$11.8 Million Revenue in Q2; +10% Quarter Over Quarter; Management Anticipates 20% 3rd Quarter Year over Year Revenue Growth; $288k Cashflow Generated in First Six Months of 2010; $150 Million Gross Sales Pipeline; Form 10Q filed by Zanett

Zanett, Inc.

Condensed Consolidated Balance Sheets

June 30,

December 31,

2010

2009

(unaudited)

Assets

Current assets:

      Cash and cash equivalents

$     94,861

$    180,598

      Accounts receivable, net of allowance

        for doubtful accounts of $308,297 and

        $432,490, respectively

8,212,684

6,536,874

      Income tax receivable

13,431

51,863

      Unbilled revenue

298,756

206,681

      Prepaid expenses

301,453

250,335

      Customer deposits

535,000

535,000

      Other current assets

210,915

174,306

             Total current assets

9,667,100

7,935,657

Property and equipment, net

1,209,865

1,304,522

Goodwill

17,072,189

16,479,746

Other intangibles, net

478,693

615,088

Other assets

175,513

165,349

             Total assets

$ 28,603,360

$ 26,500,362

Liabilities and stockholders' equity  

Current liabilities:                                    

      Accounts payable

$  2,580,808

$  1,235,640

      Accrued expenses

2,663,714

2,836,387

      Short-term debt

4,372,644

4,350,090

      Short-term debt-related party

-

6,652,322

      Short-term renewable unsecured subordinated debt

1,318,250

1,123,048

      Other current liabilities

993,549

1,032,620

      Income taxes payable

5,703

14,591

      Deferred revenue

2,038,274

1,228,802

      Deferred income taxes

30,645

30,645

      Capital lease obligations

35,988

35,988

             Total current liabilities

14,039,575

18,540,133

Convertible subordinated note

7,131,983

-

Long term renewable unsecured subordinated debt

815,995

1,131,104

Capital lease obligations

29,985

47,980

Deferred rent expense

86,557

76,535

Deferred income taxes

25,053

25,053

             Total liabilities

22,129,148

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; 9,249,040 and 8,738,833 shares

         issued and outstanding, respectively

32,844

32,443

      Additional paid-in capital

33,064,544

32,482,502

      Treasury stock, at cost; 14,915 shares

(179,015)

(179,015)

      Accumulated deficit                                        

(26,444,161)

(25,656,373)

              Total stockholders' equity

6,474,212

6,679,557

             Total liabilities and stockholders' equity

$28,603,360

$26,500,362

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZANETT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2010

2009

2010

2009

Revenues

$11,758,101

$10,932,731

$22,458,022

$21,892,585

Operating expenses:      

   Costs of revenues

8,725,690

7,508,470

16,592,949

15,156,606

   Selling and marketing

1,454,514

1,436,937

2,820,157

3,055,711

   General and administrative  

1,658,038

1,921,374

3,143,355

3,807,902

      Total operating expenses

11,838,242

10,866,781

22,556,461

22,020,219

      Operating income(loss)

(80,141)

65,950

(98,439)

(127,634)

Other income(expense):      

 Interest expense

(312,485)

(315,113)

(650,178)

(642,602)

   Total other expense

(312,485)

(315,113)

(650,178)

(642,602)

Loss from continuing operations before                        

 income taxes

(392,626)

(249,163)

(748,617)

(770,236)

Income tax provision

(14,288)

-

(39,288)

(34,136)

Loss from continuing operations after taxes

(406,914)

(249,163)

(787,905)

(804,372)

Gain on sale of discontinued operations,

 net of taxes    

-

-

-

887,500

Net (loss)/income

$  (406,914)

$  (249,163)

$  (787,905)

$    83,128

Basic and diluted income/(loss) per share:                            

 Continuing operations

$     (0.05)

$     (0.03)

$     (0.09)

$     (0.09)

 Discontinued operations  

$      0.00

$      0.00

$      0.00

$      0.10

Net (loss) income per common share to

 common stockholders - basic and diluted

$     (0.05)

$     (0.03)

$     (0.09)

$      0.01

Weighted average shares outstanding – basic                          

 and diluted    

9,022,227

8,727,847

8,881,313

8,514,003

The accompanying notes are an integral part of these condensed consolidated financial statements.

Zanett, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

2010

2009

Cash flows from operating activities:                          

Net (loss)income

$   (787,905)

$   83,128

Adjustments to reconcile net (loss)income to net cash                

     provided by(used in) operating activities:                              

         Depreciation and amortization

415,883

451,921

         Stock based compensation and services

-

318,788

         Gain on sale of discounted operations

-

(887,500)

         Provision (recoveries) for doubtful accounts

(124,643)

360,857

         Income tax payable    

(8,888)

(14,740)

         Changes in:                              

              Accounts receivable  

(1,551,166)

(520,628)

              Unbilled revenue      

(92,075)

(536,682)

              Prepaid expenses and other current assets  

(74,247)

8,490

              Other assets

(10,165)

14,561

              Accrued expenses  

(172,559)

(790,559)

              Accounts payable  

1,345,169

418,566

              Other current liabilities

490,593

(14,384)

              Deferred revenue      

809,472

808

              Deferred rent expense      

10,022

(3,700)

              Income taxes receivable

38,432

5,322

    Net cash provided by (used in) operating activities

287,923

(1,105,752)

Cash flows from investing activities:                          

    Cash paid for contingent consideration related                

      to acquisitions  

(60,000)

(221,983)

    Additions to property and equipment    

(184,831)

(132,680)

    Cash received from sale of discontinued operation, net

-

720,833

    Net cash (used in) provided by investing activities

(244,831)

366,170

Cash flows from financing activities:

    Payments for debt issuance costs  

(13,480)

-

    Repayments of short term debt

(477,446)

780,594

    Proceeds of note related party

-

7,829

    Borrowings of short term debt  

500,000

-

    Repayments for redemptions of unsecured notes  

(119,908)

-

    Capital lease payments

(17,995)

-

    Net cash (used in) provided by financing activities  

(128,829)

788,423

Net (decrease)/increase in cash and cash equivalents    

(85,737)

48,841

Cash and cash equivalents, beginning of period  

180,598

450,304

Cash and cash equivalents, end of period    

$     94,861

$   499,145

Supplemental cash flow information:

Income taxes paid      

$     61,383

$    57,848

Interest paid                

$    275,285

$   525,378

Non-cash financing activity:

Shares issued for contingent consideration  

582,443

243,372

Exchange of related party debt for convertible

 subordinated debt

$  7,131,983

$         -

The accompanying notes are an integral part of these condensed consolidated financial statements.

Brad Gillespie

Zanett, Inc.

212-583-0300