United States

Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2010~~2011 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ~~EXCHANGE ACT OF 1934~~

EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

1-32589 ~~(Commission File No.)~~

(Commission File No.)

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

(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)~~

(Address of principal executive offices)

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

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).~~Yes~~ Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (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 ¨ No x

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

common stock, as of the latest practicable date:

CLASS		Outstanding at June 7, 2011
Common stock $.004 Par Value		9,265,224

CLASS		Outstanding at November 11, 2010
Common stock $.001 Par Value		9,265,224

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
PART I	FINANCIAL INFORMATION
Item 1 –	Condensed Consolidated Financial Statements.	31
	Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009	3
	Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	64
Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4 -	Controls and Procedures.	2120
PART II OTHER INFORMATION 23
PART II	OTHER INFORMATION
Item 6 –	Exhibits.	2221
Signatures		2322

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Zanett, Inc.

Condensed Consolidated Balance Sheets

	September 30,			December 31,
	March 31,			December 31,
	2010			2009
	2011			2010
	(unaudited)			(Restated – Note 2)
Assets
Current assets:
Cash and cash equivalents	$	78157,~~270~~805		$	~~180~~59,~~598~~472
Accounts receivable, net of allowance
Accounts receivable net of allowance for doubtful accounts of $308,297 and $308,297, respectively		7,015,126			7,693,563
for doubtful accounts of $308,297 and $432,490, respectively		8,949,666			6,536,874
Unbilled revenue		1,062,230			525,144
Income tax receivable		34,358			51,863
Prepaid expenses		435,631			419,457
Unbilled revenue		311,977			206,681
Customer deposits		35,000			35,000
Prepaid expenses		297,503			250,335
Other current assets		528,372			469,502
Customer deposits		35,000			535,000
Total current assets		9,234,164			9,202,138
Other current assets		226,558			174,306
Property and equipment, net		1,181,363			1,141,424
Total current assets		9,933,332			7,935,657
Goodwill		17,839,562			17,839,562
Property and equipment, net		1,254,357			1,304,522
Other intangibles, net		292,470			354,545
Goodwill		17,321,972			16,479,746
Other assets		426,829			92,946
Other intangibles, net		416,619			615,088
Total assets	$	28,974,388		$	28,630,615
Other assets		177,342			165,349
Total assets	$	29,103,622		$	26,500,362
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	13,~~888~~355,~~709~~840		$	1,~~235~~529,~~640~~890
Accrued expenses		2,~~970~~714,~~489~~309			23,~~836~~752,~~387~~638
Short-term debt		54,~~117~~490,~~484~~865			4,~~350~~116,~~090~~487
Short-term debt-related party		-			6,652,322
Short-term renewable unsecured subordinated debt		1,298,321			1,467,898
Short-term renewable unsecured subordinated debt		1,309,873			1,123,048
Other current liabilities		1,596,638			2,266,604
Other current liabilities		1,238,731			1,032,620
Income taxes payable		42,239			27,337
Income taxes payable		-			14,591
Deferred revenue		1,014,688			1,777,435
Deferred revenue		1,979,915			1,228,802
Deferred income taxes		9,145			9,145
Deferred income taxes		30,645			30,645
Capital lease obligations		35,528			35,988
Capital lease obligations		35,988			35,988
Total current liabilities		14,557,573			14,983,422
Total current liabilities		14,571,834			18,540,133
Convertible subordinated note, net of Of unamortized discount of $128,374 and $136,398		7,003,609			6,995,585
Convertible subordinated note, net of discount
Long term renewable unsecured subordinated debt		611,742			510,453
of $1,360,619		5,771,364			-
Long term debt- other		1,800,296			500,000
Long term renewable unsecured subordinated debt		692,919			1,131,104
Derivative Liability		151,744			149,577
Capital lease obligations		20,988			47,980
Capital lease obligation		3,453			11,991
Deferred rent expense		8374,~~654~~721			7680,~~535~~562
Deferred income taxes		25,053			25,053
Total liabilities		2124,~~165~~228,~~812~~191			1923,~~820~~256,~~805~~643
Commitments and contingencies		-			-
Stockholders' equity
Preferred stock, $0.001 par value; 10,000,000 shares
Preferred stock, $0.004 par value; 10,000,000 shares authorized; none issued and outstanding		-			-
authorized; none issued and outstanding		-			-
Common stock, $0.004 par value; 200,000,000 shares authorized; 9,265,224 and 9,265,224 shares issued and outstanding, respectively		37,060			37,060
Common stock, $0.001 par value; 200,000,000 shares
Additional paid-in capital		33,060,328			33,060,328
authorized; 9,249,040 and 8,738,833 shares
issued and outstanding, respectively		32,953			32,443
Additional paid-in capital		34,433,489			32,482,502
Treasury stock, at cost; 14,915 shares		(179,015	)		(179,015	)
Accumulated deficit		(2628,~~349~~172,~~617~~176	)		(2527,~~656~~544,~~373~~401	)
Total stockholders' equity		74,~~937~~746,~~810~~197			65,~~679~~373,~~557~~972
Total liabilities and stockholders' equity	$	2928,~~103~~974,~~622~~388		$	2628,~~500~~630,~~362~~615

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

ZANETT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months ended March 31,
	2010			2009			2010			2009
	2011			2010
Revenues
				(Restated – Note 2)
Operating expenses:	$	12,697,163		$	9,903,120		$	35,155,185		$	31,795,705
Revenue	$	12,360,489		$	10,699,921
Costs of revenues		8,995,130			7,402,212			25,588,080			22,558,819
Operating expenses:
Selling and marketing		1,584,944			1,213,919			4,405,101			4,269,631
Cost of revenue		9,253,916			7,867,260
General and administrative		1,734,351			1,812,285			4,877,705			5,620,186
Selling and marketing		1,385,452			1,365,643
Total operating expenses		12,314,425			10,428,416			34,870,886			32,448,636
General and administrative		1,823,378			1,485,317
Operating income(loss)		382,738			(525,296	)		284,299			(652,931	)
Total operating expenses		12,462,746			10,718,220
Other income (expense):
Operating loss		(102,257	)		(18,299	)
Interest expense		(311,241	)		(317,312	)		(961,419	)		(959,914	)
Interest and other expense:
Total other expense		(311,241	)		(317,312	)		(961,419	)		(959,914	)
Increase in fair value of derivative liability		(2,167	)		-
Income/(loss) from continuing operations before income taxes		71,497			(842,608	)		(677,120	)		(1,612,845	)
Interest expense		(523,351	)		(348,693	)
Income tax benefit/(expense)		23,163			24,536			(16,124	)		(9,600	)
Total interest and other expense		(525,518	)		(348,693	)
Income/(loss)from continuing operations after taxes		94,660			(818,072	)		(693,244	)		(1,622,445	)
Loss from continuing operations before income taxes		(627,775	)		(366,992	)
Gain on sale of discontinued operations, net of taxes		-			-			-			887,500
Income tax provision		-			25,000
Net income (loss)	$	94,660		$	(818,072	)	$	(693,244	)	$	(734,945	)
Loss from continuing operations after taxes	$	(627,775	)	$	391,992
Basic income (loss) per share:
Net loss	$	(627,775	)	$	391,992
Continuing operations	$	0.01		$	(0.09	)	$	(0.08	)	$	(0.19	)
Basic and diluted loss per share:
Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.10
Net loss per common share to common stockholders – basic and diluted	$	(0.07	)	$	(0.04	)
Net income (loss) per common share to common stockholders - basic	$	0.01		$	(0.09	)	$	(0.08	)	$	0.09
Weighted average shares outstanding - basic and diluted		9,265,224			8,738,883
Weighted average shares outstanding – basic		9,249,040			8,738,833			9,005,235			8,590,696
Diluted income (loss) per share:
Continuing operations	$	0.01		$	(0.09	)	$	(0.08	)	$	(0.19	)
Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.10
Net income (loss) per common share to common stockholders – diluted	$	0.01		$	(0.09	)	$	(0.08	)	$	0.09
Weighted average shares outstanding – diluted		9,283,414			8,738,833			9,005,235			8,590,696

