                                                                   ================================
 Diluted                                                                                              5,022,911           5,008,164
                                                                                                   ================================
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                             F-3

<PAGE>

<TABLE>
                                                                                                                      SMARTPROS LTD.
                                                                                                                    AND SUBSIDIARIES

<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
====================================================================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
------------------------------------------------------------------------------------------------------------------------------------

                                                   Common Stock       Preferred Stock    Additional
                                              ----------------------  ---------------     Paid-in      Accumulated       Deferred
                                                 Shares       Amount  Shares  Amount      Capital        Deficit       Compensation
                                              --------------  ------  ------ --------  --------------------------------------------
<S>                                                <C>         <C>       <C>   <C>      <C>            <C>             <C>
Balance at January 1, 2006                         5,145,447   $514       -    $  -     $ 16,418,034   $ (8,785,935)   $    (75,000)

Common Stock Issued by Exercise of Options            24,558      3       -       -           52,797              -               -
Purchase of Treasury Shares (201,000)                      -      -       -       -                -              -               -
Amortization of Deferred Compensation                      -      -       -       -                -              -          42,000
Payment of Note Receivable from Shareholder                -      -       -       -                -              -               -
Issuance of Shares from Restricted Stock Plan         16,500      2       -       -           66,658              -         (44,440)
Stock Option Expense                                       -      -       -       -           35,455              -               -
Net Income                                                 -      -       -       -                -      1,511,111               -
                                                ------------   ----       -    ----     -------------------------------------------
Balance at December 31, 2006                       5,186,505    519       -       -       16,572,944     (7,274,824)        (77,440)

Common Stock Issued by Exercise of Options            24,401      2       -       -          125,579              -               -
Common Stock Issued by Exercise of
   Underwriters' Warrants                             87,765      8       -       -          100,084              -               -
Recapture of Short-Swing Profits                           -      -       -       -           31,195              -               -
Amortization of Deferred Compensation                      -      -       -       -                -              -          55,220
Stock Option Expense                                       -      -       -       -           41,430              -               -
Issuance of Shares from Restricted Stock Plan          6,027      1       -       -           54,082              -               -
Net Income                                                 -      -       -       -                -      2,168,365               -
                                                ------------   ----    ----    ----     -------------------------------------------
Balance at December 31, 2007                       5,304,698   $530       -    $  -     $ 16,925,314   $ (5,106,459)   $    (22,220)
                                                ============   ====    ====    ====     ===========================================

<CAPTION>

                                                Receivable                        Total
                                                   from          Treasury     Stockholders'
                                                Stockholder       Stock          Equity
                                               --------------------------------------------

<S>                                            <C>             <C>             <C>
Balance at January 1, 2006                     $   (200,000)   $   (384,600)   $  6,973,013

Common Stock Issued by Exercise of Options                -               -          52,800
Purchase of Treasury Shares (201,000)                     -        (538,025)       (538,025)
Amortization of Deferred Compensation                     -               -          42,000
Payment of Note Receivable from Shareholder         200,000               -         200,000
Issuance of Shares from Restricted Stock Plan             -               -          22,220
Stock Option Expense                                      -               -          35,455
Net Income                                                -               -       1,511,111
                                               --------------------------------------------
Balance at December 31, 2006                              -        (922,625)      8,298,574

Common Stock Issued by Exercise of Options                -               -         125,581
Common Stock Issued by Exercise of
   Underwriters' Warrants                                 -               -         100,092
Recapture of Short-Swing Profits                          -               -          31,195
Amortization of Deferred Compensation                     -               -          55,220
Stock Option Expense                                      -               -          41,430
Issuance of Shares from Restricted Stock Plan             -               -          54,083
Net Income                                                -               -       2,168,365
                                               --------------------------------------------
Balance at December 31, 2007                   $          -    $   (922,625)   $ 10,874,540
                                               ============================================
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                             F-4

<PAGE>

<TABLE>
                                                                                                                      SMARTPROS LTD.
                                                                                                                    AND SUBSIDIARIES

<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
YEARS ENDED DECEMBER 31,                                                                                 2007              2006
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>               <C>
Cash Flows from Operating Activities:
 Net income                                                                                          $  2,168,365      $  1,511,111
                                                                                                     ------------------------------
 Adjustments to reconcile net income to net cash
  provided by operating activities:
   Depreciation and amortization                                                                          749,272           653,091
   Stock compensation expense                                                                              95,510            35,455
   Deferred compensation                                                                                   55,220            64,220
   Deferred income tax benefit                                                                           (600,000)         (378,000)
   Changes in operating assets and liabilities:
    (Increase) decrease in operating assets:
     Accounts receivable                                                                                   (3,544)         (905,008)
     Prepaid expenses and other current assets                                                             40,296               783
    (Decrease) increase in operating liabilities:
     Accounts payable and accrued expenses                                                                273,573           371,966
     Deferred revenue                                                                                     802,236           317,588
     Other liabilities                                                                                    (40,056)          (40,056)
                                                                                                     ------------------------------
 Total adjustments                                                                                      1,372,507           120,039
                                                                                                     ------------------------------
Net Cash Provided by Operating Activities                                                               3,540,872         1,631,150
                                                                                                     ------------------------------

