10-Q 1 v131958_10q.htm
United States
Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008 or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

1-32589 
(Commission File No.)

ZANETT, INC.
(Exact Name of Registrant as specified in its charter)

Delaware
  
56-4389547
(State or other jurisdiction of
  
(IRS Employer
incorporation or organization)
  
Identification No.)

635 Madison Avenue, 15th Floor, New York, NY 10022
(Address of principal executive offices)

(212) 583-0300
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if smaller reporting company) Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date

CLASS
  
Outstanding at November 7, 2008
Common stock $.004 Par Value
  
7,608,506


TABLE OF CONTENTS
 
   
Page
PART I
FINANCIAL INFORMATION
  
     
Item 1 –
Financial Statements.
3
     
 
Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
3
     
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)
5
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
     
Item 2 –
Management's Discussion and Analysis of Financial Condition and Results of Operations.
17
     
Item 4 T
– Controls and Procedures.
21
     
PART II
OTHER INFORMATION
21
     
Item 6 –
Exhibits.
21
     
Signatures
23

2

Part I – FINANCIAL INFORMATION
Item 1 – Financial Statements
 
Zanett, Inc.
Condensed Consolidated Balance Sheets
 
   
September 30,
2008
(unaudited)
  
December 31,
2007
  
           
Assets
              
Current assets:
              
Cash and cash equivalents
  
$
186,268
  
$
1,261,065
  
Accounts receivable net of allowance for doubtful accounts of $115,665 and $106,843, respectively
    
7,960,708
    
7,531,980
  
Income tax receivable
    
69,919
    
132,364
  
Unbilled revenue
    
302,085
    
406,452
  
Prepaid expenses
    
366,872
    
270,672
  
Customer deposits
    
535,000
    
643,188
  
Other current assets
    
215,398
    
258,547
  
Assets held for sale
    
-
    
6,618,678
  
Total current assets
    
9,636,250
    
17,122,946
  
Property and equipment, net
    
1,185,547
    
1,005,162
  
Goodwill
    
15,365,096
    
14,538,761
  
Other intangibles, net
    
1,070,380
    
1,394,644
  
Other assets
    
322,868
    
427,929
  
Total assets
  
$
27,580,141
  
$
34,489,442
  
Liabilities and stockholders' equity
              
Current liabilities:
              
Accounts payable
  
$
1,200,444
  
$
2,117,931
  
Accrued expenses
    
3,866,579
    
2,513,619
  
Short-term debt
    
2,512,775
    
7,140,075
  
Short-term debt-related party
    
1,472,000
    
2,300,000
  
Short-term renewable unsecured subordinated debt
    
1,276,421
    
1,340,888
  
Other current liabilities
    
976,737
    
679,978
  
Deferred revenue
    
808,766
    
984,697
  
Deferred income taxes
    
27,054
    
19,359
  
Capital lease obligations
    
8,173
    
8,200
  
Liabilities held for sale
    
-
    
2,059,388
  
Total current liabilities
    
12,148,949
    
19,164,135
  
Long-term notes payable-related party
    
5,325,000
    
6,825,000
  
Long term renewable unsecured subordinated debt
    
1,029,565
    
780,784
  
Other non-current liabilities
    
-
    
472,000
  
Deferred rent expense
    
71,834
    
66,401
  
Deferred income taxes
    
193,987
    
230,449
  
Total liabilities
    
18,769,335
    
27,538,769
  
Commitments and contingencies
    
-
    
-
  
Stockholders' equity
              
Preferred stock, $0.004 par value; 2,500,000 shares authorized; none issued and outstanding
    
-
    
-
  
Common stock, $0.004 par value; 12,500,000 shares authorized; 7,608,506 and 7,449,545 shares issued and outstanding, respectively
    
30,432
    
29,925
  
Additional paid-in capital
    
31,642,866
    
31,203,565
  
Treasury stock, at cost; 14,915 shares
    
(179,015
)
  
(179,015
)
Accumulated deficit
    
(22,683,477
)
  
(24,103,802
)
Total stockholders' equity
    
8,810,806
    
6,950,673
  
Total liabilities and stockholders' equity
    
27,580,141
  
$
34,489,442
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3
 
Zanett, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2008
  
2007
  
2008
  
2007
  
Revenues
  
$
12,622,529
  
$
9,553,671
  
$
36,860,354
  
$
29,982,171
  
Operating expenses:
                          
Costs of revenues
    
8,603,760
    
7,314,204
    
25,357,905
    
22,111,848
  
Selling and marketing
    
1,546,706
    
1,007,765
    
4,353,487
    
3,634,305
  
General and administrative
    
1,937,280
    
1,562,148
    
6,121,530
    
5,236,732
  
Total operating expenses
    
12,087,746
    
9,884,117
    
35,832,922
    
30,982,885
  
Operating income/(loss)
    
534,783
    
(330,446
)
  
1,027,432
    
(1,000,714
)
                           
Other income/(expense):
                          
Interest income
    
397
    
1,818
    
10,540
    
2,200
  
Interest expense
    
(361,020
)
  
(494,609
)
  
(1,164,724
)
  
(1,378,516
)
Total other expense
    
(360,623
)
  
(492,791
)
  
(1,154,184
)
  
(1,376,316
)
Income(loss) from continuing operations before income taxes
    
174,160
    
(823,237
)
  
(126,752
)
  
(2,377,030
)
                           
Income tax provision
    
(40,086
)
  
-
    
(99,862
)
  
(43,750
)
Income(loss) from continuing operations after taxes
    
134,074
    
(823,237
)
  
(226,614
)
  
(2,420,780
)
Income from discontinued operations, net of taxes
    
-
    
66,373
    
(285,919
)
  