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

Zanett, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	Three Months Ended
	2010			2009
	March 31,
	2011			2010
				(Restated – Note 2)
Cash flows from operating activities:
Net loss	$	(~~693~~627,~~244~~775	)	$	~~(734~~391,~~945~~992	)
Adjustments to reconcile net loss to net cash
Adjustments to reconcile net loss to net cash used in operating activities:
provided by (used in) operating activities:
Depreciation and amortization		231,101			213,001
Depreciation and amortization		631,749			662,162
Provision (reduction) for doubtful accounts		-			(58,050	)
Stock based compensation and services		-			481,775
Increase in fair value of derivative		2,167			-
Gain on sale of discounted operations		-			(887,500	)
Provision (recoveries) for doubtful accounts		(124,193	)		471,809
Non-cash interest expense		8,435			-
Income tax payable		(14,591	)		(11,502	)
Changes in:
Accounts receivable		(2678,~~288,598~~437	)		~~(184~~114,~~424~~572	)
Unbilled revenue		(~~105~~537,~~295~~086	)		(~~123~~353,~~059~~346	)
Prepaid expenses and other current assets		~~414~~(60,~~664~~855	)		51(62,~~336~~127	)
Other assets		(11333,~~994~~884	)		~~(30~~16,~~956~~616	)
Accrued expenses		~~134~~(528,~~097~~032	)		~~(862~~90,~~034~~217	)
Accounts payable		~~653~~1,~~070~~825,947			~~984~~846,~~199~~507
Other current liabilities		~~490~~3,~~989~~034			~~(14~~11,~~384~~000	)
Deferred revenue		~~751~~(762,~~114~~747	)		~~(343~~453,~~182~~446	)
Deferred rent expense		7(5,~~119~~841	)		(58,~~550~~601	)
Income taxes receivable		17,505			(28,567	)
Income tax payable		14,902			34,897
Net cash used in operating activities		(129,173	)		(574,822	)
Net cash (used in)/ provided by operating activities		(100,632	)		923,342
Cash flows from investing activities:
Cash received from sale of discontinued operation, net		-			720,833
Cash paid for contingent consideration related to acquisitions		(115,000	)		(47,500	)
Cash paid for contingent consideration related
Additions to property and equipment		(200,940	)		(107,423	)
to acquisitions		(65,000	)		(317,657	)
Net cash used in investing activities		(315,940	)		(154,923	)
Additions to property and equipment		(383,115	)		(242,829	)
Net cash (used in) provided by investing activities		(448,115	)		160,347
Cash flows from financing activities:
Payments for debt issuance costs		(14347,~~083~~188	)		-(13,480	)
Repayments of short term debt		267,394			(287,285	)
Proceeds from long term borrowings		374,378			-
Proceeds of notes payable to related party		-			300,000
Proceeds from long term borrowings		565,000			-
Borrowings of short term debt		500,000			-
(Repayments)/borrowings of short term debt		-			(799,109	)
Repayments for redemptions of unsecured notes		(~~251~~68,~~360~~288	)		-(55,948	)
Issuance of unsecured notes					54,058
Capital lease payments		(8,997	)		(8,997	)
Capital lease payments		(26,991	)		(15,000	)
Net cash provided by / (used in) financing activities		514,905			(877,534	)
Net cash provided by financing activities		474,960			51,773
Net decrease in cash and cash equivalents		98,333			(109,115	)
Net decrease in cash and cash equivalents		(102,328	)		(362,703	)
Cash and cash equivalents, beginning of period		59,472			180,598
Cash and cash equivalents, beginning of period		180,598			450,305
Cash and cash equivalents, end of period	$	157,805		$	71,483
Cash and cash equivalents, end of period	$	78,270		$	87,602
Supplemental cash flow information:
Income taxes paid	$	652,~~337~~589		$	668,~~368~~004
Interest paid	$	~~494~~428,~~081~~012		$	~~777~~129,~~556~~025
Non-cash financing activity:
(including interest and penalties applicable to tax lien, see note 5)
Value of Shares issued for contingent consideration	$	582,443		$	243,372
Exchange of related party debt for convertible Subordinated debt	$	-		$	7,131,983
Capital lease obligations	$	56,976		$	92,964
Exchange of related party debt for convertible subordinated debt	$	7,131,983		$	-
Debt discount resulting from conversion reset on convertible
subordinated debt	$	1,369,054		$	-

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

Zanett, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1. Basis of Presentation and Summary of Significant Accounting policies

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. (“Zanett” or 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 condensed consolidated 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, 2010 which are contained in the Company's Annual Report on Form 10-K, as amended. The results for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

~~United States~~As of ~~America.~~March ~~In the opinion of management~~31, ~~such statements include all adjustments consisting only of normal~~2011, ~~recurring~~there ~~adjustments~~have ~~necessary for~~been ano ~~fair~~material ~~presentation~~changes ~~of the financial position, results of operations and cash flows at the dates and for the periods indicated for Zanett, Inc. (“Zanett” or the "Company"). Pursuant~~ to ~~accounting~~any ~~requirements~~ of the ~~Securities~~ ~~and~~significant ~~Exchange Commission (the "SEC") applicable to Quarterly Reports on Form 10-Q, the accompanying condensed consolidated 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 misleadingpolicies, ~~these~~described ~~condensed consolidated financial statements should be read~~ in ~~conjunction~~our ~~with the consolidated financial statements and related notes for the year ended December 31, 2009 which are contained in the Company's~~ Annual Report on Form 10-K, as amended~~. The~~, ~~results~~ for the ~~nine-month~~fiscal ~~period~~year ended ~~September~~ 30December 31, 2010 ~~are not necessarily indicative of the results to be expected for the full fiscal year~~.

AsOrganization ~~of September~~and ~~30, 2010, there have been no material changes to any of the significant accounting policies, described in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2009.~~Business

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

~~Zanett~~The ~~is an~~Company ~~information~~provides ~~technology~~full ~~("IT")~~lifecycle, ~~company~~end-to-end ~~that~~business ~~provides~~solutions. ~~customized~~These ITinclude ~~solutions~~ services to ~~Fortune~~initiate, ~~500~~develop ~~corporations~~ and ~~mid~~implement e-~~market~~business ~~companies. Until~~systems, ~~the disposition~~application ofdevelopment, ~~Paragon~~project ~~Dynamics~~management, ~~Inc.~~business ~~("PDI")~~analysis, ~~discussed~~architecture ~~below~~design, ~~the~~package ~~Company~~customization, ~~also provided~~testing ~~such~~and ~~solutions~~quality toassurance ~~classified~~and ~~government~~implementation ~~agencies. The Company's~~management, ~~overarching~~implementation ~~mission~~of isenterprise toresource ~~provide custom~~planning, supply chain management, and customer relationship management systems, and voice and data communications network integration solutions that ~~exceed client~~include ~~expectations~~the provision of hardware, ~~are~~peripheral ~~delivered~~equipment onand ~~time~~telecommunications lines for voice and ~~within~~data ~~budget,~~communications networks as well as related security and ~~achieve superior~~design ~~results~~services.

~~The Company~~Liquidity historically provided commercial solutions through its wholly-owned subsidiaries: Back Bay Technologies, Inc., (“BBT”), based in Burlington, Massachusetts, INRANGE Consulting Corporation (“ICC”), based in West Chester, Ohio, and ~~Whitbread~~Going 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, and DBA was merged into ZCS in connection with that acquisition. In December 2008, ZCS acquired PS GoLive, LLC (“PS GoLive”), based in North Palm Beach, Florida.Concern

~~The Company~~During ~~provides~~the ~~full~~quarter ~~lifecycle,~~ended ~~end-to-end~~March ~~business~~31, ~~solutions. These include services to initiate~~2011, ~~develop~~the ~~and~~Company ~~implement~~incurred ~~e-business~~a loss ~~systems,~~from ~~application development,~~continuing ~~project~~operations ~~management,~~after ~~business~~taxes ~~analysis,~~of ~~architecture design~~$627,775 ~~package customization, testing~~ and ~~quality~~net ~~assurance~~cash ~~and~~used ~~implementation~~in ~~management, implementation~~operations of ~~ERP~~approximately $100,000. ~~supply~~As ~~chain~~of ~~management~~March ~~(“SCM”) and customer relationship management (“CRM”) systems~~31,2011, ~~and~~the ~~voice~~Company ~~and~~had ~~data~~an ~~communications~~excess ~~network integration~~of ~~solutions~~current ~~that~~liabilities ~~include~~compared ~~the~~to ~~provision~~current assets of ~~hardware~~$5,303,116. These ~~peripheral equipment~~conditions ~~and~~raise ~~telecommunications~~substantial ~~lines~~doubt ~~for~~about ~~voice~~the ~~and~~Company’s ~~data~~ability ~~communications networks~~to ascontinue ~~well~~ as ~~related~~a ~~security~~going ~~and design services~~concern.

