The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report.

We provide learning solutions and/or training materials for: (a) accounting and finance professionals; (b) engineering professionals; (c) legal professionals; (d) the financial services industry, including, banking, securities and insurance personnel; (e) pharmaceutical industry employees; and
(f) information technology professionals. We also provide ethics and compliance training materials for the general corporate community. Our learning solutions for the accounting, engineering and legal professions are designed to meet the continuing professional education requirements of the various state licensing agencies and professional associations. In addition, we provide value-added services through our learning management system, marketed under the name SmartPros' Professional Education Center™, which we believe is key to our revenue growth and future success.

Our learning and training solutions are delivered in multiple formats including videotape, CD-ROM, DVD. They are also available for distribution over the Internet and corporate intranets. Online subscription sales and delivery are the fastest growing part of our business.

Since February 2006, we have made a number of acquisitions that have enabled us to expand into new markets and enhance our offerings to the markets we historically served.

In 2004, we raised approximately $6 million of net proceeds in an initial public offering. As of September 30, 2008, we have used all of the proceeds, $500,000 to repay indebtedness and $5.5 million in connection with acquisitions. Our most recent acquisition occurred in July 2008 when we acquired Loscalzo, a leading provider of live continuing education training programs for the accounting profession. The net purchase price was approximately $4.4 million in cash. Loscalzo delivers seminars and conferences either through co-sponsorships with state CPA societies, accounting firms, association of accounting firms or on their own. We intend to continue our strategy of acquiring other companies that either compliment or expand our existing product offerings. We will use cash flow from operations, our publicly traded common stock, and, possibly, debt to enhance or augment our ability to consummate transactions. There are many risks involved with acquisitions. These risks include integrating the acquired business into our existing operations and corporate structure, retaining key employees and minimizing disruptions to our existing business. We cannot assure you that we will be able to identify appropriate acquisitions opportunities or negotiate reasonable terms or that any acquired business or assets will deliver the stockholder value that we anticipated at the outset.

In the first quarter of 2008 we launched a new division that we call The Hawthorne Center of Excellence. We have engaged a number of academicians on a consulting basis to produce accounting- and finance-based courses. Upon completion of the requisite number of courses, a user will receive a certificate

While we have not experienced any significant impact from the general slowdown of the economy or current global credit crisis, continuing economic deterioration could have a negative impact on our net revenues and profitability in future periods. For example, recently we have noticed that clients are taking longer to renew their subscriptions.

We have retained a consultant to assist management in connection with their obligation under the Sarbanes-Oxley Act of 2002 to prepare a report on our internal controls and reporting systems. Management has prepared a list of internal controls and testing of those controls began in the fourth quarter of 2007.

On April 22, 2008, our stock and warrants began trading on the NASDAQ Capital Market under the symbols SPRO and SPROW, respectively.

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.

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

Revenues from subscription services are recognized as earned, deferred at the time of billing or payment and amortized into revenue on a monthly basis over the term of the subscription. Revenues from the Loscalzo division are not subscription based and recognized when the seminar or conference is held. 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 the sale of legal courses, through our Cognistar Legal division, are either through direct sales, which are recognized immediately, or through prepaid course usage, in which case revenue is recognized as courses are taken. Unused course usage is treated as deferred revenue. Revenues from non-subscription services provided to customers, such as website design, video production, consulting services and custom projects, are generally recognized on a proportional performance basis where sufficient information relating to project status and other supporting documentation is available. Otherwise, these services are recognized as revenues after completion and

The cost of fulfilling our monthly subscription obligation does not exceed this revenue and is booked to expense as incurred. For most of our subscriptions products, there are no significant additional costs, other than shipping costs, required to complete our obligations, as the material already exists.

We use the term "revenue" to be differentiated from sales because a majority of our sales are recognized on a deferred basis.

Equipment, intangible assets and leasehold improvements

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

Impairment of long-lived assets

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

Stock-based compensation

Effective January 1, 2006, we adopted SFAS No. 123R. As a result, compensation expense includes the cost of compensatory stock option grants and stock awards, restricted and unrestricted, granted to employees, directors and consultants. Options and warrants granted to employees and non-employees are recorded as an expense at the date of grant based on the then estimated fair value of the security in question.

SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. We use the Black-Scholes-Merton ("BSM") option-pricing model, which incorporates various assumptions including volatility, expected life, interest rates and dividend yields, to determine the fair value of stock-based awards under SFAS No. 123R. We have elected the modified prospective transition method permitted by SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006.

Results of operations

Comparison of three months ended September 30, 2008 and 2007

The third quarter of 2008 resulted in an operating profit and net income, even though we continue to expend internal resources to develop new products and update existing products in our course catalogues. The quarter's results also include those of Loscalzo, acquired in July 2008.

The following table compares our statement of income data for the three months ended September 30, 2008 and 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, law, engineering, financial services, sales training, information, technology or compliance and ethics) and the method of sale (video or online) as well as the timing of custom project work, which can vary from quarter to quarter. In addition, our operating results in future periods may also be affected by acquisitions.

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                                              Three months ended September 30,
                                       2008                          2007
                              Amount        Percentage      Amount        Percentage    Change

Net revenues                $ 4,641,915         100.0 %   $ 3,697,724         100.0 %     25.5 %
Cost of revenues              2,001,564          43.1 %     1,325,621          35.8 %     51.0 %
Gross profit                  2,640,351          56.9 %     2,372,103          64.2 %     11.3 %
Selling, general and
administrative                1,879,322          40.5 %     1,747,238          47.3 %      7.6 %
Depreciation and
amortization                    212,199           4.6 %       177,757           4.8 %     19.4 %
Total operating expenses      2,091,521          45.1 %     1,924,995          52.1 %      8.7 %
Operating income                548,830          11.8 %       447,108          12.1 %     22.8 %
Other income, net                46,224           1.0 %       112,655           3.0 %    (59.0 %)
Net income before income
tax benefit                     595,054          12.8 %       559,763          15.1 %      6.3 %
Income tax benefit              131,515           2.8 %       215,792           5.8 %    (39.1 %)
Net income                  $   726,569          15.6 %   $   775,555          20.9 %    ( 6.3 %)

Net revenues

Net revenues for the three months ended September 30, 2008, increased approximately $944,000, or 25.5%, compared to net revenues for the three months ended September 30, 2007. This increase was primarily due to the acquisition of Loscalzo whose revenues for the quarter were $908,000. The remaining increases came from: (i) the Financial Services Training division, whose net revenues increased $73,000 primarily as a result of acquisitions made during the third quarter of 2007; (ii) the Technology Training division, which we also acquired in the third quarter of 2007, whose revenues increased by $41,000; (iii) the Working Values Ethics and Compliance division whose revenues increased $21,000;
(iv) the Engineering division whose revenues increased by $16,000, (v) a $69,000 increase in revenues from Skye, one of our wholly-owned subsidiaries; and (vi) an increase of $4,000 from the Congistar legal division of SmartPros Legal and Ethics, Ltd., another of our wholly-owned subsidiaries. These increases were offset by: (i) a $156,000 reduction in net revenues from our Accounting Education division; (ii) a $13,000 reduction in revenues from our technology consulting department; and (iii) an $18,000 reduction in revenues from our video production and duplication division. Under our long-standing policy, revenue is credited to the originating department regardless of the type of service that is performed. For example, a contract to convert videotapes to digital format is credited to the accounting education department if that is where the sale originated, even if the project has nothing to do with accounting.

In the third quarter of 2008, net revenues from our Accounting/Finance division, exclusive of Loscalzo were $2.19 million, or 47% of revenue, compared to $2.34 million, or 63% of revenue, in the comparable 2007 period. Net revenues from subscription-based products and direct sales of course material on a non-subscription basis, decreased by $35,000 from $2.04 million in the 2007 period to $2.01 million in the corresponding 2008 period. Net revenues derived from other projects in our Accounting/Finance division that are not subscription based decreased from $298,000 in 2007 to $177,000 in 2008. These revenues fluctuate from period to period, and are not indicative of any trends.

