Edgar Filing: SmartPros Ltd.

As filed with the Securities and Exchange Commission on August 6, 2004

Registration No. 333-115454
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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SMARTPROS LTD.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 8299 13-4100476
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

12 SKYLINE DRIVE
HAWTHORNE, NEW YORK 10532
(914) 345-2620
(914) 345-2603 FACSIMILE

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S EXECUTIVE OFFICES)

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ALLEN S. GREENE
CHIEF EXECUTIVE OFFICER
SMARTPROS LTD.
12 SKYLINE DRIVE
HAWTHORNE, NEW YORK 10532
(914) 345-2620
(914) 345-2603 FACSIMILE

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:

JOEL J. GOLDSCHMIDT, ESQ. MARK A. VON BERGEN, ESQ.
MORSE, ZELNICK, ROSE & LANDER LLP DAVID C. WANG, ESQ.
405 PARK AVENUE HOLLAND & KNIGHT LLP
SUITE 1401 2300 U.S. BANCORP TOWER
NEW YORK, NY 10022 111 S.W. FIFTH AVENUE
(212) 838-8269 PORTLAND, OR 97204
(212) 838-9190 FACSIMILE (503) 243-2300
(503) 241-8014 FACSIMILE

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. |X|

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. | |

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (SUBJECT TO COMPLETION)
DATED AUGUST 6, 2004

900,000 UNITS

EACH CONSISTING OF TWO SHARES AND ONE WARRANT

[SMARTPROS LOGO]

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This is our initial public offering. We are offering 900,000 units, each
unit consisting of two shares of common stock and one warrant. Each warrant will
entitle its holder to purchase one share of common stock at an exercise price
equal to 75% of the initial unit offering price. The warrants are exercisable at
any time after they become separately tradable until their expiration date, five
years after the date of this prospectus. We may redeem some or all of the public
warrants at a price of $0.25 per warrant, at any time beginning six months after
this offering, by giving not less than 30 days' notice to the warrant holders,
which we may do at any time after the closing price for our common stock on the
principal exchange on which the stock trades, for any five consecutive trading
days, has equaled or exceeded 100% of the initial unit offering price. We
anticipate that the initial public offering price of the units will be in the
range of $9.50 - $10.50 per unit.

Initially, only the units will trade. The common stock and the warrants
will begin trading separately on the tenth business day following the date on
which the representative notifies us and the American Stock Exchange that
trading in those securities will commence. Separate trading for the common stock
and the warrants may not begin any earlier than the 31st day following the
effective date of this offering and may not begin later than the 45th day after
the effective date of this offering. Once separate trading in the common stock
and warrants begins, trading in the units will cease and the units will be
delisted.

We have applied to the American Stock Exchange ("Amex") to list the units,
common stock and warrants under the symbols "PRO.u," "PRO" and "PRO.ws,"
respectively.

INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

-----------------------
PER UNIT TOTAL
-------- --------
Public offering price $ $
Underwriting discount $ $
Proceeds to us, before expenses $ $

We have also agreed to pay Paulson Investment Company, Inc., the
representative of the underwriters of this offering, a non-accountable expense
allowance equal to 3% of the total public offering price of the 900,000 units
offered by this prospectus and to issue to it a warrant covering 90,000 units,
identical to the units offered by this prospectus, having an exercise price per
unit equal to 120% of the initial unit public offering price.

We have also granted Paulson a 45-day option to purchase up to an
additional 135,000 units to cover over-allotments.

PAULSON INVESTMENT COMPANY, INC.

The date of this Prospectus is _________, 2004

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Unless specified to the contrary or the context indicates otherwise, the
use of the pronouns "we," "us," "our," and the like shall be deemed to refer to
SmartPros Ltd., its predecessors, its subsidiaries and their respective
predecessors.

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PROSPECTUS SUMMARY

THIS SUMMARY DESCRIBES WHAT WE BELIEVE ARE THE KEY OR MOST SIGNIFICANT
ASPECTS OF OUR BUSINESS AND THIS OFFERING. IT DOES NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS
OFFERING, WE ENCOURAGE YOU TO READ THIS ENTIRE PROSPECTUS, INCLUDING OUR
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. UNLESS INDICATED TO THE
CONTRARY, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN RETROACTIVELY ADJUSTED TO
REFLECT THE CONVERSION OF ALL OF THE OUTSTANDING SHARES OF OUR SERIES A
CONVERTIBLE PREFERRED STOCK INTO SHARES OF COMMON STOCK AND A REVERSE STOCK
SPLIT EFFECTIVE ON _________, 2004 IN WHICH EACH OUTSTANDING SHARE OF OUR COMMON
STOCK WAS CONVERTED INTO 0.5169925 SHARES OF COMMON STOCK.

SMARTPROS

We provide learning solutions for accounting/finance and engineering
professionals, as well as ethics and compliance training for the general
corporate community. We offer "off-the-shelf" courses and custom designed
programs with delivery methods suited to the specific needs of our clients. Our
customers include approximately half of the Fortune 500 companies and a large
number of midsize and small companies.

Our learning solutions for professionals are designed to meet the initial
and ongoing licensing and continuing professional education requirements imposed
by state licensing agencies and professional standards organizations. Most of
the courses in our accounting/finance library are designed to meet these
standards and adhere to the requirements of all state boards of accountancy as
well as those of the American Institute of Certified Public Accountants,
Financial Executives International, Institute of Management Accountants,
Institute of Internal Auditors, the Association of Finance Professionals and the
Association of Government Accountants. 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 corporate ethics and compliance training programs are
designed to align corporate behavior with applicable laws and regulations, as
well as generally accepted codes of conduct. So, for example, our programs may
deal with issues prompted by the Sarbanes-Oxley Act of 2002 and the U.S. Federal
Sentencing Guidelines, as well laws addressing workplace misconduct such as
harassment.

Our products are available in one or more of the following formats: print,
videotapes and digital. Digital format can be delivered on CD-ROM, DVD or
online. We believe that our learning solutions effectively address the needs of
professionals and companies seeking comprehensive learning resources for
themselves and their employees. Our solutions are flexible, cost-efficient and
easy to use. They alleviate many of the inefficiencies associated with
traditional classroom training, such as travel costs, scheduling difficulties
and opportunity costs. In addition, we also offer our clients a learning content
management system, which allows the professionals and their employers to track
usage and performance.

Although we have recorded net losses in each of the last four fiscal years
and have cumulative losses in excess of $10 million, over the last three years
our financial condition has improved markedly. We have reduced our operating
costs and our debt load. We were EBITDA positive in both 2002 and 2003 and
reported an operating profit for the first quarter of 2004 and net income for
the six month period ended June 30, 2004.

Our objective is to become a leading provider of continuing professional
education and corporate training solutions in the United States. Our growth
strategy contemplates acquiring other companies that provide learning solutions
or their assets, which would enable us to expand our presence in the markets we
currently serve or enter into new markets. There are a number of factors that
make our acquisition strategy viable. We believe that many of the companies
currently providing learning solutions are small and under-capitalized. Also,
our senior management team includes experienced mergers and acquisition
executives who have demonstrated an ability to identify and acquire companies
that have enhanced our product offerings and provided us with a platform for
future growth. At the present time, we have no agreements or commitments for any
acquisitions. We cannot assure you that we will successfully complete any
acquisitions.

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THE OFFERING

Securities offered ........ 900,000 units, each unit consisting of two shares
of common stock and one redeemable common stock
purchase warrant. Initially, only the units will
trade. The common stock and the warrants included
in the units will not trade separately until the
tenth business day following the date on which the
representative notifies us and the Amex that they
will begin trading separately. Separate trading in
the common stock and the warrants may not commence
any earlier than the 31st day following the
effective date of this offering or later than the
45th day following the effective date of this
offering. Once separate trading in the common
stock and warrants commences, the units will cease
trading and will be delisted. When we receive
notice from the representative, we will issue a
press release announcing the date on which the
common stock and warrants will begin separate
trading.

Shares of common stock
to be outstanding after
this offering ............. 5,090,000

Warrants:

Number to be
outstanding after
this offering ......... 925,000

Exercise terms ........ Each warrant entitles its holder to purchase one
share of common stock at an exercise price equal
to 75% of the initial unit offering price. The
warrants are exercisable at any time after they
become separately tradable.

Expiration date ....... __________, 2009

Redemption ............ We may redeem some or all of the warrants, at any
time beginning six months after the effective date
of this offering, at a price of $0.25 per warrant,
on 30 days notice to the holders. However, we may
only redeem the warrants if the closing price for
our common stock, as reported on the principal
exchange on which our common stock trades, for any
five consecutive trading days has equaled or
exceeded 100% of the initial unit offering price.

Proposed Amex symbols ..... Units ............. PRO.u
Common stock ...... PRO
Warrants .......... PRO.ws

Risk factors .............. Please refer to "Risk Factors" for a description
of the risk factors you should consider.

Shares and warrants outstanding after this offering takes into account the
25,000 units that we will issue to our attorneys on the date of this offering
for legal services rendered in connection with this offering and 40,000 shares
of common stock that we will issue to our chief executive officer on the date of
this offering, of which 10,000 shares will be fully vested and 30,000 will vest
ratably on each of the first, second and third anniversary of the date of this
offering.

Unless otherwise stated, the information contained in this prospectus
assumes no exercise of:

o the warrants;

o the over-allotment option to purchase up to 135,000 units;

o warrants to purchase 90,000 units granted to the representative in
connection with this offering;

o warrants and options outstanding immediately before this offering
covering 368,136 shares of common stock.

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SUMMARY FINANCIAL INFORMATION

SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
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2003 2004 2002 2003
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net revenues .......................... $ 4,323 $ 4,592 $ 7,849 $ 8,580
Gross profit .......................... $ 2,500 $ 2,905 $ 4,205 $ 5,096
Operating expenses .................... $ 2,627 $ 2,701 $ 4,907 $ 5,339
Operating income (loss) ............... $ (127) $ 204 $ (702) $ (243)
Net income (loss) ..................... $ (168) $ 174 $ (797) $ (315)
Net income (loss) per common share (1):
Basic ............................... $ (.05) $ .05 $ (.25) $ (.10)
Diluted ............................. $ (.05) $ .05 $ (.25) $ (.10)
Weighted average number of shares (1):
Basic ............................... 3,230,037 3,223,700 3,156,929 3,223,700
Diluted ............................. 3,230,037 3,267,962 3,156,929 3,223,700

OTHER DATA:
Net income (loss) ..................... $ (168) $ 174 $ (797) $ (315)
Interest expense, net ................. 41 29 95 72
Depreciation and amortization ......... 331 346 717 676
----------- ----------- ----------- -----------
Earnings before interest, taxes and
depreciation ........................ $ 204 $ 549 $ 15 $ 433
=========== =========== =========== ===========

The table below sets forth a summary of our balance sheet data as of
December 31, 2003 and June 30, 2004 on an actual basis and as adjusted for this
offering taking into account the receipt of approximately $7.45 million of
estimated net proceeds from this offering and the use of those proceeds to repay
outstanding indebtedness.

ACTUAL AS ADJUSTED
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BALANCE SHEET DATA: DECEMBER 31, JUNE 30, JUNE 30,
2003 2004 2004
--------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Current assets .................. $ 1,338 $ 1,959 $ 8,838
Working capital (deficit) ....... $(3,578) $(3,239) $ 3,640
Total assets .................... $ 5,182 $ 5,494 $12,373
Total liabilities ............... $ 5,555 $ 5,692 $ 5,121
Stockholders' equity (deficit) .. $ (373) $ (198) $ 7,252

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(1) Basic and diluted net income (loss) per common share and basic and diluted
weighted average common shares outstanding give retroactive effect to the
reverse stock split of our common stock and the automatic conversion of the
Series A Convertible Preferred Stock into shares of common stock that will
take place before this offering is effective.

CORPORATE INFORMATION

We were organized in April 1981 under the laws of Delaware as the Center
for Video Education, Inc. Our wholly owned subsidiary, Working Values, Ltd. was
formed on March 21, 2003 as WVG Acquisition Corp. under the laws of the
Commonwealth of Massachusetts. We do not have any other subsidiaries.

Our principal executive office is located at 12 Skyline Drive, Hawthorne,
New York 10532 and our telephone number is (914) 345-2620. Our primary web
address is WWW.SMARTPROS.COM. Our subsidiary Working Values has its own Web site
at WWW.WORKINGVALUES.COM. Our educational content is delivered through our
proprietary learning content management system at
HTTP://EDUCATION.SMARTPROS.COM. Except for our Code of Ethics, which will be
posted on our Web site once this offering is completed, none of the information
on our Web sites is part of this prospectus.

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RISK FACTORS

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SET FORTH BELOW ARE WHAT WE
BELIEVE ARE THE MATERIAL RISKS RELATING TO OUR BUSINESS AND THIS OFFERING. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN
THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS, BEFORE YOU PURCHASE ANY UNITS.

RISKS RELATED TO OUR BUSINESS

WE HAVE NOT RECORDED AN ANNUAL OPERATING PROFIT SINCE 1999. CONTINUING LOSSES
MAY EXHAUST OUR CAPITAL RESOURCES AND FORCE US TO DISCONTINUE OPERATIONS.

Our last recorded annual operating profit was for the 1999 fiscal year.
From 2000 through 2003, we incurred cumulative losses of $10.2 million. We
cannot assure you that we will achieve profitability in 2004 or thereafter.

WE HAVE A SIGNIFICANT WORKING CAPITAL DEFICIENCY. IF THIS TREND CONTINUES, IT
MAY BE DIFFICULT FOR US TO OBTAIN THE CAPITAL WE NEED TO GROW OUR BUSINESS.

At June 30, 2004 and December 31, 2003, we had working capital deficits of
$3.2 million and $3.6 million, respectively. As a result, if all of our current
liabilities were to become due at the same time, we would not be able to pay
them in full. Also, because of our working capital deficiency, traditional
lending sources tend to consider us a higher credit risk, which limits the
amount of credit they are willing to make available to us and increases the cost
of that credit. This has adversely impacted our ability to create or acquire new
content.

THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND HAS RELATIVELY LOW
BARRIERS TO ENTRY. INCREASED COMPETITION COULD RESULT IN MARGIN EROSION, WHICH
WOULD MAKE PROFITABILITY EVEN MORE DIFFICULT TO ACHIEVE AND SUSTAIN.

The market for continuing professional education and corporate training
solutions is extremely competitive and the barriers to entry are relatively low.
Increased competition could result in reduced operating margins, as well as a
loss of market share and brand recognition. Our competitors include public
companies, such as SkillSoft plc and Saba Software, Inc. and privately held
companies, such as CPA2Biz, Inc. and Bisk Education, Inc. in the accounting
area, and Red Vector.com Inc. and NetGen Learning Systems in the engineering
market and Integrity-Interactive Corporation, LRN, The Legal Knowledge Company
and Corpedia in the general corporate compliance and ethics training market. We
also compete with universities (traditional and online) and professional and
not-for-profit organizations and associations. Potential competitors include
traditional education and publishing companies as well as e-commerce providers.
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.

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. For
example, the National Registry of CPE Sponsors, known as NASBA, which sets the
standards that have been adopted by 36 states, the District of Columbia and
Puerto Rico and whose standards have been copied by most of the other states and
U.S. Territories, imposed the requirement that, to qualify for continuing
professional education credit, beginning in 2003 all new courses designed for
self-study must be interactive and beginning in 2004 all courses designed for
self-study had to be interactive. Had we not complied with this new requirement,
our courses would have been far less attractive to practitioners in the field
and our business would have declined appreciably. We cannot assure you 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 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 chief financial
officer, Jack Fingerhut. Mr. Greene, who joined us in 2001, is an experienced
senior corporate executive who has been instrumental in cutting costs, raising
capital and identifying and consummating two acquisitions that have helped us
refocus on our competencies. Mr. Fingerhut was a founder of the company and, in
addition to his responsibilities as our chief financial officer, is actively
involved in sales and marketing and in writing and producing some of our
programs. He also 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.

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

Our sales cycle is unpredictable and can last as long as 24 months for
large, enterprise wide or custom designed programs. Most of our revenue is
derived from corporate customers. Identifying the decision maker in these
enterprises is often time consuming. Also, sales of online products, which we
believe are essential to our future growth and success, take longer than sales
of video or CD-ROM products. Other variables also complicate the purchasing
process, including the timing of disbursement of funds and the person-to-person
sales contact process. Sales may take much longer than anticipated, may fall
outside 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 GROWTH STRATEGY ASSUMES THAT WE WILL MAKE TARGETED STRATEGIC ACQUISITIONS.
ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE OR DISTRACT
MANAGEMENT'S ATTENTION FROM OPERATIONS.

Unless we develop or acquire new content that we can market to our existing
and new clients, our rate of revenue growth will continue to be slow and
achieving profitability will be slow and difficult. We believe that the quickest
and most efficient way for us to acquire new content is through targeted
strategic acquisitions. If we fail to execute on this strategy, our revenues may
not increase and our ability to achieve significant profitability will be
delayed. Until now, our ability to acquire complimentary businesses has been
hampered by our limited capital resources and the lack of a public market for
our stock.

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

o identifying appropriate targets in an efficient and timely fashion;

o negotiating terms that we believe are reasonable;

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

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

o maintaining our focus on our existing business;

o losing key employees; and

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

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

EVEN AFTER THIS OFFERING IS COMPLETED, WE MAY NEED ADDITIONAL CAPITAL FOR
EXPANSION PURPOSES. THE AVAILABILITY OF CAPITAL AND THE TERMS ON WHICH IT WILL
BE AVAILABLE ARE UNCERTAIN.

We may need to raise additional funds to take advantage of expansion or
acquisition opportunities in the future. Other than this offering, we have no
arrangements or commitments for additional financings. If we cannot

expand or make acquisitions that we believe are necessary to maintain our
competitive position, we may not be able to maintain a reasonable growth rate.
If we raise additional capital by selling equity or equity-linked securities,
these securities would dilute the ownership percentage of our existing
stockholders. Also, these securities could also have rights, preferences or
privileges senior to those of our common stock. Similarly, if we raise
additional capital by issuing debt securities, those securities may contain
covenants that restrict us in terms of how we operate our business, which could
also affect the value of our common stock. We may not be able to raise capital
on reasonable terms or at all.

OUR STRATEGIC RELATIONSHIPS ARE USUALLY SHORT-TERM, NONEXCLUSIVE ARRANGEMENTS
AND OUR STRATEGIC PARTNERS MAY PROVIDE THE SAME OR SIMILAR SERVICES TO OUR
COMPETITORS, DILUTING ANY COMPETITIVE ADVANTAGE WE GET FROM THESE RELATIONSHIPS.

We rely on our strategic partners to provide us with access to content as
well as to sell our content. Our strategic partners may and some have entered
into identical or similar relationships with our competitors, which could
diminish the value of our products. Our strategic partners could terminate their
relationship with us at any time. 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 relationship 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 you that we will
be able to prevent third parties from using our intellectual property rights and
technology without our authorization. We do not own any patents on our
technology. Rather, to protect our intellectual property, we rely on trade
secrets, common law trademark rights, trademark registrations, copyright
notices, copyright registrations, as well as confidentiality and work for hire,
development, assignment and license agreements with our employees, consultants,
third party developers, licensees and customers. However, these measures afford
only limited protection and may be flawed or inadequate. Also, enforcing our
intellectual property rights could be costly and time-consuming and could
distract management's attention from operating business matters.

RISKS RELATED TO THIS OFFERING

WE ARE CONTROLLED BY A LIMITED NUMBER OF STOCKHOLDERS, WHICH WILL LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.

Immediately after this offering, our executive officers will, in the
aggregate, own 24.1% of the issued and outstanding shares of our common stock,
or 23.1% if the over-allotment option is exercised in full. As a result, these
stockholders will have the ability to exercise substantial control over our
affairs and corporate actions requiring stockholder approval, including electing
and removing directors, selling all or substantially all of our assets, merging
with another entity or amending our certificate of incorporation. This de facto
control could be disadvantageous to our other stockholders with interests that
differ from those of the control group. For example, the control group could
delay, deter or prevent a change in control even if a transaction of that sort
would benefit the other stockholders. In addition, concentration of ownership
could adversely affect the price that investors might be willing to pay in the
future for our securities.

IF AN ACTIVE MARKET DOES NOT DEVELOP FOR OUR STOCK, YOU MAY NOT BE ABLE TO SELL
YOUR SHARES.

Before this offering, there has been no public market for our common stock
and we cannot assure you that a regular trading market will develop after the
offering or that the market price of our common stock will not decline below the
initial public offering price. The initial public offering price of the common
stock will be determined through negotiations between the underwriters and us.
Numerous factors, many of which are beyond our control, may cause the market
price of the common stock to fluctuate significantly. These factors include
announcements of technological innovations, customer orders of new products, our
earnings releases, market conditions in the industry and the general state of
the securities markets. In addition, quarterly fluctuations of our results of
operations may also affect the market price of the common stock.

WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. THIS COULD MAKE
OUR STOCK LESS ATTRACTIVE TO POTENTIAL INVESTORS.

We anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business and we do not
intend to declare or pay any cash dividends in the foreseeable future. Future
payment of cash dividends will be at the discretion of our board of directors
after taking into account many factors, including our operating results,
financial condition and capital requirements. Corporations that pay dividends
may be viewed as a better investment than corporations that do not.

IF WE DO NOT MAINTAIN AN EFFECTIVE REGISTRATION STATEMENT OR COMPLY WITH
APPLICABLE STATE SECURITIES LAWS, YOU MAY NOT BE ABLE TO EXERCISE THE WARRANTS.

In order for you to be able to exercise the warrants, the underlying shares
must be covered by an effective registration statement and qualify for an
exemption under the securities laws of the state in which you live. We cannot
assure you that we will continue to maintain a current registration statement
relating to the offer and sale of the warrants included in the units and the
common stock underlying those warrants, or that an exemption from registration
or qualification will be available throughout their term. This may have an
adverse effect on the demand for the warrants and the prices that can be
obtained from reselling them.

THE WARRANTS MAY BE REDEEMED ON SHORT NOTICE. THIS MAY HAVE AN ADVERSE IMPACT ON
THEIR PRICE.

We may redeem the warrants for $0.25 per warrant on 30 days notice at any
time after the closing price for our stock, as reported on its principal trading
market, has, for any five consecutive trading days, equaled or exceeded 100% of
the initial unit offering price. If we give notice of redemption, you will be
forced to sell or exercise your warrants or accept the redemption price. The
notice of redemption could come at a time when it is not advisable or possible
for you to exercise the warrants or a current prospectus or exemption from
registration or qualification does not exist.

FUTURE SALES OR THE POTENTIAL FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR
COMMON STOCK COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK AND UNIT WARRANTS
TO DECLINE AND COULD IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH SUBSEQUENT
EQUITY OFFERINGS.

Sales of a substantial number of shares of our common stock in the public
markets, or the perception that these sales may occur, could cause the market
price of our stock to decline and could materially impair our ability to raise
capital through the sale of additional equity securities. Once this offering is
completed, in addition to the 5,090,000 shares of common stock actually issued
and outstanding, there will be another 2,492,403 shares of common stock reserved
for future issuance as follows:

o 925,000 shares underlying the warrants, including the warrants
underlying the units we will issue to our attorneys in connection with
this offering;

o 405,000 shares underlying the over-allotment option, including the
shares underlying the warrants included in the units underlying that
option;

o 270,000 shares underlying the representative's warrants, including the
shares underlying the unit warrants includable in the representative's
warrants;

o 882,319 shares reserved for issuance under our 1999 stock option plan;
and

o 10,084 shares issuable upon exercise of warrants outstanding on the
date of this prospectus.