327,130
  
                           
Gain on sale of discontinued operations
    
-
    
-
    
1,932,913
    
-
  
                           
Net income/(loss)
  
$
134,074
  
$
(756,864
)
$
1,420,380
  
$
(2,093,650
)
Basic and Diluted income/(loss) per share:
                          
                           
Continuing operations
  
$
0.02
  
$
(0.12
)
$
(0.03
)
$
(0.33
)
Discontinued operations
  
$
0.00
  
$
0.01
  
$
0.22
  
$
0.04
  
Net income/(loss) per common share to common shareholder - basic and diluted
  
$
0.02
  
$
(0.11
)
$
0.19
  
$
(0.29
)
Weighted average shares outstanding – basic and diluted
    
7,608,506
    
7,189,606
    
7,567,968
    
7,282,999
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

  Zanett, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

   
Nine Months Ended
September 30,
  
   
2008
  
2007
  
Cash flows from operating activities:
              
Net income/(loss)
  
$
1,420,380
  
$
(2,093,650
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
              
Depreciation and amortization
    
634,243
    
544,617
  
Stock based compensation and services
    
134,525
    
360,583
  
Gain on sale
    
(1,932,913
)
      
Deferred income taxes
    
(28,767
)
  
-
  
Changes in:
              
Accounts receivable
    
489,212
    
598,513
  
Unbilled revenue
    
(410,710
)
  
197,936
  
Prepaid expenses and other current assets
    
(45,365
)
  
(211,383
)
Other assets
    
105,062
    
38,094
  
Accrued expenses
    
1,228,773
    
(105,743
)
Accounts payable
    
(938,852
)
  
308,749
  
Other current liabilities
    
6,760
    
(1,960
)
Income taxes receivable
    
19,686
    
-
  
Income taxes payable
    
-
    
(104,954
)
Deferred revenue
    
(152,894
)
  
(297,706
)
Deferred rent expense
    
5,433
    
(16,300
)
Net cash provided by/(used in) operating activities
    
534,573
    
(783,204
)
Cash flows from investing activities:
              
Cash received from sale of discounted operations
    
7,848,964
    
-
  
Cash paid for acquisition, net of cash acquired
    
-
    
(821,069
)
Cash paid for contingent consideration related to acquisitions
    
(703,047
)
  
(893,555
)
Additions to property and equipment
    
(484,274
)
  
(591,797
)
Net cash provided by/(used in) investing activities
    
6,661,643
    
(2,306,421
)
Cash flows from financing activities:
              
Issuance of notes payable to related party
    
-
    
3,750,000
  
Redemptions of unsecured subordinated debt
    
-
    
(360,890
)
Repayment of short term borrowings
    
(4,595,365
)
  
(984,745
)
Payments for debt issuance costs
    
-
    
(58,567
)
Repayment of notes payable to related party
    
(3,828,000
)
  
-
  
Issuance of unsecured notes
    
152,379
    
172,000
  
Capital lease payments
    
(27
)
  
(17,126
)
Net Cash (used in)/provided by financing activities
    
(8,271,013
)
  
2,500,672
  
Net decrease in cash and cash equivalents
    
(1,074,797
)
  
(588,953
)
Cash and cash equivalents, beginning of period
    
1,261,065
    
622,182
  
Cash and cash equivalents, end of period
  
$
186,268
  
$
33,229
  
Supplemental cash flow information:
              
Income taxes paid
  
$
84,975
  
$
149,753
  
Interest paid
  
$
1,125,251
  
$
1,210,490
  
Non-cash financing activity:
              
Shares issued for contingent consideration
  
$
127,205
  
$
127,028
  
Shares issued for acquisition
    
-
  
$
461,066
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Zanett, Inc.
Notes to Condensed Consolidated Financial Statements

Note 1. Basis of Presentation
 
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, such statements include all adjustments consisting only of normal, recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Zanett, Inc. (the “Company”) at the dates and for the periods indicated. Pursuant to accounting requirements of the Securities and Exchange Commission (the "SEC") applicable to Quarterly Reports on Form 10-Q, the accompanying financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America for audited financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2007 which are contained in the Company's Annual Report on Form 10-K. The results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results to be expected for the full fiscal year.

As of September 30, 2008, there have been no material changes to any of the significant accounting policies, described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

On March 14, 2008, the Company entered into Stock Purchase Agreement (the "Agreement") with KOR Electronics ("KOR") and Paragon Dynamics, Inc. ("PDI"), a wholly owned subsidiary of the Company.  The Agreement provided for the sale by the Company to KOR of all the issued and outstanding stock of PDI.  The transaction closed (the "Closing") on March 18, 2008 (the "Closing Date"). The Company acquired PDI on January 31, 2003. Based in Denver, Colorado, PDI specializes in providing advanced software and satellite engineering services with domain area expertise on government and aerospace satellite and IT infrastructure contracts.

The Agreement provided for a purchase price of $8,875,000 in cash, plus certain working capital adjustments. The initial working capital adjustment was $715,175, which was adjusted to $566,691 for a total aggregate purchase consideration of $9,441,691, including the working capital adjustment.  Of that amount, $887,500 (the "Holdback Amount") was held back by KOR to secure the Company's indemnification obligations. On the Closing Date, KOR paid the Company $8,554,191, adjusted for the working capital adjustment. Total proceeds net of transaction expenses were $8,092,758. The Holdback Amount of $887,500, less any deductions made for indemnity claims, will be paid to the Company on the one year anniversary of the Closing Date.

KOR's obligation to pay the Holdback Amount is secured by a security interest in PDI's assets pursuant to a Security Agreement entered into by the Company, KOR and PDI in connection with the Closing.  The Company's security interest in PDI's assets is subordinate to KOR's senior indebtedness.