Online revenues, which previously were primarily derived from the sales of accounting/finance products, continue to be an important factor contributing to our overall revenue growth. However, many of our other products, including our Cognistar law library, our Financial Campus and banking courses and our technology training products are also delivered online. In the 2008 period, net revenues from online sales of accounting products accounted for approximately $966,000, or 21% of net revenues, compared to $906,000, or 25% of net revenues in the comparable 2007 period. This represents a 7% increase in absolute dollars. With the acquisitions made in 2007 and prior years, total online sales were $1.6 million in the 2008 period or 35% of sales as compared to $1.4 million or 38% of sales in the comparable 2007 period, an increase of 15%.

For the three months ended September 30, 2008, Skye generated net revenues of $416,000 compared to $347,000 in the third quarter of 2007. Skye's income is derived primarily from consulting projects that vary from quarter to quarter. Therefore, quarterly results will vary and revenues are not necessarily indicative of long-term trends. In addition, Skye has made its first sales of its new iReflect product. iReflect is a joint venture and revenues from the sales of this product will vary depending on a number of factors.

Our Financial Services Training division generated $471,000 of net revenues in the quarter ended September 30, 2008, as compared to revenues of $398,000 in the comparable quarter of 2007. The increase

Our Technology Training Group, acquired in August 2007, generated $86,000 of net revenues in the current quarter as compared to $45,000 in the comparable quarter of 2007.

In the quarter ended September 30, 2008, our SmartPros Legal and Ethics Ltd. ("SLE") subsidiary had net revenues of $312,000 compared to net revenues of $287,000 for the quarter ended September 30, 2007. For the 2008 period, $179,000 of SLE's net revenues were generated by the Working Values Ethics and Compliance division, and $133,000 was generated by the Cognistar Legal division. Net revenues generated by the Working Values Ethics and Compliance division are derived primarily from custom consulting work. Custom work is non-repetitive and subject to market conditions and can vary from quarter to quarter. The Cognistar Legal division derives its revenue primarily from prepaid usage and direct sales of its courses.

Our Engineering division generated $236,000 of net revenues in the third quarter of 2008 compared to $220,000 in the third quarter of 2007. This increase is not necessarily indicative of any trends, but is a result of timing differences, in the placement of orders from customers and greater marketing efforts. Sales of our engineering products are not subscription based.

Net revenues from video production and duplication services were $25,000 and from technology consulting services were $2,000 for the third quarter of 2008 compared to $43,000 and $15,000 respectively for the third quarter of 2007. We believe these fluctuations in net revenues continue to reflect a steady decline in the tape duplication business. The technology consulting division continues to devote a substantial portion of its resources to other divisions of the Company.

Cost of revenues

Cost of revenues includes: (i) production costs - i.e., the salaries, benefits and other costs related to personnel, whether our employees or independent contractors, who are used directly in production, including producing our educational programs and/or upgrading our technology; (ii) royalties paid to third parties; (iii) the cost of materials, such as videotape and packaging supplies; and (iv) shipping and other costs. There are many different types of expenses that are characterized as production costs and many of them vary from period to period depending on many factors. Generally, subscription-based products have higher profit margins than non-subscription-based products and online sales, which includes electronic delivery of the product and have higher profit margins than sales involving physical delivery of tapes, disks and written materials.

Our gross profit margin decreased for the three months ended September 30, 2008, to 56.9% compared to 64.2% for the comparable period in 2007. This decrease is attributable, in part, to: (i) our recent acquisitions, as we added additional personnel in our technology area; and (ii) changes in our product
mix. As a result of the Loscalzo acquisition, we will see fluctuations in our gross profit percentage as its business is seasonal. We have devoted a significant amount of internal resources in developing new products, re-tooling existing products and technology and integrating our recently acquired subsidiaries into our various platforms. These costs have not been capitalized and are therefore included in our cost of revenues.

Cost of revenues increased by approximately $676,000 in the current quarter from the comparable period last year. The increase is attributable to a number of factors, including costs of revenues associated with Loscalzo as well as increased salaries and related costs resulting from acquisitions made in 2007, and increased costs of producing various custom projects for clients. We have increased our labor costs as a result of these acquisitions in order to integrate these products into our various delivery platforms. We have also expended internal labor for the development of the iReflect product, which costs have not been capitalized. We outsource a substantial amount of technology projects to firms where labor costs are lower than they are in the United States. Our outsourcing strategy has been driven, in part, by increased business generated from Skye and internal projects. We have determined that it is cheaper to outsource certain projects rather than hire additional personnel. In addition, royalty expense increased by $96,000, primarily as a result of new and increased business and timing differences in reconciling our obligations to the licensors in both the accounting and engineering sectors.