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. However, if there are any unforeseen downturns in its business, the Company may require additional capital or other sources of financing in order to meet its commitments. If necessary the Company will explore other sources of capital to fund future acquisitions and provide additional working capital. The Company also continues to explore other opportunities that may be available to maximize the Company’s value for its stockholders, including strategic transactions.

On January 27, 2011, the Company and Zanett Commercial Solutions, Inc., the Company’s wholly-owned subsidiary (“ZCS”) entered into a new Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”; the Revolving Credit and Security Agreement referred to herein as the “Credit Agreement”). The Credit Agreement allows for revolving credit borrowings in a principal amount of up to $10.0 million and was used to repay the Company’s prior credit facility with Bank of America. Subject to the right to accelerate the Credit Agreement upon the occurrence of an event of default (subject to applicable cure periods), the Company must repay the Credit Agreement on January 27, 2014. Borrowings available under the Credit Agreement, along with the Company’s cash flow, may not be sufficient to fund the Company’s operations and the Company may need to seek additional financing. There can be no assurance that such financing will be available or will be available at terms acceptable to the Company.

In January 2011, the Company borrowed approximately $565,000 from Rockport Investments Ltd. (“Rockport”) to pay taxes, interest, and penalties to the Internal Revenue Service (“IRS”) in order to settle the IRS tax lien discussed further in Note 5. On May 20, 2011, the Company issued Rockport an unsecured promissory note payable to Rockport in the principal amount of approximately $1,212,128 which includes the approximately $565,000 loan from Rockport used to settle the IRS tax lien, approximately $566,993 in accrued capitalized interest under the Rockport convertible debt issued on March 31, 2010, as discussed in Note 7, and approximately $80,135 in penalties for non-payment of interest due under the Rockport convertible debt. Interest on this note accrues daily at the rate of 1.5% per month and the note matures on February 1, 2014.

Fair Value Measurements

The Company's short-term financial instruments consist of cash, customer deposits, cash equivalents, accounts receivable, income tax receivable, accounts payable, accrued expenses and short-term debt. The carrying amounts of all short-term financial instruments at March 31, 2011 and December 31, 2010 approximate their fair values due to their short maturities. The Company places its cash and cash equivalents primarily in commercial checking accounts and money market funds. Commercial bank balances may from time to time exceed federal insurance limits; money market funds are uninsured.

Based on interest rates currently available to the Company for borrowings with similar terms and maturities, the carrying value of the Company's long-term debt approximates its current fair value.

Stock Based Compensation

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, restricted stock, 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 Company’s 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 Executive 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 March 31, 2011, the Company had issued and outstanding, 472,625 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 five years from the date of issuance. Currently, the Company has incurred no expense for these options because the occurrence of the vesting event is not probable. If the occurrence of this event becomes probable an expense will be recorded.

A summary of the status of the Company’s stock option plan as of March 31, 2011 is presented below:

	Number of Options			Weighted Avg. Exercise Price
Outstanding at January 1, 2011		1,416,148		$	7.78
Granted		-			-
Exercised		-			-
Forfeited		(45,000	)	$	4.16

Outstanding at March 31, 2011		1,371,148		$	7.88

Exercisable at March 31, 2011		898,523		$	9.29

There were no options granted during the first quarter of 2011.

~~On March 14, 2008, the Company entered into a Stock Purchase Agreement (the "Agreement") with KOR Electronics ("KOR") and PDI.~~ The ~~Agreement~~options ~~provided~~outstanding ~~for the sale by the Company to KOR of all the issued~~ and ~~outstanding~~exercisable ~~stock~~at ofMarch ~~PDI which the company had acquired on January~~ 31, ~~2003. The~~2011 ~~transaction~~were ~~closed~~in onthe ~~March 18,~~following ~~2008~~exercise ~~(the~~price ~~"Closing Date").~~ranges:

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 expense were $8,092,758. The Holdback Amount of $887,500, was paid in full to the Company on the one year anniversary of the Closing Date. The proceeds of the sale of PDI were used to pay down the Company’s then existing debt, as described under the heading “Liquidity and Capital Resources” in this Quarterly Report on Form 10-Q.

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life-Years		Weighted Average Exercise Price		Number Vested and Exercisable		Weighted Average Exercise Price

$0.70 to $0.85		85,000		7.6	$	0.70		85,000	$	0.70
$1.92 to $10.00		1,012,835		1.2	$	6.70		540,210	$	8.00
$10.04 to $20.32		273,313		4.1	$	14.51		273,313	$	14.51
		1,371,148		2.6	$	7.88		898,523	$	9.29

~~Liquidity~~All outstanding and exercisable options at March 31, 2011 had an aggregate intrinsic value of $47,600. At March 31, 2011, all non-vested options consisted of awards whose vesting terms are not based on service conditions and have not yet been met, as described above. Therefore, there was zero total unrecognized compensation cost related to non-vested non-qualified stock option awards.

~~During the~~The ~~nine~~activity ~~months~~with ~~ended~~respect September 30, 2010, the Company incurred a loss from continuing operations of $693,244 and had net cash used in operations of approximately $129,173. As of September 30, 2010, the Company had an excess of current liabilities compared to ~~current~~non-vested ~~assets~~options ofunder ~~$4,638,403. As of September 30, 2010,~~ the Company’s ~~revolving~~stock ~~line~~option ofplan ~~credit~~was ~~with Bank of America, N.A. (“Bank of America”),~~ as successor-by-merger to LaSalle Bank National Association (“LaSalle”) had a balance of $4,617,484 with available borrowings of $324,295 which matured on June 21, 2010. On June 21, 2010 the Company entered into a forbearance agreement extending the expiration of the respective obligations of Bank of America and the Company to July 21, 2010. On July 21, 2010 the Company entered into an amended forbearance agreement which extended the term of forbearance to August 21, 2010. On September 28, 2010, the Company entered into a forbearance agreement extending the expiration of the respective obligations of Bank of America and the Company to October 31, 2010. To date, the respective obligations of the Company and Bank of America remain in forbearance pursuant to the forbearance agreement, as amended, as described above.follows:

Bruno Guazzoni, the uncle of Zanett’s Chief Executive Officer and a principal shareholder and related party of the Company, sold a line of credit and promissory notes issued to Mr. Guazzoni by ZCS in the amounts of $4,575,000 and $750,000, respectively, to Rockport Investments, Ltd. (“Rockport”) in a private transaction on February 28, 2010. On March 31, 2010 the Company exchanged the debt held by Rockport for a new note convertible into shares of the Company’s common stock at any time following stockholder approval of the transaction at the option of the noteholder, which stockholder approval was received at the Company’s annual meeting of stockholders on May 20, 2010. The note is in the principal amount of $7,131,983, bears interest at a rate of 7.95% per annum, payable quarterly in arrears, and matures on March 31, 2015. The initial conversion price of the convertible note is $1.99, which was the closing bid price of Zanett’s common stock as listed on Nasdaq immediately preceding the date of the convertible note. Rockport may, at its option, reset the conversion price once per calendar year to the greater of (a) the average of the closing sales price of the Company’s common stock during the preceding 20 consecutive trading day period and (b) $0.10. On September 17, 2010, Rockport elected to reset the conversion price to $1.608 per share. The conversion price is also subject to adjustment in the event of dilutive issuances by the Company or the Company’s issuance of options, warrants or other rights to purchase the Company’s common stock or convertible securities (subject to certain exceptions, including the grant of options to purchase common stock to employees, officers, directors or consultants of the Company). The Company may prepay the convertible note at any time, subject to a prepayment premium. The Company may request that Rockport accept any prepayments of principal and/or any scheduled payments of interest in shares of the Company’s common stock, but Rockport is not required to accomodate the Company’s request.