The common stock included in the units as well as the common stock
underlying the warrants, other than those shares held by "affiliates," as
defined by the rules and regulations promulgated under the Securities Act of
1933, will be freely tradable without restriction. Before this offering, we had
3,290,000 shares of common stock outstanding, including the 50,000 shares of
common stock that we will issue to our attorneys and the 40,000 shares of common
stock that we will issue to our chief executive officer on the date of this
offering. All of these shares are "restricted securities" as defined in Rule 144
promulgated under the Securities Act of 1933; 1,135,082 shares, including
1,085,082 held by "affiliates," can only be sold in compliance with the timing
and volume limitations of Rule 144 promulgated under the Securities Act of 1933
and 2,154,918 shares may be sold without limitation under Rule 144(k).
Stockholders owning in excess of 3 million "restricted" shares, or 96%,
including our executive officers and directors, have agreed not to sell any
shares of stock for a period of one year after this offering without the consent
of the representative of the underwriters. The representative may waive that
restriction in its sole discretion.

THE EXISTENCE OF OUTSTANDING OPTIONS AND WARRANTS MAY IMPAIR OUR ABILITY TO
OBTAIN ADDITIONAL EQUITY FINANCING.

The existence of outstanding options and warrants may adversely affect the
terms at which we could obtain additional equity financing. The holders of these
options and warrants have the opportunity to profit from a rise in the value or
market price of our common stock and to exercise them at a time when we could
obtain equity capital on more favorable terms than those contained in these
securities.

MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. WE
MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS THAT DO NOT IMPROVE OUR OPERATING
RESULTS OR THE MARKET VALUE OF OUR SECURITIES.

While we have general expectations as to the allocation of the net proceeds
of this offering, that allocation may change in response to a variety of
unanticipated events, such as differences between our expected and actual
revenues from operations or availability of commercial financing opportunities,
unexpected expenses or expense overruns or unanticipated opportunities requiring
cash expenditures. We have significant flexibility as to the timing and the use
of the proceeds. You will rely on our judgment with only limited information
about our specific intentions regarding the use of proceeds. We may spend most
of the net proceeds of this offering in ways with which you may not agree. If we
fail to apply these funds effectively, our business, results of operations and
financial condition may be materially and adversely affected. Also, we may not
be successful in investing the net proceeds from this offering in our operations
or external investments to yield a favorable return.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, AND THIS COULD DEPRESS OUR
STOCK PRICE.

Delaware corporate law and our restated certificate of incorporation and
bylaws contain provisions that could delay, defer or prevent a change in control
of our company or our management. These provisions could discourage proxy
contests and make it more difficult for you and other stockholders to elect
directors and take other corporate actions. As a result, these provisions could
limit the price that investors are willing to pay in the future for shares of
our common stock. For example:

o Without prior stockholder approval, the Board of Directors has the
authority to issue one or more classes of preferred stock with rights
senior to those of common stock and to determine the rights, privileges
and inference of that preferred stock.

o There is no cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates.

o Stockholders cannot call a special meeting of stockholders.

o Our bylaws establish advance notice requirements for submitting
nominations for election to the Board of Directors and for proposing
matters that can be acted upon by stockholders at a meeting.

o Our Board of Directors is divided into three classes, which makes it
significantly more difficult for someone to gain control in a contested
proxy fight.

FORWARD-LOOKING STATEMENTS

Some of the statements made in this prospectus discuss future events and
developments, including our future business strategy and our ability to generate
revenue, income and cash flow. In some cases, you can identify forward-looking
statements by words or phrases such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," "our future success depends," "seek to continue," or the negative of
these words or phrases, or comparable words or phrases. These statements are
only predictions that are based, in part, on assumptions involving judgments
about 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. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various facts, including the risks outlined in this "Risk Factors" section.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. We do not undertake to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.

USE OF PROCEEDS

The principal purposes of this offering are to raise capital to allow us to
acquire and develop new content and to respond quickly to new competitive and
business developments and to repay debt. Assuming a public offering price of
$10.00 per unit and after deducting the estimated underwriting discount of
$720,000, a non-accountable expense allowance of $270,000 and estimated offering
expenses of $560,000, we estimate that the net proceeds to us from this offering
will be approximately $7.45 million, or $8.7 million if the representative
exercises the over-allotment option in full. We expect to use the net proceeds
as follows:

APPROXIMATE APPROXIMATE
USE OF PROCEEDS AMOUNT PERCENTAGE
----------- --------- -----------
Repayment of debt .................. $ 571,000 7.7%
Development of new content ......... 500,000 6.7
Capital expenditures ............... 100,000 1.3
Working capital .................... 6,279,000 84.3
--------- --------
Total ............................ $7,450,000 100.0%
========= ========

REPAYMENT OF DEBT. This amount reflects the outstanding principal balance
of all indebtedness evidenced by notes, debentures and other debt instruments as
of June 30, 2004 held by JPMorgan Chase Bank, Freshstart Venture Capital Corp.,
James Brodie and Bigan Saliani. It does not include the repayment of any capital
lease obligations. The note payable to James Brodie, having an outstanding
principal balance of $52,000, bears interest at 9% and is due and payable out of
the proceeds of this offering. The note payable to Bigan Saliani, having an
outstanding principal balance of $24,000, was issued in November 2003 in
connection with the repurchase of stock from a stockholder and matures in
October 2004. The JPMorgan Chase indebtedness matures in 2006 and currently
bears interest at the rate of 5.5%. The Freshstart indebtdness matures in 2006
and 2008 and currently bears interest at the rate of 11.75% and 9.25%,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" for a more
detailed description of these obligations.

DEVELOPMENT OF NEW CONTENT. This amount reflects the cost of developing new
content that can be offered to a broad client base or that can serve as the
basis of a customized program for a specific client. Initially, we expect that
our focus will be to develop new content for our engineering library and for
Working Values. To develop this new content we may use our internal resources or
we may hire third party contractors. In these cases, the cost will primarily be
the salaries and benefits payable to our employees who develop the content or
the consulting fees payable to the contractors. We may also purchase specific
existing content, as opposed to purchasing content in the context of a larger
acquisition of a group of assets, from third parties. In this case, in addition
to the cost of the content itself, there may be additional costs relating to
modifying the content so that it will qualify for continuing professional
education credit and so that it can be delivered over our technology platform.
We have not yet made any final determination as to how much we will spend on
specific content or what content we will create, although we have had some
general discussions internally and with existing and potential clients as to
what content they would like us to offer. In addition, we have not contracted
with any third parties to create new content for us and we have not investigated
the availability of specific content for purchase.

CAPITAL EXPENDITURES. This amount consists primarily of property, plant and
equipment, such as computer and communications equipment, needed to support an
increase in business activity. It also includes the cost of upgrading our
accounting software should we determine that an upgrading is necessary. It may
also includes the capitalized portion of the costs to further upgrade, enhance
and improve the functionality of our proprietary learning content management
system that are properly capitalizable under applicable accounting principles.

WORKING CAPITAL. The majority of the net proceeds of this offering will be
used for working capital and general corporate purposes, including acquisitions.
The costs to be incurred in connection with acquisitions include not only the
consideration for the assets or property acquired but also any related legal,
accounting, investment banking and due diligence costs. We believe that the most
efficient way for us to grow, expanding our share of the markets we currently
serve and entering into new markets, is through strategic acquisitions. We may
acquire an entire business entity or a group of assets, depending on business,
economic and financial considerations. Our focus will be on acquisitions that
will enable us to increase the size of our content offerings and/or expand our
customer base. In addition to the markets we currently serve, we will use
acquisitions to penetrate new market segments such as insurance, financial
services and healthcare. Currently, we have no agreements or commitments to make
any acquisitions. We may also use the proceeds allocated to working capital for
general corporate purposes and to reduce our accounts payable and accrued
expenses. We may also use a portion of these proceeds to hire additional sales
and marketing personnel if we deem that to be necessary. If the representative
exercises the over-allotment option, the additional net proceeds, approximately
$1.25 million, will be added to working capital.

The above information represents our best estimate of our capital
requirements based upon the current status of our business. We will retain broad
discretion in the allocation of the net proceeds within the categories listed
above. The amounts actually expended for these purposes may vary significantly
and will depend on a number of factors, including our rate of revenue growth,
cash generated by operations, evolving business needs, changes in demand for our
products, the cost to develop or acquire new programs for our libraries, our
marketing efforts, competitive developments, new strategic opportunities,
general economic conditions and other factors that we cannot anticipate at this
time.

Pending their use, we intend to invest the net proceeds of this offering in
interest-bearing, investment grade securities, or, if necessary to avoid being
designated an Investment Company under the Investment Company Act of 1940,
United States government securities.

We expect that the net proceeds from this offering, when combined with cash
flow from operations, will be sufficient to fund our operations and capital
requirements for at least 12 months following this offering. We may be required
to raise additional capital through the sale of equity or other securities
sooner if our operating assumptions change or prove to be inaccurate. We cannot
assure you that any financing of this type would be available. In the event of a
capital inadequacy, we would be required to limit our growth and the
expenditures described above.

DIVIDEND POLICY

We have not declared or paid any dividends in the last two years, and we do
not intend to pay any dividends in the foreseeable future. We intend to retain
any future earnings for use in the operation and expansion of our business. Any
future decision to pay dividends on common stock will be at the discretion of
our board of directors and will be dependent upon our fiscal condition, results
of operations capital requirements and other factors our board of directors may
deem relevant.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2004 on an
actual basis and as adjusted for this offering, taking into account the receipt
of $7.45 million of estimated net proceeds from this offering and the
application of those proceeds to repay debt, the 25,000 units that we will issue
to our attorneys upon the completion of this offering and the 40,000 shares of
common stock that we will issue to our chief executive officer on the date of
this offering, of which 10,000 shares will be fully vested and 30,000 will vest
ratably on each of the first, second and third anniversary of the date of this
offering.

JUNE 30, 2004
-------------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)

Debt:
Notes and other indebtedness ....................................... $571 $ 0
Capital lease obligations .......................................... 134 134
---- ----
Total debt ..................................................... $705 $134
==== ====
Stockholders' equity (deficit):
Preferred stock, $.001 par value,
1,000,000 shares authorized,
no shares issued and outstanding ................................. $ -- $ --
Common stock, $0.0001 par value,
30,000,000 shares authorized;
3,258,006 shares issued and
3,200,000 shares outstanding actual; and
5,108,006 shares issued and
5,090,000 shares outstanding as adjusted ......................... 1 1
Common stock in treasury, at cost--58,007 shares ................... (220) (220)
Additional paid-in capital ......................................... 10,213 17,663
Accumulated (deficit) .............................................. (9,992) (9,992)
-------- --------
$ 2 $ 7,452
Note receivable from stockholder ................................... (200) (200)
-------- --------
Total stockholders' equity (deficit) ............................. $ (198) $ 7,252
======== ========
Total capitalization ............................................. $ 507 $ 7,386
======== ========

The information in the table set forth above gives retroactive effect to
the reverse split of our common stock and the automatic conversion of our Series
A Convertible Preferred Stock into shares of common stock that will take place
before this offering is effective. In addition, the information in the table set
forth above assumes no exercise of (i) outstanding options or warrants, (ii)
warrants issued in this offering, (iii) the over-allotment option or (iv) the
representative's warrant.

DILUTION

If you purchase units in this offering, your interest will be diluted to
the extent of the excess of the public offering price per share of common stock
over the as adjusted net tangible book value per share of common stock after
this offering. Net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities, divided by
the total number of shares of common stock outstanding. For purposes of the
dilution computation and the following tables, we have allocated the full
purchase price of a unit to the shares of common stock included in the unit and
none to the warrant.

At June 30, 2004, we had a negative net tangible book value of
approximately $2.8 million, or approximately a negative $0.87 per share. After
giving effect to the sale of the units in this offering at the assumed initial
public offering price of $10.00 per unit and taking into account the 25,000
units we will issue to our attorneys upon completion of this offering, our net
tangible book value of June 30, 2004 would have been approximately $4.7 million,
or $0.92 per share. This represents an immediate increase of $1.79 per share to
existing stockholders and immediate dilution of $4.08 per share to the new
investors who purchase units in this offering. The following table illustrates
this per share dilution:

Assumed initial public offering price per share ............................ $5.00
Pro forma net tangible book value per share at June 30, 2004 ............... $(0.87)
Increase in pro forma net tangible book value per share
attributable to new investors ............................................ 1.79
------
Net tangible book value per share after the offering ....................... 0.92
------
Dilution per share to new investors ........................................ $4.08
======

The following table summarizes as of December 31, 2003 the differences
between the existing stockholders and the new investors with respect to the
number of shares purchased, the total consideration paid and the average price
per share paid:

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- ------- ---------- ------- ---------

Existing stockholders 3,290,000 64.6% $10,213,000 53.2% $3.10
New investors 1,800,000 35.4% 9,000,000 46.8% $5.00
--------- ------- ----------- ------
Total 5,090,000 100.0% $19,214,000 100.0%
========= ======= =========== ======

The table set forth above takes into account the shares of common stock
underlying the units that we will issue to our attorneys in connection with this
offering, which will be accounted for as a cost of this offering, and the 40,000
shares that we will issue to our chief executive officer on the date of this
offering of which 10,000 shares will vest immediately and 10,000 shares will
vest on each of the first, second and third anniversary dates of this offering.

If the representative exercises the over-allotment option in full, the new
investors will purchase 2,070,000 shares of common stock. In that event, the
gross proceeds from this offering will be $10,350,000, representing
approximately 50.3% of the total consideration for 38.6% of the total number of
shares of common stock outstanding, and the dilution to new investors would be
$3.89 per share.

To the extent any options or warrants outstanding on the date of this
prospectus that have an exercise price of less than $5.00 per share are
exercised, you will experience further dilution.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data for each of the years in the two-year period ended December 31,
2003 and the balance sheet data at December 31, 2003 are derived from our
audited financial statements, which are included elsewhere in this prospectus.
The statement of operations data for each of the three months ended June 30,
2003 and 2004 and the balance sheet data at June 30, 2004 are derived from
unaudited financial statements included elsewhere in this prospectus. Historical
results are not necessarily indicative of the results to be expected in the
future.

STATEMENT OF OPERATIONS DATA:

Net revenues ................................. $ 4,323 $ 4,592 $ 7,849 $ 8,580
Cost of revenues ............................. 1,823 1,687 3,644 3,484
--------- --------- --------- ---------
Gross profit ................................. 2,500 2,905 4,205 5,096
--------- --------- --------- ---------
Selling, general and administrative .......... 2,295 2,355 4,190 4,663
Depreciation and amortization ................ 331 346 717 676
--------- --------- --------- ---------
Total operating expenses ..................... 2,627 2,701 4,907 5,338
--------- --------- --------- ---------
Operating income (loss) ...................... (127) 204 (702) (243)
Other income (expense), net .................. (41) (30) (95) (72)
--------- --------- --------- ---------
Income (loss) before provision for
income taxes ............................... $ (168) $ 174 $ (797) $ (315)
========= ========= ========= =========
Provision for income taxes ................... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ............................ $ (168) $ 174 $ (797) $ (315)
========= ========= ========= =========
Net income (loss) per common share (1):
Basic ...................................... $ (.05) $ .05 $ (.25) $ (.10)
========= ========= ========= =========
Diluted .................................... $ (.05) $ .05 $ (.25) $ (.10)
========= ========= ========= =========
Weighted average number of shares (1):
Basic ...................................... 3,230,037 3,223,700 3,156,929 3,223,700
========= ========= ========= =========
Diluted .................................... 3,230,037 3,267,962 3,156,929 3,223,700
========= ========= ========= =========

BALANCE SHEET DATA:
DECEMBER 31, JUNE 30,
2003 2004
---------- ----------
(IN THOUSANDS)
Current assets ........................................................... $ 1,338 $ 1,959
Working capital (deficit) ................................................ $(3,578) $(3,239)
Total assets ............................................................. $ 5,182 $ 5,494
Total liabilities ........................................................ $ 5,555 $ 5,692
Stockholders' equity (deficit) ........................................... $ (373) $ (198)

----------

(1) Basic and diluted net (loss) per common share and basic and diluted
weighted average common shares outstanding give retroactive effect to the
reverse stock split of our common stock and the automatic conversion of the
Series A Convertible Preferred Stock into shares of common stock that will
take place before this offering is effective.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

We provide learning solutions for accounting/finance and engineering
professionals and governance and ethics training for the general corporate
community. Accounting/finance continuing professional education was our original
market. This market covers corporate accountants and financial managers as well
as accountants in public practice. Initially, our accounting/finance programs
were delivered on videotape. In 1998, we recognized that, to remain competitive,
we would have to make our products available in digital format for distribution
over the Internet and corporate intranets. Towards that end, we hired
information technology professionals to build a new media department that, among
other things, would convert our programs to digital format for online delivery
and who would oversee the development of a learning content management system.

To take advantage of financing opportunities that were then available to
technology companies, we were advised to pursue an acquisition strategy that
focused on building revenues and diversifying into new markets. Based on
assurances we received from a specific financing source, we identified several
viable acquisition targets, including Virtual Education Corporation, or VEC, a
provider of license preparation and continuing professional development programs
for engineers. However, the dynamics of the capital markets changed and our
financing source was unable to raise any funds. At that point, we had already
consummated our acquisition of VEC.

The acquisition of VEC put a tremendous strain on our internal capital
resources. Although the accounting business continued to grow and generate
operating profits, overall we began losing money. In the four-year period
beginning in 2000 and ending in 2003, we generated over $10 million of losses.
In 2001, we hired a new chief executive officer, Allen S. Greene, who had been
the chief operating officer of a publicly traded specialty finance company. Over
the next three years, Mr. Greene successfully refocused the company on its core
competencies, cut overhead, substantially reduced debt and raised additional
equity capital. By the end of 2003, we had narrowed our annual losses to
$315,000 and were EBITDA positive for the second consecutive year. For the six
months ended June 30, 2004 we reported a net profit of $174,000.

Since 2001, we have successfully completed two key acquisitions. The
aggregate purchase price for the assets we acquired in these transactions was
$1.1 million in cash, stock (based on the value at the time of the acquisition)
and assumption of liabilities. The sellers of these assets had collectively
raised more than $30 million to develop these assets and fund their operations.
First, in May 2001, we acquired substantially all of the assets of Pro2Net. In
so doing, we acquired a library of "how to" programs, a functional learning
content management system that we could market with our programs, customer
lists, trade names and computer hardware. As a result, we were able to terminate
a contract with a third party to develop a learning content management system,
saving us approximately $2 million in development costs. Our ability to provide
the value-added services represented by the learning management system is, we
believe, key to our recent revenue growth and future success.

Second, in April 2003, we acquired a library of custom-designed
integrity-based courses and other assets from Working Values Group Ltd., a
company that specialized in building custom-designed learning solutions for the
general corporate community using traditional and alternative instructional
techniques. As part of the transaction, we also hired the development team from
Working Values Group. With the increased focus on corporate governance and
ethics and the passage of the Sarbanes-Oxley Act of 2002 along with new rules
and regulations adopted by the national stock exchanges and markets, we believe
that there is a significant growth opportunity in supplying training that
addresses corporate culture as a significant risk factor.

Currently, our products are available in multiple formats, including
downloadable print, videotape and digital. Digital formats are used to deliver
our products over the Internet, which has become our fastest growing delivery
channel, and on CD-ROM and DVD. Online delivery capability has attracted new and
existing subscribers. This has had a positive effect on our revenue as well as
our gross margins since online sales eliminate the cost for materials, i.e.,
videotapes, boxes and shipping.

Most of our revenue is in the form of subscription fees for one of our
monthly accounting update programs. Other sources of revenue include direct
sales of programs on a non-subscription basis, fees for various services,
including web design, software development, tape duplication, video production,
video conversion, course design and development, ongoing maintenance of a
SmartPros Professional Education Center, and licensing fees. Subscriptions are
billed on an annual basis, payable in advance and deferred at the time of
billing and amortized into revenue on a monthly basis. 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.

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, i.e., accounting/finance, engineering, Working Values and video
production and e-commerce, (ii) online sales, (iii) cash flows and (iv) EBITDA.

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

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

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

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

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

Limited capital and the lack of a marketable security have retarded our
growth. Once this offering is complete, these limitations will have been
alleviated. We believe that the most effective way for us to increase our rate
of growth will be to use our capital and publicly traded stock to make
acquisitions and that many acquisition opportunities will be available to us.
Even now, as a result of a number of factors, including the highly fragmented
nature of the industry in which we operate and our size and our reputation, we
frequently receive notice of acquisition opportunities. In addition, we may
engage brokers, bankers and/or finders to help us identify suitable acquisition
opportunities.

We are not currently negotiating with any potential acquisition targets or
candidates. However, we intend to focus on acquisitions that will allow us
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 market segments such as
insurance, health care and financial services. We prefer acquisitions that are
accretive, as opposed to those that are dilutive, but ultimately the decision
will be based on maximizing shareholder value rather than short-term profits.
The size of the acquisitions will be determined, in part, by our size, the
capital available to us and the liquidity and price of our stock. We may use
debt to enhance or augment our ability to consummate larger transactions.

There are many risks involved with acquisitions. Many of these risks are
discussed in the "Risk Factors" section of this prospectus. 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 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

Revenues from subscription services are recognized as earned. Video
subscriptions are generally billed on an annual basis, while on-line
subscriptions are paid by credit card at point of sale. Both of these types of
sales are deferred at the time of billing or payment and amortized into revenue
on a monthly basis over the term of the subscription, which is generally one
year. Engineering products are non-subscription based and revenue is recognized
upon shipment of the product or, in the case of on-line sales, payment. Revenues
from non-subscription services provided to customers, such as web-site design,
video production, consulting services and custom projects are generally
recognized on a proportional performance basis where sufficient information
relating to project status and other supporting documentation is available. The
contracts may have different billing arrangements

resulting in either unbilled or deferred revenue. We usually obtain either a
signed agreement or purchase orders from our non-subscription customers
outlining the terms and conditions of the sale or service to be provided.
Otherwise, these services are recognized as revenues after completion and
delivery to the customer. Duplication and related services are generally
recognized upon shipment or, if later, when our obligations are complete and
realization of receivable amounts is assured.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Fixed, tangible assets are carried at cost less accumulated depreciation
and are depreciated using the straight-line method over the estimated useful
lives, which range from 3 years for course content to 10 years for customer
lists. 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 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 disclosure only requirements of SFAS No. 123. As a
result, no compensation costs are recognized for stock options granted to
employees. 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.

RESULTS OF OPERATIONS

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 AND 2003

We experienced a significant improvement in operating performance in the
first six months of 2004 compared to the first six months of 2003. Most
significant was the fact that we reported our first net profit in more than four
years. The following table compares our statement of operations data for the
first six months of 2003 and 2004. 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).

SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
2003 2004
------------------- -------------------
AS A AS A
PERCENTAGE PERCENTAGE
OF NET OF NET INCREASE/
AMOUNT REVENUES AMOUNT REVENUES (DECREASE)
------- --------- ------ --------- -------
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)

Net revenues ..................................... $4,323 100.0% $4,592 100.0% 6.2%
Cost of revenues ................................. 1,823 42.2 1,687 36.7 (7.5)%
------ ----- ----- ----
Gross profit ..................................... 2,500 57.8 2,905 63.3 16.2%
------ ----- ----- ----
Selling, general and administrative .............. 2,295 53.1 2,355 51.3 2.6%
Depreciation and amortization .................... 331 7.7 346 7.5 4.5%
------ ----- ----- ----
Total operating expenses ......................... 2,627 60.8 2,701 58.8 2.8%
------ ----- ----- ----
Operating income (loss) .......................... (127) (2.9) 204 4.4 (260.6)%
Other (expense), net ............................. (41) (1.0) (30) (0.6) (26.8)%
------ ----- ----- ----
Net income (loss) ................................ $ (168) (3.9)% $ 174 3.8% (203.6)%
====== ===== ===== ====

NET REVENUES

Net revenues for the six months ended June 30, 2004 increased 6.2% compared
to net revenues for the six months ended June 30, 2003. Online sales continue to
be an important factor contributing to our overall revenue growth, a trend that
began in 2003. In the 2004 period, net revenues from online sales accounted for
approximately $1.14 million, or 25%, of our net revenues. In the 2003 period,
online sales accounted for $895,000, or 21%, of our net revenues.

