$10.7 Million Revenue in Q1 up 12% From Q4; $923k Cashflow Generated in Q1 $800k in Debt Paid Down; $135 Million Gross Sales Pipeline; Form 10K Filed by Zanett

Brad Gillespie

Zanett, Inc.

212-583-0300

Zanett, Inc.

Condensed Consolidated Balance Sheets

March 31,

December 31,

2010

2009

(unaudited)

Assets

Current assets

Cash and cash equivalents

$     71,483

$    180,598

Accounts receivable net of allowance for doubtful accounts of $374,440 and $432,490, respectively

6,480,352

6,536,874

Income tax receivable

13,431

51,863

Unbilled revenue

560,027

206,681

Prepaid expenses

322,304

250,335

Customer deposits

535,000

535,000

Other current assets

177,944

174,306

Total current assets

8,160,541

7,935,657

Property and equipment, net

1,271,890

1,304,522

Goodwill

17,072,189

16,479,746

Other intangibles, net

542,142

615,088

Other assets

148,734

165,349

Total assets

$ 27,195,496

$ 26,500,362

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$  2,082,146

$  1,235,640

Accrued expenses

2,446,830

2,836,387

Short-term debt

3,550,982

4,350,090

Short-term debt-related party

-

6,652,322

Short-term renewable unsecured subordinated debt

1,222,226

1,123,048

Other current liabilities

1,577,563

1,032,620

Income taxes payable

11,056

14,591

Deferred revenue

1,682,247

1,228,802

Deferred income taxes

30,645

30,645

Capital lease obligations

35,988

35,988

Total current liabilities

12,639,683

18,540,133

Convertible subordinated note

7,131,983

-

Long term renewable unsecured subordinated debt

975,978

1,131,104

Capital lease obligation

38,982

47,980

Deferred rent expense

85,136

76,535

Deferred income taxes

25,053

25,053

Total liabilities

20,896,815

19,820,805

Commitments and contingencies

-

-

Stockholders' equity

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding

-

-

Common stock, $0.001 par value; 50,000,000 shares authorized; 8,738,833 and 8,738,833 shares issued and outstanding, respectively

32,443

32,443

Additional paid-in capital

32,482,502

32,482,502

Treasury stock, at cost; 14,915 shares

(179,015)

(179,015)

Accumulated deficit

(26,037,249)

(25,656,373)

Total stockholders' equity

6,298,681

6,679,557

Total liabilities and stockholders' equity

$27,195,496

$26,500,362

ZANETT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months ended March 31,

2010

2009

Revenue

$10,699,921

$10,959,853

Operating expenses:

  Cost of revenue

7,867,260

7,648,136

  Selling and marketing

1,365,643

1,618,774

  General and administrative

1,485,317

1,886,528

       Total operating expenses

10,718,220

11,153,438

       Operating loss

(18,299)

(193,585)

Other expense:

   Interest expense

(337,693)

(327,488)

   Total other expense

(337,693)

(327,488)

Loss from continuing operations before income taxes

(355,992)

(521,073)

Income tax provision

25,000

34,136

Loss from continuing operations after taxes

$  (380,992)

$  (555,209)

Gain on sale of discontinued operations, net of taxes

-

887,500

Net (loss)/income

$  (380,992)

$   332,291

Basic and diluted income/(loss) per share:

Continuing operations

$     (0.04)

$     (0.07)

Discontinued operations

$         -

$      0.11

Net (loss)/income per common share to common stockholders – basic and diluted

$     (0.04)

$      0.04

Weighted average shares outstanding - basic and diluted

8,738,833

8,297,783

Zanett, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended

March 31,

2010

2009

Cash flows from operating activities:

Net (loss)/income

$  (380,992)

$   332,291

Adjustments to reconcile net income (loss) to net cash used in operating activities:

         Depreciation and amortization

213,001

227,091

         Stock based compensation and services

-

155,800

         Gain on sale of discontinued operations

-

(887,500)

         Provision (reduction) for doubtful accounts

(58,050)

351,654

         Deferred income taxes

-

(7,589)

         Changes in:

              Accounts receivable

114,572

(1,436,203)

              Unbilled revenue

(353,346)

(328,580)

              Prepaid expenses and other current assets

(62,127)

(27,332)

              Other assets

16,616

39,964

              Accrued expenses

90,217

354,690

              Accounts payable

846,507

555,193

              Income taxes payable

(3,535)

18,218

              Other current liabilities

-

(5,274)

              Deferred revenue

453,446

(273,896)

              Deferred rent expense

8,601

(1,850)

              Income tax receivable

38,432

-

    Net cash provided by (used in) operating activities

923,342

(933,323)

Cash flows from investing activities:

    Cash received for acquisitions, net of cash acquired

-

20,715

    Cash paid for contingent consideration related to acquisitions

(47,500)

(72,644)

    Additions to property and equipment

(107,423)

(128,070)

    Cash received from sale of discontinued operations, net

-

720,833

    Net cash (used in)/provided by investing activities

(154,923)

540,834

Cash flows from financing activities:

    Payments for debt issuance costs

(13,480)

-

   (Repayments)/borrowings of short term debt

(799,109)

36,093

    Repayments for redemptions of unsecured notes

(55,948)

(40,937)

    Capital lease payments

(8,997)

-

    Net cash used in financing activities

(877,534)

(4,844)

Net decrease in cash and cash equivalents

(109,115)

(397,333)

Cash and cash equivalents, beginning of period

180,598

450,304

Cash and cash equivalents, end of period

71,483

$    52,971

Supplemental cash flow information:

Income taxes paid

$     8,004

$    23,507

Interest paid

$   129,025

$   234,436

Non-cash financing activity:

Shares issued for contingent consideration

-

502,672

Contingent consideration accrued

$   582,443

$   194,578

Exchange of related party debt for convertible Subordinated debt

$ 7,131,983

$         -