6

As a condition to Closing, a portion of the proceeds of the sale of PDI was used to completely pay off the $1.5 million Amended and Restated Promissory Note bearing a 15% coupon issued by PDI to Emral Holdings dated March 15, 2007.  Another portion of the proceeds was used to completely pay off $1.5 million in promissory notes bearing a 15% coupon issued by the Company to Bruno Guazzoni, a related party, and to pay certain expenses of the Company incurred in connection with this transaction.  The remaining balance was used to pay down a portion of the Company's borrowings under its loan facility with LaSalle Bank National Association ("LaSalle").

On June 30, 2008, the Company effected a reverse stock split pursuant to which each four outstanding shares of common stock, par value $0.001, were automatically converted into one share of common stock, par value $0.004 (the “Reverse Stock Split”). All of the share numbers, stock prices and per-share amounts have been adjusted, on a retroactive basis, to reflect the effect of the Reverse Stock Split. Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

Earnings Per Share
        
Basic and diluted earnings/(loss) per common share are determined in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share”.
 
Outstanding stock options in the aggregate weighted average amount of 1,433,941 for both the three and nine months ended September 30, 2008 and 1,737,842 and 1,746,782 for the three and nine months ended September 30, 2007, respectively, have been excluded from the diluted loss per share since their effect would be antidilutive. 

Note 2. Organization and Business
 
The Company is an information technology ("IT") company that provides customized, mission-critical IT solutions to Fortune 500 corporations and mid-market companies. The Company's overarching mission is to provide custom solutions that exceed client expectations, are delivered on time and within budget, and achieve superior results.

Prior to December 30, 2005, the Company provided commercial solutions through its wholly-owned subsidiaries: Back Bay Technologies, Inc., (“BBT”), based in Burlington, Massachusetts, INRANGE Consulting Corporation(“ICC”), based in Mason, Ohio, and, Whitbread Technology Partners, Inc. (“WTP”), also based in Burlington, Massachusetts. On December 30, 2005, BBT, ICC and WTP merged with and into another of the Company’s wholly-owned subsidiaries, Zanett Commercial Solutions, Inc. (“ZCS”). In May 2006 ZCS acquired Data Road, based in Jacksonville, Florida. In March 2007, ZCS acquired DBA Group, Inc. (“DBA”), based in Alpharetta, Georgia.

The Company provides full lifecycle, end-to-end business solutions. These include services to initiate, develop and implement e-business systems, application development, project management, business analysis, architecture design, package customization, testing and quality assurance and implementation management, implementation of ERP, supply chain management (“SCM”) and customer relationship management (“CRM”) systems, and voice and data communications network integration solutions that include the provision of hardware, peripheral equipment and telecommunications lines for voice and data communications networks as well as related security and design services.

7
 
Liquidity

During the nine months ended September 30, 2008, the Company incurred a loss from continuing operations of $126,752. As of September 30, 2008, the Company had an excess of current liabilities compared to current assets of $2.5 million. As of September 30, 2008, our revolving line of credit with LaSalle had an outstanding balance of $2.5 million with available borrowings of $1.8 million.  In March 2007, the Company entered into a line of credit agreement with a principal shareholder of the Company in the amount of $3,000,000. This line is available for working capital requirements and is unrestricted. The line has a maturity date of March 15, 2009.  As of September 30, 2008, this line of credit had an available balance of $1.5 million. In addition to these lines of credit the Company had an outstanding cash balance at September 30, 2008 of $186,268. The Company believes, based on its 2008 and 2009 forecasts, that the existing cash balance together with the line from the principal shareholder and the LaSalle line of credit will be adequate to fund the Company’s 2008 and 2009 cash flow requirements.

Note 3. Stock Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock−Based Compensation.” SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period that the employee is required to perform services in exchange for the award. SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant date fair value of the award. For the nine months ended September 30, 2008 and 2007, the Company recorded stock−based compensation expense for employee related stock options of $84,874 and $285,324, respectively.

The Company’s Stock Option Plan is designed to provide incentives that will attract and retain individuals key to the success of the Company through direct or indirect ownership of the Company’s common stock. The plan provides for the granting of stock options, stock appreciation rights, stock awards, performance awards and bonus stock purchase awards. The terms and conditions of each award are determined by the Company’s Executive Committee, which is comprised of certain directors and officers of the Company. Under the plan, the Executive Committee may grant either qualified or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price per share that the committee may determine (which in the case of incentive stock options may not be less than the fair market value of a share of the Company’s common stock on the date of the grant). The options generally vest over a four year period. The Company’s policy for attributing the value of graded vesting share based payments is on a straight line basis over the requisite service period for the entire award.

As of September 30, 2008, the Company has issued and outstanding, 588,500 options which vest only when the Company files an Annual Report on Form 10-K showing annual revenue amount for the fiscal year of $250,000,000, and expire after five years from the date of grant. Under SFAS No. 123R the Company has incurred no expense for these options because the occurrence of the vesting event is not probable. As the occurrence of this event becomes probable an expense will be recorded.

8

A summary of the status of the Company’s stock option plan as of September 30, 2008 is presented below:

 
  
Number of
Options
  
Weighted
Avg.
Exercise
Price
  
Weighted Avg.
Remaining
Contractual
Term (years)
  
Aggregate
Intrinsic
Value
  
Outstanding at January 1, 2008
    
1,761,033
 
$
8.08
    
   
 
Granted
    
-
 
$
-
    
   
 
Exercised
    
-
   
-
   
   
 
Forfeited
    
(327,092
)
  
7.93
   
   
 
 
    
   
   
   
 
Outstanding at September 30, 2008
    
1,433,941
 
$
8.12
    
5.75
 
$
-
  
 
    
   
   
   
 
Exercisable at September 30, 2008
    
806,315
 
$
10.09
    
3.47
 
$
-
  

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2007 was $6.64. There were no options granted during the first nine months of 2008.
 