Cash Flows from Investing Activities:
 Acquisition of property and equipment                                                                   (324,350)          (91,413)
 Capitalized course costs                                                                                 (92,341)          (45,358)
 Capitalized software development                                                                        (376,536)                -
 Fixed assets acquired from acquisitions                                                                  (77,201)                -
 Intangible assets acquired from acquisitions                                                            (210,512)                -
 Cash paid for business acquisitions                                                                      (26,484)       (1,282,906)
                                                                                                     ------------------------------
Net Cash (Used in) Investing Activities                                                                (1,107,424)       (1,419,677)
                                                                                                     ------------------------------

Cash Flows from Financing Activities:
 Purchase of treasury shares                                                                                    -          (538,025)
 Payments of note receivable from stockholder                                                                   -           200,000
 Net proceeds from exercise of stock options, warrants and other                                          256,868            52,799
 Payments under capital lease obligations                                                                 (11,767)          (38,149)
                                                                                                     ------------------------------
Net Cash Provided by (Used in) Financing Activities                                                       245,101          (323,375)
                                                                                                     ------------------------------

Net Increase (Decrease) in Cash and Cash Equivalents                                                    2,678,549          (111,902)
Cash and Cash Equivalents, beginning of year                                                            7,393,789         7,505,691
                                                                                                     ------------------------------
Cash and Cash Equivalents, end of year                                                               $ 10,072,338      $  7,393,789
                                                                                                     ==============================

Supplemental Disclosure:
 Cash paid for interest                                                                              $      1,044      $      4,299
                                                                                                     ==============================
 Cash paid for income taxes                                                                          $      9,208      $      4,866
                                                                                                     ==============================
</TABLE>


--------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.                             F-5


<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    NATURE OF OPERATIONS - SmartPros  Ltd.  ("SmartPros"  or the  "Company"),  a
    Delaware  corporation,  was organized in 1981 as Center for Video  Education
    Inc. for the purpose of producing  educational  videos primarily directed to
    the accounting  profession.  SmartPros'  primary products today are periodic
    video and Internet  subscription  services directed to corporate accountants
    and  financial  managers,  accountants  in  public  practice  and  CPA  exam
    candidates.  In addition,  the Company also  produces a series of continuing
    education  courses  directed  to the  engineering  profession,  as well as a
    series of courses designed for candidates for the  professional  engineering
    exam.  Finally,  through its  wholly-owned  subsidiary,  Working Values Ltd.
    ("Working Values"), the Company produces ethics,  governance, and compliance
    programs for corporate  clients and through its Cognistar  division produces
    on-line and customized training courses for the legal profession.  Its other
    wholly-owned  subsidiary,  Skye Multimedia Ltd. ("Skye") produces customized
    training solutions for a number of industries  including the pharmaceutical,
    professional  services and others. As a result of recent  acquisitions,  the
    Company acquired a library of nationally certified online training solutions
    for the banking,  securities  and insurance  industries,  as well as courses
    designed for live  training.  The  engineering  division  provides  training
    courses  for the  profession  and  preparation  for  professional  licensing
    examinations.  SmartPros  also  produces  custom  videos  and  rents out its
    studios. SmartPros is located in Hawthorne, New York, where it maintains its
    corporate  offices,  new  media  lab,  video  production  studios  and  tape
    duplication facilities.  While the Company's management monitors the revenue
    streams of 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.

    BASIS OF PRESENTATION - The consolidated  financial  statements of SmartPros
    include the accounts of SmartPros and its wholly-owned subsidiaries, Working
    Values and Skye. 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 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 web site design, video production,
    consulting  services,  and custom  projects,  are generally  recognized on a
    proportional  performance  basis where  sufficient  information  relating to
    project  status  and  other  supporting   documentation  is  available.  The
    contracts  may have  different  billing  arrangements  resulting  in  either
    unbilled or deferred  revenue.  The Company obtains either signed agreements
    or purchase orders from its  non-subscription  customers outlining the terms
    and  conditions  of the  products  or services  to be  provided.  Otherwise,
    revenues are recognized after completion  and/or delivery of services to the
    customer.  Duplication  and related  services are generally  recognized upon
    shipment  or, if later,  when the  Company's  obligations  are  complete and
    realization of receivable amounts are assured.

    SEGMENT  ACCOUNTING - The Company has evaluated the requirements  under SFAS
    No. 141, "Financial  Reporting for Segments of a Business  Enterprise",  and
    believes that all of its operations are reportable under one segment,  which
    is educational services.


--------------------------------------------------------------------------------
                                                                             F-6
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) refers to revenue,
    expenses,   gains  and  losses  that  under  generally  accepted  accounting
    principles are included in comprehensive  income,  but are excluded from net
    income,  as  these  amounts  are  recorded  directly  as  an  adjustment  to
    stockholders'  equity.  At December  31,  2007 and 2006,  there were no such
    adjustments required.

    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.