º Royalties. Royalty expense increased in the three months ended September 30, 2008, compared to the comparable 2007 period by $96,000. This is a result of increased business from new and existing products and timing differences in reconciling our obligations to the licensors.

º Salaries. Overall, payroll and related costs attributable to production personnel increased by $236,000, which includes Loscalzo's salaries We also capitalized a portion of these costs during the current quarter, which would have resulted in a larger increase. We have reduced salaries and related costs in our video production and technology consulting departments as a result of decreased business and outsourcing. This is offset by increased salaries and related costs as a result of normal salary increases and additional personnel acquired as a result of the Loscalzo acquisition and the acquisitions made during the third quarter of 2007.

º Other production related costs. These are other costs directly related to the production of our products such as purchases of materials, travel, shipping and other. These costs increased by $379,000 from 2007 to 2008. Of this increase, $375,000 was a direct result of the Loscalzo acquisition, which provides live training throughout the United States and includes the costs of the lecturers as well as travel and related costs.

Selling, general and administrative expenses

General and administrative expenses include corporate overhead, such as compensation and benefits for administrative, sales and marketing and finance personnel, rent, insurance, professional fees, travel and entertainment and office expenses. General and administrative expenses for the three months ended September 30, 2008, increased $132,000, or 8%, compared to the three months ended September 30, 2007. The increase in general and administrative expenses is primarily attributable to the various acquisitions we made and to an overall increase in the costs of doing business.

Compensation expense in the 2008 period increased only $37,000 over compensation expense for the 2007 period. Our total number of full-time general and administrative employees at September 30, 2008, was 56 compared to 49 at September 30, 2007. Compensation expense includes stock-based compensation expense of $30,000 for the 2008 period and $17,000 for the 2007 period.

In September 2006 we began to outsource our customer service operations. This function was formerly performed internally. For the quarter ended September 30, 2008, our external customer service expense was approximately $47,000 compared to $39,000 in the comparable 2007 quarter, as we added an additional service person to handle the Financial Service Training products. Our other general and administrative costs, exclusive of compensation costs and customer service, increased $55,000. These costs consist of a number of expenses including professional fees, bank and credit card processing fees and also include the operating expenses of Loscalzo for the period. Although, we make every effort to control our costs, we anticipate that general and administrative expenses will continue to increase as a result of acquisitions and a general increase in such costs as health insurance and travel.

Depreciation and amortization expenses increased by $34,000 in the third quarter of 2008 compared to the third quarter of 2007 as a result of increased amortization expense from our capitalized course costs, intangible assets that we acquired and from the depreciation of fixed assets that we acquired and/or purchased in 2007 and 2008. We expect our depreciation and amortization expense to continue to increase as we replace and add computer equipment and capitalize internal costs for the development of new courses. We have completed the development of our new learning management system and will begin to amortize its cost commencing in the fourth quarter of 2008.

Operating income

For the three months ended September 30, 2008, net income from operations was $548,000 compared to a net operating income of $447,000 in the comparable period of 2007.

Other income, net

Other income and expense items consist of interest earned on deposits, net of any interest expense. We have no debt. In the quarter ended September 30, 2008, we used approximately $5.3 million of our cash to acquire Loscalzo, purchase treasury shares, purchase additional computer equipment, and capitalize our new LMS and course content during the quarter. That and lower interest rates resulted in a decrease in interest income for the third quarter of 2008 as compared to the third quarter of 2007 by $66,000. Due to the general decrease in interest rates and cash expended for the acquisition of Loscalzo in July 2008, we anticipate lower interest income in future periods.

We account for deferred tax benefits available from our net operating loss carryforward pursuant to SFAS No. 109. In the current quarter we recognized $139,000 of such benefits. To date we have recognized a total of approximately $1.15 million in such benefits.

Net income

For the three months ended September 30, 2008, we recorded net income of . . .