The activity with respect to non-vested options under the Company’s stock option plan was as follows:

   
 Number of
Options 
  
 Weighted
Avg. Grant
Date Fair
Value 
  
Non-vested at January 1, 2008
    
924,955
   
6.36
 
Granted
    
-
   
-
 
Vested
    
(38,829
)
  
13.76
 
Forfeited
    
(258,500
)
  
7.11
 
Non-vested at September 30, 2008
    
627,626
   
5.58
 

At September 30, 2008, there was $29,294 of total unrecognized compensation cost related to non-vested non-qualified stock option awards which is expected to be recognized over a weighted-average period of two years. The total fair value of options vested during the nine months ended September 30, 2008 was zero.

Note 4. Acquisitions

The DBA Group

On March 6, 2007, ZCS completed the acquisition of all of the issued and outstanding capital stock of DBA from the shareholders of DBA (the "DBA Shareholders”).

The total consideration to be paid by ZCS to the DBA Shareholders is comprised of initial consideration, a purchase price adjustment based upon the level of DBA's net working capital at closing, and future contingent consideration.
 
9

The initial consideration consisted of $750,000 in cash and $750,000 of Common Stock which was calculated using the average share price of the three days preceding the transaction.

The DBA Shareholders are eligible to receive contingent consideration of up to $1,500,000, in the aggregate, for the three successive annual performance periods commencing February 1, 2007 based upon DBA attaining specified adjusted income and revenue targets in each period.

In addition, for each of the first three annual performance periods, if DBA exceeds performance targets specified in the DBA purchase agreement (the “DBA Agreement”), the DBA Shareholders will be entitled to receive additional contingent consideration equal to the contingent cash consideration payable with respect to the applicable performance period multiplied by the amount by which a performance multiple calculated pursuant to the DBA Agreement exceeds one. This additional contingent consideration is payable, at the option of ZCS, in cash, options to acquire Common Stock, or a combination of both. The DBA Agreement provides that the aggregate contingent consideration payable to the DBA Shareholders under the DBA Agreement shall not exceed, in the aggregate, $2 million.

The DBA shareholders received aggregate contingent consideration of $305,290 in cash and 127,205 shares of stock for the one year performance period beginning February 1, 2007 and ending January 31, 2008 based upon DBA attaining specific earnings and revenue targets for that period. For shares issued with the contingent consideration, the value was based on the average closing price of the Common Stock for the three trading days, immediately before January 31, 2008. The shares and payments are included in goodwill.

The Common Stock issued or issuable to the DBA Shareholders pursuant to the DBA Agreement is subject to certain transfer restrictions until the fifth anniversary of the closing of the transactions pursuant to a lock-up agreement with each of the DBA Shareholders, subject to certain limited exceptions. In connection with the DBA Agreement, the DBA Shareholders also entered into employment agreements with ZCS.

For accounting purposes, the Company has recorded all of the DBA transaction consideration at its fair value. For shares issued with the initial consideration, the value was based on the average closing price of the Common Stock for the three trading days, immediately before and after March 6, 2007, which was the date the transaction was announced. Contingent consideration will be recorded by the Company if DBA’s achievement of adjusted income and revenue targets is satisfied beyond a reasonable doubt.

The following table sets forth the components of the purchase price paid to date:

Cash paid
  
$
750,000
  
Common stock issued
    
750,000
  
Costs incurred related to acquisition
    
47,421
  
Deferred purchase consideration
    
612,580
  
Total purchase price
  
$
2,160,001
  
 
10

The post acquisition consolidated financial statements include the results of operations of DBA from the March 2007 acquisition date. The purchase price has been allocated to the fair value of the net assets acquired. The valuation of the intangible assets acquired is based on a valuation prepared by an independent valuation firm that assumed, as of the valuation date, that the assets will continue to operate as configured as a going concern based on the past, present and future projected financial condition of DBA.

Current assets
  
$
419,893
 
Property and equipment
    
40,854
 
Intangible assets
    
899,000
 
Liabilities assumed, current
    
(570,954
)
Fair value of net liabilities assumed
    
788,793
 
Goodwill
  
$
1,371,208
 

Note 5. Unaudited Pro Forma Disclosures Related to Recent Acquisitions

The following unaudited pro forma summary financial information presents the consolidated results of operations of the Company as if the acquisition of DBA had occurred on January 1, 2007. The pro forma results for the nine months ended September 30, 2007 are shown for illustrative purposes only and do not purport to be indicative of the results of the Company that would have been reported had the acquisition actually occurred on January 1 or indicative of results that may occur in the future. There would be no change in the results for the three months ended September 30, 2007 as the DBA acquisition was completed as of March 2007.
 
   
Nine months ended September 30,
  
   
2007
(unaudited)
  
Pro forma results:
        
Revenues
  
$
30,575,660
  
Net loss
  
$
(2,069,362
)
Loss per common share basic and diluted
  
$
(0.28
)

Note 6. Other Intangibles and Goodwill

Intangibles and long-lived assets consisted of the following at September 30, 2008 and December 31, 2007:

11
 
   
Average
Remaining 
  
September 30, 2008
  
December 31, 2007
  
 
  
Useful
Life (in
years)
  
Gross
Carrying
Value
  
Accumulated
Amortization
Amount
  
Net
Carrying
Value
  
Gross
Carrying
Value
  
Accumulated
Amortization
Amount
  
Net
Carrying
Value
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Customer Relationships
  
1.88
    
1,577,000
   
(787,044
)
  
789,956
   
1,577,000
   
(546,196
)
  
1,030,804
 
 
    
