|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|FORM 10-K                         

|                                                                   |                                                                                          
|------------------------------------------------------------------ | -----------------------------------------------------------------------------------------
|(Mark One)                                                        
|x                                                                  | Annual Report Pursuant to
 Section 13 or 15(D) of the Securities Exchange Act of 1934    
|                                                                   |                                                                                          
|For
 the fiscal year ended December 31, 2008                      
|                                                                  
|or                                                                
|                                                                   |                                                                                          
|o                                                                  | Transition Report Pursuant
 to Section 13 or 15(D) of the Securities Exchange Act of 1934
|                                                                   |                                                                                          
|For
 the transition period from _______________ to _______________
|                                                                   |                                                                                          
|Commission
 File Number 001-32300                                 

|                                               |                | 
|---------------------------------------------- | -------------- | 
|                                               | SMARTPROS LTD. | 
|                                               |                | 
|(Name of Small Business Issuer in its Charter)

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

|                                         |           
|---------------------------------------- | ----------
|12 Skyline Drive, Hawthorne, New
 York   | 10532     
|                                        
|(Address
 of Principal Executive Office) | (Zip Code)

|                                              
|----------------------------------------------
|(914)
 345-2620                               
|                                              
|Issuers
 Telephone Number Including Area Code

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

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

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

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.                                           Yes o No x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act.                           
         Yes o No
x

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90
days.                                                                         
                                                        
                                     
                             
 Yes x No o

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.                                                                                                   
                                                                         
                                      
Yes o No x

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

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

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

The aggregate market value of
the voting and non-voting common equity held by non-affiliates of the
registrant was $15,903,295, based on the price at which the common equity was
last sold, or the average bid and ask price of such common equity on the Nasdaq
Capital Market as of June 30, 2008, the last business day of the registrants
most recently completed second fiscal quarter.

The number of shares
outstanding of each of the registrants classes of common equity, as of March
19, 2009: 5,324,316

---



DOCUMENTS
INCORPORATED BY REFERENCE

The
definitive proxy statement, relating to the issuers Annual Meeting of
Stockholders to be held on or about June 16, 2009, is incorporated by reference
in Part III to the extent described therein.

---



SMARTPROS
LTD.

Form
10-K Annual Report

TABLE
OF CONTENTS

|         |            |                                                                                                                                          |  |     
|-------- | ---------- | ---------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |            |                                                                                                                                          |  | Page
|         |            |                                                                                                                                          |  |     
|PART I   |            |                                                                                                                                          | 
|         | Item 1     | Description
 of Business                                                                                                                 |  | 3   
|         | Item 1A    | Risk
 Factors                                                                                                                            |  | 20  
|         | Item 1B    | Unresolved
 Staff Comments                                                                                                               |  | 23  
|         | Item 2     | Description
 of Property                                                                                                                 |  | 23  
|         | Item 3     | Legal Proceedings                                                                                                                        |  | 23  
|         | Item 4     | Submission
 of Matters to a Vote of Security Holders                                                                                     |  | 23  
|         |            |                                                                                                                                          |  |     
|PART II  |            |                                                                                                                                          | 
|         | Item 5     | Market for
 Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity
 Securities                                     |  | 23  
|         | Item 6     | Selected
 Financial Data                                                                                                                 |  | 24  
|         | Item 7     | Managements
 Discussion and Analysis of Financial Condition and Results of Operation                                                    |  | 24  
|         | Item 7A    | Quantitative
 and Qualitative Disclosure about Market Risk                                                                               |  | 32  
|         | Item 8     | Financial
 Statements                                                                                                                    |  | 33  
|         | Item 9     | Changes in
 and Disagreements with Accountants on Accounting and Financial Disclosure                                                    |  | 33  
|         | Item 9A(T) | Controls
 and Procedures                                                                                                                 |  | 33  
|         | Item 9B    | Other
 Information                                                                                                                       |  | 33  
|         |            |                                                                                                                                          |  |     
|PART III |            |                                                                                                                                          | 
|         | Item 10    | Directors,
 Executive Officers, Promoters, Control Persons and Corporate Governance;
 Compliance with Section 16(a) of the Exchange Act. |  | 34  
|         | Item 11    | Executive
 Compensation                                                                                                                  |  | 34  
|         | Item 12    | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters                                         |  | 34  
|         | Item 13    | Certain
 Relationships and Related Transactions, and Director Independence                                                               |  | 34  
|         | Item 14    | Principal
 Accountant Fees and Services                                                                                                  |  | 34  
|         |            |                                                                                                                                          |  |     
|PART IV  |            |                                                                                                                                          | 
|         | Item 15    | Exhibits                                                                                                                                 |  | 34  

1

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FORWARD-LOOKING
STATEMENTS

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

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

2

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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, live training and produce custom-designed programs with
delivery methods best suited to the specific needs of our clients. Our
customers include professional firms and companies of all sizes, who purchase
our courses for use by their employees, and individuals who purchase our
courses or subscriptions on a retail basis. Our e-marketing and e-commerce
business sells ads on our Web site and develops customized newsletters and
marketing programs for our clients.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Most of the courses in our accounting/finance
 library are designed to meet the standards and adhere to the requirements of
 all state boards of accountancy and those of various professional and
 certifying organizations.                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | In the engineering area, most of our courses have
 been approved for continuing professional development credit by one or more
 organizations including: the American Society of Civil Engineers, 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 including insurance brokers,
 bankers and licensed security industry professionals.                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Our entire continuing legal education library is
 approved in 12 states and the United Kingdom, and some or all of the
 continuing legal education courses are 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
products are available in multiple formats including print, CD-ROM, DVD and via
the Internet. The Internet continues to be our fastest growing delivery
channel, attracting new and existing subscribers. Until January 1, 2009, we
also offered our monthly subscription products in videotape format. We continue

3

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to offer our archived courses in video format but all
new programs are produced in DVD format. With the acquisitions of The Selbst
Group (Selbst) in 2007 and Loscalzo Associates, Ltd. (Loscalzo) in 2008, we now
offer live seminars directed to accountants and financial services
professionals delivered through a number of different channels.

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
offer clients a robust, comprehensive learning content management system known
as the SmartPros Professional Education Center (PEC). The PEC provides clients
and their employees a platform to take continuing education over the Internet
and the ability to track their usage and performance.

Corporate
History

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

Industry
Background

The
American Society for Training and Development, in its 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 non-certified accounting, finance and management
professionals, most of whom have mandatory continuing education requirements.

Accounting
and Finance

According
to the Bureau of Labor Statistics, in 2007 there were over two million
accountants and finance professionals in the United States. The American
Institute of Certified Public Accountants claims it has over 330,000 members
representing approximately 60% of all the certified public accountants in the
United States. Based on this, we estimate there are currently more than 500,000
CPAs and financial professionals that require continuing professional education
(CPE) credit to maintain their professional accreditations and hundreds of
thousands of other financial management professionals that require CPE credit
to maintain their certifications.

To
maintain their licenses, accounting professionals must satisfy the CPE
requirements mandated by the state Boards of Accountancy of the states in which
they practice. Although states may differ in terms of specific course
requirements or the cycle of the licensing period, every state (other than
Wisconsin) and the District of Columbia and the U.S. Territories (other than
the Virgin Islands), generally requires on average 40 hours of continuing
professional education credit annually to maintain their certification. In 45
states, the District of Columbia and Puerto Rico courses offered by the
National Registry of CPE Sponsors, a program offered by the National
Association of State Boards of Accountancy (NASBA) automatically qualify for
CPE credit. We are an approved NASBA sponsor.

Engineering

According to the Bureau of Labor Statistics, in 2007 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 2008 over 40,000 engineers sat for the

4

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exam and 70% 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 (PE) for civil engineering is the highest-level exam for civil engineers.
This exam is also given twice a year, in April and October. According to NCEES,
in 2008, 60% of the total candidates taking the PE exam, which covers multiple
disciplines, passed.

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

Legal

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

Ethics &
Compliance

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

Information
Technology

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

Professional
and corporate training historically was dominated by traditional classroom
instruction. However, advances in communications technology are changing the
manner in which corporate training is developed, delivered and tracked.
Further, competition demands that todays professionals spend more of their
time on revenue-generating matters. The increasing demands made on
professionals and corporate

5

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managers have ledand we believe will continue to
drivethe demand for CPE and corporate training solutions available in flexible
and cost-effective formats.

Our
Business

Since
becoming a public company in 2004, our business has expanded significantly,
primarily through acquisitions. 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:

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

To
address these needs, we have approximately 2,700 hours of programs currently
available in one or more formats including print, videotape, CD-ROM, DVD or
online:

| |   |                                                          
| | - | ---------------------------------------------------------
| |  | 1,100 hours in accounting/finance,                       
| |   |                                                          
| |  | 600 hours in engineering,                                
| |   |                                                          
| |  | 600 hours in banking, securities and financial
 services,
| |   |                                                          
| |  | 200 hours in legal training, and                         
| |   |                                                          
| |  | 200 hours in information technology.                     

These figures do not take into account custom-designed
courses or live training programs. Loscalzo provides live training programs for
accountants and Selbst provides live training programs for financial services.
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
the courses in our accounting and finance professional libraries are designed
to meet the standards and requirements of all state boards of accountancy and
those of the American Institute of Certified Public Accountants (AICPA),
Institute of Management Accountants (IMA), Institute of Internal Auditors
(IIA), the Association of Financial Professionals (AFP) and the Association of
Government Accountants (AGA). We are a registered sponsor of continuing
professional education with NASBA and are also qualified in New York, New Jersey
and Texas. NASBA also confers the status of Quality Assurance Service on
organizations that offer self-study courses that meet the requisite standards.
We have met those standards and received that status. As a result, most of our
programs qualify for CPE credit in all 50 states for certified public
accountants, certified management accountants, certified internal auditors and
certified financial managers.

6

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

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

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

Our
Skye Multimedia, Ltd. (Skye) subsidiary custom designs training programs for a
number of industries including pharmaceutical and professional and financial
services.

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

Strategic
Partners

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

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

7

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

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

Canadian
Institute of Chartered Accountants. CICA offers the online version of FMN
and SPA to its members through a co-branded PEC.

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.

In
addition, we also partner with a number of trade organizations.

Our
Strategy

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

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

Develop new products.
We continue to develop new products that utilize our existing content and we
are always seeking avenues to develop new content as well. In 2008, we created
the Hawthorne Center of Excellence (HCE). HCE will provide accountants and
other professionals certificates of study in various fields upon completing the
requisite number of hours of study required. Our first certificate program
based on forensic accounting is currently in production.

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

8

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Make strategic acquisitions.
We believe that the most efficient way
for us to expand our libraries, increase our share of the markets we currently
serve and penetrate new markets is through strategic acquisitions as evidenced
by the acquisitions we made in years 2006 through 2008. We continue to seek
strategic acquisition opportunities.

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

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

Our
Products and Services

The
following are our products and services:

Accounting and Finance

Our
accounting and finance libraries, exclusive of Loscalzo (as described below),
contain over 1,100 credit hours of content, of which 900 are generally
available, and the balance is custom-designed for specific clients. Except for
SmartPros Advantage (discussed below), which is only available, online, our
accounting and finance programs are available on DVD or online. In addition, we
can also deliver instruction through live or recorded Webcasts. Effective January
1, 2009, we have discontinued producing our monthly subscription based products
on videotape. The DVD format 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 of programs. Prices depend on the length of the
subscription (one, two or three years), the number of users and the number of libraries
covered.

Loscalzo. With the
acquisition of Loscalzo in 2008, we now offer a series of live seminars to
accountants on a variety of topics. These courses are offered by Loscalzo
directly to sole practitioners and small independent firms and indirectly
through various state CPA societies to accounting firms, association of
accounting firms or corporations. We also have the ability to deliver
instruction through live or recorded Webcasts.

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 and public accountants. The courses are
offered either individually or on a subscription basis.