Net revenues from sales of our accounting and finance products grew in both
absolute terms and as a percentage of total revenues. In the first six months of
2004, net revenues from our accounting/finance products were $3.3 million
compared to $3.0 million in the first six months of 2003. This increase was due
in part to a subscription price increase that went into effect on January 1,
2004 and to an increased level of sales. For the first six months of 2004, net
revenues from accounting/finance products includes subscription-based revenue of
$3.1 million and direct sales of course material on a non-subscription basis,
net revenues from custom work and advertis-

ing of $200,000. For the first six months of 2003, subscription-based revenue
was $2.8 million and direct sales of course material on a non-subscription
basis, custom work and advertising was $215,000.

Net revenues from sales of our engineering products, which are not
subscription-based, were $251,000 in the first half of 2004 compared to $266,000
in the comparable 2003 period. This decrease is primarily attributable to a
$38,000 sale to a reseller of our courses made in the first half of 2003 that
did not recur in the first half of 2004. On the other hand, sales to federal and
state transportation and highway agencies of our Professional Engineering (PE)
exam review course increased in 2004 compared to 2003. Sales to these agencies
in the first six months of 2004 were $50,600 compared to $8,000 in the first six
months of 2003.

For the first six months of 2004, Working Values contributed $375,000 to
net revenues. Working Values primarily engages in providing either consulting
services or custom products for its clients and recognizes its revenue on a
proportional performance basis. Working Values did not commence operations until
April 2003 and its sales in the second quarter of 2003 were $99,000. We expect
revenues from Working Values to continue to increase in 2004.

Net revenues from video production, duplication and consulting and
e-commerce services for the first six months of 2004 were $645,000 compared to
$992,000 for the first six months of 2003, continuing a trend that began in
2003. This decline is attributable to the same factors that are discussed below
in connection with 2003.

COST OF REVENUES

Cost of revenues includes 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; royalties
paid to third parties; the cost of materials, such as videotape and packaging
supplies; and shipping costs. Compared to the first six months of 2003, cost of
revenues in the first half of 2004 decreased in both absolute terms and as a
percent of net revenues. The decrease is primarily attributable to a $53,000
reduction in production costs and a $100,000 reduction in royalty payments. The
reduction in production costs was realized even though 2004 includes six months
of operations for Working Values while 2003 only includes three months of
operations for Working Values. 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. In the case of the first six months of 2003
and 2004, the expenses that showed the greatest variations and the reasons for
those variations were as follows:

o OUTSIDE LABOR AND DIRECT PRODUCTION COSTS. Outside labor includes the
cost of hiring actors and production personnel such as directors,
producers and cameramen. The cost of actors increased by $2,400 while
the cost of production personnel decreased by $22,000. Direct
production costs, which are costs relating to producing videos other
than labor costs, such as the cost of renting equipment and locations,
decreased $20,000. These variations are related to the type of video
production projects and do not reflect any trends in our business.

o SALARIES. Overall, payroll and related costs attributable to production
personnel increased by $6,000. Most of this increase was attributable
to Working Values, $23,000, and our technology group, $47,000. On the
other hand compensation payable to video duplication production
personnel decreased by $64,000. Most of this decrease is attributable
to the fact that the head of our video duplication department resigned
in October 2003.

o TRAVEL AND ENTERTAINMENT; SHIPPING. Travel and entertainment expenses
increased by $2,000 reflecting our diligence in controlling costs.
Shipping costs decreased by $4,000 reflecting a reduction in shipping
rates also achieved through negotiations with our shipping vendors.

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

Royalty expense decreased in the first six months of 2004 as compared to
the first six months of 2003 for a number of reasons. First, we terminated one
of our royalty agreements in late 2003 with a reseller of our CPA exam review
course. Second, royalty payments to two other partners decreased because sales
through these partners decreased. Third, we renegotiated our rates with one of
our strategic partners, resulting in a saving of approximately $50,000.
Ultimately, the savings we realize under these new agreements will depend on the
volume of sales. Assuming the same level of sales in 2004 as in 2003, our
royalty payments under these agreements will be reduced by approximately
$50,000. However, if volume increases, the actual royalty payments in 2004 under
these agreements will be higher than they were in 2003. Finally, for the first
six months of 2003 we overestimated our obligations to certain of our strategic
partners to the extent of $50,000. Also, it will take a full year to see the
full impact of our new royalty rates because we reflect the entire royalty
payment at the time of the sale even though a significant portion of the
subscription revenue is deferred.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses include normal 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. While general and administrative expenses in the first six
months of 2004 increased in absolute terms compared to the first six months of
2003, as a percentage of net revenues they decreased. The increase in absolute
terms is primarily attributable to the Working Values overhead, which offset
reductions in our professional fees, savings in our communication costs and
other operating expenses. We anticipate that general and administrative expenses
will begin to increase once this offering is complete as a result of increased
accounting, legal and insurance costs. The full effect of these additional costs
will not be felt until 2005.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses were higher in the first half of
2004 than they were in the comparable 2003 period, although as percentage of net
revenues they were the same. The increase is attributable to the fact that in
2003 we acquired $270,000 of depreciable and amortizeable assets, including the
assets acquired by Working Values. We have also begun to amortize the
capitalized costs related to the Sarbanes-Oxley toolkit product developed in
2003. In addition, many of our older assets are either fully or almost fully
depreciated. We expect our depreciation and amortization expenses to increase as
we realize the full effect of the asset acquisitions and capitalized costs that
were made in 2003 and additional assets are acquired as needed.

INCOME/LOSS FROM OPERATIONS

For the first six months of 2004 net income from operations was $204,000
compared to a $127,000 loss from operations in the comparable period of 2003.
This is primarily attributable to our ability to increase net revenues without
significantly increasing the cost of revenues and our operating expenses.

OTHER EXPENSES

Other income and expense items consist of interest paid on indebtedness and
interest earned on deposits. The decrease in our net interest expense is due
primarily to our continuing efforts to pay down debt and the general reduction
in interest rates.

NET INCOME AND LOSS

For the six months ended June 30, 2004 we recorded a net profit of $174,000
compared to a net loss of $168,000 for the six months ended June 30, 2003. The
change from a net loss to a net profit is attributable to increased revenue and
our continuing efforts to reduce our costs and expenses.

COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002

We saw a significant improvement in our operating performance in 2003
compared to 2002. Most significant were the increase in our gross margins and
the decrease in our net loss. The following table compares our statement of
operations data for the years ended 2003 and 2004. 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,
-------------------------------------------------------
2002 2003
--------------------- --------------------
AS A AS A
PERCENTAGE OF PERCENTAGE OF INCREASE/
AMOUNT NET REVENUES AMOUNT NET REVENUES (DECREASE)
------ --------- ------ ------------- ----------
(ALL DOLLAR AMOUNTS ARE IN THOUSANDS)

Net revenues ...................................... $7,849 100.0% $8,580 100.0% 9.3%
Cost of revenues .................................. 3,644 46.4 3,484 40.6 (4.4)%
------ ----- ------ ----
Gross profit ...................................... 4,205 53.6 5,096 59.4 21.2%
------ ----- ------ ----
Selling, general and administrative ............... 4,191 53.4 4,663 54.3 11.3%
Depreciation and amortization ..................... 717 9.1 676 7.9 (5.6)%
------ ----- ------ ----
Total operating expenses .......................... 4,907 62.5 5,338 62.2 8.8%
------ ----- ------ ----
Operating (loss) .................................. (702) (8.9) (243) (2.8) (65.4)%
Other (expense), net .............................. (95) (1.2) (72) (0.8) (24.1)%
------ ----- ------ ----
Net (loss) ........................................ $ (797) (10.1)% $ (315) (3.7)% (60.5)%
====== ===== ====== ====

NET REVENUES

Net revenues for 2003 increased 9.3% compared to net revenues for 2002. An
important factor contributing to our overall revenue growth was online sales. In
2003, net revenues from online sales accounted for approximately $1.8 million,
or 21% of our revenues. In 2002, online sales accounted for $1.1 million, or 14%
of revenues.

Sales of our accounting/finance products grew in both absolute terms and as
a percentage of total revenues, offsetting any declines in our other products.
In 2003, net revenues from sales of our accounting/finance products were $6.2
million compared to $4.9 million in 2002. The 2003 amount includes subscription
sales of $5.5 million, direct sales on a non-subscription basis of $250,000 and
revenue from custom work and advertising of $407,000. The increase in
accounting/finance revenues reflects price increase for subscriptions and for
direct sales that we imposed in 2003 as well as increased sales.

Revenues from our engineering products declined from $453,000 in 2002 to
$381,000 in 2003. Most of this decline is attributable to a reduction in sales
to federal and state transportation and highway agencies of our Professional
Engineering (PE) Exam Review course that they purchase for their staff
engineers. In 2003, sales to these federal and state agencies generated $10,000
of revenues compared to $64,000 in 2002. In 2003 the U.S. Department of
Transportation failed to secure approval for a new budget. Since a portion of
the budget is allocated to the various state departments of transportation,
these agencies eliminated our product from their 2003 budgets. New budgets were
approved in early 2004 and, as a result, various federal and state agencies
resumed their purchases of the PE Exam Review course in 2004.

In 2003 we did not realize any significant revenue from Working Values
during the nine months of operations. During this time Working Values was
focused primarily on developing new non-company specific course materials that
it can market to the general corporate market. In addition, due to general
economic conditions, the market for corporate governance, ethics and compliance
training products and services was slow as many corporations were still feeling
the effects of the latest recession and were operating in a cash conservation
mode.

Revenues from video production, duplication, consulting and e-commerce
declined from $2.5 million 2002 to $1.9 million in 2003. This decline is due to
a number of factors, including the fact that 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 department if that is where the sale originated, even if the
technology group performed all the services necessary to fulfill the terms of
that contract. Other factors contributing to the decline in this revenue
include:

o the general decline in the videotape industry reflecting the popularity
of digital formats such as CD-ROM and DVD;

o in 2003 we terminated the head of video department, which led to some
client defections;

o the maturity of the web;

o increased competition for web design services; and

o a sluggish economy.

Despite the decline in revenues, our video and technology departments continue
to operate at full capacity producing videotapes and web-enabled programs for
our accounting and engineering departments. At this time we cannot predict
whether the trend of declining revenues from these departments will continue.

COST OF REVENUES

Compared to 2002, cost of revenues in 2003 declined in both absolute terms
and as a percentage of revenues. These declines reflect our ongoing efforts to
improve gross margins and achieve profitability. Specifically, the decrease in
cost of revenues is due to the following factors:

o a decrease of $145,000 in direct production costs, most of which
related to the technology group;

o a decrease of $82,000 in the cost of materials, principally raw tape,
as a result of the increase in online sales and the decline in our
video duplication business;

o a decrease of $26,000 in salaries; and

o a decrease of $11,000 in shipping, which is attributable to the
increase in online sales.

Offsetting these reductions was an increase of $38,000 in our outside labor
costs and an increase of $58,000 in royalty payments. Most of the $50,000
increase in royalty payments was attributable to new royalty arrangements that
we entered into in 2003 - one with the American Institute of Certified Public
Accountants and one with the Association of Government Accountants.

GENERAL AND ADMINISTRATIVE EXPENSES

In 2003, general and administrative expenses increased in both absolute
terms and as a percentage of revenues when compared to 2002. A portion of this
increase was attributable to legal fees expensed in 2003 that related to a
lawsuit brought by two former employees in California. A jury rendered judgment
in our favor on the plaintiff's claims. Legal fees and related costs incurred in
2003 in connection with this lawsuit were $150,000. The balance of the increase
was attributable to Working Values' overhead.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses were lower in 2003 than in 2002.
This decrease was attributable to the fact that some of our assets were fully
depreciated in 2002 and we did not record a full year's depreciation and
amortization for any new assets acquired in 2003. In 2004, we expect our
depreciation and amortization expenses to increase, as we realize the full
effect of the following transactions that took place in 2003:

o we acquired, by purchase and/or lease, $270,000 of depreciable and
amortizeable assets; and

o we capitalized $181,000 of personnel and other costs relating to
developing products for Working Values, which we will begin amortizing
in 2004.

LOSS FROM OPERATIONS

The reduction is attributable to the fact that revenues increased at a
faster rate, 9.3%, than did operating expenses, 8.8%, and cost of revenues
decreased by 4.4%.

OTHER EXPENSES

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our working capital requirements through
internally generated funds, sales of equity and debt securities and proceeds
from short-term bank borrowings.

Our working capital deficit as of June 30, 2004 was approximately $3.2
million and as of December 31, 2003 was approximately $3.6 million. Our current
ratio at June 30, 2004 and December 31, 2003 was .38 to 1 and .27 to 1,
respectively. 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,
$3.9 million at June 30, 2004 and $3.4 million at December 31, 2003, is deferred
revenue, which is revenue collected or billed but not yet earned under the
principles of revenue recognition. Most of this revenue is in the form of
subscription fees and will be earned over the next 12 months. The cost of
fulfilling our monthly subscription obligation does not exceed this revenue and
is booked to expense as incurred. For some of our products, there are no
additional costs, other than shipping costs, required to complete this
obligation as the material is already in our library.

For the six months ended June 30, 2004, net cash generated by operating
activities was approximately $450,000 and we had a net cash increase of
$212,000. For the year ended December 31, 2003, net cash generated by operating
activities was approximately $904,000 and we had a net cash increase of
$184,000. The primary components of our operating cash flows are our net loss
adjusted for non-cash expenses, such as depreciation and amortization, and the
changes in accounts receivable, accounts payable and deferred revenues.

Capital expenditures for the six months ended June 30, 2004 were
approximately $37,000, of which $27,000 constituted equipment purchases and
$10,000 equipment leases. Cash used in investing activities for the year ended
December 31, 2003 was approximately $473,000, which included $187,000 in new
equipment purchases and $105,000 of acquisition costs relating to the Working
Values assets. In addition, we capitalized $181,000 of costs relating to
developing new courses for our Working Values library. We do not anticipate any
significant capital expenditures relating to equipment purchases over the next
12 months.

For the six months ended June 30, 2004 we made debt principal payments of
approximately $215,000 and incurred a new capital lease obligation of $10,000.
In 2003 we made debt principal payments of approximately $335,000 but incurred
new debt of $218,000, which includes a $100,000 term loan and $118,000 capital
lease facility. At quarter-end, our total indebtedness for borrowed money,
including capital lease financings, was approximately $800,000, which consisted
of the following:

o JPMORGAN CHASE BANK. This was a line of credit that was restructured in
2003 into a term loan. At the time of the restructuring, the balance
due was $410,000. We reduced the principal to $360,000 and paid all
accrued but unpaid interest through February 2003. The restated balance
of the loan, $360,000, is payable in 36 equal monthly installments of
$10,000 plus accrued interest calculated at the rate of prime plus
1.5%, or 5.5% currently. At June 30, 2004 the balance was $200,000.

o FRESHSTART VENTURE CAPITAL CORP. In August 2001 we borrowed $500,000 on
a secured basis from Freshstart, an affiliate of Medallion Financial
Corp., the former employer of our chief executive officer. This loan is
payable in 60 equal monthly installments of $8,333.33 with interest
computed at a rate equal to the prime rate plus 5%, adjusted monthly.
The interest rate may never be less than 11.75% or higher than 13%. The
current rate is 11.75%. At June 30, 2004 the balance was $217,000.

o FRESHSTART VENTURE CAPITAL CORP. In May 2003 we borrowed an additional
$100,000 on a secured basis from Freshstart at 9.25%. The funds were
used to upgrade our video production facility. This loan is payable in
60 equal monthly installments of $1,666.33 with interest computed at a
rate equal to the prime rate plus 5%, adjusted monthly. The interest
rate may never be less than 9.25% or higher than 11%. The current rate
is 9.25%. At June 30, 2004 the balance was $78,000.

o JAMES BRODIE. This liability was assumed in connection with our
acquiring Virtual Education Corporation in March 2000. The original
amount of the debt was $78,000. The balance due at March 31, and June
30, 2004 was $52,000. The note bears interest at 9% per annum and
matures November 30, 2005. The note is fully payable out of the
proceeds of a public offering.

o BIGAN SALIANI. In October 2003 we agreed to repurchase 30,037 shares of
common stock from a former employee. The total purchase price for these
shares is $72,000, payable in 12 equal monthly installments beginning
November 30, 2003. At June 30, 2004 the balance was $24,000.

o IDB LEASING. In 2003 we leased $118,000 of new computer and video
equipment, through IDB Leasing. The leases are being repaid over 48 and
36 months with monthly payments of $2,055 and $996, respectively. The
imputed interest rate on these leases is 7.0% and 7.5%, respectively.
In addition, we incurred a new capital lease obligation of $10,000 in
January 2004. This lease has a term of 36 months and an imputed
interest rate of 6.05%. The balance on that lease at June 30, 2004 was
$8,400. At June 30, 2004 the balance on all three leases was $99,000.

o The Company has other outstanding capital leases, the balances of which
were $35,000 at June 30, 2004.

In addition to the foregoing, as of June 30, 2004 we had commitments under
operating leases - principally the leases for executive offices in Hawthorne,
New York and the Working Values executive offices in Sharon, Massachusetts -
aggregating $2.8 million through 2010. In May 2004 we paid $92,000 in connection
with our termination of a sublease in Irvine, California. Finally, in connection
with our acquisition of the Working Values assets, the seller is entitled to
receive up to $200,000 of additional consideration if Working Values attains
specific performance objectives during the two-year period following the
acquisition. At June 30, 2004 none of this contingent consideration had been
earned.

The net proceeds from this offering will be used primarily for general
corporate and working capital needs. We anticipate that most of the proceeds
will be used to develop and/or acquire new content and businesses that our
complementary to ours. We believe that the net proceeds of this offering
together with cash flow from operations and the proceeds from other financings
will be sufficient to meet our working capital and capital expenditure
requirements for the next 12 months.

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

SEASONALITY AND CYCLICALITY

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. The statement
requires that an issuer classify financial instruments that are within its scope
as a liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. We are currently evaluating the provisions of this statement, and do not
believe that it will have an impact on our consolidated financial statements.

BUSINESS

We provide learning solutions for accounting/finance and engineering
professionals, two large vertical markets with mandatory continuing education
requirements. We also provide corporate governance, ethics and compliance
training for the general corporate market. Our products are available in
multiple formats, including downloadable print, videotape and digital. Digital
format is used to deliver our products on CD-ROM, DVD and online. Our solutions
provide a flexible, cost-efficient and effective format, improved ease of use
and enhanced product/user support and administrative functionality. In addition,
they alleviate many of the inefficiencies associated with traditional classroom
training, including travel costs, scheduling difficulties and opportunity costs.
In the professional markets, our learning solutions are designed to meet the
licensing and continuing professional education requirements imposed by various
state agencies and professional organizations. In the general corporate market,
our training solutions are designed to meet corporate learning objectives
regarding issues of integrity and corporate culture.

CORPORATE HISTORY

We were organized in April 1981 under the laws of Delaware as the Center
for Video Education, Inc. In 1998 we changed our name to Creative Visual
Enterprises, Ltd. ("CVE"). In January 2000 we changed our name to KeepSmart.com,
Inc. and in June 2001 we changed our name to SmartPros Ltd. Our wholly owned
subsidiary, Working Values, Ltd. was formed on March 21, 2003 under the name WVG
Acquisition Corp under the laws of the Commonwealth of Massachusetts. The name
change was effective April 4, 2003.

In October 1999, in connection with a pending merger with Virtual Education
Corporation, a California corporation ("VEC California"), we organized a new
company, also named Virtual Education Corporation, under the laws of Delaware
("VEC Delaware") solely for the purpose of holding all of the stock of both CVE
and VEC California. Eventually, both CVE and VEC California merged into VEC
Delaware. VEC Delaware never engaged in any business before the merger and all
of its shareholders were the historical shareholders of CVE and VEC California
based on the relative values of those two entities as agreed to in the merger
transaction. VEC California provided continuing professional education programs
to the engineering profession. We did not have any relationship with VEC or any
of its affiliates before the merger.

In May 2001, we purchased some of the assets of Pro2Net Corporation, formed
in 1998 under laws of the State of Washington. Pro2Net provided continuing
professional education programs to accounting and finance professionals. The
assets we purchased included course content, customer lists, a functioning
learning content management system, and computer hardware. In April 2003,
through our wholly owned subsidiary, Working Values, we acquired assets,
particularly course content and customer lists, from The Working Values Group
Ltd., a Massachusetts corporation. The principal stockholder of The Working
Values Group was David Gebler who, as part of the transaction, joined us as
President of Working Values. We did not have any relationship with Pro2Net or
The Working Values Group, or any of their respective affiliates, before these
acquisitions.

INDUSTRY BACKGROUND

The accounting and finance market includes certified public accountants,
certified management accountants, certified internal auditors and other
accounting professionals, as well as corporate accounting, finance and
management professionals, most of whom have mandatory continuing education
requirements. According to the Bureau of Labor Statistics, in 2002 there were
over two million accountants and finance professionals in the United States.
Based on the fact that the American Institute of Certified Public Accountants
claims it has over 300,000 members representing approximately 60% of all the
certified public accountants in the United States, we estimate there are
currently more than 500,000 accountants that require continuing professional
education credit to maintain their CPA licenses and hundreds of thousands of
other financial management professionals that require continuing professional
education credit to maintain their certifications.

To maintain their licenses, accounting professionals must satisfy the
continuing professional educational requirements mandated by the State Boards of
Accountancy of the states in which they practice. Although states may differ in
terms of specific course requirements or the cycle of the licensing period,
every state as well as the District of Columbia and the U.S. Territories, other
than Wisconsin and the Virgin Islands, which do not have any continuing
professional education requirement, requires at least 40 hours of continuing
professional education credit annually to maintain an accounting license. In
addition, in terms of whether a particular course will qualify for CPE credit,
36 states, the District of Columbia and Puerto Rico accept courses offered by
the National Registry of CPE Sponsors, also known as NASBA. The remaining
states, other than Wisconsin, and U.S.

Territories, other than the Virgin Islands, have standards that mirror those of
NASBA. In effect, a course offered by a NASBA registered sponsor will qualify
for CPE credit in 49 out of 50 states, the District of Columbia and the U.S.
Territories other than the Virgin Islands.

According to the Bureau of Labor Statistics, in 2002 there were 1.5 million
engineers in the United States, as well as 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, in 2003 over 42,000 engineers sat for the exam and
less than 75% 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, or PE, exam 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 2003, 16,000 engineers sat
for this exam and only 52% passed.

Currently, 26 states require licensed professional engineers to complete a
minimum number of professional development hours to maintain their professional
licenses. In November 2004, Illinois will become the 27th state to establish
minimum professional development requirements. 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.

Over the last few years, legislators, government and market regulators, the
investment community and the general public have become more aware of issues
involving corporate governance, ethics and compliance. This awareness results in
allegations of sexual harassment, accounting fraud and mismanagement, excessive
executive compensation, breach of fiduciary duties and insider trading at some
of the largest corporations, mutual funds and market specialists as well as the
New York Stock Exchange. In some cases, corporate mismanagement and misbehavior
have resulted in substantial investor losses and fines, penalties or damages. In
response to some of these occurrences, Congress passed the Sarbanes-Oxley Act of
2002, which imposes certain 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.

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

OUR BUSINESS

Our business is designed to satisfy the growing needs of:

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

o businesses to provide their employees and managers with training
programs addressing corporate governance, ethics and compliance issues;
and

o professionals and businesses to be able to track and monitor their and
their employees' compliance with continuing education requirements and
to assess the effectiveness of their educational programs.

To address these needs, we have over 1,200 hours of programs that currently
are available in one or more formats including videotape, CD-ROM or online --
approximately 1,000 in accounting/finance, 200 in engineering and 11 in Working
Values. We also have hundreds of hours of archived programs that are available
upon request. In addition, we develop customized courses based on specifications
provided to us by our clients. Most of our courses are designed to accommodate
both group and self-study.

All of our courses in the accounting and finance professional libraries are
designed to meet the standards and adhere to the requirements of all state
boards of accountancy as well as those of the American Institute of Certified
Public Accountants (AICPA), Institute of Management Accountants (IMA), Institute
of Internal Auditors (IIA), the Association of Financial Professionals (AFP) and
the Association of Government Accountants (AGA). We are a registered sponsor of
continuing professional education with NASBA and in New York and Illinois, the
only two states that have not adopted the NASBA standards. NASBA also confers
the status of

Quality Assurance Service on organizations that offer self-study courses that
meet the requisite standards. We have met those standards and received that
status. As a result, our designated programs qualify for continuing professional
education credit in all fifty states for certified public accountants, certified
management accountants, certified internal auditors and certified financial
managers.