	Number of Options			Weighted Avg. Grant Date Fair Value
Non-vested at January 1, 2011		515,375		$	5.34
Granted		-			-
Vested		-		$	-
Forfeited		(42,750	)	$	4.19

Non-vested at March 31, 2011		472,625		$	5.21

Note 2. Restatement

The December 31, 2010 financial statements have been restated to properly reflect transactions with a related party (as more fully described in Note 5). The Company failed to withhold taxes on interest payments made to a related party for the period from 2005 through 2009 and was therefore assessed approximately $558,000 (including $225,000 of interest and penalties) by the IRS in January 2011. The Company and the related party agreed that the Company would be reimbursed for the portion of the taxes paid on behalf of the related party and received a promissory note in the amount of $333,000 due January 2012. Had these related party transactions been timely accounted for during the 2005 through 2010 fiscal years, the Company would have recorded a receivable from the related party of $333,000, a payable of $558,000, and expense for the related interest and penalties in the aggregate amount of $225,000. The interest and penalties attributable to each of the years in the period from 2005 through 2010 was immaterial, quarterly or annually, to the financial statements of the Company; however, the cumulative impact of recording the entire amount of the $225,000 interest and penalties in 2011 (the date of the lien release) would have been material to the quarter ended March 31, 2011. Accordingly, the Company has restated the 2010 financial statements included herein to properly include the impact of this oversight.

InThe ~~May 2010~~net ~~the~~effect ~~Company~~on ~~issued~~the arevised ~~promissory~~balance ~~note~~sheet ~~payable~~as ~~to Rockport in the principal amount~~ of ~~$500,000. This~~December ~~note bears interest at 1.5% per month and was payable on July 27~~31, 2010~~. On~~ ~~August~~and ~~13, 2010,~~ the ~~Company~~statement ~~and Rockport~~of ~~entered~~operations ~~into~~for ~~an amendment to this note extending~~ the ~~maturity~~three-month ~~date~~period ~~to October~~ended 10March 31, 2010 ~~at the same interest rate. To date, this promissory note remains outstanding and payable to Rockport.~~is:

The loss from continuing operations, working capital deficit, current maturity dates of the Company’s outstanding debt and limited available borrowings raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently negotiating the replacement or refinancing of its line of credit arrangements and is otherwise looking to secure additional funding, though there can be no assurances that such financing will be obtained. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.

	As Reported			Adjustments			As Restated
Balance Sheet – As of December 31, 2010
Other current assets	$	136,508		$	333,000		$	469,502
Other current liabilities		1,708,604			558,000			2,266,604
Accumulated deficit		(27,319,401	)		(225,000	)		(27,544,401	)

	As Reported			Adjustments			As Restated
Statement of Operations – For the quarter ended March 31, 2010
Interest Expense	$	337,693		$	11,000		$	348,653
Net loss		380,992			11,000		$	391,992
Basic and diluted earnings per share	$	(0.04	)				$	(0.04	)

~~Fair Value~~Note ~~Measurements~~3. Other Intangibles and Goodwill

~~The Company~~Intangibles ~~adopted ASC topic 820, "Fair Value Measurements~~ and ~~Disclosures"~~long-lived ~~(“Topic 820”) on July 1, 2008 for all financial~~ assets ~~and~~consisted ~~liabilities~~of ~~and nonfinancial assets and liabilities that are recognized or disclosed at fair value in~~ the ~~financial~~ ~~statements~~following ~~on a recurring basis (~~at ~~least~~March ~~annually). Topic 820 defines fair value~~31, ~~establishes~~2011 ~~a framework for measuring fair value,~~ and ~~expands disclosures~~December about fair value measurements. Topic 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability31, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company’s own credit risk. In addition to defining fair value, Topic 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are2010: Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Level 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

		March 31, 2011 (unaudited)							December 31, 2010
	Average Remaining Useful Life (in years)	Gross Carrying Value		Accumulated Amortization Amount			Net Carrying Value		Gross Carrying Value		Accumulated Amortization Amount			Net Carrying Value

Customer
Relationships	0.75		1,577,000		(1,420,530	)		156,470		1,577,000		(1,368,080	)		208,920

Non-compete
Agreement	0		193,000		(193,000	)		0		193,000		(187,375	)		5,625

Trade Names	1.00		288,000		(272,000	)		16,000		288,000		(268,000	)		20,000

Trade
Names	Indefinite		120,000		0			120,000		120,000		0			120,000

Total		$	2,178,000	$	(1,885,530	)	$	292,470	$	2,178,000	$	(1,823,455	)	$	354,545

Amortization expense was $62,074 and $72,946 for the three months ended March 31, 2011 and 2010, respectively. Based on the Company’s amortizable intangible assets as of March 31, 2011, the Company expects related amortization expense for the remainder of 2011 and the one succeeding fiscal year to approximate $132,000 and $40,000,resectively.

~~Earnings Per~~Goodwill ~~Share~~as of March 31, 2011 was at $17,839,562. Recorded goodwill is not amortized and no impairment losses have been recognized during the three month period ended March 31, 2011. The Company performs its annual testing for impairment of goodwill in October after its annual forecasting process is completed.

Basic income/(loss) per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted income/(loss) per share gives effect to all dilutive potentially issuable common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. At September 30, 2010 and 2009, respectively, options to acquire 1,337,398 and 1,626,148 shares of Common Stock, and convertible debt convertible into 3,583,911 shares of Common Stock, were excluded from the calculation of diluted net income/(loss) per share, as their effect would be anti-dilutive.

Balance at January 1, 2011	$	17,839,562

Balance at March 31, 2011	$	17,839,562

Note 3 4. ~~Stock~~ ~~Based~~Loss ~~Compensation~~Per Share

~~The Company’s~~Basic ~~Stock~~loss ~~Option~~per ~~Plan~~share is ~~designed~~calculated tobased ~~provide~~on ~~incentives~~the ~~that~~weighted ~~will~~average ~~attract and~~number ~~retain individuals key to the success~~ of ~~the~~common ~~Company~~shares ~~through~~outstanding ~~direct~~during ~~or indirect ownership of~~ the ~~Company’s common stock~~period. ~~The~~Diluted ~~plan~~income/(loss) ~~provides~~per ~~for~~share ~~the granting~~gives ofeffect ~~stock~~to ~~options,~~all ~~stock~~dilutive ~~appreciation~~potentially ~~rights,~~issuable ~~restricted~~common ~~stock,~~shares ~~stock awards,~~outstanding ~~performance~~during ~~awards~~the ~~and bonus stock purchase awards~~period. The ~~terms~~computation ~~and conditions~~ of ~~each~~diluted ~~award~~earnings ~~are~~per ~~determined~~share bydoes ~~the~~not ~~Company’s~~assume ~~Executive Committee~~conversion, ~~which~~ isexercise ~~comprised~~or ofcontingent ~~certain~~exercise ~~directors and officers~~ of ~~the~~securities ~~Company.~~that ~~Under~~would ~~the plan,~~have ~~the~~an ~~Executive~~anti-dilutive ~~Committee~~effect ~~may~~on ~~grant~~earnings. ~~either~~At ~~qualified~~March or31, ~~nonqualified~~2011 ~~stock options with a term not to exceed ten years from the grant date~~ and atDecember ~~an exercise~~31, ~~price~~2010, ~~per share that~~ the ~~Executive~~Company ~~Committee~~excluded ~~may~~all ~~determine (which in the case~~ of ~~incentive~~its outstanding stock options ~~may~~under ~~not be less than~~ the ~~fair~~treasury ~~market value of a share of the Company’s common~~ stock onmethod ~~the~~from ~~date of~~ the ~~grant).~~computation ~~The options generally vest over a four year period. The Company’s policy for attributing the value~~ of ~~graded~~diluted ~~vesting~~loss per share ~~based~~as ~~payments~~they iswould onbe ~~a straight line basis over the requisite service period for the entire award~~antidilutive.

AsNote of September 30, 2010, the Company had 519,875 options issued and outstanding, 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 November 6, 2011, five years following issuance of these options5. ~~Currently,~~Related ~~the~~Party ~~Company has incurred no expense for these options because the occurrence of the vesting event is not probable. If the occurrence of this event becomes probable an expense will be recorded.~~Transactions

AIn ~~summary~~ the three months ended March 31, 2010, the Company incurred approximately $164,000 of interest expense attributed to various promissory notes and a line of credit with Bruno Guazzoni, the ~~status~~uncle of Zanett’s Chief Executive Officer, Claudio Guazzoni and a holder of 26.2% of the Company’s ~~Stock~~outstanding ~~Option~~common ~~Plan~~stock. Mr. asGuazzoni sold the line of ~~September~~credit 30and promissory notes to Rockport in a private transaction on February 28, 2010 ~~is presented~~(see ~~below:~~Note 7).