Financial Management Network
(FMN).
FMN is a library of update programs
dealing with current, relevant topics. We create four new courses a month for a
total of 48 new segments a year. This is

9

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

CPA Report (CPAR).This
library of programs covers topics in public accounting and is distributed
primarily to accountants in public practice. Each month (except March) we add
four new courses from among the following topical areas: Individual Tax,
Business Tax, Estate and Financial Planning, Specialized Tax Topics, Auditing
and Accounting and Financial Reporting. We also offer an online archive
containing the most recent 44 programs representing 88 credit hours. This
program is also offered either in either a video-based format or online.

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

Custom Products. In
addition to the subscription-based libraries above, we also produce customized
programs for our clients. In some cases, the client will author the content and
retain us to videotape the program and convert it into a digital format that
can be distributed via the Internet or internally through 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 50hours of material, is an interactive
multimedia tool that simulates the actual professional engineering exam using
demonstration problems comparable to the problems found on the actual exam. The
course includes seven complete, self-contained course modules that cover the
following subjects: Transportation; Sanitary and Environmental; Hydraulics and
Hydrology; Structures; Geotechnical; Surveying; and Economics.

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.

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.

10

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Project Management for
Engineers. This course is certified by the Project
Management Institute (PMI) for professional development unit credit for
certified project managers and for professional development credit for civil
engineers. Developed by engineers specifically for engineers, it was one of the
first completely interactive online project management courses. The online
format is enriched with audio and interactive graphics and allows the user to
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.

Fundamentals of Engineering Exam
Review. This is a
preparatory course for the basic entry-level licensing exam that all engineers
are required to take. It is a Flash-based, interactive review course that is
being marketed directly and through professional associations to engineers and
to engineering firms for their internal skill-building and competency testing
programs. It is available in CD-ROM and online. We also private label the
course 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.

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.

Corporate Governance,
Compliance and Ethics

SmartPros
Legal and Ethics, Ltd. (SLE) develops corporate governance, compliance and ethics
programs for major corporations and other business enterprises. SLE currently
offers the following products and services:

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

Legal

SLEs 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.

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Financial Services

Our
Financial Services division includes our Sage and FinancialCampus (FC)
libraries and Selbst. Selbst and FC were acquired in March and August 2007
respectively. Sage and FC sell online training courses for the banking,
insurance and securities industries. Selbst primarily provides live training to
those industries.

This division has over 300 courses totaling
over 600 hours in the banking, securities and insurance areas. Course offerings
include banking compliance, general banking, general bank management,
insurance, lending, retirement and estate planning, securities, ethics,
anti-money laundering, financial planning and industry-related sales and
service. Approximately 200 of these courses have been accredited by
various state departments of insurance for continuing education credit. Many
other courses have been approved by the American College for PACE credit, 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.

General Corporate

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

Other

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

Our
technology department is principally a service department. Its primary function
is to convert our courses to digital format for distribution on CD-ROM, DVD and
the Internet. This department also maintains our various Web sites, our
learning content management system, the PEC, for subscribers to our
accounting/finance and engineering products, and the Integrity Training Center
for subscribers to our ethics and compliance training programs. The PEC is a
turnkey system designed to manage the educational subscriptions, student
accounts, e-commerce and reporting needs of our clients. Using the PEC, our
clients can review and assess usage of our programs by their employees and
their employees performance and the effectiveness of these programs. The PEC
is co-branded with the clients logo and delivered using an application service
provider hosted infrastructure model that requires no client technology
resources. For 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.

12

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

Product
Development

Our
product development team includes Jeffrey Jacobs, Jack Fingerhut, Margaret
Loscalzo, John Fleming and Denise Stefano in the accounting/finance area; Jay
Gregory and Michael Fowler in financial services; James Fallon and James Graham
in information technology; and Stephen Henn and Catherine Henry in the legal,
ethics and compliance area.

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, one of our co-founders and currently our president, is a certified
public accountant and oversees the development of our accounting programs and
new product development. Margaret Loscalzo is a certified public accountant and
the former owner of Loscalzo Associates, which we acquired in July 2008. She is
responsible for developing course material for both various state accounting
societies and Loscalzos own clients. Mr. Fleming is a certified public
accountant and is responsible for instructing, writing and editing Loscalzo
courses. 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. Graham was the developer of the Watch IT program and has been
involved in IT training for a number of years. Mr. Graham was the co-founder
GIGA Information Group, Inc., an IT analyst firm. Mr. Fallon is the 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, develops and markets customized
courses and training programs for the pharmaceutical, financial services and
other industries that Skye services.

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

Sales
and Marketing

Our
sales and marketing strategy is designed to attract new customers and build
brand awareness. We market our products through our alliances with professional
organizations and associations, through our

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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 our President, a Senior Vice President
of Sales, a Vice President of Marketing, and a sales staff of 19 people. The
sales staff is divided between inside (telesales) and field sales. The field
sales force focuses on larger accounts. In addition, our senior executives, and
the heads of various divisions, dedicate varying portions of their time and
efforts to sales and marketing activities. Our Chief Technology Officer spends
a portion of his time selling and marketing our technology services.

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

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

Some
key features of the PEC include:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Scalability.Scalability is accomplished using a
 combination of load-balancing hardware and software. Multiple, redundant
 servers are deployed to handle peak periods when the largest numbers of
 concurrent users are expected on the system.                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                
| | SCORM/AICC Connectivity Layer.Where required, we use both Shareable
 Content Object Reference Model (SCORM) and Aviation Industry CBT Committee
 (AICC) Connectivity layers to ensure our content is deliverable through a
 variety of enterprise e-learning systems other than the PEC. Additionally,
 the core foundation is capable of exchanging data with third-party legacy
 systems with minimal effort.

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|  |                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Standard Relational Database Server.To enhance performance and ensure that
 users are served efficiently, the core foundation executes database-stored
 procedures to optimize intense database processing. The core foundation
 currently supports Microsoft SQL Server databases.        
|  |                                                                                                                                                                                                                                                                                            
| | ASP-based Application Server.The business and application logic
 resides on an ASP.NET-based application server. This architecture allows us
 to deploy a site across multiple servers using Microsoft Windows 2000 and
 2003 servers.                                                     
|  |                                                                                                                                                                                                                                                                                            
| | Electronic Commerce Enabled.The core foundation includes
 interfaces to external electronic payment services, enabling real-time
 electronic commerce. This allows the instant purchase of both one-off and
 subscription-based e-learning courseware.                                     
|  |                                                                                                                                                                                                                                                                                            
| | Internet Multimedia Content Delivery.We deliver high quality, low bandwidth
 video and audio via the Internet, intranets and extranets. This multimedia
 content enhances and personalizes the learning experience. We use Flash Media
 as the primary delivery mechanism for this content.
|  |                                                                                                                                                                                                                                                                                            
| | Low Bandwidth/High Impact Animations.Using Macromedias Flash technology,
 we deliver both animated and spoken educational material with minimal load on
 corporate networks.                                                                                                              

Competition

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

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

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

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

|  |                                                                 
|- | ----------------------------------------------------------------
| | Breadth, depth and relevancy of the course content              
|  |                                                                 
| | Performance support and other features of the
 training solution
|  |                                                                 
| | Reputation of presenter                                         

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|  |                                                                   
|- | ------------------------------------------------------------------
| | Adaptability, flexibility and scalability of the
 products offered
|  |                                                                   
| | Liquidity and capital resources                                   
|  |                                                                   
| | Deployment options offered to customers                           
|  |                                                                   
| | Customer service and support                                      
|  |                                                                   
| | Price                                                             
|  |                                                                   
| | Industry and professional certifications                          
|  |                                                                   
| | Brand identity                                                    
|  |                                                                   
| | Strategic relationships                                           

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

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

Some
of our existing and potential competitors have greater resources, financial
capabilities, market penetration, and more extensive libraries that have or may
enable them to establish a stronger competitive position than ours. For
example, one of our competitors is CPA2Biz, an affiliate of the AICPA.
SkillSoft and Saba, are both relatively large public companies. However,
SkillSofts primary focus is e-learning content and software products for
business and information technology professionals. Saba principally provides
software solutions that are used to manage people in large organizations,
although they do sell content as well. Since we currently do not market our
learning management system as a stand-alone

16

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product, we do not compete presently with Saba in this
area. However, many of our larger clients use the Saba system or another
learning management system. In those cases, we will interface with the learning
management system and allow the client to access our courseware while
cross-posting student progress between ours and the clients learning
management system.

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

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

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

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

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

Our
Competitive Advantages

We
believe that the following competitive advantages will help us achieve this
goal.

History and reputation.We
have been providing learning
solutions for accounting and finance professionals for more than 27 years. We
believe that in the accounting/finance market we have the reputation of being a
leading provider of continuing professional education programs, as evidenced by
our continued growth in that market and a high renewal rate. We believe that
our reputation in the accounting/finance market will assist us as we expand our
presence in the engineering, legal, financial services, information technology,
corporate ethics and governance, general corporate markets and also into new
markets.

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

Professional designations and strategic
alliances.We believe that our relationships with
some of the largest and most respected professional organizations and
associations in the accounting and engineering professions

| |   |                                                
| | - | -----------------------------------------------
| |  | give us instant credibility in the marketplace;

17

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| |   |                                                              
| | - | -------------------------------------------------------------
| |  | provide us with a distribution channel for our
 products; and
| |   |                                                              
| |  | are a source for programs and faculty.                       

Extensive library.Our content
library consists of over 2,000 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 corporate customers.
Our customers include Fortune 500 companies, professional firms, small- and
medium-sized companies and individuals. In the aggregate, we estimate that our
corporate clients employ tens of thousands of accounting and finance
professionals, representing a substantial universe of potential users. In
addition, our corporate customers are a diversified group in terms of the
industries and markets in which they operate. For example, our customers are
some of the leading businesses in the following industries: accounting, banking
and finance, law, insurance, technology, telecommunications, retail, aerospace,
natural resources, construction and chemicals.

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

Online resource and content
provider.We own and operate multiple Web sites,
including primary domains and 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.ireflecttraining.com,
www.pro2net.com,www.accountingnet.com,www.smartprosinteractive.com
and www.loscalzo.com.

Our
SmartPros family of Web sites have over 65,000 pages of proprietary content and
links to professional organizations, associations and institutions, and is a
marketing and distribution channel for our products. We believe that these Web
sites have become a destination for professionals based on the following data:

|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
| | As a result of maintaining the Web sites, we have
 built a database with over 1 million profiled users.

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|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
| | The Web sites logs over 800,000 visits per month.                                          
|  |                                                                                            
| | 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 OF EXCELLENCE, iREFLECT and
FINANCIALCAMPUS.

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

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

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

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

19

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required to pay damages, which may be significant, and
to either pay royalties to the owner or develop non-infringing technology, the
cost of which may be significant.

Government
Regulation

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

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

The
market for continuing education for the engineering professional is regulated
by each state. The 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, 2009, we had 98 employees of which 88 were full-time and 10 were
part-time. We have 43 employees based in our executive offices in Hawthorne,
New York, and nine employees based in our Westborough, Massachusetts, office.
Skye employs 12 people in their Bridgewater, New Jersey, office. Loscalzo has
eight employees in its Red Bank, New Jersey, office. In addition, we have 26
employees that work out of their homes in various states. We believe that our
relationship with all of our employees is generally good.

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

CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND
PROFITABILITY

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

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

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

20

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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.

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

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

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

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

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

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

One
of our principal competitive advantages is our ability to deliver content in
multiple formats. This flexibility has enabled us to keep pace with changes in
technology and has contributed to our growth. Keeping pace with technological
developments can be difficult and expensive, adversely impacting our operating
results. However, our continued growth depends on our ability to anticipate and
adapt to our customers needs and preferences. If we fail to do that, the
potential adverse impact could be significant to

21

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our business,
operating results and financial condition. We cannot assure that we will be
able to keep pace and adapt to changes in technology or customer preferences.

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

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

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

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

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

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

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.