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

Our Working Values subsidiary develops ethics and compliance training
programs for corporations and other organizations. These programs are designed
to align workplace behavior with legal standards and prevailing community
expectations regarding corporate conduct. We also develop training techniques
and strategies focusing on modular development of resources that track specific
risk areas identified by the client. Our library of customizable communication
and learning tools and templates, in digital and print formats, enables us to
develop training and communication solutions and strategies tailored to the
unique corporate cultures of the client at competitive price points. The result
is an integrated program that more closely reflects the unique culture of, and
the specific issues facing, the client organization while still maintaining the
cost advantages of a generic solution.

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

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. We have a joint
production and marketing arrangement with the AICPA for the AICPA Practice
Report and AICPA Practice Pro. We produce the product with the AICPA assisting
in topic selection and in providing speakers. We both independently market and
sell the product through our own distribution channels.

ASSOCIATION OF GOVERNMENT ACCOUNTANTS. AGA offers most of our
accounting/finance products to its members through a co-branded Professional
Education Center.

FINANCIAL EXECUTIVES INTERNATIONAL AND INSTITUTE OF MANAGEMENT ACCOUNTANTS.
FEI and IMA both market Financial Management Network. We are responsible for
producing the product with FEI and IMA assisting in topic selection and with
providing speakers. We also are primarily responsible for selling the product.
We also sell our SmartPros Advantage line of products through FEI and IMA.

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

NEW YORK SOCIETY OF CPAS AND VIRGINIA SOCIETY OF CPAS. Both of these
societies offer various products through a co-branded Professional Education
Center.

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

NATIONAL SOCIETY OF PROFESSIONAL ENGINEERS. The NSPE sells our courses
through a co-branded web site as well as directly on their web site.

AMERICAN COUNCIL OF ENGINEERING COMPANIES. The 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. The ASME sells our products.

OUR STRATEGY

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

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. Towards this end, we
continuously develop new courses for our accounting library, we are in the
process of developing one new major course for our engineering library and we
have recently developed a series of ten new courses for our Working Values
library. In particular, in light of the recent focus on corporate governance,
compliance and ethics, we believe that there is an increasing demand for
training programs that address different topics on these issues. Our strategy is
to create a library of modular programs on compliance, ethics and governance
issues that can be customized to meet specific client demands.

EXPAND WITHIN EXISTING MARKETS AND INTO NEW MARKETS. We will focus on
expanding our presence in the markets we currently serve, particularly
engineering where we feel our market share is relatively small and corporate
ethics and compliance training where we believe the opportunity is significant.
We plan to sell new products that we acquire or develop to our existing
customers. In addition, we will investigate expanding into completely new
markets that we think are potentially lucrative, such as insurance, financial
services and healthcare.

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. We believe that
once this offering is complete we will have the financial resources as well as
the management expertise to pursue an acquisition strategy. As of this date, we
have not identified any potential future acquisition nor can we assure you that
we will be able to acquire any companies in the future.

KEEP PACE WITH TECHNOLOGY. We believe that our ability to continue to
deliver our products in multiple formats will be critical to our future success.
For example, we believe the broad acceptance of the Internet for business
communication will continue, making it an increasingly important medium for
distributing our products. Had we not adapted our content for online delivery,
our rate of growth would have been impaired. At the same time we recognize that
new technologies may emerge that will complement our model for flexible delivery
of content. We plan to closely monitor the development and market acceptance of
these technologies and make the necessary investment to adapt our products and
services to these technologies.

EXPAND EXISTING ALLIANCES AND ENTER INTO NEW STRATEGIC ALLIANCES. We
believe that alliances with professional organizations and associations and
commercial content providers have been a key factor in the growth of our
business until now. While we do not view any single relationship as material to
our overall business, these alliances create a modest barrier to entry. For this
reason, we plan to try to broaden these existing relationships as well as seek
new ones. New strategic relationships will be particularly critical as we expand
into new markets.

OUR PRODUCTS AND SERVICES

The following are our products and services.

ACCOUNTING AND FINANCE

Our accounting and finance libraries contain over 1,000 hours of content,
of which 900 are generally available and the balance is custom-designed for
specific clients. In addition, we have an extensive library of archived content.
Except for SmartPros Advantage, discussed below, which is only available online,
our accounting and finance programs are available in both videotape and digital
formats. The videotape format can be used for either group- or self-study. The
online format is for self-study only and is usually available as text only, text
with audio or in a multimedia format that includes text, audio and streaming
video. All 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
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, whether one, two or three years, the number of users, and the
number of libraries covered.

SMARTPROS ADVANTAGE. SPA is a skills-based learning library containing over
300 courses, varying in length from one to six hours. In total, this library
includes more than 600 hours of courses qualifying for continuing professional
education credits. We produce these programs in our own production facility. A
sample of the available courses include "Auditing Cash and Cash Equivalents,"
"Understanding Entity-Level Controls" and "Valuation of an Entity." We pay the
authors of these programs a royalty. This library is marketed primarily to
corporate accounting and finance professionals as well as public accountants.
The courses are offered individually from $19.99 to $79.96 per course. The list
price for a one-year subscription purchased online is $329.

FINANCIAL MANAGEMENT NETWORK. FMN is a library of update programs dealing
with currently relevant topics. Each month, we create four new programs, or
segments, or a total of 48 new segments each year. The seg-

ments created for April 2004 are "Does the U.S. Economic Recovery Have `Legs'?,"
"Downsizing Without Destroying," "Accounts Payable: Time for Spring Cleaning,"
and "Workplace Laws: Limit Your Liability." We also maintain an online archive
containing the most recent 72 programs for our subscribers. The segments are
written and produced by our staff and generally involve an independent industry
professional as the interviewee. The material is presented in a question and
answer format. These programs are marketed primarily to corporate accounting and
finance professionals. The list price for a one-year subscription to the group
study video version starts at $4,495 and for the online version is $329 per
user.

AICPA PRACTICE REPORT AND AICPA PRACTICE PRO. This library of programs
covers topics in public accounting and are distributed primarily to accountants
in public practice through our alliance with the AICPA. Each month, other than
March, we add six new segments in the following areas: Individual Tax, Business
Tax, Estate and Financial Planning, Specialized Tax Topics, Auditing and
Accounting and Financial Reporting. The February segments included the
following: "Should Your Clients Open Health Savings Accounts," "Just in Time:
New Retirement Solutions," "Change in Depreciation as Change in Accounting
Method," "Keeping an Eye on Insurance Planning," "Back to Basics: Confirmations
and Reviews" and "Business Performance Management: A New Tool." The programs are
available in video (APR) and online (APP). We also offer an online archive
containing the most recent 66 programs. The list price for a one-year
subscription to group study APR is $1,995 and to APP is $329 per user.

THE CPA REPORT GOVERNMENT AND NOT-FOR-PROFIT. CPAR 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. For example, the March 2004 programs were "Detecting
Fraud: SAS 99 and the Public Sector," "Improving Audit Quality: The First
Steps," "Downsizing Without Destroying" and "Newest Red Flag: Reporting
Fundraising Costs." We also publish an online archive containing 32 of the most
recent programs. The list price for a one-year subscription to CPAR is $750 for
the video and $169 for the online version.

AICPA FINANCIAL PRO. AFIN is produced for and sold through the AICPA, which
distributes it to their members directly and through CPA2Biz, a for profit
company that is principally owned by the AICPA. AFIN targets accountants in
business and industry. Each month we produce four new programs, typically
including two current FMN programs and two APP programs or archived FMN
programs.

In addition to the libraries described above, the contents of which are
available on a subscription basis, we also produce customized programs for our
clients. In some cases, the client will author the content and retain us to
videotape the program and convert it into a digital format that can be
distributed via the Internet or internally through the corporate intranet. In
other cases, we will write and produce the entire program for the client. We
then deliver this custom content either through our proprietary learning content
management system or that of the client. These customized products can be
designed to qualify for CPE credit.

ENGINEERING

Our engineering library includes the following:

PE EXAM REVIEW. Our interactive PE exam review course for civil engineers
was developed jointly with the American Society of Civil Engineers and the
Boston Society of Civil Engineers Section and is designed to prepare engineers
to meet the entry-level requirements for civil engineering. The PE Exam Review
course, with over 50 hours of material, is an interactive multimedia tool that
simulates the actual professional engineering exam using demonstration problems
that are comparable to the problems that are found on the actual exam. The
course includes seven, complete, self-contained course modules that cover the
following subjects: Transportation, Sanitary and Environmental, Hydraulics and
Hydrology; Structures; Geotechnical; Surveying; and Economics. This one product
accounts for over 50% of the engineering department's revenues. The list price
for the review course is $645.

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. Some of the titles in this library include "Recruiting
Stars," "Increasing Production and Profits," "Managing Relationships and
Protecting Your License." Our library of civil engineering courses includes
"Roadside Design," "Stormwater," "Windloads" and "Slope Stability." Over half of
the content in this library was developed with the ASCE. Other courses in this
library were developed with the ACEC. The list prices for these courses range
from $30 to $449.

PROJECT MANAGEMENT FOR ENGINEERS. Introduced in 2002, this course was
co-developed with URS Corporation, the second largest engineering firm in the
United States. The Project Management Institute (PMI) certifies this course for
professional development unit credit for certified project managers and for
professional development hours credit for civil engineers. Developed by
engineers specifically for engineers, it was the first completely online
interactive project management course. 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. The Project Management Institute has certified the program. It
provides over 35 hours continuing professional development credit. The list
price for this course is $995 for 12-month access or $695 for six-month access.

FUNDAMENTALS OF ENGINEERING EXAM REVIEW. This is a new preparatory course
for the basic entry-level licensing exam that all engineers are required to
take. We expect to begin offering this course in the spring of 2004. It is a
flash-based, interactive review course that will be marketed directly to
engineers as well as to engineering firms for their internal skill building and
competency testing programs. It will be available in CD-ROM and online. We
expect the list price for this course will be $250. We also plan to private
label the course for our strategic partners so they can market it to their
members.

CORPORATE GOVERNANCE, COMPLIANCE AND ETHICS

Until recently, all of the training programs developed by Working Values
were custom-made programs that generally targeted Fortune 100 companies. Over
the last 12 months, however, Working Values has created new products that are
easily adaptable to a broader range of organizations. Working Values currently
offers the following products and services:

INTEGRITY TOOLKIT FOR SARBANES-OXLEY IMPLEMENTATION. We recently introduced
series of ten courses that meet the corporate requirements for effective
compliance programs under the Federal Sentencing Guidelines as well as respond
to the broader training requirements of Sarbanes-Oxley Act of 2002. The
Integrity Toolkit is a platform for building ethics and compliance programs. We
are marketing these courses on an individual basis per user or as a package on
an enterprise basis.

ETHICS AWARENESS AND COMPLIANCE MODULES. Included among the assets
purchased by Working Values is a library of customized programs developed over a
period of 10 years. These programs contain courses on a variety of topics and
were developed in a wide variety of formats designed to address the specific
needs of the client for whom they were developed. These programs can be adapted
and/or modified for and incorporated into programs for new clients. Based on the
notion that rules awareness is tightly linked to the working environment, these
programs are designed to create a context that links behavior to compliance
goals. Our Ethics Awareness courses are geared to address the challenges
organizations face in creating a culture that integrates compliance standards
into day-to-day work. The courses focus on encouraging the employees to
integrate the learning obtained from the compliance training into their daily
work. Using a variety of learning activities, our Ethics Awareness and
Compliance modules communicate the legal standards of compliance, integrating
ethics and values and their impact on the company, its employees, customers, and
other stakeholders.

The specific subject matter of these courses include:

o Anti-money Laundering o Equal Opportunity
o Antitrust o Gifts and Entertainment
o Books and Records o Insider Trading (Securities Trading)
o Bribery, Fraud and False Statements o Political Activity and Solicitations
o Conflicts of Interest o Sales and Marketing Integrity
o Drug-free Workplace o Sexual Harassment/Harassment
o E-communications and Information Security

CODE OF BUSINESS CONDUCT. We believe that a dynamic code of business
conduct is a critical keystone for an ethical culture. Working Values develops
interactive codes that support employee affirmations and templates to create
customized codes that reflect each client's unique culture.

BUSINESS ETHICS CONSULTING. The Integrity Alignment Process is a compliance
and ethics framework for building integrity-based organizations and managing
risks to a company's reputation. We use the process to:

o Identify the risks to finances and reputation associated with compliance
and ethics violations.

o Identify a vision of integrity for the organization that supports its
business goals.

o Mitigate future risks and support an integrity-based culture.

o Narrow the gap between company standards and employee behavior.

INTEGRITY TRAINING CENTER. This is our proprietary learning content
management system developed specifically for Working Values. It provides
employees, managers, senior executives and board members with the tools each
group needs to understand the compliance requirements of the organization and
what is required of them to help the organization achieve those goals.

VIDEO PRODUCTION AND DUPLICATION

All of our programs are produced in our state-of-the-art production
facility, which includes high-end tape duplication equipment. In addition, the
video production and duplication department generates its own revenue, by
leasing the facility to third parties and by filming third-party programs, which
may or not be related to education.

CONSULTING AND E-COMMERCE

Our technology department is principally a service department. Its primary
function is convert the accounting/finance and engineering programs from
videotape to digital format for distribution on CD-ROM and online. This
department also maintains our various websites as well as our learning content
management systems, the SmartPros Professional Education Center (PEC), for
subscribers to our accounting/finance and engineering products, and the
Integrity Training Center, for subscribers to our ethics and compliance training
programs. The SmartPros Professional Education Center is a turnkey system
designed to manage the educational subscriptions, student accounts, e-commerce
and reporting needs of our clients. Using the SmartPros PEC, our clients can
review and assess usage of our programs by their employees and their employees'
performance and the effectiveness of these programs. The SmartPros PEC is
co-branded with the client's logo and delivered using an application service
provider hosted infrastructure 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 marketed as stand alone products. Rather they are offered
together with our library of content and allow subscribers to track usage and
performance. We charge our clients a license or development fee as well as
annual maintenance fees.

The technology department also generates fees through website development
and consulting arrangements. For example, companies that have internal education
programs have engaged us to convert those programs from videotape to digital
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, William Grollman,
Jack Fingerhut and Allen S. Greene in the accounting/finance area and David
Gebler in the corporate governance, compliance and ethics area. Mr. Jacobs, who
is the head of the department, is both a certified public accountant and an
attorney and has been developing continuing education programs for accounting
and finance professionals since 1987. Messrs. Grollman and Fingerhut, in
addition to being our founders, are both certified public accountants. Each of
Messrs, Grollman, Fingerhut and Greene has a financial background. Mr. Gebler
was the founder of Working Values Group Ltd., a company that custom-designed
governance, compliance and ethics programs. Mr. Gebler joined us in 2003 when we
purchased assets from Working Values Group. Mr. Gebler is an attorney who has
focused on corporate governance, compliance and ethics matters for much of his
career.

With the additional proceeds from this offering we will be able to devote
more internal resources to developing programs. We will also have the option of
hiring independent contractors to develop programs for us and to purchase
programs from third parties. In those instances where we are relying an 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 and practice strategies,
interactivity and assessments. This process includes creating and designing
study guides and course material, scripts and, in some cases, visual aids. The
design and development team includes subject matter experts, instructional
designers, technical writers and developers, graphic designers, content editors
and quality assurance reviewers. After final assembly and integration of all
course components, we test to ensure all functional capabilities work as
designed and deliver the desired learning experience and result.

SALES AND MARKETING

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

Our sales and marketing department includes a Vice President of Marketing,
an Assistant Vice President--Director of Sales, and a sales staff of 14 people,
including two people dedicated to video production and one person dedicated to
video duplication. The remaining sales staff, 11 people, are divided between
inside, or telesales, and field sales. The field sales force focuses on larger
accounts. In addition, our senior executives, Allen S. Greene, William Grollman
and Jack Fingerhut, dedicate varying portions of their time and efforts to sales
and marketing activities. Also, David Gebler, the President of Working Values
spends approximately 50% of his time on sales and marketing efforts on behalf of
Working Values and Steve Murtha, Vice President - Engineering spends
approximately 50% of his time on sales and marketing efforts relating to our
engineering products. Finally, Joseph Fish, our Chief Technology Officer spends
approximately 50% 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 as well as
to members of the professional organizations with whom we partner; public
relations activities; advertising on our website and the websites of our
strategic partners; participating in trade shows; and ongoing customer
communication programs. We build brand awareness through our strategic
relationships with the leading professional associations and organizations and
the leading commercial content providers within the markets we serve. These
strategic relationships include co-branding initiatives on new and existing
products, joint advertising campaigns and e-commerce relationships.

TECHNOLOGY

Our proprietary learning content management system, the SmartPros
Professional Education Center, employs a logical and physical architecture that
facilitates rapid development, deployment and customization of Internet-based
solutions for organizational e-learning. Our core systems use a series of
scalable application web servers, XML and MS-SQL data sources, and utilize
industry standard Web-browser and Internet technologies for content delivery to
the end users. To ensure limited downtime and product lines that are free of
bandwidth limitations as they grow, our redundant server system is located at a
secure MCI co-location data center one mile from our Hawthorne, New York main
office. Currently, we use three co-location cabinets in their facility to house
our server network infrastructure. This co-location allows the freedom to
completely control our server infrastructure while providing us with 24/7
monitoring, support, redundant Internet connectivity, and full generator power
backup.

The SmartPros Professional Education Center 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 as well as 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:

o SCALABILITY. Scalability is accomplished using a combination of
load-balancing hardware and software. Multiple, redundant servers are
deployed to handle peak periods when the largest numbers of concurrent
users are expected on the system.

o SCORM/AICC CONNECTIVITY LAYER. Where required, we use both Shareable
Content Object Reference Model (SCORM) and Aviation Industry CBT
Committee (AICC) connectivity layers to ensure our content is
deliverable through a variety of enterprise e-learning systems other
than the PEC. Additionally, the core foundation is capable of
exchanging data with third-party legacy systems with minimal effort.

o STANDARD RELATIONAL DATABASE SERVER. We use standard relational
database servers. To enhance performance and ensure that users are
served efficiently, the core foundation executes database-stored
procedures to optimize intense database processing. The core foundation
currently supports Microsoft SQL Server databases.

o ASP-BASED APPLICATION SERVER. The business and application logic
resides on an ASP-based application server. This architecture allows us
to deploy a site across multiple servers using Microsoft Windows 2000
Servers.

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

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

o LOW BANDWIDTH/HIGH IMPACT ANIMATIONS. Using Macromedia's Flash
technology, we deliver both animated and spoken educational material
with minimal load on corporate networks.

COMPETITION

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

o The expected growth of this market as demand for highly-skilled
professional increases;

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

o Relatively low barriers to entry.

Of the markets we currently serve, we believe that the accounting
profession has the highest barriers to entry. Specifically, it would be
extremely difficult to compete in this 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 are not overwhelming. The barriers to entry
in the engineering market are somewhat lower as the certification process in
that profession is less centralized. Specifically, each state sets its own
standards, as does each engineering specialty. In the corporate education
market, the barriers to entry are virtually non-existent.

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

o The breadth, depth and relevancy of the course content;

o Performance support and other features of the training solution;

o Reputation of presenter;

o Adaptability, flexibility and scalability of the products offered;

o Liquidity and capital resources;

o The deployment options offered to customers;

o Customer service and support;

o Price;

o Industry and professional certifications;

o Brand identity; and

o Strategic relationships.

We believe that we compete favorably on most of these issues. While price
is always a competitive factor, we do not believe that we should compete solely
on that basis and, in fact, many of our competitors sell their products for less
than we sell ours. Particularly, in the accounting market, 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, our
status as a NASBA registered sponsor, 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.

While we believe that our lack of liquidity has been the most significant
obstacle to our growth, we believe that most of our direct competitors are
small, undercapitalized private businesses. While this makes it difficult to
accurately assess our relative competitive position within this industry with
any degree of certainty, it also presents us with an opportunity. We believe
that once this offering is completed, we will have the resources we need to
execute an acquisition strategy aimed at growing quickly and achieving a
meaningful level of profitability. These resources include cash, a publicly
traded security and management expertise. We have not identified any potential
acquisition candidates, and we cannot assure you that we will be able to
successfully consummate any acquisitions.

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.; private companies such as CPA2Biz, Inc., Bisk Education,
Inc., eMind, LLC, and MicroMash in the accounting market; Red Vector.com Inc.,
AEC Direct and NetGen Learning Systems in the engineering market; and LRN, The
Legal Knowledge Company, Integrity-Interactive Corporation, MIDI, Inc. and
PLI-Corpedia in the corporate compliance and ethics market. In 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.
In addition, 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
as well as professional service companies, such as accounting firms, who are
looking for alternative sources of revenue. Competition may also come from
technology and e-commerce solutions providers. Internet-based learning solutions
have become increasingly popular in recent years along with the increased demand
for flexible, cost-effective alternatives.

Some of our existing competitors have and some of our potential competitors
will have greater resources, financial and other and/or market penetration, and
more extensive libraries than we do, which has enabled or will enable them to
establish a stronger competitive position than we have. For example, although
CPA2Biz was organized and is principally owned by the AICPA, both Thomson
Financial and Microsoft have minority stakes in the company. We sometimes
compete directly with CPA2Biz, they also sell some of our products. In addition,
among our competitors, SkillSoft and Saba are both relatively large and
well-capitalized organizations. However, SkillSoft's primary focus is e-learning
content and software products for business and information technology
professionals, markets that we do not currently serve. Saba principally provides
software solutions that are used to manage people in large organizations
although they do sell content as well. Since we do not market our learning
management system as a stand-alone product, we do not compete with Saba in this
area. However, many of our larger clients use the Saba system or another system
for their learning content management. In those cases, we will build an
interface that will allow the client to access our courseware and the
concomitant management information through their system.

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

OUR COMPETITIVE ADVANTAGES

Our objective is to become a leading provider of learning solutions for the
professional, pre-professional and business communities. 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 23 years and VEC, which we
acquired in 2000, has been providing online and other digital education for
engineering professionals since 1997. In addition, the president of our Working
Values subsidiary has been developing values, ethics and compliance education
programs since 1993. We believe that in the corporate 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 of more than 90% for our FMN products. We believe that our
reputation in the corporate market will assist us as we expand our presence in
the engineering and general corporate markets, as well as potential entry into
new markets.

PROFESSIONAL DESIGNATIONS AND STRATEGIC ALLIANCES. We believe that because
we are a NASBA-registered sponsor of continuing professional education programs
and have been awarded the prestigious QAS status, we enjoy a competitive
advantage in the accounting/finance market. In addition, our relationships with
some of the largest and most respected professional organizations and
associations in the accounting and engineering professions:

o give us instant credibility in the marketplace;

o provide us with a distribution channel for our products;

o are a source for programs; and

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

EXTENSIVE LIBRARY. Our accounting/finance library consists of over 1,000
hours, and our engineering library contains almost 200 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.

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

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

LARGE AND DIVERSIFIED CUSTOMER BASE. We have over 3,000 customers,
consisting of accountants, engineers, and large, medium and small companies as
well as accounting firms. Our customers include approximately half of the
Fortune 500 companies. 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, insurance, technology,
telecommunications, retail, aerospace, natural resources, construction and
chemicals.

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

ONLINE RESOURCE AND CONTENT PROVIDER. We own and operate two websites:
www.smartpros.com and www.workingvalues.com. Our SmartPros website has over
20,000 pages of proprietary content as well as links to other professional
organizations, associations and institutions and is a marketing and distribution
channel for our products. We believe that this website has become a destination
for professionals based on the following data:

o As a result of maintaining the website, we have built a database with
over 120,000 profiled users.

o The website logs over 300,000 visits per month.

o Through our websites, we serve over 1.5 million ads and 200,000 opt-in
emails per month.