 
    
   
   
   
   
   
 
Non-compete Agreement
  
1.86
    
193,000
   
(115,048
)
  
77,952
   
193,000
   
(77,667
)
  
115,333
 
 
    
   
   
   
   
   
   
 
Trade Names
  
2.29
    
408,000
   
(205,528
)
  
202,472
   
408,000
   
(159,493
)
  
248,507
 
Total
    
 
$
2,178,000
  
$
(1,107,620
)
$
1,070,380
 
$
2,178,000
  
$
(783,356
)
$
1,394,644
 

Amortization expense was $108,087 and $62,012 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, amortization expense was $324,264 and $186,040, respectively. Based on the Company’s amortizable intangible assets as of September 30, 2008, the Company expects related aggregate amortization expense for fiscal 2008 and the four succeeding fiscal years to approximate $432,348, $347,207, $260,547, $194,092 and $40,450, respectively.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2008 were as follows:

Balance at January 1, 2008  
  
$
14,536,761
  
Contingent consideration -DBA
    
612,580
 
Contingent consideration -DataRoad
    
215,755
 
       
      
Balance at September 30, 2008
  
$
15,365,096
  

Goodwill increased by $828,355 as a result of the contingent consideration payments to the DBA Shareholders and the DataRoad Shareholders. Recorded goodwill is not amortized and no impairment losses have been recognized during the nine month period ended September 30, 2008. The Company performs its annual testing for impairment of goodwill as of October 1, after its annual forecasting process is completed.

Note 7. Related Party Transactions

On March 15, 2008, the Company replaced notes totaling $6,075,000 payable to Bruno Guazzoni, the uncle of the Company’s Chief Executive Officer, Claudio Guazzoni, and the owner of approximately 30% of the Company’s outstanding Common Stock, with new notes which have identical terms to the old notes except for extended maturity dates. The Company had previously extended the maturity dates on these promissory notes in March 2006 and March 2007. Promissory notes in the amounts of $3,075,000 and $1,500,000 originally due on October 31, 2006 were replaced with new notes with identical terms due March 15, 2010. These notes bear interest at an annual rate of 11%. The Company also replaced a note issued on December 30, 2005, in the amount of $500,000 to Bruno Guazzoni with a new note with identical terms due March 1, 2010. This note requires quarterly cash interest payments at the rate of 15% per annum. In March 2006, the Company issued two additional promissory notes in the amount of $500,000 each to Bruno Guazzoni. These notes were subsequently replaced with new notes with identical terms maturing on March 1, 2010. These notes bear interest at an annual rate of 15% and require quarterly cash payments for interest. Principal on all of the notes mentioned above is repayable in cash at maturity and can be pre-paid without penalty. On March 18, 2008 a portion of the proceeds of the sale of PDI were used to completely pay off $1.5 million in promissory notes bearing a 15% annual rate issued to the Company by Bruno Guazzoni.
 
12

In February 2007, the Company entered into a new line of credit agreement with Bruno Guazzoni in the amount of $3,000,000. This line is available for working capital requirements and is unrestricted. The line has a maturity date of March 15, 2009 with interest payment at a rate of Prime +2%. As of September 30, 2008 the outstanding balance on this line was $1,472,000.
 
On February 21, 2007, ZCS entered into a new, unsecured promissory note in an aggregate principal amount of $750,000, with Bruno Guazzoni. This note had a maturity date of March 6, 2009 and required quarterly payments of interest beginning March 31, 2007, at the rate of eleven percent (11%) per annum. Principal was repayable at maturity. The note may be pre-paid without penalty. The proceeds of this note were used fund the cash portion of the merger consideration paid at closing for the acquisition of the DBA Group. This note was subsequently replaced with a new note with identical terms due March 15, 2010.

In 2007, the Company entered into a sub-lease arrangement for their New York City office with an entity related to the CEO of the Company. Rental income of $23,500 for the nine months ended September 30, 2008 and another current asset of $58,500 has been recognized through September 30, 2008 in connection with this arrangement.

Note 8. Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and accounts receivable. The Company places its excess cash in money-market instruments with institutions of high credit quality. All of the Company's accounts receivable are unsecured. The Company believes that any credit risk associated with its receivables is minimal due to the size and creditworthiness of its customers, which principally are large domestic corporations. Receivables are stated at estimated net realizable value, which approximates fair value.

Note 9. Notes Payable, Revolving Credit Facility and Subordinated Debt Arrangements

Notes payable, revolving credit facility and subordinated debt arrangements comprising the Company’s outstanding debt at September 30, 2008 are as follows:

13

 
  
September 30, 2008
  
Notes payable to principal shareholder
      
11% annual interest, quarterly interest payments, matures March 15, 2010
  
$
4,575,000
  
Notes payable to principal shareholder
      
11% annual interest, quarterly interest payments, matures February 21, 2010
    
750,000
  
Total notes payable
  
$
5,325,000
  
Less: Current Portion
    
-
 
Long-term portion of notes payable
  
$
5,325,000
  

The Company made interest payments on the above mentioned notes payable to a related party during the nine months ended September 30, 2008 and 2007 of $425,562 and $377,437, respectively.

Revolving Credit Facility

On March 18, 2008, the Company entered into a Third Amendment and Modification to Loan and Security Agreement and Other Loan Documents (the “Amendment”) with LaSalle. The Amendment amends certain terms of the Loan and Security Agreement (the “Loan Agreement”) dated December 21, 2006 between LaSalle and the Company, PDI and ZCS (“the Borrowers”), as amended by that certain First Amendment and Modification to Loan and Security Agreement and Other Loan Documents dated May 31, 2007 and that certain Second Amendment and Modification to Loan and Security Agreement dated November 14, 2007. Under this revolving line of credit the Company may borrow up to $5,000,000. Borrowing under the Loan Agreement incurs interest at the prime rate. The Amendment was consummated concurrently with the consummation of the sale by the Company of PDI to KOR.