22

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Rather, to
protect our intellectual property, we rely on trade secrets, common law
trademark rights, trademark registrations, copyright notices, copyright
registrations, and confidentiality and work for hire, development, assignment
and license agreements with our employees, consultants, third-party developers,
licensees and customers. However, these measures afford only limited protection
and may be flawed or inadequate. Also, enforcing our intellectual property
rights could be costly and time consuming and could distract managements
attention from operating business matters.

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

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

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 1B. | Unresolved Staff Comments

None.

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

Our
executive offices, production facility, technology center and fulfillment
center are located on Route 9A in Hawthorne, New York, where we lease 17,850
square feet. The lease expires January 31. 2019. We lease 2,000 square feet in
Westborough, Massachusetts, where SLE is based. The lease expires January 31,
2012. Skye leases 2,320 square feet in Bridgewater, New Jersey, at which the
lease expires in August 2009. Finally, we lease 2,600 square feet in Red Bank,
New Jersey for our Loscalzo subsidiary, which expires on June 30, 2011. This
property is owned by an affiliate of Ms. Loscalzo.

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

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

|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | 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 Nasdaq Capital Market under the symbol
SPRO.

23

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

As
of March 19, 2009, the closing sale price per share for our common stock, as
reported on the Nasdaq Capital Market was $2.50.

| |                                                                                 |          
| | ------------------------------------------------------------------------------- | ---------
| | (b)                                                                             | Holders  
| |                                                                                 |          
| | As of March
 4, 2009, the number of record holders of our common stock was 124.
| |                                                                                 |          
| | (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 2007 and 2008, we
did not pay any dividends. Payment of future dividends will be within the
discretion of our Board of Directors and will depend on, among other factors,
our retained earnings, capital requirements and operating and financial
condition.

Recent Sales of Unregistered Securities

None.

Use of Proceeds

Not
applicable.

Company Purchases of
its Equity Securities

On
November 11, 2008, 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. In 2008, we purchased 172,018 shares of our common
stock for approximately $603,000.

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

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

24

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|        |                                                                                                 
|------- | ------------------------------------------------------------------------------------------------
|Item 7. | 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-K. Certain statements in this discussion and
  elsewhere in this report constitute forward-looking statements within the
  meaning of Section 21E of the Securities and Exchange Act of 1934. See
  Forward-Looking Statements following the Table of Contents of this 10-K.
  Because this discussion involves risk and uncertainties, our actual results may
  differ materially from those anticipated in these forward-looking statements.

Overview

We
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, 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.

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

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

Over
the last four years, our annual revenues have grown from $10.2 million to $18.3
million and our annual net operating income has grown from $739,000 to $1.3
million. This growth is due in large part to seven acquisitions that we have
completed in this period. Our most recent acquisition was Loscalzo in July
2008. Loscalzo is a leading provider of live training to accountants. These
courses are delivered through various state CPA societies, accounting firms,
corporations or through seminars and conferences that they conduct. This
acquisition expands our product line and customer base and gives us the
opportunity to cross-market and cross-sell our full line of products to the
Loscalzo customer base.

We
intend to continue focusing on acquisitions that will allow us to increase the
breadth and depth of our current product offerings, including the general
corporate market for compliance, governance and ethics. We will also consider
acquisitions that will give us access to new markets and products. We prefer
acquisitions that are accretive, as opposed to those that are dilutive, but
ultimately the decision will be based on maximizing shareholder value rather
than short-term profits. The size of the acquisitions will be

25

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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.

Critical Accounting Policies and Estimates

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

Revenues

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

Revenues
from subscription services are recognized as earned; deferred at the time of
billing or payment and amortized into revenue on a monthly basis over the term
of the subscription. Engineering products are non-subscription based and
revenue is recognized upon shipment of the product or, in the case of online
sales, payment. Revenues from live training are recognized when earned, usually
upon the completion of a one-day seminar or conference. Revenues from
non-subscription services provided to customers, such as Web site design, video
production, consulting services and custom projects are generally recognized
on a proportional performance basis where sufficient information relating to
project status and other supporting documentation is available. The contracts
may have different billing arrangements resulting in either unbilled or
deferred revenue. We obtain either a signed agreement or purchase order from
our non-subscription customers outlining the terms and conditions of the sale
or service to be provided. Otherwise, these services are recognized as 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.

Revenues
from live training are recognized when the seminar or conference is completed.
These are usually one or two day events.

26

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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

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

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

Results of Operations

Comparison
of the years ended December 31, 2008, and 2007

The
following table compares our statement of operations data for the years ended
December 31, 2008, and December 31, 2007. The trends suggested by this table
may not be indicative of future operating results, which will depend on various
factors including the relative mix of products sold (accounting/finance,
engineering or corporate training) and the method of sale (video or online).

|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|-------------------------------------- |  | ------------------------ | ---------- | ---------- |  | ------ | - | ---------- | ---------- | ------ |  | ----- | - |  | ----- | --
|                                       |  | Years ended
 December 31 |           
|                                       |  |                          |           
|                                       |  | 2008                     |            | 2007       |  |        |  
|                                       |  |                          |            |            |  |        |  
|                                       |  | Amount                   |            | Percentage |  | Amount |   | Percentage |            | Change | 
|                                       |  |                          |            |            |  |        |   |            |            |        | 
|                                      
|Net revenues                           |  | $                        | 18,256,328 |            |  | 100.0  | % | $          | 15,204,506 |        |  | 100.0 | % |  | 20.1  | % 
|Cost of revenues                       |  |                          | 7,811,500  |            |  | 42.8   | % |            | 5,962,788  |        |  | 39.2  | % |  | 31.0  | % 
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Gross profit                           |  |                          | 10,444,828 |            |  | 57.2   | % |            | 9,241,718  |        |  | 60.8  | % |  | 13.0  | % 
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|General and administrative             |  |                          | 8,200,253  |            |  | 44.9   | % |            | 7,326,308  |        |  | 48.2  | % |  | 11.9  | % 
|Depreciation and amortization          |  |                          | 945,932    |            |  | 5.2    | % |            | 749,272    |        |  | 4.9   | % |  | 26.2  | % 
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Total operating expenses               |  |                          | 9,146,185  |            |  | 50.1   | % |            | 8,075,580  |        |  | 53.1  | % |  | 13.3  | % 
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Operating income                       |  |                          | 1,298,643  |            |  | 7.1    | % |            | 1,166,138  |        |  | 7.7   | % |  | 11.4  | % 
|Other income (net)                     |  |                          | 204,182    |            |  | 1.1    | % |            | 411,435    |        |  | 2.7   | % |  | (50.4 | %)
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Income before benefit for income taxes |  |                          | 1,502,825  |            |  | 8.2    | % |            | 1,577,573  |        |  | 10.4  | % |  | (4.7  | %)
|Income tax benefit                     |  |                          | 98,438     |            |  | 0.5    | % |            | 590,792    |        |  | 3.9   | % |  | (83.3 | %)
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   
|Net income                             |  | $                        | 1,601,263  |            |  | 8.8    | % | $          | 2,168,365  |        |  | 14.3  | % |  | (26.2 | %)
|                                       |  |                          |            |            |  |        |   |            |            |        |  |       |   |  |       |   

Net
revenues

Net
revenues for 2008 increased 20% compared to net revenues for 2007. Online
revenues continue to be an important factor contributing to our overall revenue
growth. In 2008, net revenues from online sales of subscription-based products
and other sales accounted for approximately $6.8 million, or 37%, of our net
revenues. In 2007, online revenues accounted for $5.7 million, or 38%, of our
net revenues. Although online revenues have increased in total dollars, as a
result of Loscalzo its percentage of total net revenues declined.

27

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Net
revenues from sales of our accounting/finance products grew in absolute terms
but were relatively flat as a percentage of net revenues. In 2008, net revenues
from our accounting/finance and related products were $11.2 million compared to
$9.3 million in 2007. This increase was primarily due to Loscalzo. In each of
2008 and 2007 net revenues from accounting/finance products including both
subscription and non-subscription based revenue was $8.2 million. Net revenues
from live training, custom work and advertising were $3.0 million in 2008 as
compared to $1.0 million in 2007. The difference is primarily attributable to
Loscalzo.

Net
revenues from sales of our engineering products, which are not
subscription-based were $979,000 in 2008 compared to $858,000 in 2007. The
largest component of this increase was from an increase in sales from our MGI
product line, which was $486,000 in 2008 as compared to $434,000 in 2007. Other
engineering sales increased as a result of marketing efforts and the
introduction of new courses. We are also developing new products for other
engineering disciplines to address societal changes such as the desire for more
green technology.

Net
revenues from video production, duplication and consulting services decreased
in 2008 by $79,000, to $211,000 from $290,000 in 2007. Although video
production income increased $30,000 from 2007, the video duplication business
continues to decline as video technology is being replaced by digital formats.
Consulting work varies from year to year and sales are credited to the
department from which they originate and not to the department where the work
is performed.

Net
revenues from SLE decreased slightly from $1.33 million in 2007 to $1.31
million in 2008. This decrease was primarily due to a decrease of $41,000 from
Cognistar, offset by an increase of $18,000 from our ethics division. Working
Values develops customized ethics training for its clients and Cognistar
concentrates on delivering online continuing legal education.

Skye
generated $2.34 million of net revenues in 2008 as compared to $2.16 million in
2007. Skye produces customized training and educational material for the
pharmaceutical industry, professional firms, financial service companies and
others.

Our
financial services training division generated net revenues of $1.87 million in
2008 as compared to only $1.18 million in 2007. The largest portion of the
growth comes from FC course sales.

Our
technology training division, WatchIT, acquired in August 2007, generated net
revenues of $289,000 in 2008 as compared to $92,000 of revenues 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 or conducting
our educational programs; (ii) royalties paid to third parties; (iii) the cost
of materials, such as DVDs and packaging materials; and (iv) shipping costs.
Compared to 2007, cost of revenues in 2008 increased by approximately $1.8
million. Approximately $800,000 of this increase came from Loscalzo and the
remaining increase is a result of business that required a substantial amount
of outsourcing in order to complete projects and increased royalty payments on
some of our products. Cost of revenues in 2008 increased to 42.8% from 39.6% in
2007, resulting in a 13% decrease in our gross profit margin. With the addition
of Loscalzo which represents approximately 17% of our net revenues on an
annualized basis we anticipate a lower gross profit percentage as this business
is more labor and cost intensive than our online products.

There
are many different types of expenses that are characterized as production costs
and they vary from period to period depending on many factors. The expenses
that showed the greatest variations from 2007 to 2008 and the reasons for those
variations were as follows:

28

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Outside
 labor and direct production costs. Outside labor
 includes the cost of hiring actors and production personnel such as
 directors, producers and cameramen and the outsourcing of non-video
 technology. It also includes the costs of instructors for live training and
 the production of those courses. These costs increased by $538,000 in 2008
 from 2007. Both Skye and our consulting/technology departments employ a
 number of consultants to write scripts, edit course material and provide
 technology services. Loscalzo employs a number of consultants to write course
 material in addition to instructors throughout the United States. We have
 been outsourcing some of the programming and content development functions
 that were previously done by our employees to firms in India and China at a
 substantial savings. We are always exploring other areas such as the
 Philippines, for outsourcing our technology needs. Direct production costs,
 which are costs related to producing videos other than labor costssuch as
 the cost of renting equipment and locations, and the purchase of
 materialsincreased by $399,000. These variations are related to the type of
 video production and custom projects and do not reflect any trends in our
 business.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Salaries.
 Overall payroll and related costs attributable to production personnel
 increased by approximately $398,000. The increase was primarily attributable
 to salaries and related costs from our recent acquisitions including Loscalzo
 in 2008 and others made in 2007 offset by decreases in other areas such as video
 production/tape duplication. While our technology group and SLE salaries and
 related costs remained constant, this was offset by increased salaries from
 Skye of approximately $90,000 in 2008 from 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Royalties.
 Royalty expense increased in 2008 as compared to 2007 by $260,000. This was
 due to increased revenues in accounting education and engineering products
 and a change in a royalty agreement with one of our accounting education
 partners. In addition, we often have to estimate the royalty expense due our
 partners as the information may not be available. However, if volume
 increases or if we enter into new agreements or modify existing agreements,
 the actual royalty payments in 2009 under these agreements may be either
 higher or lower than they were in 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Other costs.
 Travel and entertainment and other miscellaneous expenses increased by
 $283,000, primarily related to Loscalzo. The largest component of these
 expenses is travel and entertainment that increased by $249,000 in 2008 from
 2007 as a result of Loscalzo and other travel related to custom projects.
 Loscalzo bills certain customers for these expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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
2008 were higher than they were in 2007 by $874,000. Of this amount
approximately $390,000 is directly attributable to Loscalzo, which resulted in
increased rent, administrative payrolls and other costs. The remaining increase
of approximately $484,000 is primarily due to salaries and related costs that
were attributable to acquisitions made in the second half of 2007. In addition,
in conformity with SFAS No. 123R, we are expensing the costs associated with
the grants of option and restricted stock to employees and directors. This
non-cash expense in 2007 was $120,000 and $223,000 in 2008. We anticipate that
general and administrative expenses will increase in 2009 as we fully absorb
our recent acquisition and increase marketing expenses.