The IRS commenced an audit of the Company’s tax return for the fiscal year ended December 31, 2007, and the audit was concluded in January 2011. As a result of the audit, the IRS instituted a tax lien on the Company for the non-payment of individual withholding taxes that, per IRS regulations, should have been withheld on interest payments to Bruno Guazzoni. As described in Note 1, the Company borrowed $565,000 from Rockport and paid the taxes, interest and penalties due to the IRS and the tax lien was released. The Company and Bruno Guazzoni agreed that the Company would be reimbursed for the taxes paid on behalf of Bruno Guazzoni, and on May 31, 2011, Bruno Guazzoni issued a promissory note (effective January 25, 2011) to the Company in the amount of $333,849. The promissory note bears interest at 4.5% per annum, and is payable on January 24, 2012, including accrued interest. As collateral, Mr. Guazzoni has agreed to pledge 292,118 of his personal shares of common stock in the Company which were valued at $1.20 per share, the closing price of our common stock on the Nasdaq Capital Market on January 25, 2011, the effective date of the note. On March 31, 2011, the end of our first fiscal quarter, the closing price of our common stock on the Nasdaq Capital Market was $1.26 per share. On June 7, 2011, the last complete day of trading immediately preceding the filing of this Quarterly Report on Form 10-Q, shares of our common stock on the Nasdaq Capital Market closed at $0.62.

				Weighted
				Avg.
	Number of			Exercise
	Options			Price
Outstanding at January 1, 2010		1,617,773		$	6.99
Granted		-			-
Exercised		(147,500	)		0.70
Forfeited		(17,875	)	$	6.89
Outstanding at September 30, 2010		1,452,398		$	7.63
Exercisable at September 30, 2010		932,523		$	9.03

Note 6.

Concentration of Credit Risk

~~There were~~Financial noinstruments ~~options~~that ~~granted~~potentially ~~during~~subject the ~~nine~~Company ~~months~~to ~~ended~~concentrations ~~September~~of 30credit risk primarily consist of cash and cash equivalents and trade accounts receivable. The Company places its excess cash and cash equivalents primarily in commercial checking accounts and 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, ~~2010~~ which principally are large domestic corporations. Receivables are stated at estimated net realizable value, which approximates fair value.

~~The options~~For ~~outstanding~~the ~~and~~three ~~exercisable~~months atended ~~September~~March 3031, ~~2010~~2011, ~~were~~the inCompany had one customer that accounted for 9% of total revenue. For the ~~following exercise~~three ~~price~~months ~~ranges:~~ended March 31, 2010, the Company had a different customer that accounted for 8% of total revenue.

		Options Outstanding						Options Exercisable
				Weighted
				Average		Weighted				Weighted
Range of				Remaining		Average		Number		Average
Exercise		Number		Contractual		Exercise		Vested and		Exercise
Prices		Outstanding		Life-Years		Price		Exercisable		Price
$	0.70 to $0.85		115,000		8.1	$	0.70		115,000	$	0.70
$	1.92 to $10.00		1,060,085		1.7	$	6.58		540,210	$	8.00
$	10.04 to $20.32		277,313		4.6	$	14.50		277,313	$	14.50
			1,452,398		3.2	$	7.63		932,523	$	9.03

Note 7.

Notes Payable, Revolving Credit Facility and Subordinated Debt Arrangements

~~All outstanding~~Convertible ~~and~~debt, ~~executable~~a ~~options~~revolving atcredit ~~September 30~~facility, ~~2010~~promissory ~~had~~notes anpayable ~~aggregate intrinsic~~and ~~value~~subordinated debt arrangements comprise all of ~~$103~~the Company’s outstanding debt at March 31,~~500.~~ 2011 and are as follows:

~~The activity~~Convertible ~~with respect to non-vested options under the Company’s Stock Option Plan was as follows:~~debt

				Weighted
				Avg. Grant
	Number of			Date Fair
	Options			Value
Non-vested at January 1, 2010		550,750		$	5.34
Granted		-			-
Vested		(15,000	)	$	12.92
Forfeited		(15,875	)	$	5.71
Non-vested at September 30, 2010		519,875		$	5.11

On March 31, 2010, the Company exchanged the line of credit and promissory notes previously held by Bruno Guazzoni and sold to Rockport in a private transaction on February 28, 2010 for a new note convertible into shares of the Company’s common stock at the option of the note holder and at any time following stockholder approval of the transaction, which was received on May 20, 2010. The note has a principal amount of $7,131,983 which is due and payable on March 31, 2015 and bears interest at a rate of 7.95% per annum, payable quarterly in arrears through March 31, 2015. There was no gain or loss on this exchange. The conversion rate was initially equal to the closing bid price immediately preceding the closing date ($1.99). Rockport may, at its option, reset the conversion price once per calendar year to the greater of (a) the average of the closing price of the Company’s common stock during the preceding 20 consecutive trading day period and (b) $0.10. The conversion price reset feature has been reflected as a derivative liability in the accompanying condensed consolidated financial statements (see also discussion below). On September 17, 2010 Rockport elected to reset the conversion price to $1.608 per share. The conversion price is also subject to adjustment in the event of dilutive issuances by the Company or the Company’s issuance of options, warrants or other rights to purchase the Company’s common stock or convertible securities subject to certain exceptions, including the grant of options to purchase common stock to employees, officers, directors or consultants of the Company. In addition, the note holder has the right to vote on all matters to which holders of the Company’s common stock are entitled to vote, on an as-converted basis using the closing bid price immediately preceding the closing date as the conversion rate. Pursuant to the terms of the convertible subordinated note, Rockport would have the right to vote approximately 32% of the Company’s common stock; however, Rockport has entered into a voting agreement with the Company’s Chief Executive Officer, Claudio Guazzoni, pursuant to which it has appointed Mr. Guazzoni as its proxy on Rockport’s behalf in all matters to which stockholders are entitled to vote for the term of the note.

At September 30, 2010, there was zero total unrecognized compensation cost related to non-vested, non-qualified stock option awards. The total fair value of options vested in the quarter ended September 30, 2010 was zero.

On May 20, 2011, the Company and Rockport entered into an amendment to the Rockport convertible note (the “Note 4 Amendment”). ~~Other~~ Under ~~Intangibles~~the Note Amendment, interest and ~~Goodwill~~ penalties payable under the Rockport convertible note in the amount of approximately $647,128 were consolidated in the unsecured promissory note described in Note 1 for the period of March 31, 2010 to and including March 31, 2011. Other than the capitalization of the interest described above, the Rockport convertible note remains an outstanding obligation of the Company.

~~Intangibles~~ In connection with the preparation of its Annual Report on Form 10-K for the year ended December 31, 2010, the Company noted that the conversion feature embedded in the Rockport convertible debt should have been bifurcated and ~~long~~accounted for separately as a derivative liability. This embedded derivative had an estimated fair value of $160,467 on March 31, 2010, the inception date, and should have been reflected as a liability and then re-~~lived~~measured ~~assets~~at ~~consisted~~fair value at each subsequent reporting date with the change in fair value reported in the statement of operations. Hence, the ~~following~~initial carrying value assigned to the Rockport convertible debt should have been $6,971,516 calculated as the difference between the principal amount of the debt and the fair value of the bifurcated embedded derivative. This resulted in additional debt discount interest expense of approximately $24,069 for the year ended December 31, 2010 and an unamortized balance of the convertible note debt discount of $128,374 and $136,398 at ~~September~~March 3031, 2011 and December 31, 2010, respectively. The fair value of the embedded derivative liability was $151,744 and $149,577 at March 31, 2011 and December 31, ~~2009:~~2010, respectively. The cumulative change in fair value has been recorded in the statement of operations.