    INVESTMENTS - The Company has  established a policy to invest  proceeds from
    its public offering in AAA-rated  bonds with short-term  maturities or money
    market funds.  The Company  determines  the  appropriate  classification  of
    securities at the time of purchase and reassesses the appropriateness of the
    classification at each reporting date. At December 31, 2007, the Company had
    no short-term investments. Unrealized gains and losses on available-for-sale
    securities  are recorded as a separate  component of  stockholders'  equity.
    Realized  gains and losses on the sale of  securities,  as  determined  on a
    specific  identification basis, are included in the consolidated  statements
    of  operations.  For the years ended December 31, 2007 and 2006, the Company
    had no unrealized gains or losses on available-for-sale securities.

    CONCENTRATION  OF CREDIT  RISK -  Financial  instruments  that  subject  the
    Company to  concentrations of credit risk consist primarily of cash and cash
    equivalents,  investments,  and accounts receivable.  From time to time, the
    cash balances  exceed the federal  depository  insurance  coverage  limit of
    $100,000. The Company's cash balances are deposited with high credit quality
    financial   institutions.   No  single  customer  represents  a  significant
    concentration of sales or receivables.

    ACCOUNTS  RECEIVABLE - Accounts  receivable are recorded at 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.

    INVENTORIES  -  Inventories  are  valued at the lower of cost or market on a
    first-in,  first-out basis and consists  primarily of videotape stock,  both
    unsold video and non-video  courses and related  materials.  Inventories are
    included in prepaid expense and other current assets.

    SHIPPING AND  HANDLING  COSTS - The Company has  included  freight-out  as a
    component  of cost of goods sold for the years ended  December  31, 2007 and
    2006.

    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.


--------------------------------------------------------------------------------
                                                                             F-7
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    LONG-LIVED ASSETS - The Company accounts for long-lived assets in accordance
    with the provisions of Statement of Financial  Accounting Standards ("SFAS")
    No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets".
    This statement  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. SFAS No. 144  requires,  among other things,
    that  the  Company  reviews  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 Company's long-lived assets were impaired.

    GOODWILL - Goodwill results from prior business  acquisitions and 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  will be
    recognized in the period identified.

    INTANGIBLE  ASSETS - Certain  intangible  assets  are being  amortized  on a
    straight-line  basis over their estimated  useful lives,  which vary between
    five to nineteen 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.  For the year ended  December  31,  2007,  the Company has expended
    approximately  $92,000 on such costs. The amortization period is five years,
    except for the  Sarbanes-Oxley  courses that have a three-year  amortization
    period.  Other course costs incurred in connection with any of the Company's
    monthly  subscription  products  or custom  work is  charged  to  expense as
    incurred.  As a result of  recent  acquisitions,  the  Company  acquired  an
    additional  $175,000 of course costs which are being  amortized  over a five
    year period,  as well.  Included in other intangible  assets at December 31,
    2007,  are  capitalized  course  costs  of  $977,000,   net  of  accumulated
    amortization of $492,000.

    CAPITALIZED  SOFTWARE DEVELOPMENT - The Company has developed a new Learning
    Management  System ("LMS") and has capitalized those costs permissible under
    SFAS No. 86,  "Accounting  for the Costs of  Computer  Software  to be Sold,
    Leased, or Otherwise  Marketed".  Total capitalized costs as of December 31,
    2007 are  $376,536.  The  Company  will begin  amortizing  these  costs upon
    completion of the LMS over a five-year period.

    DEFERRED  REVENUE  -  Deferred  revenue  related  to  subscription  services
    represents the portion of unearned subscription revenue,  which is amortized
    on a monthly,  straight-line  basis, as earned.  Deferred revenue related to
    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
    temporary  differences  between the  financial  reporting  basis and the tax
    basis of the Company's assets and liabilities. Deferred taxes are recognized
    for the estimated taxes ultimately  payable or recoverable  based on enacted
    tax  laws.  Changes  in  enacted  tax rates  and laws are  reflected  in the
    financial statements in the periods they occur.

    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 for the years ended December 31, 2007 and 2006 is
    as follows:


--------------------------------------------------------------------------------
                                                                             F-8
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    The reconciliation for the years ended December 31, 2007 and 2006 is as
    follows:

<TABLE>
<CAPTION>
    YEARS ENDED DECEMBER 31,                                                             2007           2006
   ------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>            <C>
    Weighted Average Number of Shares Outstanding                                      4,924,098      4,994,090
    Effect of Dilutive Securities, common stock equivalents                               98,813         14,074
                                                                                    ---------------------------
    Weighted Average Number of Shares Outstanding, used for
     computing diluted earnings per share                                              5,022,911      5,008,164
                                                                                    ===========================
</TABLE>

    STOCK-BASED  COMPENSATION - Prior to January 1, 2006, the Company  accounted
    for share-based payments under the recognition and measurement provisions of
    APB Opinion No. 25,  ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and
    related  Interpretations,  as permitted by Statement of Financial Accounting
    Standards  No.  123,  ACCOUNTING  FOR STOCK BASED  COMPENSATION  ("Statement
    123").  Under that  method,  when  options  were granted with a strike price
    equal to or greater  than  market  price on date of  issuance,  there was no
    impact on earnings either on the date of grant or thereafter, absent certain
    modifications  to the  options.  The Company  adopted  Financial  Accounting
    Standard No. 123 (R), SHARE-BASED PAYMENT ("Statement  123(R)"),  on January
    1, 2006, using the  modified-prospective-transition  method.  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.
    In addition, the Company adheres to the guidance set forth within Securities
    and Exchange  Commission ("SEC") Staff Accounting  Bulletin ("SAB") No. 107,
    which provides the Staff's views regarding the interaction  between SFAS No.
    123(R) and certain SEC rules and  regulations  and provides  interpretations
    with respect to the valuation of share-based  payments for public companies.
    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.  As of December 31, 2007, options and restricted shares
    reserved for grants under the Plan were 761,506,  provided  that  restricted
    stock grants may not exceed 200,000 shares and 67,072 restricted shares have
    been issued.