INTELLECTUAL PROPERTY

We own a variety of intellectual property, including trademarks, trade
names, copyrights, proprietary software, technical know-how and expertise,
designs, process techniques and inventions. We believe that the trademarks and
trade names we use to identify our products and services are material to our
business. All of the following trademarks/trade names have been federally
registered, or applications have been filed, with the United States Patent and
Trademark Office seeking federal registration: SMARTPROS, KEEPSMART, WORKING
VALUES, PROFESSIONAL EDUCATION CENTER and Design, PEC, FMN FINANCIAL MANAGEMENT
NETWORK and Design, FMN, CPAR CPA REPORT and Design, CPAR, Integrity Alignment
Process, Integrity Training Center, INTEGRITY TOOLKIT, INTEGRITY ALIGNMENT and
WORKING VALUES. In addition, under our agreement with the AICPA we have a right
to use "AICPA" in connection with the following products: AICPA Financial Pro,
AICPA Practice Report, and AICPA Practice Pro. Finally, we use the following
trademarks and trade names to which we claim common law rights: SmartPros
Advantage (SPA), The CPA Report

Government & Not-for-Profit (CPARGov/NFP), Integrity Alignment Process and
Integrity Training Center. Despite our efforts to protect our proprietary
rights, unauthorized persons may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is extremely difficult, and the means we use to protect our
proprietary rights may be inadequate. We believe that, ultimately, our success
depends to a larger extent on the innovative skills, know-how, technical
competence and abilities of our personnel.

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

In connection with our learning content management systems, our license
agreement restricts use of the system and prohibits users from copying or
sharing the system without our express written consent. Our learning content
management systems incorporate products and systems and technology that we
license and purchase from third parties. We cannot assure you 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 are terminated for
any reason, we would have to purchase, license or internally develop comparable
products and systems. Any one of these options may be expensive and/or time
consuming, which could have a material adverse effect on our business and
financial performance.

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

GOVERNMENT REGULATION

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

In addition, laws, rules and regulations enacted by governments and their
agencies play an important role in the growth of our business. For example, we
anticipate that the Sarbanes-Oxley Act of 2002 will help drive the growth of our
Working Values subsidiary as companies seek to educate their employees on
matters relating to corporate ethics, compliance and governance.

EMPLOYEES

As of July 31, 2004 we had 59 employees of which 56 were full-time and
three were part-time. We have 44 employees based in our executive offices in
Hawthorne, New York and four employees based in our office in Sharon,
Massachusetts. In addition, we have an aggregate of 12 employees that work out
of their homes in New York, New Jersey, Washington, California, Illinois and
Texas. We believe that our relationship with all of our employees is generally
good.

FACILITIES

Our executive offices, production facility, technology center and
fulfillment center is located on Route 9A in Hawthorne, New York, where we lease
17,850 square feet. The lease expires February 28, 2010. In addition, we lease
800 square feet in Sharon, Massachusetts, where Working Values is based. This
lease expires March 1, 2006. We also have a lease in Irvine, California that we
intend to terminate on July 31, 2004.

LEGAL PROCEEDINGS

We are not presently involved in any legal proceeding that we deem
material.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The names, ages and titles of our executive officers and directors, as of
July 31, 2004, are as follows:

NAME AGE POSITION
--------------------------- ---- ------------------------------------------------

Allen S. Greene 57 Chief Executive Officer and Vice Chairman of
the Board of Directors

William K. Grollman 62 President, Secretary and Director

Jack Fingerhut 53 Senior Executive Vice President, President
Accounting Division, Chief Financial and
Accounting Officer, Treasurer and Director

David M. Gebler 45 Senior Vice President and President, Working
Values Ltd.

Joseph R. Fish 38 Chief Technology Officer

John F. Gamba(1)(2) 65 Chairman of the Board of Directors

Bruce Judson(2) 46 Director

Martin H. Lager(1) 52 Director

Joshua A. Weinreich(1)(2) 44 Director

----------

(1) Member of audit committee.

(2) Member of compensation and nominating committees.

ALLEN S. GREENE. Mr. Greene has been our Vice Chairman of the Board and
Chief Executive officer since April 2001. From August 1997 until December 1999
he was the Senior Executive Vice President, Chief Operating Officer, and Chief
Lending Officer of Medallion Financial Corporation, a Nasdaq listed financial
holding company lending to small business. Since 1997, Mr. Greene has been
President of Veral & Co. LLC, a private consulting firm that provided general
business, financial and M&A advisory services. Veral is currently inactive. Mr.
Greene holds an MBA from Baruch College of the City University of New York and a
BBA from the City University of New York in Finance and Investments.

WILLIAM K. GROLLMAN. Dr. Grollman, along with Jack Fingerhut, is our
founder. He has been our President and a director since 1981 and Secretary since
2001. In January 2004, Dr. Grollman was appointed to the Board of Directors of
the publicly held Nomura Funds. Dr. Grollman received a Ph.D. in Business
Administration from the New York University Graduate School of Business
Administration. He earned an MBA in Accounting from the same institution and a
BS degree in Economics with a major in Marketing from the Wharton School of the
University of Pennsylvania. He is a member of the American Institute of
Certified Public Accountants and the New York Society of Certified Public
Accountants.

JACK FINGERHUT. Mr. Fingerhut is one of our founders. Mr. Fingerhut has
been a director since 1981 and served as our Chief Operating Officer from 1981
through 1998 when he was appointed President of the Accounting Division and
Chief Financial Officer. In April 2004 he was also given the title Senior
Executive Vice President and was appointed Secretary and Treasurer as well. In
1973, he received a BA degree in History from the University of Maryland and
earned his MBA in Accounting from Rutgers University in 1974. He is certified to
practice accounting in New Jersey. Mr. Fingerhut is a member of the American
Institute of Certified Public Accountants and the New Jersey Society of
Certified Public Accountants.

DAVID M. GEBLER. Mr. Gebler joined us in April 2003 as a Senior Vice
President and President of our Working Values Ltd. subsidiary. Mr. Gebler was
the founder of Working Values Group Ltd. and was its President from December
1993 through March 31, 2003. Mr. Gebler received his JD from the University of
California at Davis in 1984.

JOSEPH R. FISH. Mr. Fish joined us in November 1998 when we acquired
Creative Visual Enterprises. From November 1, 1998 through December 31, 1999 his
title was Vice President of New Media. Since January 1, 2000 he has been our
Chief Technology Officer. Mr. Fish attended Embry-Riddle Aeronautical University
in Katterbach, Germany.

JOHN F. GAMBA. Mr. Gamba joined us in January 2000 as Chairman of the
Board. Since 1997, he has been President of his own consulting firm that
specializes in advising high tech start-up companies on developing growth
strategies. From July 1999 to January 2000, Mr. Gamba served as Chief Executive
Officer of Virtual Education Corporation. He has been a member of the Board of
Directors of Avante Global LLC since September 1999 and of PACE LLC (Partnership
Academic and Community Excellence) since September 2001. Mr. Gamba also served
on the Board of Bellcore (now Telecordia) and the Board of Trustees of Capital
College, and now serves on the Committee for Undergraduate Financial Aid for the
University of Pennsylvania. Mr. Gamba received a BS in Economics from the
University of Pennsylvania Wharton School in 1961 and an MBA from Drexel
University in 1969.

BRUCE JUDSON. Mr. Judson has been a director since March 2000. Mr. Judson
is a business consultant, providing consulting services, directly and through
his wholly owned consulting business, The Judson Group, Inc., to various public
and private companies. Since September 2000, Mr. Judson has been a Faculty
Fellow at the Yale School of Management. Mr. Judson is also the founder and
chief executive officer of Speed Anywhere, Inc., an Internet marketer of
broadband and other services. Mr. Judson served as director of Activeworlds
Corp. (OTCBB: AWLD), a provider of Internet-based three dimensional experiences,
from April 2001 through August 2002. He also served as Activeworld's interim
vice president of finance and treasurer from June through August 2002. Over the
last five years, Mr. Judson has served as a director and a member of the
advisory boards of a number of private companies as well as a member of the
advisory board to a subsidiary of Phoenix Technologies Ltd. (Nasdaq: PTEC). He
is the author of HYPERWARS: 11 STRATEGIES FOR SURVIVAL AND PROFIT IN THE ERA OF
ONLINE BUSINESS (1999) AND NETMARKETING: HOW YOUR BUSINESS CAN PROFIT FROM THE
ONLINE REVOLUTION (1996). Mr. Judson received an AB in Policy Studies in 1980
from Dartmouth College, a JD from The Yale Law School and an MBA from The Yale
School of Management in 1984.

MARTIN H. LAGER. Mr. Lager was appointed to our board of directors in April
2004. From January 1, 1996 through December 31, 2003 Mr. Lager was a partner in
the accounting firm of Rubin & Katz LLP where he was the manager of the tax
department. On January 1, 2004 Mr. Lager started his own accounting practice,
Martin H. Lager, CPA. Mr. Lager received a B.S. in Accounting from Babson
College in 1974 and an MBA in Taxation in 1980 from St. John's University. He is
a licensed CPA in the State of New York.

JOSHUA A. WEINREICH. Mr. Weinreich joined the Board in July 2001. Since
March 2001 Mr. Weinreich has been the Chief Executive Officer and Global Head of
Absolute Return Strategies, a unit of Deutsche Bank. From July 1999 until March
2001, Mr. Weinreich held the position of Regional Head of Deutsche Asset
Management in the Americas. From January 1999 through July 1999, Mr. Weinreich
was co-head of Bankers Trust Global Private Bank. Mr. Weinreich received a BA in
Economics from Cornell University in 1982 and an MBA from the Wharton School in
1985.

Immediately after this offering is completed, Mr. Fingerhut will relinquish
the titles and roles of Chief Accounting and Financial Officer and Treasurer and
Stanley P. Wirtheim will assume those positions. Mr. Wirtheim is a certified
public accountant. He will work for us three full days per week on a part-time
basis so that he will be able to maintain his independent accounting practice,
Stanley P. Wirtheim, CPA, which he founded in 1997. Since 1981 he has performed
accounting services for us as a consultant. Mr. Wirtheim received a BBA in
accounting from Baruch College.

The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the shareholders will elect the
members of one of the three classes to a three-year term of office. Messrs.
Grollman and Gamba serve in the class whose term expires in 2005; Messrs.
Fingerhut and Weinreich serve in the class whose term expires in 2006; and
Messrs. Judson, Lager and Greene serve in the class whose term expires in 2007.

COMMITTEES OF THE BOARD OF DIRECTORS

Our Board of Directors has established an audit committee, a compensation
committee and a nominating committee. The chairman of the audit committee is Mr.
Lager and the other members of the audit committee are Messrs. Weinreich and
Gamba. The audit committee will meet with management and our independent public
accountants to determine the adequacy of internal controls and other financial
reporting matters and review related party transactions for potential conflict
of interest situations. The chairman of the compensation and nominating
committees is Mr. Gamba and the other members of the compensation and nominating
committees are Messrs. Weinreich and Judson. The compensation committee reviews
and recommends the compensation and benefits payable to our officers, reviews
general policy matters relating to employee compensation and benefits

and administers our various stock option plans and other incentive compensation
arrangements. The nominating committee is authorized to identify individuals
qualified to become members of the Board of Directors and to make
recommendations to the Board of Directors of new nominees to be elected by
stockholders or to be appointed to fill vacancies on the Board.

The Board has determined that the chairman of the audit committee, Mr.
Lager, is an "audit committee financial expert," as that term is defined in Item
401(h) of Regulation S-K, and "independent" for purposes of current and
recently-adopted Amex listing standards and Section 10A(m)(3) of the Securities
Exchange Act of 1934.

We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer and other persons performing similar
functions, as well as all of our other employees and directors. Once this
offering is completed, the Code of Ethics will be posted on our website at
www.smartpros.com and is filed as Exhibit 14.1 to this report.

COMPENSATION OF DIRECTORS

Once this offering is effective, our directors will receive an annual fee
of $5,000, payable in equal quarterly installments and $500 plus reimbursement
for actual out-of-pocket expenses in connection with each board meeting attended
in person and $200 for each board meeting attended telephonically. The head of
the audit committee will receive an annual fee of $1,000, payable in equal
quarterly installments. Each member of the audit, compensation and nominating
committees will receive $500 for each committee meeting he attends in person and
$200 for each audit committee meeting attended telephonically unless the meeting
immediately precedes or follows a Board meeting, in which case he will receive
$200 for attending in person or $100 if he attends by telephone.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION. The following table sets forth information regarding
compensation awarded to, earned by, or paid to our Chief Executive Officer and
our other most highly compensated executive officers whose compensation exceeded
$100,000 in 2003 for all services rendered to us in all capacities during the
last three completed fiscal years.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION
NAME AND SECURITIES
PRINCIPAL UNDERLYING
POSITION YEAR SALARY OPTIONS
----------------------------------- ------ -------- ------------

Allen S. Greene, Vice Chairman of the
Board and Chief Executive Officer 2003 $225,000 --
2002 $225,000 129,249
2001 $168,750(1) --
William K. Grollman, President,
Secretary and Director 2003 $201,522 --
2002 $201,522 --
2001 $201,269(2) --
Jack Fingerhut, Chief Financial Officer
and Director 2003 $151,522 --
2002 $151,522 --
2001 $137,518(3) --

Joseph R. Fish, Chief Technology Officer 2003 $121,468 --
2002 $125,892 --
2001 $146,268 34,897
David M. Gebler, Senior Vice President,
President of Working Values Ltd. 2003 $135,000(4) 25,850

-----------------

(1) Employment commenced in April 2001.

(2) Does not include $10,000 paid in 2001 that was accrued in a previous year.

(3) Does not include $8,000 paid in 2001 that was accrued in a previous year.

(4) Employment commenced in April 2003.

OPTIONS HELD BY NAMED EXECUTIVES

The following tables provide information with respect to stock options
granted during the fiscal year ended December 31, 2003 to each of the executives
named in the Summary Compensation Table above and the number and aggregate value
of unexercised options held by those executives as of December 31, 2003. The per
share exercise price of all options was equal to, or above, the estimated fair
market value of a share of common stock on the date of grant. No options granted
to any named executives have been exercised.

OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
(INDIVIDUAL GRANTS)

PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS FISCAL YEAR PRICE DATE
------------------ ---------- ------------- -------- ----------

David M. Gebler 25,850(1) 83% $5.32 March 31, 2013

-----------------

(1) These options vest ratably, 5,170 options, on each of March 31, 2004-2008.

2003 YEAR-END OPTION VALUES

NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL YEAR-END (#)OPTIONS AT FISCAL YEAR-END ($)(1)
-------------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ --------------- ------------------ --------------- ------------------

Allen S. Greene 86,167 43,082 $44,459 $22,234
Joseph R. Fish 17,449 17,448 $ 0 $ 0
David M. Gebler 0 25,850 $ 0 $ 0

-----------------

(1) Assumes a $5.00 stock price based on a $10.00 initial public offering price
for the units.

None of the options referred to above had been exercised as of December 31,
2003.

EMPLOYMENT AGREEMENTS

We have employments agreements with Allen S. Greene, William K. Grollman,
Jack Fingerhut and David M. Gebler. Mr. Greene's employment agreement, dated as
of May 1, 2004, is for a term of three years but 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 before the end of the first year of each three year
term of its intention not to renew the agreement. Under his agreement, Mr.
Greene receives a base salary of $236,250 per annum, which will increase to
$250,000 once this offering is consummated. Mr. Grollman's employment agreement,
dated as of April 1, 2003, is for a term of three years. Under his agreement,
Mr. Grollman receives a base salary of $210,000 per annum. Mr. Fingerhut's
employment agreement, dated as of April 1, 2003, is also for a term of three
years. Under his agreement, Mr. Fingerhut receives a base salary of $157,500. In
April 2004, the Board voted to increase Mr. Fingerhut's base salary to $170,000
once this offering is completed. The Board increased Mr. Fingerhut's salary,
because it recognized that Mr. Fingerhut's salary has not kept pace with his
increasing responsibilities, which include managing many of our key professional
relationships in the accounting/finance area, developing course content, and
supervisory responsibility for financial and administrative matters, and the
overall value he brings to our business. In addition, as Senior Executive Vice
President and President of the Accounting Division, once this offering is
complete Mr. Fingerhut's responsibilities will continue to grow. Mr. Gebler's
employment agreement, dated as of April 1, 2003, is also for a term of three
years. Under his agreement, Mr. Gebler receives a base salary of $180,000. In
addition, as an inducement to join the company as an executive officer, Mr.
Gebler was granted stock options under our incentive option plan to purchase up
to 25,850 shares of our common stock at $5.32 per share.

Each employment agreement provides, among other things, for additional
compensation and benefits including bonuses at times and amounts determined in
the discretion of the Board, for fringe benefits commensurate with the
executive's duties and responsibilities and for participation in all employee
benefit programs or plans maintained by SmartPros on the same basis as other
similarly situated executive employees. In addition to the foregoing, Mr. Gebler
is entitled to a non-discretionary bonus equal to 23.335% of the net profits of
Working Values in excess of $10,000 in each of the two years beginning April 1,
2003, but in no event more than $175,000 in the aggregate. No amount was payable
to Mr. Gebler in connection with the 12-month period ended March 31, 2004.

Under each agreement, we, for cause or without cause, may terminate
employment immediately and without notice. Termination by us without cause or in
the case of Mr. Gebler, by him for good reason, would subject us to liability
for liquidated damages in an amount equal to (i) the terminated executive's base
salary at the then current rate for the remaining term of the employment
agreement, (ii) a bonus equal to the highest annual bonus received in the last
five years multiplied by the number of years or fraction thereof and (iii)
including, for the remaining term of the employment agreement, the right to the
same benefits at the same levels. In addition to the foregoing,

Mr. Gebler will be entitled to receive his non-discretionary bonus, if any, and
all of his stock options will immediately become exercisable. Finally, each
employment agreement provides that if we do not extend the employment term for
at least one three-year term after the expiration of the initial term at a fixed
minimum base salary defined in the agreement, the executive is entitled to a
lump sum payment equal to 50% of his then base salary.

EQUITY COMPENSATION PLANS

To attract and retain the personnel necessary for our success, the Board
and our stockholders adopted our 1999 Stock Option Plan. As initially adopted,
this plan covered options for 284,346 shares of common stock. In July 2001, the
plan was amended to cover options for 516,993 shares of common stock and in
April 2004 the plan was amended to cover options for 882,319 shares of common
stock. Until now, the Board has administered the plan. Once this offering is
consummated, the compensation committee of the Board will administer the plan.
The plan covers employees and others who perform services for us, which would
include directors and consultants. The administrator of the plan, whether the
Board or the compensation committee, determines who is eligible to receive these
incentive stock options, how many options they will receive, the term of the
options, the exercise price and other conditions relating to the exercise of the
options. Stock options granted under the plan must be exercised within a maximum
of 10 years from the date of grant at an exercise price that is not less than
the fair market value of the common shares on the date of the grant. Options
granted to shareholders owning more than 10% of our outstanding common shares
must be exercised within five years from the date of grant and the exercise
price must be at least 110% of the fair market value of the common shares on the
date of the grant.

In 2001, we issued to consultants warrants to purchase up to 10,084 shares
of our common stock at a price $36.42 per share at any time on or before March
2, 2005.

The following table sets forth information as of December 31, 2003 relating
to all of our equity compensation arrangements.

NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS OPTIONS AND EQUITY COMPENSATION
AND WARRANTS WARRANTS PLANS
------------------- ----------------- -----------------------

Equity compensation plans
approved by stockholders (1) 368,136 $4.75 514,183

Equity compensation plans
not approved by stockholders (2) 10,084 $46.42 --

-----------------

(1) The 1999 Stock Option Plan.

(2) Warrants issued to consultants.

On August 3, 2004, the Board authorized the issuance of 40,000 shares of
our common stock to Allen S. Greene, our chief executive officer. The shares
will be issued to Mr. Greene on the date of this offering. Of the 40,000 shares
to be issued, 10,000 shares will vest immediately and 10,000 shares will vest on
each of the first, second and third anniversary dates of this offering. Mr.
Greene will be deemed the owner of these shares as of the date of grant and, as
such, will be entitled to vote them on all matters presented to stockholders for
a vote and will be entitled to dividends, if any, payable on our common stock.
If Mr. Greene terminates his employment with us voluntarily or we terminate him
for "cause," as defined in his employment agreement, any unvested shares will be
forfeited and will revert to the company. If Mr. Greene's employment with us is
terminated without "cause," or if his employment is terminated as a result of
his death or disability (as defined in his employment agreement), or if we
experience a change in control (as defined in his employment agreement) any
unvested shares will immediately vest.

LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION

Our certificate of incorporation limits the liability of individual
directors for specified breaches of their fiduciary duty. The effect of this
provision is to eliminate the liability of directors for monetary damages
arising out of their failure, through negligent or grossly negligent conduct, to
satisfy their duty of care, which requires them to exercise informed business
judgment. The liability of directors under the federal securities laws is not
affected. A director may be liable for monetary damages only if a claimant can
show receipt of financial benefit to which the director is not entitled,
intentional infliction of harm on us or on our shareholders, a violation of
section 174 of the Delaware General Corporation Law (dealing with unlawful
distributions to shareholders effected by vote of directors), and any amended or
successor provision thereto, or an intentional violation of criminal law.

Our certificate of incorporation also provides that we will indemnify each
of our directors or officers, and their heirs, administrators, successors and
assigns against any and all expenses, including amounts paid upon judgments,
counsel fees, and amounts paid or to be paid in settlement before or after suit
is commenced, actually and necessarily incurred by such persons in connection
with the defense or settlement of any claim, action, suit or proceeding, in
which they, or any of them are made parties, or which may be asserted against
them or any of them by reason of being, or having been, directors or officers of
the corporation, except in relation to such matters in which such director or
officer shall be adjudged to be liable for his own negligence or misconduct in
the performance of his duty.

There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which we are required or permitted
to provide indemnification, except as set forth under Certain Relationships and
Related Party Transactions. We are also not aware of any threatened litigation
or proceedings that may result in a claim for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons under our
certificate of incorporation, we have been informed that, in the opinion of the
SEC, indemnification is against public policy as expressed in the Securities Act
and is unenforceable.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In February 2002, we sold 2,000 shares of our Series A Convertible
Preferred Stock to our President, William Grollman. The purchase price for these
shares, $200,000, was reflected in a secured promissory note in the original
principal amount of $200,000. The note accrues interest at the rate of 5.5% per
annum and the entire principal amount and all accrued interest is due and
payable on February 14, 2007. As security for the repayment of this note, Mr.
Grollman pledged the 2,000 shares of Series A Convertible Preferred Stock,
convertible into 82,719 shares of common stock, and an additional 41,359 shares
of common stock that he owns. (All share numbers give retroactive effect to the
reverse stock split that will be effected before the offering is effective.)

In August 2001, we borrowed $500,000 from Freshstart Venture Capital Corp.,
an affiliate of Medallion Financial Corporation, the former employer of our
Chief Executive Officer, Allen S. Greene. As a condition to making the loan,
Medallion required that Mr. Greene contribute $50,000 towards the loan proceeds.
As a result, Mr. Greene receives a portion of each payment we make to Freshstart
in regard to this loan. This loan is payable in 60 equal monthly installments of
$8,333.33 with interest computed at a rate equal to the prime rate plus 5%,
adjusted monthly. The interest rate may never be less than 11.75% or higher than
13%. The current rate is 11.75%. In May 2003 we borrowed an additional $100,000
from Freshstart to upgrade our video production facility. This loan is payable
in 60 equal monthly installments of $1,666.33 with interest computed at a rate
equal to the prime rate plus 5%, adjusted monthly. The interest rate may never
be less than 9.25% or higher than 11%. The current rate is 9.25%. Both loans are
secured by a first priority security interest on all of our fixed assets and a
second priority security interest in all of our receivables. The loans are
callable at the option of Freshstart 90 days after Mr. Greene's employment with
us terminates if a replacement satisfactory to Freshstart is not found.