			September 30, 2010 (unaudited)							December 31, 2009
	Remaining
	Useful		Gross		Accumulated			Net		Gross		Accumulated			Net
	Life (in		Carrying		Amortization			Carrying		Carrying		Amortization			Carrying
	years)		Value		Amount			Value		Value		Amount			Value
Customer
Relationships		1.25		1,577,000		(1,315,631	)		261,369		1,577,000		(1,149,474	)		427,526
Non-compete
Agreement		0.50		193,000		(181,750	)		11,250		193,000		(161,440	)		31,560
Trade
Names		1.50		288,000		(264,000	)		24,000		288,000		(251,998	)		36,002
Trade
Names	Infinite			120,000		-			120,000		120,000		-			120,000
Total			$	2,178,000	$	(1,761,381	)	$	416,619	$	2,178,000	$	(1,562,912	)	$	615,088

Payment at maturity of the note on March 31, 2015 will be made solely in cash or solely in shares of the Company’s common stock, at the option of the noteholder. The Company may prepay the note at any time, subject to a prepayment premium. The Company may request that Rockport accept any prepayments of principal and/or any scheduled payments of interest in shares of the Company’s common stock, but Rockport is not required to accommodate the Company’s request.

Amortization expense was $62,074 and $86,005 for the three months ended September 30, 2010 and 2009, respectively. Amortization expense was $198,469 and $192,503 for the nine months ended September 30, 2010 and 2009, respectively. Based on the Company’s amortizable intangible assets as of September 30, 2010, the Company expects related amortization expense for the remainder of 2010 and the two succeeding fiscal years to approximate $62,075, $194,092 and $40,452, respectively.Notes

~~Goodwill during~~In May 2010 the ~~third~~Company ~~quarter~~issued a promissory note payable to Rockport in the principal amount of ~~2010~~$500,000. This note bears interest at 1.5% per month and was ~~$17~~payable on July 27,~~321~~ 2010. On August 13,~~972~~ 2010, the Company and Rockport entered into an ~~increase~~amendment ~~from~~to ~~goodwill~~this ~~of $16,479,746~~note ~~for~~extending the ~~period~~maturity ~~ended~~date ~~December~~to 31October 10, ~~2009~~2010 at the same interest rate. ~~Recorded~~On ~~goodwill~~January is27, ~~not amortized~~2011, ~~and~~this nonote ~~impairment~~was ~~losses~~amended ~~have~~to ~~been~~extend ~~recognized~~the ~~during~~maturity date to February 2014 under the ~~nine~~same ~~month period~~terms. ~~ended~~On ~~September~~May 3020, ~~2010.~~2011, this note was amended and restated to increase the principal amount to $588,168 in order to capitalize the interest under the note. The ~~Company~~interest ~~performs~~rate ~~its~~on ~~annual~~the ~~testing~~amended ~~for impairment~~and ofrestated ~~goodwill~~note asremains ofat ~~October~~1.5% per month and the note matures on February 1, ~~after~~2014. The ~~its~~original ~~annual~~note ~~forecasting~~and ~~process~~all ~~is completed~~amendments were terminated and superseded by the amended and restated note.

Balance at January 1, 2010	$	16,479,746
Contingent consideration - DBA		582,443
PSGoLive consideration		259,783
Balance at September 30, 2010	$	17,321,972

In May 2011 the Company issued a promissory note payable to Rockport in the principal amount of approximately $1,212,128. This note bears interest at 1.5% per month and is payable on February 1, 2014, as further described in Note 1.

Under the original DBA agreement there was a provision for stock protection at the third anniversary of the closing date. The stock protection was calculated using the difference between the average closing price of a share of Zanett common stock as reported on NASDAQ for the three (3) consecutive trading days prior to the third anniversary of the closing date (which was $1.45) and the average closing price for a share of Zanett common stock as reported on NASDAQ for the three (3) consecutive trading days prior to the closing date (which was $6.51). To the extent the closing bid price calculated at the time of the third anniversary was less than the closing bid price calculated at the time of the closing, then an additional number of shares of Zanett common stock would be issued to the DBA equity holders equaling the price per share difference multiplied by the number of shares issued as the initial stock payment. In May 2010, the Company issued 401,024 shares to the DBA equity holders.

~~Note 5. Related~~Revolving ~~Party~~Credit ~~Transactions~~Facility

On ~~March 15~~January 27, ~~2009~~2011, the Company and ZCS ~~replaced~~entered ~~two~~into ~~promissory~~the ~~notes,~~Credit ~~one~~Agreement with PNC. The Credit Agreement allows for revolving credit borrowings in a principal amount of up to $~~1,500,000~~10.0 million and ~~the~~proceeds ~~other for~~were ~~$3,075,000,~~used ~~both~~in ~~entered~~part ~~into~~to onrefinance ~~December~~the ~~30,~~Company’s ~~2005~~previous credit facility with ~~Bruno~~Bank ~~Guazzoni~~of America. Borrowings under the Credit Agreement bear interest at either (a) LIBOR plus the applicable margin, or (b) the ~~uncle~~ ofBase ~~Zanett~~Rate (as defined in the Credit Agreement) plus the applicable margin. The loan will be used to provide for the Company’s ~~Chief~~business ~~Executive Officer~~purposes, ~~Claudio~~including ~~Guazzoni~~without limitation, to provide for the Company’s future working capital requirements. The Company and ZCS are jointly and severally liable for all of the ~~owner~~obligations of ~~approximately~~ 22each other under the Credit Agreement.8% The loan is secured by substantially all of ~~Zanett~~the assets of the Company and ZCS. Subject to PNC’s ~~outstanding~~right ~~common~~to ~~stock~~accelerate ~~calculated~~the asloan upon the occurrence of ~~November~~ 11an event of default (subject to applicable cure periods), ~~2010~~the Company must repay the loan on January 27, ~~with~~2014. aEvents ~~combined~~of ~~promissory~~default ~~note~~under ~~for~~the $4Credit Agreement include,~~575~~ but are not limited to,~~000~~ ~~having~~the following: (a ~~maturity~~)cross ~~date~~default in respect of ~~March~~certain ~~15,~~significant ~~2010. Also~~contracts onof ~~March~~the ~~15,~~Company ~~2009,~~or ZCS ~~replaced an~~or any of the Company’s or ZCS’ existing ~~promissory~~indebtedness ~~note~~that ~~issued~~has been subordinated to ~~Bruno~~the ~~Guazzoni~~loan; in(b) the ~~aggregate~~insolvency ~~principal amount~~ of ~~$750,000~~the ~~with~~Company or ZCS or the appointment of a ~~new~~receiver ~~note~~or ~~with~~trustee ~~identical~~for ~~terms,~~any ~~except~~of the ~~maturity date~~Company ~~which~~or ~~was~~ZCS; ~~extended~~(c) ~~from~~unsatisfied ~~March~~judgments ~~15,~~in ~~2009~~excess toof ~~March~~certain ~~15,~~threshold ~~2010~~amounts; (d) a change of control of the Company or ZCS in certain circumstances; and (e) default under any of the Company’s or ZCS’ covenants under the Credit Agreement. ~~These two~~ ~~new~~There ~~notes~~are financial covenants in the Credit Agreement including a fixed charge coverage ratio covenant under which the Borrowers are required ~~quarterly~~to ~~payments~~maintain a fixed charge coverage ratio of ~~interest~~not atless ~~the~~than ~~rate~~1.10 to 1.0 as of ~~eleven percent~~the ~~(11%)~~end ~~per~~of ~~annum~~each calendar quarter.

InThe ~~March 2009, the~~ Company ~~extended~~had ~~the maturity date on a line of credit agreement with Bruno Guazzoni from March 15, 2009 to March 15, 2010. The maximum~~ borrowings under ~~this~~the ~~line~~Credit Agreement of ~~credit were~~ $34,~~000~~490,~~000~~865 ~~and~~as ~~the interest rate was prime plus two percent (2%). Interest expense attributed to this line~~ of ~~credit~~March ~~for~~31, ~~the nine months ended September 30~~2011, ~~2010~~which ~~and~~is ~~2009~~reflected ~~was~~as ~~$17,421~~a ~~and $40,944,~~current ~~respectively.~~liability ~~The~~on ~~Company~~the ~~paid~~balance Mrsheet. Borrowings ~~Guazzoni~~available ~~$39,767 and $41,372 of interest~~ under ~~this~~the revolving line of credit ~~for~~were ~~the nine months ended September 30~~$1, ~~2010 and 2009~~149,173 ~~respectively.~~as ~~Mr. Guazzoni sold the line~~ of ~~credit~~March ~~and promissory notes to Rockport in a private transaction on February 28~~31, ~~2010 (see Note 7)~~2011.