29

---



Depreciationand amortization

Depreciation
and amortization expenses were $196,000 higher in 2008 than they were in 2007.
The increase is attributable to certain intangible assets acquired in 2007 and
2008. We have also begun to amortize the cost of our new PEC in the fourth
quarter of 2008 resulting in an additional cost of approximately $50,000 in
2008. We are also constantly upgrading our computer hardware as we have built
an offsite data back-up center. We expect our depreciation and amortization
expenses on our fixed and intangible assets to increase as we begin to amortize
the costs related to these acquisitions and the development of our new PEC and
SPA courses.

Operating
income

For
2008, operating income was $1.30
million compared to $1.17 million in 2007, an increase of 11.4%. As a
percentage of net revenues, operating income in 2008 was 7.1% compared to 7.7%
in 2007, a decrease of 7.8%. Our recent acquisition of Loscalzo and
acquisitions made in the second half of 2007 that are now fully absorbed have
contributed to this increase in net income.

Other
income

Other
income and expense items primarily consist of interest earned on deposits. We
currently have no outstanding debt, other than normal trade payables. Net
interest income decreased by $207,000 due to decreased cash and substantially
lower interest rates in 2008 as compared to 2007. We do not anticipate an
increase in interest income as interest rates continue to remain very low in
2009.

Income
tax benefit

We have now
recognized the full benefit of our net operating loss carryforwards pursuant to
SFAS No. 109. This has resulted in a net $98,000 benefit in 2008. We anticipate
that in 2009 we will begin to use the tax-deferred benefit of approximately
$1.1 million as we begin to incur federal income tax expense.

Net
income

For
2008, we recorded net income of
$1.60 million compared to $2.17 million for 2007.Our net
profit margin for 2008 was 8.8% compared to 14.3% in 2007, a decrease of 38%.
The decrease in net income is primarily due to a decrease in interest income of
$207,000, and a decrease in the income tax benefits available through our net
operating loss carryforwards of approximately $493,000, offset by an increased
operating profit of $133,000.

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.

Our
working capital as of December 31, 2008, was approximately $2.3 million
compared to a $5.7 million working capital as of December 31, 2007. The
decrease is attributable to positive cash flow from operations and earnings
offset by cash used to acquire Loscalzo and purchase treasury shares. Our
current ratio at December 31, 2008, is 1.31 to 1, compared to 1.86 to 1 at
December 31, 2007. The current ratio is derived by dividing current assets by
current liabilities and is a measure used by lending sources to assess our
ability to repay short-term liabilities. The largest component of our current
liabilities, approximately $5.6 million and $5.3 million at December 31, 2008
and 2007 respectively, is deferred revenue, which is revenue collected or
billed but not yet earned under the principles of revenue recognition. Most of
this revenue is in the form of subscription fees and will be earned over the
next 12 months. The cost of fulfilling our monthly subscription obligation does
not exceed this revenue and is booked to expense as incurred. For

30

---



some of our
products, there are no additional costs, other than shipping costs, required to
complete this obligation as the material is already in our library.

For
the year ended December 31, 2008, we had a net decrease in cash of $3.4
million. The majority of this was due to the $4.3 million expended for the
Loscalzo acquisition and an investment in a joint venture and approximately
$900,000 for asset acquisitions. We also expended $603,000 for the purchase of
treasury shares. These decreases were offset by $2.3 million generated from
operations. The primary components of our operating cash flows are our net
income adjusted for non-cash expenses, such as depreciation and amortization,
and the changes in accounts receivable, accounts payable and deferred revenues.

In
comparison, for the year-ended December 31, 2007, we had a $2.7 million
increase in cash. That increase was a result of cash generated by operations of
$3.5 million and cash generated from investing activities of $245,000. This was
offset by a decrease in cash of $1.1 million for investing activities including
the acquisition of equipment, capitalization of the PEC and purchase of
treasury shares.

Capital
expenditures for the year ended December 31, 2008, were approximately $878,000,
of which $216,000 consisted of
computer equipment, most of which was at our off-site backup center, a
requirement of SOX compliance. We capitalized $44,000 of costs for the
production of various courses and $618,000 for capitalizing the costs of our
new PEC. We are constantly upgrading our technology and cannot anticipate any
significant increase in capital expenditures relating to equipment purchases
over the next 12 months.

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

As
of December 31, 2008, we had commitments under various leases for our offices
in Hawthorne, New York, the SLE office in Westborough, Massachusetts, Skyes
offices in Bridgewater, New Jersey, and Loscalzos office in Red Bank, New
Jersey. The total aggregate commitment under these leases is approximately $4.0
million through January 2019. SLE recently entered into a new lease that
expires in January 2012 and calls for a monthly rent of approximately $2,500.
The Skye lease was recently extended to August 2009 at a monthly rental of
$3,670 and the lease for the Loscalzo office expires on June 30, 2011, at a
monthly rent of $5,000.

The
former 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.
At our discretion, the additional payment may be paid 50% in cash and 50% in
our common stock. If the additional payment is made in stock, it will be
determined by the average price for the 20 trading days subsequent to December
31, 2008. We have accrued $925,000 as our estimated liability.

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

---



Credit Risk

Most
of our cash is held in deposit accounts, U.S. Treasury and non-Treasury money
market funds. Our bank deposit accounts are insured by the U.S. government but
only up to a maximum of $250,000 at any one bank. Our money market funds are
held in a brokerage account that is insured by the Security Industry Protection
Corp (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. Loscalzo derives most of its revenue in the second half 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. With the current down turn in
the economy we have noticed many of our clients are taking longer to make
renewal decisions and more closely examining their use of our various products.
Adverse business conditions and developments, however, would negatively affect
the performance of some of our product lines.

Recent Accounting Pronouncements

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 will
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.

In
October 2008, the FASB issued FSP FAS No. 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Is Asset Not Active
with an immediate effective date, including prior periods for which financial
statements have not been issued. FSP FAS No. 157-3 clarifies the application of
fair value in inactive markets and allows for the use of managements internal
assumptions about future cash flows with appropriately risk-adjusted discount
rates when relevant observable market data does not exist. The objective of FAS
No. 157-3 has not changed and continues to be the determination of the price
that would be received in an orderly transaction that is not a forced
liquidation or distressed sale at the measurement date. The adoption of FSP FAS
No. 157-3 in the second quarter did not have a material effect on the Companys
results of operations, financial position or liquidity.

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

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

32

---



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

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

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

None.

|            |                        
|----------- | -----------------------
|Item 9A(T). | Controls And Procedures

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

Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered 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, 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, 2008. 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, 2008, 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. We have excluded from this assessment the
internal control over financial reporting of Loscalzo Associates, Ltd., which
we acquired in July 2008. The total assets and net sales of Loscalzo Associates
represented $1.1 million and $2.3 million respectively, of the consolidated
total assets and net revenues for the year ended December 31, 2008.

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

None.

33

---



PART III

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

Information
relating to our directors and executive officers that is responsive to Item 10
of Form 10-K will be included in our Proxy Statement in connection with our
2009 annual meeting of stockholders, which information is incorporated by
reference herein.

Code
of Ethics

We
have adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer and other persons performing similar functions, and
all of our other employees and directors. The Code of Ethics is posted on our
Web site at http://ir.smartpros.com 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 11. | Executive Compensation

Information
relating to our directors and executive officers that is responsive to Item 11
of Form 10-K will be included in our Proxy Statement in connection with our
2009 annual meeting of stockholders, which information is incorporated by
reference herein.

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

Information
relating to our directors and executive officers that is responsive to Item 12
of Form 10-K will be included in our Proxy Statement in connection with our
2009 annual meeting of stockholders, which information is incorporated by
reference herein.

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

Information
relating to our directors and executive officers that is responsive to Item 13
of Form 10-K will be included in our Proxy Statement in connection with our
2009 annual meeting of stockholders, which information is incorporated by
reference herein.

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

Information
that is responsive to Item 14 of Form 10-K will be included in our Proxy
Statement in connection with our 2009 annual meeting of stockholders, which
information is incorporated by reference herein.

PART IV

|         |         
|-------- | --------
|Item 15. | Exhibits

(a) 1. Financial Statements.

The
    financial statements of SmartPros Ltd. are submitted as a separate section
    of this report (See F-pages) and are incorporated by reference in Item
    8.

2.
Financial Statement Schedules.

All
    other schedules are omitted because they are either not required or not applicable
    or the required information is shown in the Financial Statements or notes
thereto.

3.
Exhibits.

See
    Item 15(b) below.

(b)
      Exhibits

|             |  |                                                         
|------------ |  | --------------------------------------------------------
|Exhibit
 No. |  | Description                                             
|             |  |                                                         
|             |  |                                                         
|3.1          |  | Certificate of
 Incorporation, as amended (1)           
|             |  |                                                         
|3.2          |  | Amended and Restated
 By-Laws, as amended (1)           
|             |  |                                                         
|4.1          |  | Specimen stock certificate
 (1)                         
|             |  |                                                         
|4.2          |  | Form of warrant agreement
 including form of warrant (1)

34

---



|       |  |                                                                                                                                                                          
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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   |  | Employment Agreement,
 dated as of February 1, 2007, between Allen S. Greene and SmartPros, Ltd. (3)                                                                     
|       |  |                                                                                                                                                                          
|10.3   |  | Seconded Amended
 Employment Agreement, dated as of October 1, 2008 between SmartPros Ltd. and
 Jack Fingerhut*                                                          
|       |  |                                                                                                                                                                          
|10.4   |  | Amended Employment
 Agreement, dated as of July 1, 2008, between SmartPros Ltd. and Stanley
 Wirtheim*                                                                   
|       |  |                                                                                                                                                                          
|10.5   |  | First Amendment to
 Employment Agreement, dated as of October 1, 2008, between SmartPros Ltd. and
 Joseph Fish*                                                          
|       |  |                                                                                                                                                                          
|10.6   |  | Employment Agreement
 between SmartPros Ltd. and Seth Oberman (5)                                                                                                        
|       |  |                                                                                                                                                                          
|10.7.1 |  | Lease for premises at 12
 Skyline Drive, Hawthorne, New York (1)                                                                                                         
|       |  |                                                                                                                                                                          
|10.7.2 |  | Lease for premises at Westborough,
 Massachusetts (4)                                                                                                                    
|       |  |                                                                                                                                                                          
|10.7.3 |  | Lease for
 premises at Bridgewater, New Jersey (4)                                                                                                                       
|       |  |                                                                                                                                                                          
|10.8   |  | Letter Agreement between
 SmartPros Ltd. and Allen S. Greene re: restricted stock (1)                                                                                    
|       |  |                                                                                                                                                                          
|10.9   |  | Final form of Restricted
 Stock Agreement, dated as of January 29, 2007, executed by Allen S. Greene,
 Jack Fingerhut, Stanley Wirtheim, Joseph Fish and David Gebler (3)
|       |  |                                                                                                                                                                          
|10.10  |  | Asset Purchase Agreement,
 dated as of February 14, 2006, between Skye Acquisition Company, Inc. and
 Skye Multimedia, Inc. (6)                                          
|       |  |                                                                                                                                                                          
|10.11  |  | Stock Purchase Agreement,
 dated as of July 3, 2008, between SmartPros Ltd. and Margaret Loscalzo (7)                                                                    
|       |  |                                                                                                                                                                          
|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 to our Registration Statement on Form SB-2 (No.
 333-115454), effective as of October 19, 2004, and incorporated herein by
 reference.
|    |                                                                                                                                                           
|(2) | Filed on March 14, 2005, as an exhibit with the same number to our
 Current Report on Form 8-K and incorporated herein by reference.                      