    ADVERTISING  -  Advertising  is expensed as incurred  and was  approximately
    $62,000  and  $55,000  for the  years  ended  December  31,  2007 and  2006,
    respectively.

    NEW ACCOUNTING  PRONOUNCEMENTS  - In February 2007, the FASB issued SFAS No.
    159, "The Fair Value Option for Financial Assets and Financial Liabilities".
    SFAS No. 159 permits an entity to choose,  at specified  election  dates, to
    measure eligible financial instruments and certain other items at fair value
    that are not  currently  required to be  measured  at fair value.  An entity
    shall report  unrealized  gains and losses on items for which the fair value
    option has been  elected in  earnings  at each  subsequent  reporting  date.
    Upfront  costs and fees  related to items for which the fair value option is
    elected shall be  recognized in earnings as incurred and not deferred.  SFAS
    No. 159 also establishes  presentation and disclosure  requirements designed
    to facilitate comparisons between entities that choose different measurement
    attributes  for  similar  types of assets and  liabilities.  SFAS No. 159 is
    effective for financial  statements  issued for fiscal years beginning after
    November 15, 2007,  and interim  periods  within those fiscal years.  At the
    effective date, an entity may elect the fair value option for eligible items
    that exist at that date.  The  entity  shall  report the effect of the first
    remeasurement to fair value as a cumulative-effect adjustment to the opening
    balance of retained  earnings.  The Company believes that this pronouncement
    will not have a material effect on the consolidated financial statements.


--------------------------------------------------------------------------------
                                                                             F-9
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    In December  2007, the FASB issued SFAS No. 141R,  "Business  Combinations",
    which  changes  how  business  acquisitions  are  accounted.  SFAS No.  141R
    requires the  acquiring  entity in a business  combination  to recognize all
    (and only) 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.  SFAS No. 141R is effective  for business  combinations  occurring
    after  December 15, 2008.  The Company is  currently  evaluating  the future
    impacts and disclosures of this standard.

    In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
    Consolidated  Financial  Statements,  an  amendment  of ARB No.  51",  which
    establishes  new  standards  governing the  accounting  for and reporting of
    noncontrolling   interests   ("NCIs")  in   partially   owned   consolidated
    subsidiaries and the loss of control of subsidiaries.  Certain provisions of
    this standard indicate,  among other things, that NCIs (previously  referred
    to as minority  interests) be treated as a separate component of equity, not
    as a liability;  that  increases  and  decreases  in the parent's  ownership
    interest that leave control intact be treated as equity transactions, rather
    than as step acquisitions or dilution gains or losses;  and that losses of a
    partially  owned  consolidated  subsidiary be allocated to the NCI even when
    such  allocation  might  result in a deficit  balance.  This  standard  also
    requires changes to certain presentation and disclosure  requirements.  SFAS
    No.  160 is  effective  beginning  January 1, 2009.  The  provisions  of the
    standard  are to be  applied  to all  NCIs  prospectively,  except  for  the
    presentation   and  disclosure   requirements,   which  are  to  be  applied
    retrospectively  to all periods  presented.  The Company  believes that this
    pronouncement will not have a material effect on the consolidated  financial
    statements.

2.  ACQUISITIONS

    The Company made three acquisitions  during 2007. In March 2007, it acquired
    substantially  all of the  assets and  assumed  certain  liabilities  of The
    Selbst  Group Inc. for  approximately  $177,000.  The Selbst Group  provides
    various training programs for the financial services industry.

    In August 2007,  the Company  acquired  substantially  all of the assets and
    assumed certain liabilities of Bright Ideas Group d/b/a WatchIT ("BIG"). BIG
    develops information technology education and training programs for business
    and information technology professionals.  The purchase price for the assets
    was $175,000 plus the assumption of BIG's obligations under certain customer
    contracts.  In  addition,  BIG was  entitled  to an  incentive  payment if a
    certain revenue target for the six-month  period  beginning  August 1, 2007,
    and ending January 31, 2008, was met. No additional  payments were due under
    this provision.