~~In respect~~Line of all of the promissory notes described above, interest expense was $168,859 and $80,256 for the nine months ended September 30, 2010 and 2009, respectively. In 2010 and 2009, the Company paid $0 and $320,464 to Mr. Guazzoni in respect of these promissory notes, respectively.Credit

~~Note 6~~In February 2007, the Company entered into a line of credit agreement with Bruno Guazzoni in the amount of $3,000,000. ~~Concentration~~ This line was available for working capital requirements and was unrestricted. The interest rate on the line of ~~Credit~~credit ~~Risk~~was prime plus two percent (2%). In March 2009, the Company extended the maturity of the line of credit to March 15, 2010. Mr. Guazzoni sold the line of credit and promissory notes to Rockport in a private transaction on February 28, 2010 and the Company exchanged the line of credit for a convertible note due March 31, 2015, as discussed above under the heading “Convertible debt.”

~~Financial instruments~~Renewable ~~that~~unsecured ~~potentially~~subordinated ~~subject the Company to concentrations~~debt

ofIn ~~credit risk~~December ~~primarily~~2004, ~~consist~~the ofCompany ~~cash~~filed ~~and~~a ~~cash~~public ~~equivalents~~offering ~~and~~of ~~trade~~up ~~accounts receivable. The~~to ~~Company~~$50,000,000 ~~places~~of ~~its~~Renewable ~~excess~~Unsecured ~~cash~~Subordinated ~~and~~Notes ~~cash~~that ~~equivalents primarily~~was declared effective in ~~commercial~~February ~~checking~~2005. ~~accounts~~Through ~~and~~March in31, ~~money-market~~2011, ~~instruments~~the ~~with institutions~~Company ofhas ~~high~~issued ~~credit~~$1,910,063 ~~quality. All~~in ofrenewable ~~the~~unsecured ~~Company's~~subordinated ~~accounts receivable~~notes, ~~are~~net ~~unsecured~~of redemptions. The Company ~~believes~~had ~~that~~no ~~any~~gains ~~credit~~or ~~risk associated~~losses ~~with~~or ~~its~~redemptions ~~receivables~~during isthe ~~minimal~~quarters ~~due~~ended toMarch ~~the~~31, ~~size~~2011 and ~~creditworthiness of~~2010. ~~its~~The ~~customers,~~table ~~which~~below ~~principally~~presents ~~are~~the ~~large~~Company’s ~~domestic corporations. Receivables~~outstanding ~~are~~notes ~~stated~~payable atas ~~estimated~~of ~~net~~March ~~realizable value~~31, ~~which approximates fair value.~~2011:

For the nine months ended September 30, 2010, the Company had one customer that accounted for 7.41% of total revenue. For the nine months ended September 30, 2009, the Company had a different customer that accounted for 8.1% of total revenue.

In May 2009, two customers of the Company filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. For the quarter ended March 31, 2009, these customers accounted for $98,038 of total revenue, and did not account for any revenue in the three or nine months ended September 30, 2010. As of the end of the third quarter of 2010, one of these customers accounted for approximately 3.4% of accounts receivable, which is fully reserved as of September 30, 2010 (the other customer has no balance).

Note 7. Notes Payable, Revolving Credit Facility and Subordinated Debt Arrangements

		(Unaudited)
	Original Term	Principal Amount			Percentage			Weighted Average Interest Rate
Renewable unsecured	3 months	$	45,827			2.40	%		7.71	%
subordinated notes	6 months		26,500			1.39	%		8.66	%
	1 year		547,227			28.65	%		12.57	%
	2 years		537,690			28.15	%		13.50	%
	3 years		613,723			32.13	%		13.98	%
	4 years		33,500			1.75	%		14.82	%
	5 years		28,096			1.47	%		12.22	%
	10 years		77,500			4.06	%		8.77	%
Total		$	1,910,063			100.00	%		12.99	%
Less current portion of notes payable			(1,298,321	)
Long-term portion			611,742

~~Notes payable,~~The aCompany ~~revolving~~recognized ~~credit~~interest ~~facility,~~expense aon ~~line~~the ofabove ~~credit~~mentioned ~~and~~unsecured subordinated ~~debt arrangements~~notes ~~comprise~~during ~~all~~the first quarters of ~~the~~2011 ~~Company’s~~and ~~outstanding~~2010 ~~debt~~in atthe ~~September~~amounts 30of $65, ~~2010~~673 and ~~are~~$77,863, ~~as follows:~~respectively.

~~Convertible Subordinated~~ Note 8 – Fair Value of Financial Instruments

OnThe ~~March 31, 2010, the~~ Company ~~exchanged~~measures ~~the~~fair ~~line~~value ofas ~~credit~~required ~~and promissory notes previously held~~ by ~~Bruno Guazzoni and sold to Rockport in a private transaction on February 28, 2010 for a new note convertible into shares of~~ the ~~Company’s common~~ASC ~~stock~~Topic at820 ~~the~~“Fair ~~option~~Value ofMeasurements ~~the noteholder~~ and atDisclosures”(“ASC ~~any~~Topic ~~time~~820”). ~~following stockholder~~ASC ~~approval~~Topic of820 ~~the~~defines ~~transaction,~~fair ~~which was received on May 20~~value, ~~2010. The~~ ~~note~~establishes ~~has~~ a ~~principal~~framework ~~amount of $7,131,983~~ and ~~bears interest~~gives atguidance aregarding ~~rate of 7.95% per annum, payable quarterly in arrears through March 31, 2015. The conversion rate is initially equal to~~ the ~~closing bid~~methods ~~price~~used ~~immediately~~for ~~preceding~~measuring ~~the~~fair ~~closing date ($1.99). Rockport may~~value, atand ~~its~~expands ~~option,~~disclosures ~~reset~~about ~~the~~fair ~~conversion~~value ~~price once per calendar year to the greater of (a) the average of the closing price of the Company’s common stock during the preceding 20 consecutive trading day period and (b) $0~~measurements.~~10.~~ ~~As described~~ASC ~~below,~~Topic ~~Rockport~~820 ~~elected~~clarifies tothat ~~reset~~fair ~~the~~value ~~conversion price to $1.608 per share. The conversion price~~ is ~~also~~an ~~subject~~exit ~~to adjustment in the event of dilutive issuances by the Company or the Company’s issuance of options~~price, ~~warrants~~representing ~~or other rights to purchase~~ the ~~Company’s~~amount ~~common~~that ~~stock~~would ~~or convertible~~be ~~securities~~received ~~subject~~ to ~~certain~~sell ~~exceptions,~~an ~~including~~asset ~~the grant of options to purchase common stock to employees, officers, directors~~ or ~~consultants~~ ofpaid ~~the Company. In addition, the noteholder has the right~~ to ~~vote~~transfer ona ~~all~~liability ~~matters~~in ~~to which holders of the Company’s common stock are entitled to vote, on~~ an ~~as-converted~~orderly ~~basis~~transaction ~~using~~between ~~the~~market ~~closing bid price immediately preceding the closing date as the conversion rate~~participants. ~~Pursuant~~ toAs ~~the terms of the convertible subordinated note, effective upon~~ such ~~stockholder approval~~, ~~Rockport~~fair ~~would~~value ~~have~~is ~~the right to vote approximately 32% of the Company’s common stock; however, Rockport has entered into~~ a ~~voting~~market-based ~~agreement~~measurement ~~with~~that ~~the~~should ~~Company’s~~be ~~Chief~~determined ~~Executive~~based ~~Officer,~~on ~~Claudio Guazzoni,~~assumptions ~~pursuant~~that tomarket ~~which~~participants itwould ~~has~~use ~~appointed Mr. Guazzoni as its proxy to vote on Rockport’s behalf~~ in ~~all~~pricing ~~matters~~an toasset ~~which~~or ~~stockholders are entitled to vote beginning upon such stockholder approval and continuing for the term of the note~~liability. On ~~September~~As ~~17, 2010, Rockport elected to reset the conversion price to $1.608 per share. This resulted in~~ a ~~convertible~~basis ~~debt discount~~for ofconsidering ~~$1,369,054~~such ~~which will be amortized over the life of the loan. In the three and nine months ended September 30~~assumptions, ~~2010,~~there ~~the Company~~exists ~~incured~~ a ~~non~~three-~~cash~~tier ~~interest~~fair ~~expense~~value ~~of $8~~hierarchy,~~435~~ ~~related~~which toprioritizes ~~Rockport’s convertible note. At September 30, 2010~~ the ~~balance~~inputs onused ~~the convertible~~in ~~note~~measuring ~~which~~fair ~~had~~value ~~not~~as ~~been amortized was $1,360,619.~~follows:

~~The Company~~• ~~may~~Level ~~prepay~~1 ~~the~~- ~~convertible~~unadjusted ~~note~~quoted atprices ~~any~~in ~~time,~~active ~~subject~~markets tofor aidentical ~~prepayment premium. The~~assets ~~Company~~or ~~may~~liabilities ~~request~~ that ~~Rockport~~the ~~accept~~Company ~~any~~has ~~prepayments of~~the ~~principal~~ability ~~and/or~~to ~~any~~access ~~scheduled~~as ~~payments~~ of ~~interest in shares of~~ the ~~Company’s~~ ~~common~~measurement ~~stock, but Rockport is not required to accomodate the Company’s request~~date.