35

---



|    |                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                       
|(5) | Filed as an
 exhibit to the Asset Purchase Agreement, dated as of February 14, 2006,
 between Skye Acquisition Company, Inc. and Skye Multimedia, Inc., which was
 filed on February 21, 2006, as an exhibit to our Current Report on Form 8-K,
 and incorporated herein by reference.
|    |                                                                                                                                                                                                                                                                                       
|(6) | Filed on
 February 21, 2006, as an exhibit to our Current Report on Form 8-K and
 incorporated herein by reference.                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                       
|(7) | Filed on July
 8, 2008, as an exhibit to our Current Report on Form 8-K and incorporated
 herein by reference.                                                                                                                                                                        

(c)
Other Financial Statement Schedules.

The
    financial statements required by Regulation S-X (17CFR210) are excluded from
    the annual report to shareholders by Rule 14a-3(b).

See
    response to Item 15(a)2 above.

36

---



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
23, 2009

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 23, 2009.

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

37

---



| |                                                        
| | -------------------------------------------------------
| | SMARTPROS LTD.
 AND SUBSIDIARIES                       
| |                                                        
| | REPORT
 ON AUDITS OF CONSOLIDATED
 FINANCIAL STATEMENTS
| |                                                        
| | Years Ended December 31, 2008 and 2007                 









ITEM 15 (A) (1)









F-1


---



| |                                 
| | --------------------------------
| | SMARTPROS LTD.
 AND SUBSIDIARIES

|                                                         |  |           
|-------------------------------------------------------- |  | ----------
|Contents                                                 |  |           
|                                                        
|Years Ended December 31, 2008 and
2007                   |  | Pages     
|                                                         |  |           
|                                                         |  |           
|Financial Statements                                     |  |           
|                                                         |  |           
|Report
 of Independent Registered Public Accounting Firm |  | F-3       
|                                                         |  |           
|Consolidated
 Balance Sheets                             |  | F-4       
|                                                         |  |           
|Consolidated
 Statements of Income                       |  | F-5       
|                                                         |  |           
|Consolidated
 Statements of Stockholders Equity         |  | F-6       
|                                                         |  |           
|Consolidated
 Statements of Cash Flows                   |  | F-7       
|                                                         |  |           
|Notes
 to Consolidated Financial Statements              |  | F-8 - F-18

|
|
|

F-2


---



Report of Independent Registered
Public Accounting Firm

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

We have audited the accompanying consolidated balance
sheets of SmartPros Ltd. and Subsidiaries (the Company) as of
December 31, 2008 and December 31, 2007, and the related consolidated
statements of income, stockholders equity and cash flows for the years then
ended. The consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SmartPros Ltd. and Subsidiaries as of December 31, 2008
and December 31, 2007, and the results of their operations and their cash flows
for the two years ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

|                                   | 
|---------------------------------- | 
|/s/ Holtz Rubenstein
 Reminick LLP | 
|                                   | 
|Holtz Rubenstein Reminick
 LLP     | 
|                                   | 
|Melville, New York                 | 
|March 13, 2009                     | 

F-3

---



| |                 
| | ----------------
| | SMARTPROS LTD.  
| | AND SUBSIDIARIES
| |                 

|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Consolidated
 Balance Sheets                                                                                                                                                                                                                         |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|December 31,                                                                                                                                                                                                                                         |  | 2008 |            | 2007 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Assets                                                                                                                                                                                                                                               |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current Assets:                                                                                                                                                                                                                                      |  |      |            |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                            |  | $    | 6,626,181  |      | $ | 10,072,338 |  
|Accounts receivable, net of allowance for doubtful
accounts of
 $39,677 and $39,842 at December 31, 2008 and 2007, respectively                                                                                                                      |  |      | 3,114,139  |      |   | 1,964,483  |  
|Prepaid expenses and other current assets                                                                                                                                                                                                            |  |      | 249,281    |      |   | 237,097    |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Current Assets                                                                                                                                                                                                                                 |  |      | 9,989,601  |      |   | 12,273,918 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Property and Equipment, net                                                                                                                                                                                                                          |  |      | 607,988    |      |   | 630,857    |  
|Goodwill                                                                                                                                                                                                                                             |  |      | 3,394,329  |      |   | 145,684    |  
|Other Intangibles, net                                                                                                                                                                                                                               |  |      | 4,500,639  |      |   | 3,296,538  |  
|Other Assets, including restricted cash of $150,000                                                                                                                                                                                                  |  |      | 155,613    |      |   | 154,673    |  
|Deferred Tax Asset                                                                                                                                                                                                                                   |  |      | 1,103,923  |      |   | 978,000    |  
|Investment in Joint Venture, at cost                                                                                                                                                                                                                 |  |      | 23,890     |      |   |           |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      | 9,786,382  |      |   | 5,205,752  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Assets                                                                                                                                                                                                                                         |  | $    | 19,775,983 |      | $ | 17,479,670 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Current Liabilities:                                                                                                                                                                                                                                 |  |      |            |      |   |            |  
|Accounts payable                                                                                                                                                                                                                                     |  | $    | 779,870    |      | $ | 786,781    |  
|Accrued expenses                                                                                                                                                                                                                                     |  |      | 1,294,042  |      |   | 419,886    |  
|Other liabilities                                                                                                                                                                                                                                    |  |      |           |      |   | 40,040     |  
|Deferred revenue                                                                                                                                                                                                                                     |  |      | 5,576,607  |      |   | 5,318,382  |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Current Liabilities                                                                                                                                                                                                                            |  |      | 7,650,519  |      |   | 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; 1,000,000 shares
authorized, 0
 shares issued and outstanding                                                                                                                                                      |  |      |           |      |   |           |  
|Common stock, $.0001 par value; 30,000,000 shares
authorized,
 5,324,316 and 5,304,698 shares issued as of December 31, 2008 and 2007,
 respectively, and 4,841,567 and 4,993,967 shares outstanding as of December
 31, 2008 and 2007, respectively |  |      | 532        |      |   | 530        |  
|Common stock in treasury, at cost - 482,749 and
310,731 shares as of
 December 31, 2008 and 2007, respectively                                                                                                                                       |  |      | (1,525,723 | )    |   | (922,625   | )
|Additional paid-in capital                                                                                                                                                                                                                           |  |      | 17,155,851 |      |   | 16,925,314 |  
|Accumulated deficit                                                                                                                                                                                                                                  |  |      | (3,505,196 | )    |   | (5,106,459 | )
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|                                                                                                                                                                                                                                                     |  |      | 12,125,464 |      |   | 10,896,760 |  
|Deferred compensation                                                                                                                                                                                                                                |  |      |           |      |   | (22,220    | )
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Stockholders Equity                                                                                                                                                                                                                           |  |      | 12,125,464 |      |   | 10,874,540 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                           |  | $    | 19,775,983 |      | $ | 17,479,670 |  
|                                                                                                                                                                                                                                                     |  |      |            |      |   |            |  

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

---



| |                 
| | ----------------
| | SMARTPROS LTD.  
| | AND SUBSIDIARIES
| |                 

|                                                |  |      |            |      |   |            | 
|----------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | 
|Consolidated
 Statements of Income              |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Years Ended December 31,                        |  | 2008 |            | 2007 |  
|                                                |  |      |            |      |  
|                                                |  |      |            |      |   |            | 
|Net Revenues                                    |  | $    | 18,256,328 |      | $ | 15,204,506 | 
|Cost of Revenues                                |  |      | 7,811,500  |      |   | 5,962,788  | 
|                                                |  |      |            |      |   |            | 
|Gross Profit                                    |  |      | 10,444,828 |      |   | 9,241,718  | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Operating Expenses:                             |  |      |            |      |   |            | 
|Selling, general and administrative             |  |      | 8,200,253  |      |   | 7,326,308  | 
|Depreciation and amortization                   |  |      | 945,932    |      |   | 749,272    | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      | 9,146,185  |      |   | 8,075,580  | 
|                                                |  |      |            |      |   |            | 
|Operating Income                                |  |      | 1,298,643  |      |   | 1,166,138  | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Other Income (Expense):                         |  |      |            |      |   |            | 
|Interest and dividend income, net               |  |      | 215,292    |      |   | 411,435    | 
|Loss from joint venture                         |  |      | (11,110    | )    |   |           | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      | 204,182    |      |   | 411,435    | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Net Income before Benefit
 for Income Taxes     |  |      | 1,502,825  |      |   | 1,577,573  | 
|                                                |  |      |            |      |   |            | 
|Income Tax Benefit                              |  |      | 98,438     |      |   | 590,792    | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Net Income                                      |  | $    | 1,601,263  |      | $ | 2,168,365  | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Net Income per Common
 Share:                   |  |      |            |      |   |            | 
|Basic net income per common share               |  | $    | 0.32       |      | $ | 0.44       | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Diluted net income per common share             |  | $    | 0.32       |      | $ | 0.43       | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Weighted Average Number of
 Shares Outstanding: |  |      |            |      |   |            | 
|Basic                                           |  |      | 4,938,548  |      |   | 4,924,098  | 
|                                                |  |      |            |      |   |            | 
|                                                |  |      |            |      |   |            | 
|Diluted                                         |  |      | 4,975,198  |      |   | 5,022,911  | 
|                                                |  |      |            |      |   |            | 