The Amendment modifies the fixed charge coverage ratio test and the senior debt ratio test required by the Loan Agreement.  As amended, the Loan Agreement requires the Company and ZCS to maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 for the nine-month period ending September 30, 2008, the twelve-month period ending December 31, 2008, and each twelve-month period ending on the last day of each fiscal quarter thereafter. 

As amended, the Loan Agreement also requires the Borrowers to maintain a senior debt ratio of not greater than 2.5 to 1.0 for the nine-month period ending September 30, 2008, the twelve-month period ending December 31, 2008 and each twelve-month period ending on the last day of each fiscal quarter thereafter. 

The Borrowers are also required to maintain EBITDA for each calendar month (other than the calendar months of December and January) of not less than $140,000. 

In addition, the Amendment released and removed PDI as a borrower under the Loan Agreement and the related loan documents, and removed PDI’s collateral as security for the obligations under the Loan Agreement.  The amendment also releases PDI from its obligations under the Continuing Unconditional Guaranty it executed in connection with the Loan Agreement.
 
14

The Company has borrowings under its revolving line of credit of $2,512,775 to LaSalle National Bank as of September 30, 2008, which were reflected as current liabilities on the balance sheet. The LaSalle note is reflected as short term based upon certain terms of the agreement in accordance with Emerging Issues Task Force No.95-22.

Renewable unsecured subordinated debt
 
In December 2004, the Company filed a public offering of up to $50 million of Renewable Unsecured Subordinated Notes that was declared effective in February 2005. As of September 30, 2008, the Company has outstanding an aggregate principal amount of $2,305,986 of renewable unsecured subordinated notes net of redemptions. The table below presents the Company’s outstanding notes payable as of September 30, 2008:

(Unaudited)
 
  
Original
Term
  
Principal
Amount
  
Percentage
  
Weighted
Average
Interest Rate
  
Renewable unsecured
    
3 months
  
$$
49,545
    
2.15
%
  
7.31
%
subordinated notes
    
6 months
  
$
57,575
    
2.50
%
  
8.12
%
 
    
1 year
  
$
626,541
    
27.17
%
  
12.07
%
 
    
2 years
  
$
592,634
    
25.70
%
  
11.86
%
 
    
3 years
  
$
731,944
    
31.74
%
  
12.49
%
 
    
4 years
  
$
132,600
    
5.75
%
  
8.07
%
 
    
5 years
  
$
33,097
    
1.43
%
  
9.52
%
 
    
10 years
  
$
82,050
    
3.56
%
  
8.85
%
Total
      
$
2,305,986
   
100.00
%
  
11.57
%
Less current portion of notes payable
        
(1,276,421
)
        
Long-term portion
        
1,029,565
         

The Company made interest payments on the above mentioned unsecured subordinated notes during the first nine months of 2008 and 2007 in the amounts of $186,566 and $99,058, respectively.

Note 10. Discontinued Operations

The following amounts relate to the operations of the Company’s disposed business that have been segregated from continuing operations and reflected as discontinued operations in each period’s consolidated statement of operations:

     
  
Three months ended September 30,
  
     
  
(unaudited)
  
     
  
2008
  
2007
  
Revenue    
  
$
-
  
$
1,802,151
  
     
          
Operating gain before income taxes    
    
-
   
66,372
 
Income tax expense    
    
-
   
-
 
Income from discontinued operations, net of taxes  
  
$
-
  
$
66,372
  

15

     
  
Nine months ended September 30,
  
     
  
(unaudited)
  
     
          
     
  
2008
  
2007
  
Revenue    
  
$
1,602,575
  
$
5,828,239
  
     
          
Operating gain before income taxes    
    
(285,919
)
  
327,130
 
Income tax expense    
    
-
   
(33,976
)
Income from discontinued operations, net of taxes    
  
$
(285,919
)
$
293,154
  

Note 11. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. This Statement is effective for the Company beginning January 1, 2008, except for non- financial assets and liabilities recognized or disclosed on a recurring basis, for which the effective date is fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.

In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141 (R)”). SFAS No. 141(R) revises SFAS No. 141 on establishing the requirements in recognizing and measuring identifiable assets acquired and liabilities assumed within a business combination, any noncontrolling interest, goodwill acquired in a business combination or a gain from a bargain purchase, and any applicable disclosures needed to evaluate the nature and financial effect of a business combination. SFAS No. 141(R) is effective the first annual reporting period beginning on or after December 15, 2008. The impact that the adoption of SFAS No. 141(R) will have on the Company’s consolidated financial statements will depend on the nature, terms and size of business combinations that occur after the effective date.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, in which the noncontrolling interest will be reclassified as equity; and the income, expense and comprehensive income from a noncontrolling interest will be fully consolidated. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and there fore would be effective for the Company beginning January 1, 2009. The Company does not expect any significant changes to its consolidated financial statements as a result of this new standard.

Note 12. Subsequent Event

On September 22, 2008, ZCS, a wholly-owned subsidiary of Zanett, signed a letter of intent to purchase all of the assets of PSGoLive, LLC. ("PSGoLive") The Company expects to close on this transaction in the fourth quarter.

16

We acquired PSGoLive in order to broaden our services and solutions portfolio, specifically in the area of supply chain management and add a roster of blue-chip companies to our client base.

Founded in 2001, PSGoLive is a dedicated Oracle services company that specializes in supply chain management. Based in North Palm Beach, Florida, PSGoLive provides consulting services throughout the United States.