In April 2003, we acquired assets from Working Values Group Ltd. David
Gebler, Senior Vice President and the President of our Working Values
subsidiary, was the principal stockholder of Working Values Group. As part of
the purchase price, we agreed to pay Mr. Gebler a non-discretionary bonus equal
to 26.665% of the net profits (as defined) of Working Values in excess of
$10,000 in each of the two years beginning April 1, 2003, but in no event more
than $200,000 in the aggregate. This is in addition to any amount payable to Mr.
Gebler under his employment agreement. No amount was payable to Mr. Gebler in
connection with the 12-month period ended March 31, 2004.

Immediately after this offering is completed Stanley P. Wirtheim, CPA will
join us as our Chief Accounting and Financial Officer and Treasurer. Mr.
Wirtheim has been providing us with accounting services as a consultant. Since
July 2002, we have paid him at the rate of $5,000 per month, or $60,000 per
year.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of our common shares as of the date of this prospectus by:

o each person, or group of affiliated persons, known by us to be the
beneficial owner of more than 5% of our outstanding common shares;

o each of our directors;

o each executive officer named in the Summary Compensation Table above;
and

o all of our directors and executive officers as a group.

The following table does not take into account any common shares sold as a
result of the exercise of the over-allotment option granted to the underwriters.
Except as otherwise indicated, the persons listed below have sole voting and
investment power with respect to all of the common shares owned by them. The
individual shareholders have furnished all information concerning their
respective beneficial ownership to us.

PERCENT OF COMMON SHARES
BENEFICIALLY OWNED
-----------------------------
COMMON SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) OFFERING OFFERING (3)
---------------------------------------- ---------------------- -------- ------------

Allen S. Greene 255,728(4) 6.5%(5) 4.9%
William K. Grollman 492,775(6) 15.4% 9.7%
Jack Fingerhut 156,193 4.9% 3.1%
David M. Gebler 5,170(7) * *
Joseph R. Fish 34,897(7) 1.1% *
John F. Gamba 142,779(8) 4.4% 2.8%
Martin H. Lager -- -- --
Bruce Judson 10,132(9) * *
Joshua A. Weinreich 223,531(10) 7.0% 4.4%
All directors and executive officers
as a group (9 persons) 1,321,205 37.3% 24.1%

------------------

*Less than 1%

(1) All addresses are c/o SmartPros Ltd., 12 Skyline Drive, Hawthorne, New York
10532.

(2) According to the rules and regulations of the SEC, common shares that a
person has a right to acquire within 60 days of the date of this prospectus
are deemed to be outstanding for the purpose of computing the percentage
ownership of that person but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.

(3) Takes into account the 50,000 shares underlying the 25,000 units we will
issue to our attorneys and the 40,000 shares of common stock that we will
issue to Allen S. Greene, our chief executive officer, on the date of this
offering.

(4) Includes 129,249 shares underlying vested options and options exercisable
within 60 days of the date of this prospectus and 40,000 shares of common
stock that we will issue to Mr. Greene on the date of this offering, of
which 10,000 shares will vest immediately and 30,000 will vest ratably on
each of the first, second and third anniversary of the date of this
offering.

(5) Does not take into account the 40,000 shares of common stock that we will
issue to Mr. Greene on the date of this offering, of which 10,000 shares
will vest immediately and 30,000 will vest ratably on each of the first,
second and third anniversary of the date of this offering.

(6) Includes 9,399 shares owned by his wife, Gail Grollman and 775 shares
underlying vested options granted to Mrs. Grollman.

(7) Reflects shares underlying vested options.

(8) Includes 93,032 shares held in trust and 49,374 shares underlying vested
options.

(9) Includes 6,979 shares underlying vested options.

(10) Includes 9,306 shares underlying vested options.

All of the common shares set forth in the above table are covered by
lock-up agreements prohibiting their sale, assignment or transfer for one year
following the date of this prospectus without the prior written consent of the
underwriters' representative.

DESCRIPTION OF SECURITIES

As of the date of this prospectus, our authorized capital stock consists of
30,000,000 shares of common stock, par value $.0001 per share and 1,000,000
shares of undesignated preferred stock, par value $.001 per share. After this
offering, we will have 5,090,000 shares of common stock issued and outstanding,
5,360,000 if the over-allotment option is exercised in full. In addition, 58,006
shares of common stock are designated as treasury shares. As of the date of this
prospectus, we have 3,290,000 shares of common stock outstanding held of record
by approximately 200 stockholders taking into account the 50,000 shares of
common stock that we will issue to our attorneys and the 40,000 shares of common
stock that we will issue to our chief executive officer on the date of this
offering.

UNITS

Each unit consists of two shares of common stock and one warrant to
purchase one share of common stock. Initially, only the units will trade. The
common stock and the warrants included in the units will not trade separately
until the tenth business day following the date on which the representative
notifies us and the American Stock Exchange that they will begin trading
separately. Separate trading in the common stock and the warrants may not
commence any earlier than the 31st day following the effective date of this
offering or later than the 45th day following the effective date of this
offering. Once separate trading in the common stock and warrants commences, the
units will cease trading and they will be delisted. We will announce in advance
the delisting of the units and the commencement of trading in the stock and the
warrants by a public press release. Unit holders who wish to hold physical
certificates will receive unit certificates. These unit certificates may, at any
time, be exchanged for separate certificates of shares and warrants.

At closing, we will deliver only unit certificates. An investor can request
physical delivery of the certificate and can immediately request that the unit
certificate be exchanged for stock and unit warrant certificates. If the
investor does so before the stock and unit warrants trade separately, trades
based on the stock and unit warrant certificates will not clear until trading in
those securities commences.

COMMON STOCK

The holders of outstanding shares of common stock are entitled to receive
dividends out of legally available assets when and to the extent determined by
our board of directors from time to time. Each stockholder is entitled to one
vote for each share held by him on each matter submitted to a vote of
stockholders, including the election of directors. Our certificate of
incorporation prohibits cumulative voting. Each director is elected by a
majority vote of the holders of the shares of common stock voting. The shares of
common stock are not entitled to preemptive rights and are not convertible or
redeemable. In the case of a liquidation, dissolution or other termination or
our business, the holders of common stock are entitled to share ratably in the
distribution of all of our assets remaining available for distribution after all
of our liabilities have been satisfied. Each outstanding share of common stock
is, and all shares of common stock outstanding after this offering is completed
will be, fully paid and nonassessable.

UNIT WARRANTS

GENERAL. The unit warrants issued in this offering may be exercised at any
time beginning 30 days after this offering and ending on _____________ ___,
2009. Each unit warrant entitles the holder to purchase one share of common
stock at an exercise price of $_______ per share (75% of the unit offering
price). This exercise price will be adjusted if specific events, summarized
below, occur. A holder of unit warrants will not be deemed a holder of the
underlying stock for any purpose until the unit warrant is exercised.

REDEMPTION. Beginning six months after the effective date of this offering,
we will have the right to redeem the unit warrants at a price of $0.25 per
warrant, after providing 30 days' prior written notice to the warrantholders, at
any time after the closing price for our common stock, as reported on the
principal exchange on which our stock trades, was at or above 100% of the unit
offering price for any five consecutive trading days. We will send a written
notice of redemption by first class mail to holders of the unit warrants at
their last known addresses appearing on the registration records maintained by
the transfer agent. No other form of notice or publication or otherwise will be
required. If we call the unit warrants for redemption, the holders of the unit
warrants will then have to decide whether to sell the unit warrants, exercise
them before the close of business on the business day preceding the specified
redemption date or hold them for redemption. If the unit warrants are not
covered by a current registration statement or are not qualified for sale under
the laws of the state in which you reside, you may not be able to exercise them.

EXERCISE. The holders of the unit warrants may exercise them only if an
appropriate registration statement is then in effect and if the common stock
issuable upon their exercise are qualified for sale under the securities laws of
the state in which the holder resides. To exercise a unit warrant, the holder
must deliver to our transfer agent the unit warrant certificate on or before the
expiration date or the redemption date, as applicable, with the form on the
reverse side of the certificate executed as indicated, accompanied by payment of
the full exercise price for the number of unit warrants being exercised.
Fractional shares of common stock will not be issued upon exercise of the unit
warrants.

In order for you to exercise the warrants, the shares of common stock
underlying them must be covered by an effective registration statement and, if
the issuance of shares is not exempt under state securities laws, must be
properly registered with state securities regulators. At present, we plan to
have a registration statement current when the warrants are exercised and, to
the extent that the underlying shares do not qualify for one or more exemptions
under state securities laws, we intend to register the shares with the relevant
authorities. However, we cannot provide absolute assurances that state
exemptions will be available, the state authorities will permit us to register
the underlying shares, or that an effective registration statement will be in
place at the relevant time(s). These factors may have an adverse effect on the
demand for the warrants and the prices that can be obtained from reselling them.

ADJUSTMENT OF EXERCISE PRICE. The exercise price of the unit warrants will
be adjusted if we declare any stock dividend to stockholders or effect any split
or share combination with regard to our common stock. If we effect any stock
split or stock combination with regard to our common stock, the exercise price
in effect immediately before the stock split or combination will be
proportionately reduced or increased, as the case may be. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
underlying a unit warrant or, if we elect, an adjustment of the number of unit
warrants outstanding.

OPTIONS AND WARRANTS

As of the date of this prospectus, we had outstanding options covering a
total of 368,136 shares of common stock, of which employees hold options
covering 253,881 shares of common stock; directors hold options covering 65,659
shares of common stock; and others hold options covering 48,596 shares of common
stock. These options have exercise prices ranging from $2.15 to $32.13 per share
and expire between 2004 and 2013. Of the options outstanding at June 30, 2004,
327,229 are exercisable. In addition, as of the date of this prospectus, we had
outstanding warrants to purchase 10,084 shares of common stock at a price of
$46.42 per share. These warrants expire in March 2005.

AUTHORIZED BUT UNISSUED SHARES

The authorized but unissued shares of common stock are available for future
issuance without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued common stock could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.

The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our certificate of incorporation does not impose
any supermajority vote requirements except that a 75% supermajority is required
to amend Article Eighth of the certificate of incorporation, which divides the
board into three classes.

TRANSFER AGENT, WARRANT AGENT AND REGISTRAR

The transfer agent and registrar for our common stock and the warrant agent
for the unit warrants is American Stock Transfer and Trust Company, located in
New York, New York.

UNDERWRITING

The underwriters named below have severally agreed, subject to the terms
and conditions contained in an underwriting agreement with us, to purchase
900,000 units, each unit consisting of two shares of common stock and one
warrant to purchase one share of common stock, from us at the price set forth on
the cover page of this prospectus, in accordance with the following table:

NUMBER OF
UNDERWRITER UNITS
----------- --------
Paulson Investment Company, Inc.
--------
Total 900,000
========

NATURE OF UNDERWRITING COMMITMENT. The underwriting agreement provides that
the underwriters are committed to purchase all the units offered by this
prospectus if any units are purchased. This commitment does not apply to 135,000
units covered by the over-allotment option granted by us to Paulson Investment
Company, Inc., the representative of the several underwriters, to purchase
additional units in this offering.

CONDUCT OF THE OFFERING. We have been advised by the representative that
the underwriters propose to offer the units to be sold in this offering directly
to the public at the public offering price set forth on the cover page of this
prospectus and to securities dealers at that price less a concession of not more
than $0.__ per share. The underwriters may allow, and those dealers may reallow,
a concession not in excess of $0.__ per unit to other dealers. After the units
are released for sale to the public, the underwriters may change the offering
price and other selling terms from time to time. No change in those terms will
change the amount of proceeds to be received by us as set forth on the cover
page of this prospectus. The underwriters have informed us that they do not
expect to confirm sales of units offered by this prospectus to accounts over
which they exercise discretionary authority without obtaining the specific
approval of the account holder.

OVER-ALLOTMENT OPTION. We have granted the representative an option,
expiring 45 days after the date of this prospectus, to purchase up to 135,000
additional units from us on the same terms as set forth in this prospectus with
respect to the 900,000 units. The representative may exercise this option, in
whole or in part, only to cover over-allotments, if any, in the sale of the
units offered by this prospectus.

OFFERING DISCOUNTS. We have agreed to sell the units, including the units
covered by the over-allotment option, to the underwriters at a discount of eight
percent (8%) from the unit public offering price set forth on the cover page of
this prospectus.

EXPENSE ALLOWANCE. We have agreed to pay the representative a
non-accountable expense allowance equal to three percent (3%) of the aggregate
public offering price of the firm commitment units (and not the over-allotment
units) sold by us in this offering, or $_____.

The following table provides information regarding the amount of the
discount and non-accountable expense allowance, as determined in accordance with
the Conduct Rules of the National Association of Securities Dealers, Inc., to be
paid to the underwriters by us:

TOTAL DISCOUNT AND
NON-ACCOUNTABLE
TOTAL EXPENSE ALLOWANCE TOTAL DISCOUNT
NON-ACCOUNTABLE PAID BY US PAID BY US ON
TOTAL EXPENSE ON FIRM OVER-ALLOTMENT
DISCOUNT ALLOWANCE COMMITMENT UNITS(1) UNITS(1)
-------- --------------- ------------------- --------------

Per Unit
Total

-----------------

(1) Does not take into account the representative's warrant described below.

REIMBURSEMENT OF CERTAIN EXPENSES. We have agreed to reimburse the
representative for certain due diligence expenses relating to obtaining
information on key company personnel. We estimate these expenses to be
approximately $6,000.

UNDERWRITERS' WARRANTS. On completion of this offering, we will issue to
the representative a warrant to purchase from us up to 90,000 units, identical
in all respects to the warrants included in the units being sold to the public,
for a price of $_____ per unit (120%). This warrant is exercisable beginning 180
days from the date of this prospectus through ___ __, 2009. This warrant may not
be sold, transferred, pledged, assigned or hypothecated or be the subject of any
hedging, short sale, derivative, put or call transaction that would result in
the effective economic

disposition of the warrant or the underlying securities for a period of 180 days
following the effective date of this offering except to an individual who is an
officer or partner of the underwriters and the members of the selling group or
by operation of law, but only if all securities so transferred remain subject to
this lock-up restriction for the remainder of the 180-day period and are not
redeemable. The holder of this warrant will have, in that capacity, no voting,
dividend or other shareholder rights. This warrant and the securities underlying
them are being registered pursuant to the registration statement of which this
prospectus is a part. During the term of this warrant, the holder is given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while this warrant
is outstanding. At any time at which this warrant is likely to be exercised, we
may be able to obtain additional equity capital on more favorable terms.

INDEMNIFICATION. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in respect
thereof.

Lock-up Agreements. Our officers, directors and stockholders holding
approximately 96% of the issued and outstanding shares of our common stock
before this offering have agreed not to sell or transfer any shares of our
common stock or equity securities for a period of one year after the date of
this public offering, without first obtaining the written consent of the
representative. Specifically, these officers and directors have agreed not to,
directly or indirectly:

o sell or offer to sell any shares of our common stock or equity
securities;

o grant any option to sell any shares of our common stock or equity
securities;

o engage in any short sale of our common stock or equity securities;

o pledge or otherwise transfer or dispose of any shares of our common
stock or equity securities; or

o publicly announce an intention to do any of the foregoing.

These lock-up agreements apply to all securities that are currently owned
or later acquired either of record or beneficially by the persons executing the
agreements. However, the representative may, in its sole discretion and without
notice, release some or all of the securities subject to these agreements at any
time during the ninety-day period. Currently, there are no agreements by the
representative to release any of the securities from the lock-up agreements.

STABILIZATION AND OTHER TRANSACTIONS. The rules of the SEC generally
prohibit the underwriters from trading in our securities on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our securities to be above or below that which would
otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.

o transactions consist of bids or purchases made by the managing
underwriter for the purpose of preventing or slowing a decline in the
market price of our securities while this offering is in progress.

o Short sales and over-allotments occur when the managing underwriter, on
behalf of the underwriting syndicate, sells more of our shares than
they purchase from us in this offering. In order to cover the resulting
short position, the managing underwriter may exercise the
over-allotment option described above and/or may engage in syndicate
covering transactions. There is no contractual limit on the size of any
syndicate covering transaction. The underwriters will deliver a
prospectus in connection with any such short sales. Purchasers of
shares sold short by the underwriters are entitled to the same remedies
under the federal securities laws as any other purchaser of units
covered by the registration statement.

o Syndicate covering transactions are bids for or purchases of our
securities on the open market by the managing underwriter on behalf of
the underwriters in order to reduce a short position incurred by the
managing underwriter on behalf of the underwriters.

o A penalty bid is an arrangement permitting the managing underwriter to
reclaim the selling concession that would otherwise accrue to an
underwriter if the common stock originally sold by the underwriter were
later repurchased by the managing underwriter and therefore was not
effectively sold to the public by such underwriter.

If the underwriters commence these activities, they may discontinue them at
any time without notice. The underwriters may carry out these transactions on
the American Stock Exchange, in the over-the-counter market or otherwise.

EXPENSES. The following table sets forth an itemization of all expenses we
will pay in connection with the issuance and distribution of the securities
being registered. Except for the SEC registration fee, the NASD filing fee and
American Stock Exchange listing fee, the amounts listed below are estimates:

NATURE OF EXPENSE AMOUNT
----------------- ---------
SEC registration fee $
Underwriters' nonaccountable expense allowance
NASD filing fees
AMEX listing fee
Accounting fees and expenses
Legal fees and expenses
Printing and related expenses
Transfer agent fees and expenses
Miscellaneous expenses
---------
Total
=========

LEGAL MATTERS

The validity of the common shares offered by this prospectus will be passed
upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Affiliates
of Morse, Zelnick, including its partners, own an aggregate of 30,700 shares of
our common stock and have options to purchase an additional 15,510 shares of
common stock at a price of $5.32 per share, which expires in July 2011. In
addition, upon the completion of this offering, we will issue approximately
25,000 units to Morse Zelnick affiliates in consideration for legal services
rendered in connection with this offering. Holland & Knight LLP will pass upon
certain matters for the underwriters named in this prospectus in connection with
this offering.

EXPERTS

McGladrey & Pullen LLP, independent auditors, have audited our financial
statements as of and for the years ended December 31, 2002 and 2003 as set forth
in their report. We have included these financial statements in the prospectus
and elsewhere in the registration statement in reliance on McGladrey & Pullen's
report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

In connection with the units offered by this prospectus, we have filed a
registration statement on Form SB-2 under the Securities Act with the SEC. This
prospectus, filed as part of the registration statement, does not contain all of
the information included in the registration statement and the accompanying
exhibits and schedules. For further information with respect to our units,
shares and warrants, and us you should refer to the registration statement and
the accompanying exhibits and schedules. Statements contained in this prospectus
regarding the contents of any contract or any other document are not necessarily
complete, and you should refer to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by the actual contents of the contract or other
document referred to. You may inspect a copy of the registration statement and
the accompanying exhibits and schedules without charge at the Securities and
Exchange Commission's public reference facilities, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and you may obtain copies of all or any part of the
registration statement from those offices for a fee. You may obtain information
on the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically. The address of the site is
HTTP://WWW.SEC.GOV.

We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent certified public accountants.

CONTENTS

Unaudited Condensed Consolidated Financial Statements as at and for the Six Months Ended June 30, 2004
and 2003:

Condensed Consolidated Balance Sheets F-2

Condensed Consolidated Statement of Operations F-3

Condensed Consolidated Statement of Cash Flows F-4

Notes to Unaudited Condensed Consolidated Financial Statements F-5

Audited Consolidated Financial Statements as at and for the Years Ended December 31, 2003 and 2002:

Report of Independent Registered Public Accounting Firm F-9

Consolidated Balance Sheets F-10

Consolidated Statement of Operations F-11

Consolidated Statement of Stockholders' Deficit F-12

Consolidated Statement of Cash Flows F-13

Notes to Consolidated Financial Statements F-14

F-1

SMARTPROS LTD. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004 DECEMBER 31, 2003
--------------------------- ---------------------------
PRO FORMA PRO FORMA
ACTUAL (NOTE 1) (NOTE 1)
(UNAUDITED) (UNAUDITED) ACTUAL (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------

ASSETS (NOTE 6)

Current assets:

Cash and cash equivalents $ 759,007 $ 546,993
Accounts receivable, net of allowance for doubtful
accounts of $67,984 and $78,357 757,874 662,368
Prepaid expenses and other current assets 441,653 128,580
----------- -----------
TOTAL CURRENT ASSETS 1,958,534 1,337,941
----------- -----------
Property and equipment, net 635,044 753,435
----------- -----------
Goodwill 53,434 53,434
Intangible assets, net 2,518,951 2,679,503
Other assets, including restricted cash of $150,000 327,662 357,881
----------- -----------
2,900,047 3,090,818
----------- -----------
$ 5,493,625 $ 5,182,194
=========== ===========

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:

Note payable for treasury stock $ 24,000 $ 60,000
Current maturities of long-term debt 266,004 282,004
Current maturities of capital lease obligations 67,380 75,340
Accounts payable 423,627 581,950
Accrued expenses 500,777 500,988
Deferred revenue 3,916,158 3,415,224
----------- -----------
TOTAL CURRENT LIABILITIES 5,197,946 4,915,506
----------- -----------
Long-Term Liabilities:

Long-term debt, less current maturities 280,997 400,999
Obligations under capital leases, less current
maturities (Note 5) 66,650 91,873
Other-long-term liabilities 146,349 146,349
----------- -----------
TOTAL LONG-TERM LIABILITIES 493,996 639,221
----------- -----------
Commitments and contingencies
Stockholders' (deficit):

Convertible preferred stock, $.001 par value,
authorized 1,000,000 shares, 14,979 issued and
outstanding actual; none pro forma 15 $ -- 15 $ --
Common stock, $.0001 par value, authorized
30,000,000 shares, 5,103,525 issued and
4,991,325 outstanding actual; 3,258,007 510 326 510 326
shares issued and 3,200,000 shares outstanding
pro forma
Common stock in treasury, at cost - 112,200
shares actual; 58,007 shares pro forma (220,000) (220,000) (220,000) (220,000)
Additional paid-in capital 10,213,213 10,213,412 10,213,213 10,213,412
Accumulated (deficit) (9,992,055) (9,992,055) (10,166,271) (10,166,271)
----------- ----------- ----------- -----------
1,683 1,683 (172,533) (172,533)
Note receivable from stockholder (200,000) (200,000) (200,000) (200,000)
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' (DEFICIT) $ (198,317) $ (198,317) (372,533) $ (372,533)
----------- ----------- ----------- -----------

$ 5,493,625 $ 5,182,194
=========== ===========

See Notes to Condensed Consolidated Financial Statements (Unaudited).

F-2

SMARTPROS LTD. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
UNAUDITED)

2004 2003
-------------------------------------------------------------------------------

Net revenues $4,592,296 $4,322,944
Cost of revenues 1,686,988 1,823,107
---------- ----------
GROSS PROFIT 2,905,308 2,499,837
---------- ----------

Operating expenses:
Selling, general and administrative 2,355,409 2,295,453
Depreciation and amortization 346,226 331,415
---------- ----------
2,701,635 2,626,868
---------- ----------
OPERATING INCOME (LOSS) 203,673 (127,031)
---------- ----------

Other income (expense):
Interest income 7,318 8,033
Interest expense (36,775) (49,463)
---------- ----------
(29,457) (41,430)
---------- ----------

Income (loss) before provision for income tax 174,216 (168,461)
Provision for income tax -- --
---------- ----------

NET INCOME (LOSS) $ 174,216 $ (168,461)
========== ==========

Net income (loss) per common share:
Basic $ .03 $ (.03)
========== ==========
Diluted $ .02 $ (.03)
========== ==========

Weighted average number of shares:
Basic 5,037,168 5,049,425
========== ==========
Diluted 6,321,101 5,049,425
========== ==========

See Notes to Condensed Consolidated Financial Statements (Unaudited).