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

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                                
|------------------------------------------------
|Consolidated
 Statements of Stockholders Equity
|                                                
|Years Ended December 31, 2008 and 2007          
|                                                

|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|--------------------------------------------------------- |  | ------------ | --------- | --------------- | - | ---------------------------- |  | --------------------- | - | ---------------------- | - | ---------------- |  | ---------------------------- | ---------- |  | - | ---------- | - | - | ------- | - | - | ---------- | - | - | ---------- | -
|                                                          |  | Common Stock |           | Preferred Stock |   | Additional
 Paid-in
 Capital |  | Accumulated 
 Deficit |   | Deferred
 Compensation |   | Treasury 
 Stock |  | Total
 Stockholders
 Equity |           
|                                                          |  |              |           |                 |   |                              |  |                       |   |                       
|                                                          |  | Shares       |           | Amount          |   | Shares                       |  | Amount                |   |                        |   |                  |  |                             
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |  
|Balance at January 1, 2007                                |  |              | 5,186,505 |                 | $ | 519                          |  |                       |  |                        | $ |                 |  | $                            | 16,572,944 |  | $ | (7,274,824 | ) | $ | (77,440 | ) | $ | (922,625   | ) | $ | 8,298,574  |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|Common Stock Issued by Exercise of Options                |  |              | 24,401    |                 |   | 2                            |  |                       |  |                        |   |                 |  |                              | 125,579    |  |   |           |   |   |        |   |   |           |   |   | 125,581    |  
|Common Stock Issued by Exercise of Underwriters
Warrants |  |              | 87,765    |                 |   | 8                            |  |                       |  |                        |   |                 |  |                              | 100,084    |  |   |           |   |   |        |   |   |           |   |   | 100,092    |  
|Recapture of Short-Swing Profits                          |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              | 31,195     |  |   |           |   |   |        |   |   |           |   |   | 31,195     |  
|Amortization of Deferred Compensation                     |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              |           |  |   |           |   |   | 55,220  |   |   |           |   |   | 55,220     |  
|Stock Option Expense                                      |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              | 41,430     |  |   |           |   |   |        |   |   |           |   |   | 41,430     |  
|Issuance of Shares from Restricted Stock Plan             |  |              | 6,027     |                 |   | 1                            |  |                       |  |                        |   |                 |  |                              | 54,082     |  |   |           |   |   |        |   |   |           |   |   | 54,083     |  
|Net Income                                                |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              |           |  |   | 2,168,365  |   |   |        |   |   |           |   |   | 2,168,365  |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|Balance at December 31, 2007                              |  |              | 5,304,698 |                 |   | 530                          |  |                       |  |                        |   |                 |  |                              | 16,925,314 |  |   | (5,106,459 | ) |   | (22,220 | ) |   | (922,625   | ) |   | 10,874,540 |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|Common Stock Issued by Exercise of Options                |  |              | 12,716    |                 |   | 1                            |  |                       |  |                        |   |                 |  |                              | 29,339     |  |   |           |   |   |        |   |   |           |   |   | 29,340     |  
|Issuance of Shares from Restricted Stock Plan             |  |              | 6,902     |                 |   | 1                            |  |                       |  |                        |   |                 |  |                              | 126,076    |  |   |           |   |   |        |   |   |           |   |   | 126,077    |  
|Amortization of Deferred Compensation                     |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              |            |  |   |           |   |   | 22,220  |   |   |           |   |   | 22,220     |  
|Stock Option Expense                                      |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              | 75,122     |  |   |           |   |   |        |   |   |           |   |   | 75,122     |  
|Purchase of Treasury Shares                               |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              |           |  |   |           |   |   |        |   |   | (603,098   | ) |   | (603,098   | )
|Net Income                                                |  |              |          |                 |   |                             |  |                       |  |                        |   |                 |  |                              |           |  |   | 1,601,263  |   |   |        |   |   |           |   |   | 1,601,263  |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  
|Balance at December 31, 2008                              |  |              | 5,324,316 |                 | $ | 532                          |  |                       |  |                        |   |                 |  | $                            | 17,155,851 |  | $ | (3,505,196 | ) | $ |        |   | $ | (1,525,723 | ) | $ | 12,125,464 |  
|                                                          |  |              |           |                 |   |                              |  |                       |   |                        |   |                  |  |                              |            |  |   |            |   |   |         |   |   |            |   |   |            |  

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

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                                                                   |  |      |            |      |   |            |  
|---------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Consolidated
 Statements of Cash Flows                                             |  |      |            |      |   |            |  
|                                                                                  
|Years Ended December 31,                                                           |  | 2008 |            | 2007 |  
|                                                                                  
|                                                                                   |  |      |            |      |   |            |  
|Cash Flows from Operating Activities:                                              |  |      |            |      |   |            |  
|Net income                                                                         |  | $    | 1,601,263  |      | $ | 2,168,365  |  
|                                                                                   |  |      |            |      |   |            |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |      |            |      |   |            |  
|Depreciation and amortization                                                      |  |      | 945,932    |      |   | 749,272    |  
|Stock compensation expense                                                         |  |      | 201,198    |      |   | 95,510     |  
|Deferred compensation                                                              |  |      | 22,220     |      |   | 55,220     |  
|Deferred income tax benefit                                                        |  |      | (125,923   | )    |   | (600,000   | )
|Loss from joint venture                                                            |  |      | 11,110     |      |   |           |  
|Gain on sale of equipment                                                          |  |      | (3,616     | )    |   |           |  
|Changes in operating assets and
 liabilities:                                      |  |      |            |      |   |            |  
|(Increase) decrease in operating assets:                                           |  |      |            |      |   |            |  
|Accounts receivable                                                                |  |      | (390,465   | )    |   | (3,544     | )
|Prepaid expenses and other current assets                                          |  |      | 35,155     |      |   | 40,296     |  
|(Decrease) increase in operating liabilities:                                      |  |      |            |      |   |            |  
|Accounts payable and accrued expenses                                              |  |      | (168,231   | )    |   | 273,573    |  
|Deferred revenue                                                                   |  |      | 226,458    |      |   | 802,236    |  
|Other liabilities                                                                  |  |      | (80,081    | )    |   | (40,056    | )
|                                                                                   |  |      |            |      |   |            |  
|Total adjustments                                                                  |  |      | 673,757    |      |   | 1,372,507  |  
|                                                                                   |  |      |            |      |   |            |  
|Net Cash Provided by Operating Activities                                          |  |      | 2,275,020  |      |   | 3,540,872  |  
|                                                                                   |  |      |            |      |   |            |  
|                                                                                   |  |      |            |      |   |            |  
|Cash Flows from Investing Activities:                                              |  |      |            |      |   |            |  
|Acquisition of property and equipment                                              |  |      | (215,784   | )    |   | (324,350   | )
|Capitalized course costs                                                           |  |      | (43,932    | )    |   | (92,341    | )
|Capitalized software development                                                   |  |      | (617,961   | )    |   | (376,536   | )
|Fixed assets acquired from acquisitions                                            |  |      |           |      |   | (77,201    | )
|Intangible assets acquired from
 acquisitions                                      |  |      |           |      |   | (210,512   | )
|Proceeds from sale of asset                                                        |  |      | 12,000     |      |   |           |  
|Investment in joint venture                                                        |  |      | (35,000    | )    |   |           |  
|Cash paid for business acquisitions                                                |  |      | (4,246,742 | )    |   | (26,484    | )
|                                                                                   |  |      |            |      |   |            |  
|Net Cash Used in Investing Activities                                              |  |      | (5,147,419 | )    |   | (1,107,424 | )
|                                                                                   |  |      |            |      |   |            |  
|                                                                                   |  |      |            |      |   |            |  
|Cash Flows from Financing Activities:                                              |  |      |            |      |   |            |  
|Purchase of treasury shares                                                        |  |      | (603,098   | )    |   |           |  
|Net proceeds from exercise of stock
 options, warrants and other                   |  |      | 29,340     |      |   | 256,868    |  
|Payments under capital lease obligations                                           |  |      |           |      |   | (11,767    | )
|                                                                                   |  |      |            |      |   |            |  
|Net Cash (Used in) Provided by Financing
 Activities                               |  |      | (573,758   | )    |   | 245,101    |  
|                                                                                   |  |      |            |      |   |            |  
|                                                                                   |  |      |            |      |   |            |  
|Net (Decrease) Increase in Cash and Cash
 Equivalents                              |  |      | (3,446,157 | )    |   | 2,678,549  |  
|Cash and Cash Equivalents, beginning of
 year                                      |  |      | 10,072,338 |      |   | 7,393,789  |  
|                                                                                   |  |      |            |      |   |            |  
|Cash and Cash Equivalents, end of year                                             |  | $    | 6,626,181  |      | $ | 10,072,338 |  
|                                                                                   |  |      |            |      |   |            |  
|                                                                                   |  |      |            |      |   |            |  
|Supplemental Disclosure:                                                           |  |      |            |      |   |            |  
|Cash paid for interest                                                             |  | $    | 287        |      | $ | 1,044      |  
|                                                                                   |  |      |            |      |   |            |  
|Cash paid for income taxes                                                         |  | $    | 27,562     |      | $ | 9,208      |  
|                                                                                   |  |      |            |      |   |            |  
|Additional purchase consideration payable
 for earn-out                            |  | $    | 925,000    |      | $ |           |  
|                                                                                   |  |      |            |      |   |            |  

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

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years Ended December 31, 2008 and 2007    
|                                          

|   |                                                                        
|-- | -----------------------------------------------------------------------
|1. | Description of Business and Summary of Significant Accounting
 Policies

Nature of operations
- SmartPros Ltd. and Subsidiaries (SmartPros or
the Company), a Delaware corporation, was organized in 1981 as Center for
Video Education Inc. for the purpose of producing educational videos primarily
directed to the accounting profession. SmartPros primary products today are
periodic video and internet subscription services directed to corporate
accountants and financial managers, accountants in public practice and CPA exam
candidates. In 2008, the Company acquired Loscalzo Associates, Ltd.
(Loscalzo), a leading provider of live training to accountants. 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. Its wholly-owned subsidiary,
SmartPros Legal and Ethics, Ltd. (SLE) produces ethics, governance and
compliance programs for corporate clients, and through its Cognistar division,
produces online and customized training courses for the legal profession. 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. Basis of
presentation - The consolidated financial
statements of SmartPros include the accounts of SmartPros and its wholly-owned
subsidiaries, SLE, Skye and Loscalzo. All significant intercompany balances and
transactions have been eliminated. Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Revenue recognition
- The Company recognizes revenue from its
subscription services as earned. Subscriptions are generally billed on an
annual basis, deferred at the time of billing and amortized into revenue on a
monthly basis over the term of the subscription, generally one year.
Engineering products are non-subscription based and revenue is recognized upon
shipment or, in the case of online sales, upon receipt of payment. Revenues
from other non-subscription services, such as website design, video production,
consulting services, and custom projects, are recognized on a percentage of
completion method where sufficient information relating to project status and
other supporting documentation is available. The contracts may have different
billing arrangements resulting in either unbilled or deferred revenue. The
Company obtains either signed agreements or purchase orders from its
non-subscription customers outlining the terms and conditions of the products
or services to be provided. Otherwise, revenues are recognized after completion
and/or delivery of services to the customer. 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. 131, Financial Reporting for
Segments of a Business Enterprise. 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.


| |    
| | ---
|
| | F-8

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years Ended December 31, 2008 and 2007    
|                                          

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, 2008 and 2007, 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 in AAA-rated bonds with short-term
maturities or money market funds pursuant to its investment policy. The Company
determines the appropriate classification of securities at the time of purchase
and reassesses the appropriateness of the classification at each reporting
date. 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. As of, and for the years
ended December 31, 2008 and 2007, the Company had no short-term investments or
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 $250,000.
The Companys cash balances are deposited with high credit quality financial
institutions. No single customer represents a significant concentration of
sales or receivables. With the recent economic problems in the financial
sector, the Company closely monitors its cash investments in money market
funds. 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. Shipping and
handling costs - The Company has included
freight-out as a component of cost of goods sold for the years ended December 31,
2008 and 2007. 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-9

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years Ended December 31, 2008 and 2007    
|                                          

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 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 3 to 19 years. Capitalized course
costs -Capitalized course costs include the
direct cost of internally developing proprietary educational products and
materials that have extended useful lives. Amortization of these capitalized
course costs commences when the courses are available for sale from the
Companys catalog. The Company has expended approximately $44,000 and $92,000
on such costs for the years ended December 31, 2008 and 2007, respectively. The
amortization period is five years, except for the Sarbanes-Oxley courses that
had a three-year amortization period and are now fully amortized. 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 $200,000 of course
costs in 2008 that are being amortized over a three-year period. Included in
other intangible assets are course costs net of accumulated amortization of
$611,000 and $485,000 at December 31, 2008 and 2007, respectively. 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, 2008 are $994,497. The Company began
amortizing these costs over a five-year period in the fourth quarter of 2008.
Amortization expense for 2008 was $49,725. 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.


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

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years Ended December 31, 2008 and 2007    
|                                          

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, 2008 and 2007 is as follows: Years Ended December 31,

2008

2007Weighted Average Number of Shares
 Outstanding


4,938,548


4,924,098Effect of Dilutive Securities, common stock
 equivalents


36,650


98,813Weighted Average Number of Shares
 Outstanding, used for computing diluted earnings per share


4,975,198


5,022,911 Stock-based
compensation -The Company accounts for stock
based compensation in accordance with Financial Accounting Standard No. 123(R),
Share-Based Payment (Statement
123(R)). Under the fair value recognition provisions of this statement, stock
based compensation cost is measured at the grant date based on the fair value
of the award and is recognized as expense on a straight-line basis over the
vesting period. Determining the fair value of share-based awards at the grant
date requires assumptions and judgments about expected volatility and
forfeiture rates, among other factors. Advertising -Advertising
is expensed as incurred and was approximately
$116,000 and $62,000 for the years ended December 31, 2008 and 2007,
respectively. Reclassifications -
Certain prior year balances have been reclassified to conform with current year
classifications. New accounting
pronouncements -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 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 is currently
evaluating the future impacts and disclosures of this standard.