    Finally,  BIG is also entitled to an  "earn-out"  equal to three times BIG's
    average  annual  earnings for the  three-year  period  ending July 31, 2010.
    Average  annual  earnings  is income  before  taxes,  less all  intercompany
    charges and an amount for the use of capital the Company provides BIG. In no
    event may the "earn-out" exceed $3,000,000. Any payment under the "earn-out"
    will be reduced by the sum of (i) $115,000 and (ii) any  incentive  payments
    made with respect to the  six-month  period  ending  January 31,  2008.  The
    "earn-out"  amount may be paid at our discretion  either entirely in cash or
    50% in cash and 50% in shares of our common stock provided that at that time
    payment  is due (i) our  common  stock  is  traded  on the  New  York  Stock
    Exchange,  the American Stock Exchange or the NASDAQ Capital Market and (ii)
    we have  filed all  periodic  reports  we were  required  to file  under the
    Securities Act of 1934. Any payment in shares of common stock will be valued
    based on the average  closing  price of the common stock for the 20 business
    days after July 31, 2010.


--------------------------------------------------------------------------------
                                                                            F-10
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    On August 21, 2007, the Company acquired substantially all of the assets and
    assumed  certain  liabilities  of  Financial  Campus  ("FC") from  SkillSoft
    Corporation.  The seller is entitled to an additional  annual "earn-out" for
    three years based on an amount equal to 10% of sales in excess of $2,000,000
    per  annum.  In no event  shall  the  total  cumulative  "earn-out"  for the
    three-year period exceed $750,000. The "earn-out" is payable in cash. Should
    the Company sell the FC business prior to the end of the "earn-out"  period,
    the seller will be entitled to $750,000  less any payments  made against the
    "earn-out".  Certain key employees of FC have become employees of SmartPros.
    FC produces  and  maintains a library of training  courses  designed for the
    security, insurance and other financial services industries. In addition, FC
    produces  customized  training courses for its customers.  This product line
    will be included in SmartPros Financial Services Training division.

3.  PROPERTY AND EQUIPMENT

    The components of property and equipment are as follows:

<TABLE>
<CAPTION>
    DECEMBER 31, 2007
   ------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                              <C>
    Furniture, Fixtures and Equipment                                                                            $3,733,044
    Leasehold Improvements                                                                                          189,709
                                                                                                                 ----------
                                                                                                                  3,922,753
    Less Accumulated Depreciation                                                                                 3,291,896
                                                                                                                 ----------
                                                                                                                 $  630,857
                                                                                                                 ==========
</TABLE>

    Depreciation expense for the years ended December 31, 2007 and 2006 were
    approximately $214,000 and $179,000, respectively.

4.  GOODWILL AND INTANGIBLE ASSETS

    The components of intangible assets are as follows:

<TABLE>
<CAPTION>
    DECEMBER 31, 2007
   ------------------------------------------------------------------------------------------------------------------------
                                                                                            Accumulated           Carrying
                                                                            Cost            Amortization            Value
                                                                        ---------------------------------------------------
<S>                                                                      <C>                 <C>                 <C>
    Engineering Courses                                                  $2,766,837          $1,976,271          $  790,566
    Rights to CPA Report ("CPAR")                                         1,700,000           1,445,022             254,978
    Pro2 Net Courses ("P2N")                                                837,504             543,320             294,184
    Sarbanes-Oxley Toolkit                                                  248,804             222,127              26,677
    Evergreen Client List                                                     3,500               1,050               2,450
    Working Values                                                           94,700              49,500              45,200
    Skye Multimedia Ltd.                                                    204,000              46,200             157,800
    MGI                                                                      54,000               9,375              44,625
    Cognistar                                                               380,164              59,151             321,013
    Sage Courses                                                            250,012              91,671             158,341
    SPA Course Development                                                  116,044              18,745              97,299
    Engineering Course Development                                           12,000                   -              12,000
    Selbst Courses                                                          139,099              15,570             123,529
    Watch It Courses                                                        197,930              12,413             185,517
    Financial Campus                                                        340,894              11,363             329,531
    Capitalized Acquisition Costs                                            69,071                   -              69,071
    Capitalized Software Development                                        376,536                   -             376,536
    Purchased Domain Names                                                    7,221                   -               7,221
                                                                        ---------------------------------------------------
                                                                         $7,798,316          $4,501,778          $3,296,538
                                                                        ===================================================
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-11
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    The aggregate  amortization expense for each of the years ended December 31,
    2007 and 2006 was approximately $535,000 and $474,000, respectively.

    Estimated amortization expense for the five years subsequent to December 31,
    2007 is as follows:

<TABLE>
<CAPTION>
    YEARS ENDING DECEMBER 31,
   --------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>
    2008                                                                                             $   576,000
    2009                                                                                                 478,000
    2010                                                                                                 389,000
    2011                                                                                                 285,000
    2012                                                                                                 188,000
</TABLE>

    The following  table presents the changes in the carrying amount of goodwill
    and other intangibles during the year ended December 31, 2007:

<TABLE>
<CAPTION>
                                                                                                        Other
                                                                                        Goodwill     Intangibles
   --------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>            <C>
    Balance, January 1, 2006                                                          $    53,434    $ 2,158,593
    Amortization Expense                                                                        -       (473,332)
    Goodwill and Intangibles Acquired                                                      77,250        965,871
                                                                                      --------------------------
    Balance, December 31, 2006                                                            130,684      2,651,132
    Amortization Expense                                                                        -       (535,099)
    Goodwill and Intangibles Acquired                                                      15,000      1,180,505
                                                                                      --------------------------
    Balance, December 31, 2007                                                        $   145,684    $ 3,296,538
                                                                                      ==========================
</TABLE>