F-3

SMARTPROS LTD. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)

2004 2003
-------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net (loss) $ 174,216 $(168,461)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization 346,226 331,415
(Increase) decrease in:
Accounts receivable (95,306) 54,386
Prepaid expenses and other current assets (313,073) 661
Increase (decrease) in:
Accounts payable and accrued expenses (158,536) (85,395)
Deferred revenue 500,734 336,058
Other long-term liabilities -- 6,334
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 454,261 474,998
--------- ---------
Cash flows from investing activities:
Purchase of equipment (37,062) 155,050
Cash paid for business acquisition (--) (110,250)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (37,062) (265,300)
--------- ---------
Cash flows from financing activities:
Payments of note payable -- treasury stock (36,000) --
Proceeds from issuance of long-term debt -- 100,000
Proceeds from equipment financing 10,135 --
Payments of long-term debt (136,002) (146,667)
Payments under capital lease obligations (43,318) (19,278)
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES 205,185 (65,945)
--------- ---------

NET INCREASE IN CASH 212,014 143,753
Cash and cash equivalents at beginning of year 546,993 362,943
--------- ---------
Cash and cash equivalents at end of year $ 759,007 $ 506,696
========= =========
Supplemental disclosure:
Interest paid $ 36,775 $ 49,463
========= =========
Supplemental disclosure of noncash investing and financing activities:
Equipment purchased under capital leases $ 10,135 $ --
========= =========

See Notes to Condensed Consolidated Financial Statements (Unaudited).

F-4

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SmartPros, Ltd. ("SmartPros" or the "Company"), a Delaware corporation, was
organized in 1981 as Center for Video Education, Inc. for the purpose of
producing educational videos primarily directed to the accounting profession.
SmartPros' primary products today are periodic video and Internet subscription
services directed to corporate accountants and financial managers, accountants
in public practice and CPA exam candidates. In addition, the Company also
produces a series of continuing education courses directed to the engineering
profession as well as a series of courses designed for candidates for the
professional engineering exam. SmartPros also produces custom videos and rents
out its studios. SmartPros is located in Hawthorne, New York, where it maintains
its corporate offices, new media lab, video production studios and tape
duplication facilities. While the Company's management monitors the revenue
streams of the 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.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, which, in the opinion of management, are necessary for
a fair presentation of the results of operations for the periods shown and
include the accounts and results of the Company's wholly-owned subsidiary,
Working Values, Ltd. Such adjustments consisted only of normal recurring items.
All significant intercompany accounts have been eliminated in consolidation. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period.

These financial statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the Company's
year end financial statements included elsewhere in this registration statement.

PRO FORMA PRESENTATION

The unaudited pro forma stockholders' deficit as of June 30, 2004 and
December 31, 2003 has been prepared assuming the conversion of the outstanding
Series A Convertible Preferred Stock (the "Convertible Preferred Stock") into
1,198,320 pre-split shares of Common Stock and the Company's intended reverse
stock split of .5169925 new shares for 1 old share (Note 5). The Convertible
Preferred Stock automatically converts into Common Stock immediately before the
closing of an initial pubic offering if specified aggregate valuation and
minimum proceeds are met.

The unaudited pro forma net income per common share is shown below,
assuming the conversion of the Convertible Preferred Stock as well as the
Company's intended reverse stock split. The unaudited pro forma net income per
common share is computed based upon the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares are included in
the calculations where the effect of their inclusion would be dilutive. The
Convertible Preferred Stock to be converted into Common Stock immediately before
the closing of the initial public offering is treated as having been converted
into Common Stock at the dates of original issuance.

SIX MONTHS ENDED JUNE 30,
--------------------------------
2004 2003
---------- ----------

Net income (loss) $ 174,216 $ (168,461)
========== ==========

Pro forma basic income (loss) per common share $ .05 $ (.05)
========== ==========

Pro forma diluted income (loss) per common share $ .05 $ (.05)
========== ==========

Pro forma basic weighted average common
shares outstanding 3,223,700 3,156,929
========== ==========

Pro forma diluted weighted average common
shares outstanding 3,267,962 3,156,929
========== ==========

F-5

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

USE OF 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 revenues from its subscription services as earned.
Video subscriptions are generally billed on an annual basis, while on-line
subscriptions are paid by credit card at point of sale. Both of these types of
sales are deferred at the time of billing or payment and amortized into revenue
on a monthly basis over the term of the subscription, which is generally one
year. Engineering products are non-subscription based and revenue is recognized
upon shipment or, in the case of on-line sales, payment. Revenues from
non-subscription services provided to customers, such as web-site design, video
production, consulting services and custom projects are generally recognized on
a proportional performance basis where sufficient information relating to
project status and other supporting documentation is available. The contracts
may have different billing arrangements resulting in either unbilled or deferred
revenue. The Company obtains either signed agreements or purchase orders from
its non-subscription customers outlining the terms and conditions of the sale or
service to be provided. Otherwise, such 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 the Company's
obligations are complete and realization of receivable amounts is assured.

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 with the realization of
course revenues. The amortization period is three years. Other course costs
incurred in connection with any of the Company's monthly subscription products
or custom work are charged to expense as incurred. Included in other assets at
June 30, 2004 are capitalized course costs of $151,097, net of accumulated
amortization of $30,219.

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 website 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.

EARNINGS (LOSS) PER SHARE

Basic earnings per common share is net income (loss) divided by the
weighted average number of common shares outstanding during the year. Basic
earnings (loss) per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock options,
warrants and Convertible Preferred Stock. Diluted earnings per share is computed
using the weighted average number of Common and Common Stock equivalent shares
outstanding during the period. Common Stock equivalent shares of 1,283,933 for
the period ended June 30, 2004 include the Company's Convertible Preferred
Stock, stock options and warrants that are dilutive. Common Stock equivalent
shares of 576,905 have not been included in the computation because their
inclusion would be anti-dilutive. Common Stock equivalent shares of 1,953,447
for the period ended June 30, 2003, including the Company's Convertible
Preferred Stock, stock options and warrants, are excluded from the computation
because the effect of their inclusion would be antidilutive.

DEFERRED STOCK ISSUANCE COSTS

Deferred stock issuance cost represent costs incurred in connection with
the Company's proposed initial public offering (Note 5). Proceeds from the
offering will be reduced by these costs. In the event the offering is not

F-6

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

consummated, these costs will be reflected as expenses. Included in prepaid
expenses and other current assets at June 30, 2004 are deferred stock issuance
costs of $373,165.

STOCK-BASED COMPENSATION

Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying Common Stock at date of grant.

The following table illustrates the effect on net loss and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123 "Accounting for Stock-Based Compensation":

JUNE 30,
---------------------------
2004 2003
------------ ------------

Net income (loss) as reported $ 174,216 $ (168,421)
Deduct: Stock-based compensation expense
determined under fair value-based method 78,076 80,916
------------ ------------
Pro forma net income (loss) 96,140 $ (249,337)
============ ============
Basic earnings (loss) per share, as reported $ .03 $ (.03)
============ ============
Diluted earnings (loss) per share, as reported $ .02 $ (.03)
============ ============
Basic earnings (loss) per share, pro forma $ .02 $ (.05)
============ ============
Diluted earnings (loss) per share, pro forma $ .01 $ (.05)
============ ============

The fair value of options granted in 2003 were estimated on the date of
grant using the Black-Scholes Option Pricing model with an average assumed
risk-free interest rate of 4.0%, an average expected life of 10 years, an
expected volatility of close to zero and the assumption that no dividends will
be paid. The weighted average fair value per option of options granted during
2003 was $.90.

NOTE 2. ACQUISITIONS

Unaudited pro forma consolidated results of operations for the six months
ended June 30, 2003 as if Working Values had commenced operations as of January
1, 2003 is as follows:

Revenue $ 4,578,944
===========
Net loss (273,777)
===========
Pro forma basic and diluted earnings per share $ (.05)
===========

NOTE 3. STOCK OPTION PLAN

A summary of all stock option activity for the six months ended June 30,
2004 is as follows:

WEIGHTED
NUMBER EXERCISE AVERAGE
OF OPTIONS PRICE EXERCISE PRICE
---------- -------------- --------------

Outstanding at December 31, 2003 730,072 $ 1.11 - 16.61 $ 2.46
Options cancelled (18,000) $ 2.75 $ 2.75
---------- -------------- --------
Outstanding at June 30, 2004 712,072 $ 1.11 - 16.61 $ 2.46
========== ============== ========
Exercisable at June 30, 2004 632,947 $ 1.11 - 16.61 $ 2.26
========== ============== ========

F-7

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 4. RESTRUCTURING CHARGE

The Company closed its California technology center in August 2001. At the
time, the Company evaluated the costs to be incurred with respect to the closure
of the facility to be $245,883. In May 2004, the Company elected to terminate
this lease effective July 31, 2004. In connection therewith, it paid a lease
cancellation fee of $93,000, which had been previously accrued.

NOTE 5. SUBSEQUENT EVENTS

On May 13, 2004, the Company filed an SB-2 registration statement with the
Securities and Exchange Commission for an initial public offering. The
registration statement covers the sale of 900,000 units, each unit consisting of
two shares of Common Stock and a warrant to purchase one share of Common Stock
at an exercise price of 75% of the unit offering price. In addition, the
underwriter has an option to purchase an additional 135,000 units to cover
over-allotments. The underwriter intends to purchase the units at a 8% discount
from the public offering price and receive a non-accountable expense allowance
equal to 3% of the total offering. The underwriter will also be granted a
warrant to purchase 90,000 units at a price equal to 120% of the unit public
offering price.

The Company intends on consummating a reverse stock split immediately
before the initial public offering in which each outstanding share of Common
Stock would convert into .5169925 new shares. All Convertible Preferred Stock
will automatically convert into Common Stock around that time. In April 2004,
the Company's authorization for Common Stock was increased to 30,000,000 shares
and the number of shares reserved under the 1999 Stock Option Plan was increased
to 1,706,637.

On August 3, 2004 the Board of Directors authorized the issuance of 40,000
shares of common stock to the Chief Executive Officer. Of the 40,000 shares to
be issued, 10,000 shares will vest immediately on the date of the public
offering and 10,000 shares will vest on each of the first, second and third
anniversary dates of the offering. The Chief Executive Officer will be entitled
to vote the shares and will be entitled to dividends, if any. If the Chief
Executive Officer terminates his employment voluntarily or the Company
terminates for cause, any unvested shares will be forfeited. In the case of
termination without cause, death or disability or change in control, any
unvested shares will immediately vest.

F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
SmartPros Ltd. and Subsidiary

We have audited the accompanying consolidated balance sheet of SmartPros Ltd.
and Subsidiary as of December 31, 2003, and the related consolidated statements
of operations, stockholders' deficit and cash flows for the two years ended
December 31, 2003 and 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 financial position of SmartPros Ltd. and
Subsidiary as of December 31, 2003, and the results of their operations and
their cash flows for each of the two years then ended, in conformity with U.S.
generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New York, New York
March 12, 2004

McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms.

F-9

SMARTPROS LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003

PRO FORMA
(NOTE 1)
ACTUAL (UNAUDITED)
----------------------------------------------------------------------------------------------------------------

ASSETS (NOTE 6)

Current assets:

Cash and cash equivalents $ 546,993
Accounts receivable, net of allowance for doubtful accounts
of $78,357 662,368
Prepaid expenses and other current assets 128,580
------------
TOTAL CURRENT ASSETS 1,337,941
------------

Property and equipment, net (Note 3) 753,435
------------

Goodwill (Notes 2 and 4) 53,434
Intangible assets, net (Notes 2 and 4) 2,679,503
Other assets, including restricted cash of $150,000 (Note 11) 357,881
------------
3,090,818
------------
$ 5,182,194
============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:

Note payable for treasury stock (Note 9) $ 60,000
Current maturities of long-term debt (Note 6) 282,004
Current maturities of capital lease obligations (Note 5) 75,340
Accounts payable 581,950
Accrued expenses 500,988
Deferred revenue 3,415,224
------------
TOTAL CURRENT LIABILITIES 4,915,506
------------

Long-Term Liabilities:

Long-term debt, less current maturities (Note 6) 400,999
Obligations under capital leases, less current maturities (Note 5) 91,873
Other-long-term liabilities (Note 11) 146,349
------------
TOTAL LONG-TERM LIABILITIES 639,221
------------

Commitments and contingencies (Note 11)

Stockholders' (deficit) (Notes 8 and 9):

Convertible preferred stock, $.001 par value, authorized 1,000,000
shares, 14,979 issued and outstanding actual; none pro forma 15 $ --
Common stock, $.0001 par value, authorized 20,000,000 shares,
5,103,525 issued and 4,991,325 outstanding actual; 3,258,007
shares issued and 3,200,000 shares outstanding pro forma 510 326
Common stock in treasury, at cost - 112,200 shares actual; 58,007
shares pro forma (220,000) (220,000)
Additional paid-in capital 10,213,213 10,213,412
Accumulated (deficit) (10,166,271) (10,166,271)
------------ ------------
(172,533) (172,533)
Note receivable from stockholder (200,000) (200,000)
------------ ------------
TOTAL STOCKHOLDERS' (DEFICIT) (372,533) (372,533)
------------ ------------

$ 5,182,194
============

See Notes to Consolidated Financial Statements.

F-10

SMARTPROS LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002

2003 2002
----------------------------------------------------------------------------------------------------------------

Net revenues $8,579,989 $7,849,183
Cost of revenues 3,483,868 3,644,274
---------- ----------
GROSS PROFIT 5,096,121 4,204,909
---------- ----------

Operating expenses:

Selling, general and administrative 4,662,432 4,190,409
Depreciation and amortization 676,382 716,542
---------- ----------
5,338,814 4,906,951
---------- ----------
OPERATING (LOSS) (242,693) (702,042)
---------- ----------

Other income (expense):

Interest income 16,841 21,319
Interest expense (88,890) (116,269)
---------- ----------
(72,049) (94,950)
---------- ----------

NET (LOSS) $ (314,742) $ (796,992)
========== ==========

Basic and diluted (loss) per common share $ (0.06) $ (0.16)
========== ==========

Basic and diluted weighted average common shares outstanding 5,037,168 5,008,552
========== ==========

See Notes to Consolidated Financial Statements.

F-11

SMARTPROS LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002

COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE COMMON
------------- -------------- PAID-IN ACCUMULATED FROM STOCK IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER TREASURY TOTAL
------------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2001 5,060,778 $ 506 8,863 $ 9 $ 9,548,189 $ (9,054,537) $ -- $ (148,000) $ 346,167

Issuance of common stock 42,747 4 -- -- 53,430 -- -- -- 53,434

Issuance of preferred stock -- -- 6,116 6 611,594 -- -- -- 611,600

Net loss -- -- -- -- -- (796,992) -- -- (796,992)

Note receivable from
stockholder -- -- -- -- -- -- (200,000) -- (200,000)
--------- ----- ------ --- ----------- ------------- ----------- ----------- ----------

BALANCE, DECEMBER 31, 2002 5,103,525 510 14,979 15 10,213,213 (9,851,529) (200,000) (148,000) 14,209

Net loss -- -- -- -- -- (314,742) -- -- (314,742)

Purchase of 58,100 shares of
treasury shares -- -- -- -- -- -- -- (72,000) (72,000)
--------- ----- ------ --- ----------- ------------- ----------- ----------- ----------

BALANCE, DECEMBER 31, 2003 5,103,525 $ 510 14,979 $15 $10,213,213 $ (10,166,271) $ (200,000) $ (220,000) $ (372,533)
========= ===== ====== === =========== ============= =========== =========== ==========

See Notes to Consolidated Financial Statements.

F-12

SMARTPROS LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002

2003 2002
----------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net (loss) $ (314,742) $ (796,992)
Adjustments to reconcile net (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 676,382 716,542
(Increase) decrease in:
Accounts receivable 221,559 (94,474)
Prepaid expenses and other current assets (73,094) 70,784
Increase (decrease) in:
Accounts payable and accrued expenses 18,272 (621,329)
Deferred revenue 480,938 553,267
Other long-term liabilities (104,895) (23,176)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 904,420 (195,378)
---------- ----------

Cash flows from investing activities:

Purchase of equipment (186,931) (40,469)
Capitalized course costs (181,316) --
Cash paid for business acquisition (Note 2) (104,950) --
---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (473,197) (40,469)
---------- ----------

Cash flows from financing activities:
Payments of note payable - treasury stock (12,000) --
Proceeds from issuance of long-term debt 97,813 --
Proceeds from issuance of preferred stock, net of subscription receivable -- 411,600
Payments of long-term debt (276,664) (185,000)
Payments under capital lease obligations (56,322) (46,095)
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (247,173) 180,505
---------- ----------

NET INCREASE (DECREASE) IN CASH 184,050 (55,342)

Cash and cash equivalents at beginning of year 362,943 418,285
---------- ----------
Cash and cash equivalents at end of year $ 546,993 $ 362,943
========== ==========

Supplemental disclosure:
Interest paid $ 88,869 $ 116,269
========== ==========

Supplemental disclosure of noncash investing and financing activities:
Common stock repurchased in exchange for debt $ 72,000 $ --
========== ==========

Preferred stock issued in exchange for note receivable $ -- $ 200,000
========== ==========

Equipment purchased under capital leases $ 120,619 $ --
========== ==========

See Notes to Consolidated Financial Statements.

F-13

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements of SmartPros include the accounts of
SmartPros and its wholly-owned, newly formed, subsidiary Working Values Ltd. All
significant intercompany balances and transactions have been eliminated.

PRO FORMA PRESENTATION (UNAUDITED)

The unaudited pro forma stockholders' deficit as of December 31, 2003 has
been prepared assuming the conversion of the outstanding Series A Convertible
Preferred Stock (the "Convertible Preferred Stock") into 1,198,320 pre-split
shares of Common Stock and the Company's intended reverse stock split of
..5169925 new shares for 1 old share (Note 13). The Convertible Preferred Stock
automatically converts into Common Stock immediately before the closing of an
initial pubic offering if specified aggregate valuation and minimum proceeds are
met.

2003 2002
------------ ------------

Net (loss) $ (314,742) $ (796,992)
=========== ============

Pro forma basic and diluted (loss) per common share $ (0.10) $ (0.25)
=========== ============

Pro forma basic and diluted weighted average
common shares outstanding 3,223,700 3,156,929
=========== ============

USE OF ESTIMATES

REVENUE RECOGNITION

F-14

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

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 sale or
service to be provided. Otherwise, such 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 the Company's
obligations are complete and realization of receivable amounts is assured.

CASH AND CASH EQUIVALENTS

The Company invests excess cash primarily in money market accounts which
are stated at cost and approximate market value. All highly liquid instruments
with an original maturity of three months or less are considered cash
equivalents.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. No
single customer represents a significant concentration of sales or receivables.

ACCOUNTS RECEIVABLE

Accounts receivable are recorded at original invoice amount less an
allowance that management believes will be adequate to absorb estimated losses
on existing accounts receivable. The allowance is established through a
provision for bad debts charged to expense. Accounts receivable are charged
against the allowance for doubtful accounts when management believes that
collectibility is unlikely. The allowance is an amount that management believes
will be adequate to absorb estimated losses on existing accounts receivable,
based on an evaluation of the collectibility of accounts receivable and prior
bad debt experience. This evaluation also takes into consideration such factors
as changes in the nature and volume of the accounts receivable, overall accounts
receivable quality, review of specific problem accounts receivable, and current
economic conditions that may affect the customer's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions.

Accounts receivable are generally considered to be past due if any portion
of the receivable balance is outstanding for more than 90 days.

INVENTORIES

Inventories are valued at the lower of cost or market on a first-in,
first-out basis and consist primarily of videotape stock, unsold video courses
and related materials.

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 3 to 10
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.

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. SFAS No.
144 requires, among other things, that the Company review its long-lived assets
and certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. If
this review indicates that the long-lived asset will not be recoverable, as
determined based on the estimated undiscounted cash flows of the Company over
the remaining amortization period, the carrying amount of the asset is reduced
by the estimated shortfall of cash flows. The Company believes that none of the
Company's long-lived assets were impaired.

F-15

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

GOODWILL

Goodwill results from prior business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets and
liabilities and identified intangible assets. Upon adopting new accounting
guidance in 2002, the Company ceased amortizing all of its goodwill. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.

INTANGIBLE ASSETS

Certain acquired intangible assets are being amortized on a straight-line
basis over their estimated useful lives, which vary between 5 and 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 with the realization of
course revenues. The amortization period is three years. Other course costs
incurred in connection with any of the Company's monthly subscription products
or custom work are charged to expense as incurred. Other assets include
capitalized course costs of $181,000.

DEFERRED REVENUE

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.

EARNINGS (LOSS) PER SHARE

Basic earnings per common share is net loss divided by the weighted average
number of common shares outstanding during the year. Basic earnings (loss) per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options, warrants and
convertible preferred stock. Diluted earnings per share is computed using the
weighted average number of Common and Common Stock equivalent shares outstanding
during the period. Common Stock equivalent shares of 1,948,297 for 2003 and
1,956,763 for 2002, including the Convertible Preferred Stock, stock options and
warrants, are excluded from the computation because the effect of their
inclusion would be anti-dilutive.

DEFERRED STOCK ISSUANCE COSTS

Deferred stock issuance cost represent costs incurred in connection with
the Company's proposed initial public offering (Note 13). Proceeds from the
offering will be reduced by these costs. In the event the offering is not
consummated, these costs will be reflected as expenses. Included in other assets
at December 31, 2003 are deferred stock issuance costs of $10,000.

STOCK-BASED COMPENSATION

F-16

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

2003 2002
----------- ----------
Net (loss) as reported $ (314,742) $ (796,992)
Deduct: Stock-based compensation expense

determined under fair value-based method (184,524) (185,192)
----------- ----------
Pro forma net (loss) $ (499,266) $ (982,184)
=========== ==========
Basic and diluted earnings per share, as reported $ (0.06) $ (0.16)
=========== ==========
Pro forma basic and diluted earnings per share (0.10) (0.20)
=========== ==========

The fair value of options granted in 2003 and 2002 was estimat ed on the
date of grant using the Black-Scholes Option Pricing model with an average
assumed risk-free interest rate of 4.0% and 4.03%, respectively, an average
expected life of 10 years, an expected volatility of close to zero and the
assumption that no dividends will be paid. The weighted average fair value per
option of options granted during 2003 and 2002 was $.90 and $.37, respectively.

ADVERTISING

Advertising is expensed as incurred and was approximately $39,000 and
$31,000 for the years ended December 31, 2003 and 2002, respectively.

RECLASSIFICATIONS

Certain items in the 2002 financial statements have been reclassified to
conform with 2003 presentation.

NEW ACCOUNTING STANDARD

The FASB has issued Statement No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." Statement No.
150 requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. Depending on the type of financial instrument,
it will be accounted for at either fair value or the present value of future
cash flows determined at each balance sheet date with the change in that value
reported as interest expense in the income statement. Prior to the application
of Statement No. 150, either those financial instruments were not required to be
recognized, or if recognized were reported in the balance sheet as equity and
changes in the value of those instruments were normally not recognized in net
income. The Company is currently evaluating the effect of SFAS No. 150; however,
the Company has not assessed the impact, if any, this standard may have on its
convertible preferred stock, its financial position and results of operations.

NOTE 2. ACQUISITIONS

In April 2003, the Company, through a newly-formed, wholly-owned
subsidiary, Working Values, Ltd., acquired course content and intangible assets
from The Working Values Group Ltd. (a Massachusetts corporation). The results of
operations are included herein beginning from the acquisition date of April 1,
2003. The purchase price for the aquired assets was $104,950. As part of the
purchase price, the seller is entitled to receive up to $200,000 as additional
consideration based on achieving certain net profits through April 2005. At
December 31, 2003, no contingent consideration had been earned.

F-17

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

The following table summarizes the fair values of the assets acquired from
The Working Values Group at the date of acquisition:

Course content $ 50,000
Trademarks 10,000
Client lists, domain names and other 44,950
---------
$ 104,950
=========

Unaudited pro forma consolidated results of operations for the years ended
December 31, 2003 and 2002 as if Working Values had commenced operations as of
January 1, 2002 are as follows:

2003 2002
------------ ------------
Revenue $ 8,835,989 $ 9,423,281
Net loss (342,742) (861,962)
Pro forma basic and diluted loss per share (0.07) (0.17)

NOTE 3. PROPERTY AND EQUIPMENT

The components of property and equipment are as follows:

Furniture, fixtures and equipment $ 2,969,154
Leasehold improvements 177,419
-----------
3,146,573

Less: Accumulated depreciation 2,393,138
-----------
$ 753,435
===========

Depreciation expense for the years ended December 31, 2003 and 2002 was
approximately $361,000 and $372,000, respectively. At December 31, 2003,
property and equipment includes assets that were acquired under capitalized
leases of approximately $356,000 and accumulated depreciation of approximately
$182,000.