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

---



|                
|----------------
|SMARTPROS LTD.  
|AND SUBSIDIARIES

|                                          
|------------------------------------------
|Notes to Consolidated Financial Statements
|                                          
|Years Ended December 31, 2008 and 2007    
|                                          

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements, which clarifies
the definition of fair value, establishes guidelines for measuring fair value,
and expands disclosures regarding fair value measurements. SFAS No. 157 does
not require any new fair value measurements and eliminates inconsistencies in
guidance found in various prior accounting pronouncements. SFAS No. 157 became
effective for the Company on January 1, 2008. Adoption of SFAS No. 157 did not
have a material impact on the consolidated financial statements of the Company. In October
2008, the FASB issued FSP FAS No. 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Is Asset Not
Active (FAS No. 157-3) with an immediate effective date,
including prior periods for which financial statements have not been issued.
FSP FAS No. 157-3 clarifies the application of fair value in inactive markets
and allows for the use of managements internal assumptions about future cash
flows with appropriately risk-adjusted discount rates when relevant observable
market data does not exist. The objective of FAS No. 157-3 has not changed and
continues to be the determination of the price that would be received in an
orderly transaction that is not a forced liquidation or distressed sale at the
measurement date. The adoption of FSP FAS No. 157-3 did not have a material
effect on the Companys consolidated financial statements.


|   |                              
|-- | -----------------------------
|2. | Acquisition and Joint Venture

In July 2008, the Company acquired all of the outstanding shares of
Loscalzo for approximately $4,400,000. Loscalzo is a leading provider of
in-house training for accounting firms. It also conducts live classroom style
training for both its own account and numerous state accounting societies. The Companys
core products have been focused on self-study and online learning, whereas,Loscalzo is a leading provider of live
training offered through a number of different mediums. With Loscalzo in the
mix, the Company now offers a complete, blended learning environment for
accounting and finance professionals and organizations on a national level.In conjunction with the acquisition,
Loscalzos president was given a two year employment agreement. The purchase
price of the acquisition exceeded the carrying value of the assets acquired.
The allocation of the excess of the purchase price over the carrying value was
classified as follows: Restrictive Covenant

$
200,000Trade Name


350,000Customer Lists


400,000Course Content


200,000Other Intangible Assets


15,000Goodwill and Other Non-Amortizable Intangibles


2,323,645$
3,488,645 The course content is being amortized over a three-year period, the
restrictive covenant and client lists are being amortized over a ten-year
period. The following pro forma results for the years ended December 31, 2008
and 2007 assume that the Loscalzo acquisition was made as of January 1, 2007: Years Ended December 31,

2008

2007Revenues

$
19,524,000

$
18,600,000Net Income


1,600,000


3,500,000Basic Net
 Income per Share


.32


.45Diluted Net
 Income per Share


.32


.44


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

---



|                                           
|-------------------------------------------
|SMARTPROS LTD.                             
|AND SUBSIDIARIES                           
|                                           
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2008 and 2007    
|                                           

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In 2008, Skye, our
 subsidiary, formed a joint venture with Education and Training Systems
 International (ETSI) for the purpose of marketing its iReflect product and
 invested $35,000 in this joint venture. iReflect is an inter-active,
 web-based tool used for the development of marketing and presentation skills.
 The investment in the joint venture has been accounted for using the equity
 method and Skye has reduced the carrying amount of its investment by its
 share of losses in the joint venture.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|3. | Property
 and Equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The components of property
 and equipment are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                   |  |      |           |      |   |           | 
|---------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|Years Ended December 31,           |  | 2008 |           | 2007 |  
|                                   |  |      |           |      |  
|                                   |  |      |           |      |  
|Furniture, Fixtures and
 Equipment |  | $    | 4,011,864 |      | $ | 3,733,044 | 
|Leasehold Improvements             |  |      | 189,709   |      |   | 189,709   | 
|                                   |  |      |           |      |   |           | 
|                                   |  |      | 4,201,573 |      |   | 3,922,753 | 
|Less Accumulated
 Depreciation     |  |      | 3,593,585 |      |   | 3,291,896 | 
|                                   |  |      |           |      |   |           | 
|                                   |  | $    | 607,988   |      | $ | 630,857   | 
|                                   |  |      |           |      |   |           | 

|   |                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------
|   | Depreciation
 expense for the years ended December 31, 2008 and 2007 were approximately
 $230,000 and $214,000, respectively.
|   |                                                                                                                              
|4. | Goodwill and Other Intangible Assets, netThe components of intangible assets are as follows:                                 

|                                  |  |      |           |      |   |           | 
|--------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|Years Ended December 31,          |  | 2008 |           | 2007 |  
|                                  |  |      |           |      |   |           | 
|                                  |  |      |           |      |   |           | 
|Engineering Courses               |  | $    | 2,766,837 |      | $ | 2,766,837 | 
|Rights to CPA Report
 (CPAR)    |  |      | 1,700,000 |      |   | 1,700,000 | 
|Pro2 Net Courses (P2N)          |  |      | 837,504   |      |   | 837,504   | 
|Course Content                    |  |      | 996,988   |      |   | 714,848   | 
|Customer Lists                    |  |      | 728,500   |      |   | 328,500   | 
|Restrictive Covenant              |  |      | 200,000   |      |   |          | 
|Trade Name                        |  |      | 350,000   |      |   |          | 
|Capitalized Software
 Development |  |      | 994,497   |      |   | 376,536   | 
|Financial Campus                  |  |      | 340,894   |      |   | 340,894   | 
|Other Intangible Assets           |  |      | 803,330   |      |   | 733,197   | 
|                                  |  |      |           |      |   |           | 
|                                  |  |      | 9,718,550 |      |   | 7,798,316 | 
|Less Accumulated
 Amortization    |  |      | 5,217,911 |      |   | 4,501,778 | 
|                                  |  |      |           |      |   |           | 
|                                  |  | $    | 4,500,639 |      | $ | 3,296,538 | 
|                                  |  |      |           |      |   |           | 

| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | The aggregate amortization
 expense for each of the years ended December 31, 2008 and 2007 was
 approximately $716,000 and $535,000, respectively.
| |                                                                                                                                                   
| | Estimated amortization
 expense for the five years subsequent to December 31, 2008 is as follows:                                                 

|                          |  |  |  |  |   |         | 
|------------------------- |  |  |  |  | - | ------- | 
|Years Ending December 31, |  |  |  |  |   |         | 
|                          |  |  |  |  |   |         | 
|                         
|2009                      |  |  |  |  | $ | 816,000 | 
|2010                      |  |  |  |  |   | 731,000 | 
|2011                      |  |  |  |  |   | 604,000 | 
|2012                      |  |  |  |  |   | 464,000 | 
|2013                      |  |  |  |  |   | 388,000 | 

|    
|----
|    
|F-13

---



|                                           
|-------------------------------------------
|SMARTPROS LTD.                             
|AND SUBSIDIARIES                           
|                                           
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2008 and 2007    
|                                           

| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table
 presents the changes in the carrying amount of goodwill and other intangibles
 during the years ended December 31, 2008 and 2007:

|                                  |  |          |           |                           |   |           |  
|--------------------------------- |  | -------- | --------- | ------------------------- | - | --------- | -
|                                  |  | Goodwill |           | Other
 Intangible
 Assets |  
|                                  |  |          |           |                           |  
|                                  |  |          |           |                           |   |           |  
|Balance, January 1, 2007          |  | $        | 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 |  
|Amortization Expense              |  |          |          |                           |   | (716,133  | )
|Goodwill and Intangibles Acquired |  |          | 3,248,645 |                           |   | 1,920,234 |  
|                                  |  |          |           |                           |   |           |  
|Balance, December 31, 2008        |  | $        | 3,394,329 |                           | $ | 4,500,639 |  
|                                  |  |          |           |                           |   |           |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Companys asset
 purchase agreement with Skye provides for a contingent purchase price based
 on certain criteria. The Company has estimated its liability at $925,000
 subject to certain adjustments. These amounts have been included in goodwill
 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|5. | Income
 Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | At December 31, 2008 and
 2007, the Company has a net deferred tax asset of approximately $1,100,000
 and $978,000, respectively, primarily resulting from the future tax benefit
 of net operating loss carryforwards. The net valuation allowance decreased by
 approximately $523,000 for the year ended December 31, 2008. 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, 2008, the Company
 has net operating loss carryforwards available to offset future taxable
 income of approximately $3,300,000 which expire in 2023.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The components of income
 tax benefit for the years ended December 31, 2008 and 2007 consist of the
 following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                   |  |      |          |      |   |          |  
|------------------ |  | ---- | -------- | ---- | - | -------- | -
|                   |  | 2008 |          | 2007 |  
|                   |  |      |          |      |  
|                   |  |      |          |      |   |          |  
|Current:           |  |      |          |      |   |          |  
|Federal            |  | $    | 27,562   |      | $ | 9,208    |  
|State              |  |      |         |      |   |         |  
|                   |  |      |          |      |   |          |  
|                   |  |      | 27,562   |      |   | 9,208    |  
|                   |  |      |          |      |   |          |  
|Deferred:          |  |      |          |      |   |          |  
|Federal            |  |      | (107,000 | )    |   | (510,000 | )
|State              |  |      | (19,000  | )    |   | (90,000  | )
|                   |  |      |          |      |   |          |  
|                   |  |      | (126,000 | )    |   | (600,000 | )
|                   |  |      |          |      |   |          |  
|Income Tax Benefit |  | $    | (98,438  | )    | $ | (590,792 | )
|                   |  |      |          |      |   |          |  

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

|    
|----
|    
|F-14

---



|                                           
|-------------------------------------------
|SMARTPROS LTD.                             
|AND SUBSIDIARIES                           
|                                           
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2008 and 2007    
|                                           

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

|                                                                                            |  |      |           |      |   |           |   
|------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | --
|Years Ended December 31,                                                                    |  | 2008 |           | 2007 |  
|                                                                                            |  |      |           |      |  
|                                                                                            |  |      |           |      |   |           |   
|U.S. Federal Statutory Income Tax Rate                                                      |  |      | 34.0      | %    |   | 34.0      | % 
|Valuation Allowance                                                                         |  |      | (41.0     | )%   |   | (71.0     | )%
|                                                                                            |  |      |           |      |   |           |   
|Income Tax Benefit                                                                          |  |      | (7.0      | )%   |   | (37.0     | )%
|                                                                                            |  |      |           |      |   |           |   
|                                                                                            |  |      |           |      |   |           |   
|The temporary differences and carryforwards gave rise to the
 following deferred tax asset: |  |      |           |      |   |           |   
|                                                                                            |  |      |           |      |   |           |   
|Years Ended December 31,                                                                    |  | 2008 |           | 2007 |  
|                                                                                            |  |      |           |      |  
|                                                                                            |  |      |           |      |   |           |   
|Depreciation and Amortization                                                               |  | $    | 57,000    |      | $ | 17,000    |   
|NOL Carryforward                                                                            |  |      | 1,093,000 |      |   | 1,530,000 |   
|Valuation Allowance                                                                         |  |      | (46,000   | )    |   | (569,000  | ) 
|                                                                                            |  |      |           |      |   |           |   
|                                                                                            |  | $    | 1,104,000 |      | $ | 978,000   |   
|                                                                                            |  |      |           |      |   |           |   