5.  INCOME TAXES

    At  December  31,  2007,  the  Company  has  a net  deferred  tax  asset  of
    approximately  $978,000,  primarily resulting from the future tax benefit of
    net operating loss  carryforwards.  The net valuation allowance decreased by
    approximately  $600,000 for the year ended December 31, 2007. Realization of
    deferred tax assets  depends on sufficient  future taxable income during the
    period that deductible temporary  differences and carryforwards are expected
    to be available to reduce taxable income.  At December 31, 2007, the Company
    has net operating  loss  carryforwards  available to offset  future  taxable
    income of approximately $4,500,000 which expire in 2023.

    The  components  of income tax benefit for the years ended  December 31 2007
    and 2006 consist of the following:

<TABLE>
<CAPTION>
                                                                                          2007          2006
   -------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>            <C>
    Current:
     Federal                                                                          $     9,208    $     5,500
     State                                                                                      -              -
                                                                                      --------------------------
                                                                                            9,208          5,500
                                                                                      --------------------------
    Deferred:
     Federal                                                                              510,000        321,300
     State                                                                                (90,000)       (56,700)
                                                                                      --------------------------
                                                                                         (600,000)      (378,000)
                                                                                      --------------------------
    Income Tax Benefit                                                                $  (590,792)   $  (372,500)
                                                                                      ==========================
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-12
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    Deferred income tax expense results primarily from the reversal of temporary
    timing differences between tax and financial statement income.

    A  reconciliation  of income tax  expense at the federal  statutory  rate to
    income tax expense at the Company's effective rate is as follows:

<TABLE>
<CAPTION>
    YEARS ENDED DECEMBER 31,                                                               2007          2006
   -----------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>           <C>
    U.S. Federal Statutory Income Tax Rate                                                 34.0%         34.0%
    Valuation Allowance                                                                   (71.0)%       (67.0)%
                                                                                         --------------------
    Income Tax Benefit                                                                    (37.0)%       (33.0)%
                                                                                         ====================
</TABLE>

    The  temporary  differences  and  carryforwards  gave rise to the  following
    deferred tax asset at December 31, 2007:

<TABLE>
<S>                                                                                               <C>
    Depreciation and Amortization                                                                 $    17,000
    NOL Carryforward                                                                                1,530,000
    Valuation Allowance                                                                              (569,000)
                                                                                                  -----------
                                                                                                  $   978,000
                                                                                                  ===========
</TABLE>

6.  CONVERTIBLE PREFERRED STOCK

    In February 2002, the Company sold 2,000 shares of its Convertible Preferred
    Stock to its former  president.  The entire purchase price for those shares,
    $200,000, was evidenced by a promissory note from the purchaser.  The entire
    principal balance of the note and all accrued  interest,  calculated at 5.5%
    per annum, was repaid in 2006.

7.  STOCKHOLDERS' EQUITY

    In January  2007,  the  Company's  compensation  committee  granted  certain
    officers  and key  employees  of the  Company  a total of  16,500  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 2006 and
    were  considered  issued as of December  31, 2006 and  included in the total
    outstanding shares as of that date. The stock is unregistered and subject to
    certain  forfeiture  provisions if the employee  leaves the Company prior to
    January 29, 2009.

    In conjunction with the Company's initial public offering,  the underwriters
    were issued 60,000 warrants ("Underwriter Warrants"), each warrant entitling
    the holder  thereof to purchase  three shares of the Company's  common stock
    and  warrants  to  purchase  additional  1.5 shares at $7.15 per share.  The
    Underwriters  Warrants  are  exercisable  at a price of $15.30 per  warrant.
    During 2007, various holders of the Underwriter  Warrants were issued 68,139
    shares of common stock and warrants to purchase an additional  34,070 shares
    for 51,883 Underwriter Warrants. In addition,  6,542 Underwriters'  Warrants
    were  exercised  for cash  totaling  $100,092,  resulting in the issuance of
    19,626 shares of common stock and warrants to purchase an  additional  9,812
    shares.  As of December  31, 2007,  there is a balance of 1,575  Underwriter
    Warrants outstanding which expire on October 19, 2009.

    In 2007,  two employees and one  consultant to the Company  exercised  their
    vested stock  options for the  purchase of 24,401  shares of common stock at
    prices ranging between $4.05 and $5.32.

    The Company received a net of $31,195 after deducting legal expenses, as the
    result of a penalty assessed against a more than ten percent shareholder for
    violation  of Rule 16b of the  Securities  and  Exchange Act of 1934 for the
    violation of short-swing profits rules.