The total consideration to be paid by the Company to PSGoLive will be comprised of a discharge of PSGoLive debt and future contingent consideration, based upon the acquired business obtaining certain earning and revenue targets.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
This report contains certain forward-looking statements and information relating to Zanett, Inc. ("Zanett" or the "Company") and its wholly-owned subsidiaries that are based on assumptions made by management and on information currently available. When used in this report, the words "anticipate", "believe", "estimate", "expect", "intend", "plan" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management's current view of the Company concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: a general economic downturn; a downturn in the securities markets; federal or state laws or regulations having an adverse effect on the Company; and other risks and uncertainties including those identified in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.

The following discussion should be read in conjunction with Zanett's audited Consolidated Financial Statements and related Notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2007, as amended, as filed with the Securities and Exchange Commission.


We are an information technology ("IT") company that provides customized, mission-critical IT solutions to Fortune 500 corporations and mid-market companies. Our overarching mission is to provide custom solutions that exceed client expectations, are delivered on time and within budget, and achieve superior results.

Results of Operations

Three months ended September 30, 2008 versus three months ended September 30, 2007

In the quarter ended September 30, 2008, we generated revenues of $12,622,529, an increase of 32% over the $9,553,671 generated in the same quarter of 2007. This increase was attributable to the organic growth from the addition of new customers and the expansion of existing customer relationships, which was a direct result of the alignment of our different Oracle platforms in the beginning of 2007. This alignment has enabled us to expand our national practice expertise, and we believe it will drive future efficiencies, improve our bill rates and better position us for future growth.
 
17

While revenue increased 32%, costs of revenues increased 18% during the three months ended September 30, 2008 from the comparable prior year period. This increase is primarily due to increased revenue in the quarter ended September 30, 2008 from the same quarter of 2007.

Selling and marketing expenses in the third quarter of 2008 included, among other things, expenses related to a significant trade show, which previously were expensed in the fourth quarter of 2007. We believe that competition for new customers and consulting engagements continues to intensify in the commercial solutions marketplace. As a result, we increased our marketing activities, which resulted in a 53% increase in our selling and marketing expense to $1,546,706 for the quarter ended September 30, 2008, as compared with $1,007,765 during the quarter ended September 30, 2007. This increase in costs is related to additional salespeople and increased expenses incurred in connection with trade shows and conferences.

General and administrative expenses for the quarter ended September 30, 2008 were $1,937,280 as compared to $1,562,148 in the same quarter in 2007, representing an increase of $375,132, or 24%. This increase is a result of an increase in compensation cost and professional fees at the operating level and an increase in amortization (from DBA). These increases were partially offset by a 5% decrease in corporate costs.

Net interest expense for the quarter ended September 30, 2008 was $360,623 as compared to $492,791 for the same quarter in 2007. This reduction in interest expense is a direct result of the pay down of debt which occurred as result of the income from continuing operations and the PDI transaction.

In the three months ended September 30, 2008 we recorded an income tax provision of $40,086.
 
As a result of the above, for the quarter ended September 30, 2008, we reported net income of $134,074 compared to a net loss from continuing operations of $823,237 for the quarter ended September 30, 2007.
 
Nine months ended September 30, 2008 versus 2007

Our revenues were $36,860,354 for the nine months ended September 30, 2008 versus revenues of $29,982,171 for the nine months ended September 30, 2007, an increase of 23%. This increase was partly attributable to (1) an additional $460,000 contribution from the inclusion of DBA for the full nine months in 2008 as compared to seven months in the prior year and (2) organic growth which is being driven by our new customers and opportunities at our existing customers. While revenues increased 23%, costs of revenues also increased by 15% for the nine month period ended September 30, 2008 from the comparable prior year period. The competition for new customers and consulting engagements continued to intensify in the commercial solutions marketplace; therefore we increased our marketing efforts. As a result, selling and marketing expenses increased 20%, from $3,634,305 in the six months ended September 30, 2007 to $4,353,487 for the nine months of 2008.

General and administrative expenses for the first nine months of 2008 were $6,121,530 as compared to $5,236,732 in the first nine months of 2007, representing an increase of $884,798, or 17%. This increase is primarily a result of one-time expenses incurred at the corporate level, related to the sale of PDI.
 
18
 
In addition to these one time expenses we have seen an increase in compensation cost as a result of the payment of additional performance based bonuses due the to the Company’s improved performance, an increase in amortization as a result of the DBA acquisition. These increases were offset by a decrease in recurring corporate expenses.

For the reasons discussed above, our operating income in the first nine months of 2008 was $1,027,432 compared to our operating loss of $1,000,714 in the comparable prior year period.

Included in operating income of $1,027,432 are one-time expenses incurred at the corporate level of $600,000, related to but not offset against the gain from the sale of PDI. As indicated in the table below, without these nonrecurring expenses we would have had operating income of $1,627,432 for the nine months ended September 30, 2008, as reflected in the table below.

   
  
Nine months ended September 30,
  
   
  
2008
  
2007
  
Operating income (loss)  
  
$
1,027,432
  
$
(1,000,714
)
Nonrecurring expenses related to the   sale of discontinued operations  
    
600,000
   
-
 
Operating income after effect on   nonrecurring expenses  
  
$
1,627,432
  
$
(1,000,714
)

General and administrative expenses after effect for nonrecurring expenses and operating income after effect on nonrecurring expenses are non-GAAP performance measures and are not intended to be regarded as an alternative to or more meaningful than GAAP performance measures.  Zanett's management believes the presentation of these non-GAAP performance measures provide useful information to Zanett's investors regarding Zanett's financial condition and result of operations as they reflect how the operations of the Company are performing and the Company's expenses independent of non-recurring expenses.