NOTE 4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

On January 1, 2002, the Company implemented Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the
provisions of SFAS No. 142, goodwill is no longer subject to amortization over
its estimated useful life, but instead is subject to at least annual assessments
for impairment by applying a fair-value based test. SFAS No. 142 also requires
that an acquired intangible asset be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the asset can be sold, transferred, licensed, rented or exchanged, regardless of
the acquirer's intent to do so. The Company determined that no transitional
impairment loss was required at January 1, 2002.

In November 2002, the Company issued 42,747 shares of common stock valued
at $53,434 to two former owners of Deerfield Video Productions, Inc. as
additional consideration pursuant to the merger agreement signed in 1999. The
shares were valued based upon recent financings by the Company. This contingent
consideration was charged to goodwill.

F-18

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

The components of intangible assets are as follows:

ACCUMULATED CARRYING
COST AMORTIZATION VALUE
---------- ---------- ----------
Wiley CPA exam review course $ 102,516 $ 102,516 $ --
---------- ---------- ----------
Engineering courses 2,766,837 1,750,278 1,016,559
---------- ---------- ----------
Rights to CPA Report ("CPAR") 1,700,000 765,010 934,990
---------- ---------- ----------
P2N:

Trade names 200,000 -- 200,000
Courses 200,000 50,000 150,000
Technology documentation 150,000 75,000 75,000
Customer database 100,000 25,000 75,000
Other 187,504 59,000 128,504
---------- ---------- ----------
Total P2N 837,504 209,000 628,504
---------- ---------- ----------
Working Values:

Course content 50,000 2,900 47,100
Trademarks 10,000 -- 10,000
Client list, domain names and other 44,950 2,600 42,350
---------- ---------- ----------
104,950 5,500 99,450
---------- ---------- ----------
$5,511,807 $2,832,304 $2,679,503
========== ========== ==========

Amortization expense for the years ended December 31, 2003 and 2002 was
approximately $316,000 and $344,000, respectively.

Amortization expense (including capitalized course costs) is expected to be
as follows for the next five years: 2004 - $381,000; 2005 - $381,000; 2006 -
$381,000; 2007 - $304,000 and 2008 - $304,000.

The following table presents the changes in the carrying amount of goodwill
and other intangibles during the year ended December 31, 2003:

GOODWILL INTANGIBLES
------------ -----------
Balance at beginning of period $ 53,434 $2,890,153
Amortization expense -- (315,600)
Goodwill and intangibles acquired -- 104,950
------------ -----------
Balance at end of period $ 53,434 $2,679,503
============ ===========

NOTE 5. OBLIGATIONS UNDER CAPITAL LEASES

The Company is obligated under capital leases for the acquisition of office
and video production equipment. The interest rates on these leases vary between
6.8% and 16.3% per annum. The minimum annual payments and present values of
these payments as of December 31, 2003 are as follows:

Due in:

2004 $ 85,900
2005 55,974
2006 32,836
2007 10,289
---------
184,999
Less: Amount representing interest 17,786
---------
167,213
Less: Current maturities 75,340
---------
Noncurrent $ 91,873
=========

F-19

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 6. LONG-TERM DEBT

Long-term debt consist of the following:
Line of credit-- JPMorgan Chase (a) $ 260,000
Notes payable-- Freshstart Venture Capital Corp. (b) 355,003
Notes payable (c) 68,000
----------
683,003

Less: Current maturities 282,004
----------
$ 400,999
==========

(a) In February 2003, the Company refinanced its $410,000 line of credit with
JP Morgan Chase. The Company repaid $50,000 plus unpaid interest on the
existing loan and renewed the remaining balance of $360,000, which matures
in February 2006. Commencing on March 31, 2003, the note is payable in 36
monthly installments of $10,000 plus interest at 1.5% over the prime rate
(5.5% as of December 31, 2003).

(b) In August 2001, the Company issued a $500,000 five-year secured promissory
note to Freshstart Venture Capital Corp. (Freshstart) payable in 60 monthly
installments $8,333, with interest currently at 11.75%. A portion of the
payments to Freshstart are received by the Company's Chief Executive
Officer, who was formerly affiliated with Freshstart. In May 2003, the
Company borrowed an additional $100,000 from Freshstart, secured by certain
assets. The note is payable in sixty (60) equal monthly installments of
$1,667, with interest currently at 9.25%. Both loans are secured by certain
assets of the Company. At December 31, 2003 the balances on these loans
were $266,667 and $88,336, or $355,003 in the aggregate.

(c) In connection with one of its acquisitions, the Company issued a note for a
portion of the finder's fee due. The note is payable in variable
installments through November 30, 2005 with interest at 9% payable
semi-annually.

The secured note to Freshstart is subject to an inter-creditor agreement.
The notes to Chase and Freshstart are secured by substantially all the assets of
the Company.

As of December 31, 2003, the future principal payments of long-term debt are as
follows:

2004 $ 282,004
2005 266,004
2006 106,671
2007 20,004
2008 8,320
---------
$ 683,003
=========

NOTE 7. INCOME TAXES

At December 31, 2003, the Company has net deferred tax assets of
approximately $4.1 million, primarily resulting from the future tax benefit of
net operating loss carryforwards. Such net deferred tax assets are fully offset
by valuation allowances because of the uncertainty as to their future
realizability. The net valuation allowance increased by approximately $270,000
for the year ended December 31, 2003. 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, 2003, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $9.7 million which
expire as follows: $4,100,000 in 2020, $4,800,000 in 2021, $500,000 in 2022 and
$300,000 in 2023.

F-20

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

The components of income tax expense for the years ended December 31, 2003
and 2002 consist of the following:
2003 2002
----------- --------
Current income tax expense:
Federal $ -- $ --
State -- --
--------- ---------
Current tax expense $ -- $ --
========= =========
Deferred tax expense (benefit) arising from:

Excess of financial over tax accounting depreciation $(150,000) $(150,000)
Net operating loss carryforwards (120,000) (200,000)
Valuation allowance 270,000 350,000
--------- ---------
Net deferred tax expense $ -- $ --
========= =========

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

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

2003 2002
--------- ---------
Computed at the expected statutory rate 34.0% 34.0%
Valuation allowance (34.0) (34.0)
--------- ---------
Income tax expense --% --%
========= =========
The temporary differences, tax credits and carryforwards gave rise to the
following deferred tax asset at December 31, 2003:

Depreciation and amortization $ 240,000
NOL carryfoward 3,876,000
Valuation allowance (4,116,000)
-----------
$ --
===========

NOTE 8. CONVERTIBLE PREFERRED STOCK

At their option, the holders of the Convertible Preferred Stock may convert
each share of Convertible Preferred Stock into 80 shares of Common Stock. The
Convertible Preferred Stock does not have a dividend payment requirement. Upon
liquidation of the Company, the holders of the Convertible Preferred Stock are
entitled to receive $100 per share from the assets of the Company. The holders
of the Convertible Preferred Stock are entitled to vote in proportion to their
conversion number of shares. The Company does not have the ability to alter the
rights of, make any other securities senior to or increase the authorized number
of shares of Convertible Preferred Stock without the affirmative vote of 60% of
the preferred stockholders. The Convertible Preferred Stock automatically
converts into Common Stock immediately before the closing of an initial public
offering if specified aggregate valuation and minimum proceeds are met.

NOTE 9. STOCKHOLDERS' EQUITY

In March 2002, the Company completed the second phase of its Convertible
Preferred Stock offering whereby the Company received an additional $411,600 in
cash and a secured promissory note for $200,000 in exchange for the issuance of
6,116 shares of Convertible Preferred Stock. As part of the above transaction,
the Company received the promissory note from its president in exchange for the
issuance of 2,000 shares of its Convertible Preferred Stock the note accrues
interest at an annual rate of 5.5%. The entire principal amount of the note and
all accrued interest is due and payable on February 14, 2007. The note is
collateralized by those preferred shares and 80,000 shares of Common Stock owned
by the stockholder.

In October 2003, the Company entered into an agreement to repurchase 58,100
shares of its Common Stock from a former employee for $72,000 to be paid in
twelve (12) equal monthly installments of $6,000.

In 2001, the Company issued warrants to purchase up to 19,505 shares of
Common Stock at $24.00 per share. The warrants may be exercised at any time
through March 2005. The warrants' fair value at the time of issuance was DE
MINIMUS.

F-21

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

NOTE 10. STOCK OPTION PLAN

The 1999 Stock Option Plan (the "Plan"), as amended, provides for the grant
of incentive or non-qualified stock options and restricted stock awards for the
purchase of Common Stock for up to 1,000,000 shares to employees, directors and
consultants. The Plan is administered by the Board at Directors or a committee
established by the Board, which determines the terms of options including the
exercise price, expiration date, number of shares and vesting provisions. In
2002, the Company granted 56,000 options at exercise prices ranging from $1.25
to $2.75 and in 2003 granted 60,000 options at an exercise price of $2.75.
During 2003, 68,466 options were surrendered by former employees. At December
31, 2003, 269,928 shares remain available for future grants under the Plan.

A summary of all stock option activity for the years ended December 31,
2003 and 2002 is as follows:

WEIGHTED
NUMBER EXERCISE AVERAGE
OF OPTIONS PRICE EXERCISE PRICE
---------- ------------- -------------

Outstanding at December 31, 2001 809,630 $ 1.11 - 16.61 $ 2.58
Options granted 56,000 1.25 - 2.75 1.41
Options cancelled (127,092) 1.11 - 11.07 2.90
---------- -------------- -------
Outstanding at December 31, 2002 738,538 $ 1.11 - 16.61 $ 2.46
========== ============== =======
Options granted 60,000 2.75 2.75
Options cancelled (68,466) 1.11 - 2.75 2.65
---------- ------------ -------
Outstanding at December 31, 2003 730,072 $ 1.11 - 16.61 $ 2.46
========== ============== ======
Exercisable at December 31, 2003 526,029 1.11 - 16.61 $ 2.40
========== ============== =======

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE REMAINING
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE LIFE (YEARS)
------- ----------- ----------- ----------- ----------- -----------

$ 1.11 105,022 5.7 $ 1.11 105,022 5.7
1.25 50,000 6.7 1.25 33,333 6.7
2.75 570,580 7.2 2.75 383,204 7.2
8.50 1,339 6.3 8.50 1,339 6.3
11.07 2,408 5.7 11.07 2,408 5.7
16.61 723 5.7 16.61 723 5.7
------- --------- ---- -------- --------- ----
730,072 6.9 $ 2.46 526,029 6.8
========= ==== ======== ========= ====

NOTE 11. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

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

SUB-LEASE
GROSS INCOME NET
---------- ----------- ----------

2004 $ 528,000 $(103,000) $ 425,000
2005 540,000 -- 540,000
2006 561,000 -- 561,000
2007 558,000 -- 558,000
2008 491,000 -- 491,000
Thereafter 297,000 -- 297,000
--------- -------- ---------
$2,975,000 $(103,000) $2,872,000
========== ========= ==========

F-22

SMARTPROS LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The Company entered into a sub-lease agreement for the Irvine, California
space. The agreement calls for the sub-tenant to rent the space until July 2004
with an option to renew for the balance of the lease term. The Company intends
to exercise its right to terminate the Irvine lease in 2004. The Company is
obligated to pay the landlord $90,000 upon termination which is reflected in the
payments above and which had been previously accrued in 2001 (Note 12).

Deferred rent credit of approximately $146,000 included in other long-tem
liabilities in the accompanying balance sheet results from rent reductions
provided for at the inception of the Hawthorne, New York lease. Rent expense is
recorded on a straight-line basis over the lease term. Rent expense for the
years ended December 31, 2003 and 2002 was approximately $331,000 and $345,000,
respectively.

The Company arranged for a $150,000 letter of credit representing a
security deposit for the Hawthorne, New York lease. The Company has pledged a
$150,000 certificate of deposit to the bank issuing the letter of credit as
collateral for the letter of credit and the restricted cash account is included
in other assets.

EMPLOYMENT AGREEMENTS

In April 2003, the Company renewed its three-year employment agreements
(extended to 2006) with three senior executives providing for specified annual
base salaries, subject to increases at the discretion of the Company's Board of
Directors. Pursuant to the 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. In
April 2003, the Company also entered into a three-year employment agreement with
the president of its Working Values subsidiary. The contract provides for a base
salary, plus performance and other bonuses if the Company reaches certain income
levels. At December 31, 2003, the aggregate annual commitment was approximately
$810,000.

LITIGATION

The Company is a party to litigation arising in the normal course of its
business operations. In the opinion of management, it is not anticipated that
the settlement or resolution of any such matters will have a material adverse
impact on the Company's financial condition, liquidity or results of operations.

NOTE 12. RESTRUCTURING CHARGE

Balance, December 31, 2001 $ 135,728
Payments, net of sublease income (29,231)
------------
Balance, December 31, 2002 106,497
Payments, net of sublease Income 5,817
------------
Balance, December 31, 2003 $ 112,314
============

The remaining balance will be paid in 2004.

NOTE 13. SUBSEQUENT EVENTS

The Company has entered into a letter of intent with an underwriter for the
initial public offering on a firm commitment basis. The letter of intent
contemplates an offering by the Company for the sale of 900,000 units, each unit
consisting of two shares of Common Stock and a warrant to purchase one share of
Common Stock at an exercise price of 75% of the unit-offering price. In
addition, the underwriter has an option to purchase an additional 135,000 units
to cover over-allotments. The letter of intent further provides that the
underwriter will purchase the units at a 9% discount from the public offering
price and receive a non-accountable expense allowance equal to 3% of the total
offering. The underwriter will also be granted a warrant to purchase 90,000
units at a price equal to 120% of the unit public offering price.

The Company intends on consummating a reverse stock split immediately
before the initial public offering in which each share of Common Stock would
convert into .5169925 new shares. All Convertible Preferred Stock (Note 8) would
automatically convert into Common Stock at that time. In addition, the Company's
authorization for Common Stock was increased to 30,000,000 shares and the number
of shares reserved under the 1999 Stock Option Plan was increased to 1,706,637.

F-23

================================================================================
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON SHARES
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY OUR COMMON SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.

---------------------------

TABLE OF CONTENTS
PAGE
----

Prospectus Summary ................................ 3
Risk Factors ...................................... 6
Forward Looking Statements ........................ 10
Use of Proceeds ................................... 11
Dividend Policy ................................... 12
Capitalization .................................... 13
Dilution .......................................... 14
Selected Consolidated Financial Data .............. 15
Management's Discussion and
Analysis of Financial Condition and
Results of Operations ........................... 16
Business .......................................... 25
Management ........................................ 38
Certain Relationships and Related
Party Transactions .............................. 44
Security Ownership of Certain
Beneficial Owners and Management ................ 45
Description of Securities ......................... 46
Underwriting ...................................... 48
Legal Matters ..................................... 50
Experts ........................................... 50
Where You Can Find More Information ............... 50
Index to Financial Statements ..................... F-1

---------------------------

Until _________, 2004 (the 25th day after the date of this prospectus) all
dealers effecting transactions in our units, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
================================================================================

================================================================================

900,000 UNITS

SMARTPROS [LOGO]

------------

PROSPECTUS

------------

PAULSON INVESTMENT
COMPANY, INC.

_________ ___, 2004

================================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law grants us the power to
indemnify our directors and officers against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with
specified actions, suits or proceedings, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation --
a "derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification in which the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.

Our Certificate of Incorporation provides that we indemnify and hold
harmless each of our directors and officers to the fullest extent authorized by
the Delaware General Corporation Law, against all expense, liability and loss
(including attorney's fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith.

Our Certificate of Incorporation also provides that a director will not be
personally liable to us or to our stockholders for monetary damages for breach
of the fiduciary duty of care as a director. This provision does not eliminate
or limit the liability of a director:

o for breach of his or her duty of loyalty to us or to our stockholders;

o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

o under Section 174 of the Delaware General Corporation Law (relating to
unlawful payments or dividends or unlawful stock repurchases or
redemptions); or

o for any improper benefit.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to our
Certificate of Incorporation, Bylaws and the Delaware General Corporation Law,
we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and is, therefore,
unenforceable.

The Underwriting Agreement provides for reciprocal indemnification between
us and our controlling persons, on the one hand, and the underwriters and their
respective controlling persons, on the other hand, against certain liabilities
in connection with this offering, including liabilities under the Securities Act
of 1933, as amended.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following are the expenses of the issuance and distribution of the
securities being registered, other than underwriting commissions and expenses,
all of which will be paid by the Company. Other than the SEC registration fee
and the NASD filing fees all of such expenses are estimated.

Registration fee ................................................ $ 2,643
NASD fee ........................................................ $ 2,586
American Stock Exchange listing fee ............................. $ 55,000*
Printing expenses ............................................... $ 85,000*
Accounting fees and expenses .................................... $100,000*
Legal fees and expenses ......................................... $280,000*
Blue sky filing fees and related attorney fees and expenses ..... $ 2,500*
Transfer agent and registrar fees and expenses .................. $ 2,500*
Miscellaneous ................................................... $ 29,771*
--------
Total ........................................................... $560,000*
========
-------------------
* Estimated.

II-1

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

In May 2001, we sold 487,572 shares of our common stock at a price of $5.32
per share, or an aggregate of approximately $2.6 million in cash. In addition,
we issued 625,278 shares of common stock in satisfaction of approximately $3.4
million of outstanding indebtedness. From November 2001 through March 2002 we
sold an aggregate of 14,979 shares of our Series A Convertible Preferred Stock
("Series A Preferred Stock") a price of $100 per share raising approximately
$1,497,900 in gross proceeds. All of these shares of the Series A Preferred
Stock will be converted into 619,522 shares of common stock immediately before
this offering. The foregoing securities were issued in reliance upon the
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided in Section 4(2) thereof and Rule 506 promulgated thereunder,
as a transaction by an issuer not involving a public offering. The registrant
filed a Form D with the Commission with respect to both of the above-described
issuances. Each purchaser represented that such purchaser was an "accredited
investor" as defined in Rule 501(a) and that such purchaser had an intention to
acquire the securities for investment only and not with a view to distribution
thereof and appropriate legends were affixed to the stock certificates. No
commissions were paid in connection with such issuances.

In May 2001, we issued 64,624 shares of our common stock, which we valued
at $5.32 per share, or approximately $344,000 in the aggregate, in connection
with our acquisition of the assets of Pro2Net Corporation. These assets included
course content, a functioning learning content management system content, trade
names, customer database and computer hardware. The shares were issued to
Pro2Net and were subsequently distributed to the shareholders of Pro2Net in a
liquidation proceeding under the jurisdiction of the United States Bankruptcy
Court.

On August 3, 2004, the Board authorized the issuance of 40,000 shares of
our common stock to Allen S. Greene, our chief executive officer. The shares
will be issued to Mr. Greene on the date of this offering. Of the 40,000 shares
to be issued, 10,000 shares will vest immediately on the date of this offering
and 10,000 shares will vest on each of the first, second and third anniversary
dates of this offering. Mr. Greene will be deemed the owner of these shares as
of the date of grant and, as such, will be entitled to vote them on all matters
presented to stockholders for a vote and will be entitled to dividends, if any,
payable on our common stock. If Mr. Greene terminates his employment with us
voluntarily or we terminate him for "cause," as defined in his employment
agreement, any unvested shares will be forfeited and will revert to the company.
If Mr. Greene's employment with us is terminated without "cause," or if his
employment is terminated as a result of his death or disability (as defined in
his employment agreement), or if we experience a change in control (as defined
in his employment agreement) any unvested shares will immediately vest. The
issuance to Mr. Greene is exempt under Rule 506 and Rule 701.

EXHIBITS

EXHIBIT
NO. DESCRIPTION
------- -----------
1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation, as amended*
3.2 Amended and Restated Bylaws, as amended
4.1 Specimen stock certificate*
4.2 Form of warrant agreement, including form of warrant*
4.3 Form of unit certificate*
4.4 Form of representative's warrant*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1999 Stock Option Plan, as amended*
10.2 Third Amended Employment Agreement between SmartPros Ltd. and
Allen S. Greene*
10.3 Second Amended Employment Agreement between SmartPros Ltd. and
Jack Fingerhut*
10.4 Second Amended Employment Agreement between SmartPros Ltd. and
William K. Grollman*
10.5 Employment Agreement between SmartPros Ltd. and David M. Gebler*
10.6.1 Lease for premises at 12 Skyline Drive, Hawthorne, New York*
10.6.2 Lease for premises at 28 South Main Street Rear, Sharon,
Massachusetts*
10.7 $200,000 Secured Promissory Note and Stock Pledge Agreement*
10.8 The Asset Purchase Agreement between the SmartPros Ltd. and
Working Values Group, Ltd.*

II-2

10.9.1(a) Loan Agreement dated August 28, 2001 between SmartPros Ltd. and
Freshstart Venture Capital Corp.*
10.9.1(b) Negotiable Promissory Note dated August 28, 2001 made by
SmartPros Ltd to Freshstart Venture Capital Corp. with a
principal amount of $500,000*
10.9.1(c) Security Agreement dated as of August 28, 2001 between SmartPros
Ltd. and Freshstart Venture Capital Corp. in connection with
Exhibits 10.9.1(a) and (b)*
10.9.1(d) Participation Agreement dated August 28, 2001 between Veral &
Co., L.L.C. and Freshstart Venture Capital Corp. in connection
with Exhibit 10.9.1(a)*
10.9.2(a) Loan Agreement dated May 9, 2003 between SmartPros Ltd. and
Freshstart Venture Capital Corp.*
10.9.2(b) Negotiable Promissory Note dated May 9, 2003 made by SmartPros
Ltd to Freshstart Venture Capital Corp. with a principal amount
of $100,000*
10.9.2(c) Security Agreement dated as of May 9, 2003 between SmartPros Ltd.
and Freshstart Venture Capital Corp. in connection with Exhibits
10.9.2(a) and (b)*
10.10 Form of Lock-up Agreement between the underwriter and the
Officers and Directors of SmartPros Ltd.*
10.11 Agreement and Plan of Merger among Deerfield Video Productions,
Inc., Daniel Sladkus and William Doscher and Virtual Education
Corporation and Deerfield Acquisition Corp.
10.12 Letter Agreement between SmartPros Ltd. and Allen S. Greene re
restricted stock
14.1 Code of Ethics*
21.1 Subsidiary schedule*
23.1 Consent of McGladrey & Pullen LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1)
24 Power of Attorney (included in signature page)*

----------------------------
* Previously filed.

ITEM 27. UNDERTAKINGS

A. The undersigned Registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:

(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement; and

(iii) include any additional or changed material information with
respect to the plan of distribution disclosed in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

(4) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.

(5) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.

II-3

(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

II-4

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Hawthorne, State of New York on August 6, 2004.

SMARTPROS LTD.

By: /s/ ALLEN S. GREENE
---------------------------------
Allen S. Greene, Chief Executive Officer

In accordance with the requirements of the Securities Act of 1933, as
amended, the following persons have signed this Registration Statement in the
capacities indicated on the date set forth above.

SIGNATURE TITLE
--------- ------

ALLEN S. GREENE Chief Executive Officer and Vice
------------------------ Chairman of the Board of Directors

Allen S. Greene

JACK FINGERHUT Chief Financial and Accounting
------------------------ Officer and Director
Jack Fingerhut

* Chairman of the Board of Directors
------------------------
John F. Gamba

* Director
------------------------
William K. Grollman

* Director
------------------------
Bruce Judson

* Director
------------------------
Martin H. Lager

* Director
------------------------
Joshua A. Weinreich

By: *ALLEN S. GREENE
------------------------
Allen S. Greene, as
attorney-in-fact

II-5