--------------------------------------------------------------------------------
                                                                            F-13
<PAGE>
                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

8.  STOCK OPTION PLAN

    The Company's 1999 Stock Option Plan (the "Plan"), as amended,  provides for
    the grant of incentive or  non-qualified  stock options and restricted stock
    awards  for  the  purchase  of up to  882,319  shares  of  common  stock  to
    employees,  directors and consultants. Prior to the Company's initial public
    offering,  the Plan was  administered  by the Board of Directors.  Since the
    initial public offering,  the Plan is being 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, 2007 and 2006 was $2.06 and $1.26, respectively. The
    fair  value  of  options  at the  date of  grant  was  estimated  using  the
    Black-Scholes  Option  Pricing  Model.  During  2007,  the Company took into
    consideration  guidance under SFAS No. 123(R) and SAB 107 when reviewing and
    updating  assumptions.  The  expected  volatility  is based upon  historical
    volatility of our stock and other contributing factors. The expected term is
    based upon  observation  of actual time  elapsed  between  date of grant and
    exercise of options for all  employees.  Previously  such  assumptions  were
    determined based on historical data.

    The assumptions  made in calculating the fair values of options for the year
    ended December 31, 2007 is as follows:

    Contractual Term                                                   10 years
    Expected Volatility                                                35% - 45%
    Expected Dividend Yield                                                   0%
    Risk-Free Interest Rate                                         4.1% - 4.63%
    Expected Term                                                5.5 - 6.0 years

    For the year ended  December  31,  2007,  share-based  compensation  expense
    related to stock options was approximately $41,000. As of December 31, 2007,
    the fair value of  unamortized  compensation  cost related to unvested stock
    option awards was approximately $178,000.  Unamortized  compensation cost as
    of  December  31,  2007  is  expected  to be  recognized  over  a  remaining
    weighted-average vesting period of three years.

    As of December 31, 2007, 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  $495,000  and  $364,000,
    respectively.

    In February 2008, the Company  granted 34,025 options to various  employees.
    These options vest in three years and have an exercise price of $5.10.


--------------------------------------------------------------------------------
                                                                            F-14
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

    A summary of all stock option activity for the years ended December 31, 2006
    and 2007 is as follows:

<TABLE>
<CAPTION>
                                                                                     Number         Weighted
                                                                                       of            Average
                                                                                    Options      Exercise Price
   ------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>
    Outstanding, January 1, 2006:                                                   406,531        $     4.67
      Options granted                                                                51,100              3.09
      Options cancelled                                                             (47,466)             5.06
      Options expired                                                                     -                 -
      Options exercised                                                             (24,558)             2.15
                                                                                  ---------------------------
    Outstanding, December 31, 2006:                                                 385,607              4.57
      Options granted                                                                30,500              5.60
      Options cancelled                                                              (4,909)             3.90
      Options expired                                                                  (517)             5.32
      Options exercised                                                             (24,401)             5.15
                                                                                  ---------------------------
    Outstanding, December 31, 2007                                                  386,280              4.62
                                                                                  ---------------------------
    Exercisable, December 31, 2007                                                  317,483        $     4.69
                                                                                  ===========================
</TABLE>

<TABLE>
<CAPTION>
                                         Options Outstanding                          Options Exercisable
                       ---------------------------------------------------     ---------------------------------
                                               Weighted                                               Weighted
                                               Average           Weighted                             Average
                                              Remaining          Average                             Remaining
                             Number          Contractual         Exercise           Number          Contractual
      Exercise Price      Outstanding        Life (Years)         Price          Exercisable        Life (Years)
     ---------------------------------------------------------------------     ---------------------------------
<S>                           <C>                    <C>         <C>                 <C>                    <C>
       $      2.15             24,322                1.5         $   2.15             24,322                1.5
              2.42             25,850                4.1             2.42             25,850                4.1
              2.75             26,000                8.8             2.75              8,666                8.8
              3.00              2,100                8.2             3.00              1,050                8.2
              3.05              9,000                8.2             3.05              4,500                8.2
              3.44             15,000                7.8             3.44             11,250                7.8
              4.00             10,000                7.3             4.00              7,500                7.3
              4.05              6,667                8.8             4.05                  -                  -
              4.15                300                7.6             4.15                224                7.6
              4.27             15,475                6.8             4.27             15,475                6.8
              4.49              5,000                9.2             4.49                  -                  -
              5.32            218,674                2.2             5.32            213,504                2.2
              5.50              1,500                9.2             5.50                500                9.2
              5.78             15,000                9.8             5.78                  -                  -
              5.94              9,000                9.7             5.94              2,250                9.7
              8.32                773                2.1             8.32                773                2.1
             21.41              1,245                1.5            21.41              1,245                1.5
             32.13                374                1.5            32.13                374                1.5
    ---------------------------------------------------------------------        ------------------------------
       $         -            386,280                7.1         $   4.57            317,483                5.4
    =====================================================================        ==============================
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-15
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

9.  COMMITMENTS AND CONTINGENCIES

    The Company leases office space and  production and warehouse  facilities in
    Hawthorne, New York, Westborough, Massachusetts and Bridgewater, New Jersey.
    Future minimum lease payments are as follows:

    YEARS ENDING DECEMBER 31,
    ----------------------------------------------------------------------------

    2008                                                            $    414,000
    2009                                                                 357,000
    2010                                                                  60,000
                                                                    ------------
                                                                    $    831,000
                                                                    ============

    A  deferred  rent  credit of  approximately  $80,000  is  included  in other
    liabilities provided for, at the inception of the Hawthorne, New York lease.
    Rent expense is recorded on a straight-line  basis over the lease term. Rent
    expense for the years  ended  December  31, 2007 and 2006 was  approximately
    $445,000 and $408,000, respectively.