Net interest expense decreased $222,132, or 16%, to $1,154,184 for the nine months ended September 30, 2008 from $1,376,316 for the same period in 2007. This is a result of the reduction in our borrowings which resulted from the pay down of our debt with a portion of the proceeds of the PDI transaction as well as the improved operating results

In the first nine months of 2008, we recorded an income tax provision of $99,862 versus a provision of $43,750 in the same quarter last year.

Loss from the discontinued operations of PDI net of tax was $285,919 for the nine months ended September 30, 2008. In addition, we recorded a $1,932,913 gain on the sale of PDI for the same period in 2008. The Company tax basis exceeds the gain and therefore there is no tax effect.  PDI was classified as a discontinued operation in the fourth quarter of 2007 and sold in the first quarter of 2008.

As a result of the above, for the nine months ended September 30, 2008, we reported net income of $1,420,380 compared to a net loss of $2,093,650 for the nine months ended September 30, 2007.

19

Summary of Critical Accounting Policies; Significant Judgments and Estimates

There were no changes to our critical accounting policies, which are described in our Annual Report on Form 10-K for the year ended December 31, 2007, during the first nine months of 2008. Items incorporated in the Company's financial statements that required the significant use of management estimates include the allowance for doubtful accounts, revenue recognition, stock based compensation, purchase accounting and the evaluation of the carrying value of goodwill.

Liquidity and Capital Resources

At September 30, 2008 we had cash and cash equivalents of $186,268, representing a decrease of $1,074,796 from the December 31, 2007 year-end balance of $1,261,065. This decrease was primarily a result of paying down our loan balances.

Cash provided by operating activities was $534,573 for the nine months ended September 30, 2008 compared to cash used in operating activities of $783,204 for the same period last year. The increase in cash provided by operating activities was primarily due to improvements in our operating results offset by the gain on sale resulting from the sale of PDI. We also had an increase in accrued expenses resulting from the PDI transaction and a decrease in accounts receivable which was offset by the decline in accounts payable.

Cash provided by investing activities was $6,661,643 for the nine months ended September 30, 2008 compared to a cash used in investing activities of $2,306,421 for the corresponding period in 2007. The 2008 inflow primarily reflected net proceeds of $7,848,964 for the PDI acquisition, which was partially offset by the additions to property and equipment as well as $703,047 of contingent consideration paid in 2008.

Cash used in financing activities for the nine months ended September 30, 2008 was $8,27,013 versus cash provided of $2,500,672 for the same period in 2007. This activity in 2008 included approximately $8,300,000 of loan pay downs resulting from the PDI transaction and improved operations.

In February 2007, the Company entered into a line of credit agreement with Bruno Guazzoni in the amount of $3,000,000. This line is available for working capital requirements and is unrestricted. The line has a maturity date of March 15, 2009.

On February 21, 2007, ZCS entered into a new, unsecured promissory note in an aggregate principal amount of $750,000, with Bruno Guazzoni. This note had a maturity date of March 6, 2009 and requires quarterly payments of interest beginning March 31, 2007, at the rate of eleven percent (11%) per annum. Principal is repayable at maturity. The note may be pre-paid without penalty. The proceeds of this note were used fund the cash portion of the merger consideration paid at closing for the acquisition of the DBA Group, discussed above. This note was replaced with a new note with identical terms due March 15, 2010. The Company also has additional notes with Mr. Guazzoni in an aggregate amount of $4,575,000 outstanding. These notes are due March 15, 2010.

In addition, the Company has a revolving credit facility with LaSalle Bank National Association (the “LaSalle Facility”) under which it may borrow up to $5,000,000. As of September 30, 2008, the Company has borrowings of $2,512,775 under the LaSalle Facility. For additional information regarding the LaSalle Facility, see Note 9 to the Financial Statements.
 
20

Management will continue to monitor the Company’s cash position carefully and evaluate its future operating cash requirements with respect to its strategy, business objectives and performance.

To minimize cash outlays, we have compensated employees with equity incentives where possible. We believe this strategy provides us with the ability to increase stockholder value as well as utilize cash resources more effectively. The issuance of equity securities under the stock plan may result in dilution to existing stockholders.

Our Board of Directors also reauthorized a stock repurchase plan effective March 21, 2008 that allows us to repurchase up to 4,000,000 shares of the our common stock from time to time in open market transactions. As a result of the Company’s previous stock repurchase plan, as of June 30, 2008, we have previously repurchased a total of 14,915 shares of common stock. These shares are reflected as treasury stock on the balance sheet. For the nine months ended September 30, 2008 no shares were repurchased.

Recent Accounting Pronouncements

See Note 13 to the Condensed Financial Statements included elsewhere in this report, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements, which is incorporated herein by reference.

Item 4 T – Controls and Procedures

The Company carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal year covered by this quarterly report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2008, the design and operation of the Company’s disclosure controls and procedures were effective.

During the three month period covered by this quarterly report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are seasonably likely to materially affect, the Company’s internal control over financial reporting.

PART 2 OTHER INFORMATION


3.1(1)
Certificate of Incorporation
3.2(1)
Bylaws
 
 
21
 
 
4.1(2)
Indenture between Zanett, Inc. and U.S. Bank National Association, dated February 1, 2005
31.1(3)
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2(3)
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1(4)
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2(4)
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000.
(2) Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-2/A, as filed on February 1, 2005.
(3) Filed herewith.
(4) Furnished herewith.

22

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ZANETT, INC.
   
Dated: November 14, 2008
/s/ Claudio M. Guazzoni
 
Claudio M. Guazzoni, Chief Executive Officer
 
(Principal Executive Officer)
   
Dated: November 14, 2008
/s/ Dennis J. Harkins
 
Dennis J. Harkins, Chief Financial Officer and
 
President (Principal Accounting and
 
Financial Officer)

23