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | Stockholders
 Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | 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 10% shareholder for violation of Rule 16b of the
 Securities and Exchange Act of 1934 for the violation of short-swing profits
 rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In January 2008, the
 Companys compensation committee granted certain officers and key employees
 of the Company a total of 18,072 shares of restricted common stock. The grant
 vests one-third immediately and one-third each year, thereafter. The grants
 were part of a bonus paid for 2007 and were considered issued as of December
 31, 2007 and included in the total outstanding shares as of that date. The
 stock is unregistered and subject to certain forfeiture provisions if the
 employee leaves the Company prior to January 29, 2009.                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In 2008, one employee and
 two former consultants to the Company exercised their vested stock options
 for the purchase of 12,716 shares of common stock at prices ranging between
 $2.15 and $2.75.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|7. | Stock
 Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Companys 1999 Stock
 Option Plan (the Plan), as amended, provided 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.
 As of December 31, 2008, 765,143 shares are available under the Plan,
 provided that restricted stock grants may not exceed 200,000 shares and
 66,772 restricted shares have been issued, leaving a net balance of which,
 133,228 are reserved for the issuance of stock grants. The Plan is
 administered by the Compensation Committee of the board of directors of the
 Company. The administrator of the Plan determines the terms of options,
 including the exercise price, expiration date, number of shares and vesting
 provisions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The weighted average
 estimated fair value of stock options granted for the year ended December 31,
 2008 and 2007 was $2.29 and $2.06, respectively. The fair value of options at
 the date of grant was estimated using the Black-Scholes Option Pricing Model.
 During 2008, the Company took into consideration guidance under SFAS No.
 123(R) 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.                                                                                               

|    
|----
|    
|F-15

---



|                                           
|-------------------------------------------
|SMARTPROS LTD.                             
|AND SUBSIDIARIES                           
|                                           
|Notes to
 Consolidated Financial Statements
|                                           
|Years
 Ended December 31, 2008 and 2007    
|                                           

| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The assumptions made in
 calculating the fair values of options for the years ended December 31, 2008
 and 2007 are as follows:

|                        |  |      |             |      |  |                  | 
|----------------------- |  | ---- | ----------- | ---- |  | ---------------- | 
|                        |  | 2008 |             | 2007 | 
|                        |  |      |             |      |  |                  | 
|                        |  |      |             |      |  |                  | 
|Contractual Term        |  |      | 10 years    |      |  | 10
 years        | 
|Expected Volatility     |  |      | 45%         |      |  | 35% - 45%        | 
|Expected Dividend Yield |  |      | 0%          |      |  | 0%               | 
|Risk-Free Interest Rate |  |      | 2.8% - 3.0% |      |  | 4.1% - 4.63%     | 
|Expected Term           |  |      | 5.5 years   |      |  | 5.5
 - 6.0 years | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended
 December 31, 2008 and 2007, share-based compensation expense related to stock
 options was approximately $75,000 and $41,000, respectively. As of December
 31, 2008, the fair value of unamortized compensation cost related to unvested
 stock option awards was approximately $126,000. Unamortized compensation cost
 as of December 31, 2008, is expected to be recognized over a remaining
 weighted-average vesting period of three years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | As of December 31, 2008
 and 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 $3,000 and $495,000, respectively.                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In February 2008, the
 Company granted 34,025 options to various employees. These options vest in
 three years. Of these options, 31,025 have an exercise price of $5.10 and
 3,000 have an exercise price of $5.16.                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In February 2009, the
 Compensation Committee granted options and restricted stock awards to certain
 officers, senior management and employees of the Company. All of the awards
 were granted at $2.54. Included in the grant are 55,750 stock options and
 116,616 restricted stock grants, all of which have various vesting schedules
 ranging from February 2009 through February 2013.                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | A summary of all stock
 option activity for the years ended December 31, 2008 and 2007 is as follows:                                                                                                                                                                                                                                                                                                                                                                 

|                                |  |                     |         |                                   |   |      | 
|------------------------------- |  | ------------------- | ------- | --------------------------------- | - | ---- | 
|                                |  | Number
 of
 Options |         | Weighted
 Average
 Exercise Price |  
|                                |  |                     |         |                                   |  
|                                |  |                     |         |                                   |   |      | 
|Outstanding, January 1, 2007:   |  |                     | 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 | 
|Options granted                 |  |                     | 34,025  |                                   |   | 5.11 | 
|Options cancelled               |  |                     | (42,445 | )                                 |   | 4.89 | 
|Options expired                 |  |                     |        |                                   |   |     | 
|Options exercised               |  |                     | (12,716 | )                                 |   | 2.31 | 
|                                |  |                     |         |                                   |   |      | 
|Outstanding, December 31, 2008  |  |                     | 365,144 |                                   | $ | 4.71 | 
|                                |  |                     |         |                                   |   |      | 
|Exercisable, December 31, 2008  |  |                     | 297,254 |                                   | $ | 4.55 | 
|                                |  |                     |         |                                   |   |      | 

|    
|----
|    
|F-16

---



|                                            |                 
|------------------------------------------- | ----------------
|                                            | SMARTPROS LTD.  
|                                            | AND SUBSIDIARIES
|                                            |                 
|Notes
 to Consolidated Financial Statements |                 
|                                            |                 
|Years Ended December 31, 2008 and
 2007     |                 
|                                            |                 

|               |       |                     |                     |                                                         |                     |                                    |   |                   |  |                                                         |  |     | 
|-------------- | ----- | ------------------- | ------------------- | ------------------------------------------------------- | ------------------- | ---------------------------------- | - | ----------------- |  | ------------------------------------------------------- |  | --- | 
|               |       |                     | Options Outstanding |                                                         | Options Exercisable |                                   
|               |       |                     |                     |                                                         |                     |                                   
|Exercise Price |       | Number
 Outstanding |                     | Weighted
 Average
 Remaining
 Contractual
 Life (Years) |                     | Weighted
 Average
 Exercise
 Price |   | NumberExercisable |  | Weighted
 Average
 Remaining
 Contractual
 Life (Years) | 
|               |       |                     |                     |                                                         |                     |                                    |   |                   |  |                                                         | 
|               |       |                     |                     |                                                         |                     |                                    |   |                   |  |                                                         |  |     | 
|$              | 2.15  |                     | 14,939              |                                                         | 0.5                 |                                    | $ | 2.15              |  | 14,939                                                  |  | 0.5 | 
|               | 2.42  |                     | 25,850              |                                                         | 3.1                 |                                    |   | 2.42              |  | 25,850                                                  |  | 3.1 | 
|               | 2.75  |                     | 16,000              |                                                         | 7.8                 |                                    |   | 2.75              |  | 10,666                                                  |  | 7.8 | 
|               | 3.00  |                     | 1,850               |                                                         | 7.2                 |                                    |   | 3.00              |  | 1,386                                                   |  | 7.2 | 
|               | 3.05  |                     | 9,000               |                                                         | 7.1                 |                                    |   | 3.05              |  | 6,750                                                   |  | 7.1 | 
|               | 3.44  |                     | 15,000              |                                                         | 6.8                 |                                    |   | 3.44              |  | 15,000                                                  |  | 6.8 | 
|               | 4.00  |                     | 10,000              |                                                         | 6.3                 |                                    |   | 4.00              |  | 10,000                                                  |  | 6.3 | 
|               | 4.05  |                     | 6,667               |                                                         | 7.8                 |                                    |   | 4.05              |  | 3,333                                                   |  | 7.8 | 
|               | 4.15  |                     | 300                 |                                                         | 6.6                 |                                    |   | 4.15              |  | 300                                                     |  | 6.6 | 
|               | 4.27  |                     | 15,175              |                                                         | 5.8                 |                                    |   | 4.27              |  | 15,175                                                  |  | 5.8 | 
|               | 4.49  |                     | 5,000               |                                                         | 8.1                 |                                    |   | 4.49              |  | 1,667                                                   |  | 8.1 | 
|               | 5.10  |                     | 30,175              |                                                         | 9.3                 |                                    |   | 5.10              |  |                                                        |  |    | 
|               | 5.16  |                     | 3,000               |                                                         | 9.3                 |                                    |   | 5.16              |  |                                                        |  |    | 
|               | 5.32  |                     | 185,069             |                                                         | 1.2                 |                                    |   | 5.32              |  | 185,069                                                 |  | 1.2 | 
|               | 5.50  |                     | 1,500               |                                                         | 8.2                 |                                    |   | 5.50              |  | 1,000                                                   |  | 8.2 | 
|               | 5.78  |                     | 15,000              |                                                         | 8.8                 |                                    |   | 5.78              |  |                                                        |  |    | 
|               | 5.94  |                     | 9,000               |                                                         | 8.7                 |                                    |   | 5.94              |  | 4,500                                                   |  | 8.7 | 
|               | 21.41 |                     | 1,245               |                                                         | 0.5                 |                                    |   | 21.41             |  | 1,245                                                   |  | 0.5 | 
|               | 32.13 |                     | 374                 |                                                         | 0.5                 |                                    |   | 32.13             |  | 374                                                     |  | 0.5 | 
|               |       |                     |                     |                                                         |                     |                                    |   |                   |  |                                                         |  |     | 
|$              |      |                     | 365,144             |                                                         | 5.7                 |                                    | $ | 4.71              |  | 297,254                                                 |  | 5.7 | 
|               |       |                     |                     |                                                         |                     |                                    |   |                   |  |                                                         |  |     | 

|   |                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. | Commitments
 and Contingencies                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                              
|   | The Company leases office space and production and
 warehouse facilities in Hawthorne, New York, Westborough, Massachusetts,
 Bridgewater and Red Bank, New Jersey. The office in Red Bank, New Jersey is
 owned by an affiliate of the president of Loscalzo. Future minimum lease
 payments are as follows:

|                          |  |   |           | 
|------------------------- |  | - | --------- | 
|Years Ending December 31, |  |   |          
|                          |  |   |          
|                          |  |   |           | 
|2009                      |  | $ | 436,327   | 
|2010                      |  |   | 412,296   | 
|2011                      |  |   | 383,293   | 
|2012                      |  |   | 340,341   | 
|2013                      |  |   | 339,150   | 
|And thereafter            |  |   | 2,064,501 | 
|                          |  |   |           | 
|                          |  | $ | 3,975,908 | 
|                          |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense is recorded on a straight-line basis
 over the lease term. Rent expense for the years ended December 31, 2008 and
 2007 was approximately $431,000 and $445,000, 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.

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

---



|                                            |                 
|------------------------------------------- | ----------------
|                                            | SMARTPROS LTD.  
|                                            | AND SUBSIDIARIES
|                                            |                 
|Notes
 to Consolidated Financial Statements |                 
|                                            |                 
|Years Ended December 31, 2008 and
 2007     |                 
|                                            |                 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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 SLE, Skye and Loscalzo. The employment agreement with the Companys chief
 executive officer was renewed in February 2007, and is for a term of three
 years. The agreement renews automatically for a new three-year term at the
 end of the first year of each three-year term, unless either party gives
 notice of their intent not to renew before the end of the first year, of each
 three-year term. The chief financial officers agreement was renewed in July
 2008 and expires June 2011. The employment agreement with the president was
 renewed on October 1, 2008 for a period of three years. The chief technology
 officers agreement was 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 SLE 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. Skyes
 presidents agreement is for three years, beginning March 1, 2006 and expires
 January 31, 2009, and was extended at the Companys option for one additional
 year. The agreement with the president of Loscalzo is for two years, expiring
 in June 2010.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | At December 31, 2008, the aggregate commitment under
 the five employment agreements for the senior executives approximated
 $1,120,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Litigation- The Company
 is currently not a party in any litigation other than that arising in the
 normal course of its business operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|9. | Fair
 Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The methods and assumptions used to estimate the
 fair value of the following classes of financial instruments were:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Current assets and current liabilities-The carrying
 values of cash, investments securities available-for-sale, accounts
 receivables, payables and certain other short-term financial instruments
 approximate their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| | ----
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| | F-18

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