    The Company arranged for a $150,000 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 employment agreements with its chief
    executive officer,  its president,  its chief financial  officer,  its chief
    technology officer and the presidents of Working Values and Skye Multimedia.
    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 executed in June 2005 and expires
    June 2008.  The  employment  agreement  with the  president  was  renewed on
    October 1, 2005 for a period of three years. The chief technology  officer's
    agreement  was entered  into on October 1, 2007 for a period of three years.
    Each  employment  agreement  provides for  specified  annual base  salaries,
    subject to increases at the discretion of the Company's  Board of Directors.
    Under  certain  agreements,   if  the  Company  terminates  any  executive's
    employment  without cause, or if an executive  terminates his employment for
    good  reason,  the  executive  is  entitled  to  receive  certain  severance
    benefits.  The  employment  agreement  with the president of Working  Values
    provides for performance  and other bonuses,  if the Company reaches certain
    income  levels.  To date, no amounts have been paid or accrued in connection
    with this provision. The Company has employment agreements with Stephen Henn
    who joined the Company on account of the  acquisition  of  Cognistar.  He is
    vice  president  of  Working  Values  Ltd.  His  contract  is for two years,
    beginning  November 1, 2006 and expiring on November 15, 2008, and has terms
    similar to the other agreements.  Skye's president's  agreement is for three
    years, beginning March 1, 2006 and expires January 31, 2009.

    At December 31, 2007,  the aggregate  commitment  under the four  employment
    agreements for the senior executives approximated $820,000.

    LITIGATION - The Company is currently  not a party in any  litigation  other
    than that arising in the normal course of its business operations.


--------------------------------------------------------------------------------
                                                                            F-16
<PAGE>

                                                                  SMARTPROS LTD.
                                                                AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

10. 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 carrying  values of cash,
         investments   securities   available-for-sale,   accounts  receivables,
         payables and certain other short-term financial instruments approximate
         their fair value.

         CAPITAL LEASE AND EQUIPMENT  FINANCING  OBLIGATIONS - The fair value of
         the  Company's  capital  lease  and  equipment  financing  obligations,
         including the current portion, approximates fair value.


--------------------------------------------------------------------------------
                                                                            F-17
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.

ITEM 8A(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 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 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, 2007. 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, 2007, 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 8B. OTHER INFORMATION

       None.

                                    PART III

ITEM 9. 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 9 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.


                                       33
<PAGE>

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, as well as all of our other employees and directors. The Code of
Ethics is posted on our Web site at www.smartpros.com and is filed as Exhibit
14.1 to this report. Amendments to and waivers from the Code of Ethics will also
be posted on our Web site.

ITEM 10. EXECUTIVE COMPENSATION

       Information relating to our directors and executive officers that is
responsive to Item 10 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.

ITEM 11. 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 11 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE

       Information relating to our directors and executive officers that is
responsive to Item 12 of Form 10-KSB will be included in our Proxy Statement in
connection with our 2007 annual meeting of stockholders, which information is
incorporated by reference herein.

ITEM 13. 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)

4.2               Form of warrant agreement including form of warrant (1)

4.3               Form of unit certificate (1)

4.4               Form of representative's warrant issued (1)

10.1              1999 Stock Option Plan, as amended (1)

10.2              Second Amended Employment Agreement between SmartPros Ltd. and
                  Jack Fingerhut (1)

10.3              Employment Agreement between SmartPros Ltd. and David M.
                  Gebler (1)

10.4              Employment Agreement between SmartPros Ltd. and Seth Oberman*

10.5              Employment Agreement, dated February 1, 2007, between Allen S.
                  Greene and SmartPros, Ltd. (3)

10.6.1            Lease for premises at 12 Skyline Drive, Hawthorne, New York
                  (1)

10.6.2            Lease for premises at 28 South Main Street Rear, Sharon,
                  Massachusetts (1)

10.6.3            Lease for premises at Westborough, Massachusetts (4)


                                       34
<PAGE>

10.6.4            Lease for premises at Bridgewater, New Jersey (4)

10.7              Letter Agreement between SmartPros Ltd. and Allen S. Greene
                  re: restricted stock (1)

10.8              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 (2)

21.1              Subsidiaries (4)

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*

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


-------

         NOTES TO EXHIBITS

*        Filed herewith
(1)      Filed as an exhibit with the same number to Registration Statement on
         Form SB-2 (No. 333-115454), effective as of October 19, 2004, and
         incorporated herein by reference.
(2)      Filed on March 14, 2005, as an exhibit with the same number to our
         Current Report on Form 8-K 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-KSB for the fiscal
         year ended December 31, 2005, and incorporated herein by reference.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Information that is responsive to Item 14 of Form 10-KSB will be
included in our Proxy Statement in connection with our 2007 annual meeting of
stockholders, which information is incorporated by reference herein.


                                       35
<PAGE>

                                   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 24, 2008

         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 24, 2008.

                    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