In• ~~May 2010~~Level ~~the~~2 ~~Company~~- ~~issued~~inputs aother ~~promissory~~than ~~note~~quoted ~~payable~~prices toincluded ~~Rockport~~within inLevel ~~the principal amount of $500,000. This note bears interest at~~ 1~~.5%~~ ~~per~~that ~~month~~are ~~and was~~directly ~~payable~~observable onfor ~~July 27, 2010. On August 13, 2010,~~ the ~~Company~~asset ~~and Rockport~~or ~~entered~~liability ~~into~~or anindirectly ~~amendment~~observable tothrough ~~this~~corroboration ~~note~~with ~~extending~~observable ~~the~~market ~~maturity date to October 10, 2010 at the same interest rate~~data. ~~To date, this promissory note remains outstanding and payable to Rockport.~~

•

Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

~~Revolving~~The ~~Credit Facility~~Company’s recurring fair value measurements at March 31, 2011 were as follows:

On December 31, 2006 the Company entered into a revolving credit facility with LaSalle, which facility is now with Bank of America, as successor-by-merger to LaSalle. The agreement was amended on May 31, 2007, November 14, 2007, March 18, 2008, January 22, 2009 and December 21, 2009. As amended, the available line of credit was based on 80% of eligible accounts receivable up to a maximum of $6,000,000, which has since been decreased as described below. Loans under the revolving credit facility bear interest at a rate per annum equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 0.5% or (c) the 30-day LIBOR rate plus 1.0%, in each case plus 3.0% per annum, which has since been increased as described below. In addition to the credit facility, Bank of America provides the Company with treasury and cash management services. The facility is secured by a first priority lien on all of the Company’s assets. In addition to the interest charges there is an unused line fee of 1/2% per annum, payable monthly. At September 30, 2010, fees paid to the bank and attorneys were $178,825. These fees were classified as other assets in our balance sheet and amortized over the life of the loan. The credit facility terms require the Company to meet certain financial covenants, including a fixed charge coverage ratio of 1.25 to 1.0, a maximum senior debt ratio of 2.5 to 1.0, maintenance of minimum net availability of $500,000 at all times, and excess cash flow of not less than $0 at all times, tested quarterly. The Company was not in compliance with these covenants as of September 30, 2010. As amended, the credit facility matured on June 21, 2010. The Company’s line of credit is subject to a forbearance agreement, entered into between the Company and Bank of America on June 21, 2010, amended on July 21, 2010, following expiration of the previous forbearance term, and amended again on September 28, 2010, following expiration of the previous forbearance term, with a forbearance term expiring on October 31, 2010. Under the forbearance agreement, as amended, the advance rate was reduced from 80% of the face amount of eligible accounts receivable to 62.5% of the face amount of eligible accounts receivable, and the maximum revolving loan limit was reduced to $5,000,000. Under the forbearance agreement, as amended, interest on loans under the line of credit was increased by 2.0% to 5.0% per annum over the base rate of the revolving credit facility. To date, the respective obligations of Bank of America and the Company remain in forbearance pursuant to the forbearance agreement, as amended.

	Fair Value as of March 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Derivative liability	$	151,744	$	—	$	—	$	151,744

The ~~Company~~ ~~had~~table ~~borrowings~~below ~~under~~provides ~~its~~a ~~revolving~~reconciliation ~~line~~ of ~~credit~~the ~~with~~beginning ~~Bank~~and ofending ~~America of~~balances ~~$4,617,484~~for asthe major classes of ~~September~~assets ~~30,~~and ~~2010,~~liabilities ~~which~~measured isat ~~reflected~~fair asvalue ausing ~~current liability~~significant onunobservable ~~the~~inputs ~~balance~~(Level ~~sheet~~3). ~~Available~~ ~~borrowings~~The ~~under~~table reflects gains and losses for the ~~revolving~~ ~~line~~quarter offor ~~credit~~all ~~were~~financial ~~$324,295~~liabilities categorized as Level 3 as of ~~September~~March 3031, ~~2010~~2011.

~~The Company~~Fair isValue ~~currently~~Measurements inUsing ~~discussion~~Significant toUnobservable ~~replace~~Inputs ~~its~~(Level ~~revolving credit facility.~~ 3):

Renewable Unsecured Subordinated Debt

	Increases (decreases) during the quarter ended March 31, 2011

Balance as of January 1, 2011	$	149,577

Increase in fair value of derivative liability	$	2,167
Balance as of March 31, 2011	$	151,744

~~In December~~Note ~~2004,~~9 ~~the~~– ~~Company~~Income filed a public offering of up to $50,000,000 of Renewable Unsecured Subordinated Notes that was declared effective in February 2005. Through September 30, 2010, the Company has issued $2,002,792 in renewable unsecured subordinated notes net of redemptions. The Company had no gains or losses or redemptions during the nine months ended September 30, 2010 and 2009. The table below presents the Company’s outstanding notes payable as of September 30, 2010:Taxes

The Company did not utilize any net operating loss carryforwards to offset income taxes for the three months ended March 31, 2011 and 2010. The Company applies ASC 740 relating to accounting for uncertainty in income taxes. A tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position is sustainable based on its technical merits. Additionally, this pronouncement provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company does not have any liabilities for uncertain tax positions at March 31, 2011.

		(Unaudited)
								Weighted
	Original	Principal						Average
	Term	Amount			Percentage			Interest Rate
Renewable unsecured	3 months	$	45,781			2.29	%		7.71	%
subordinated notes	6 months		26,500			1.32	%		8.66	%
	1 year		565,705			28.25	%		12.51	%
	2 years		522,729			26.10	%		12.96	%
	3 years		692,981			34.60	%		13.76	%
	4 years		43,500			2.17	%		14.92	%
	5 years		28,096			1.40	%		12.22	%
	10 years		77,500			3.87	%		8.77	%
Total		$	2,002,792			100.00	%		12.80	%
Less current portion
of notes payable			(1,309,873	)
Long-term portion			692,919

The Company recognized interest expense on the above mentioned unsecured subordinated notes during the nine months ended September 30, 2010 and 2009 in the amounts of $175,331 and $165,482, respectively.

Note 8. Recent Accounting Pronouncements

In September 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”), which excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of Subtopic 985-605, “Revenue Recognition.” ASU 2009-14 is effective for periods beginning after December 15, 2009 with earlier adoption permitted. The adoption of ASU 2009-14 did not have a material impact on our consolidated financial statements.

October 2009, the FASB issued ASU 2009-13 which supersedes certain guidance in ASC 605-25, “Revenue Recognition – Multiple Elements Arrangements”. This topic requires and entity to allocate arrangements consideration at the inception of an arrangement to all of its deliverable based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company is currently evaluating the impact that this topic will have on its consolidated financial statements.

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 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 further or prolonged general economic downturn; a further or prolonged downturn in the securities or credit markets; federal or state laws or regulations having an adverse effect on the Company; and other risks and uncertainties. Please see Item 1A of the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, ~~2009~~2010 for a discussion of important risk factors that relate to the forward looking statements in this report. 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.

15The 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, as amended, for the year ended December 31, 2010 as filed with the SEC.

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, as amended, for the year ended December 31, 2009 as filed with the SEC.

Overview

Zanett is 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~~March 3031, ~~2010~~2011 versus ~~three months ended September 30, 2009~~2010

In the ~~three~~ ~~months~~first quarter ended ~~September~~March 3031, ~~2010~~2011, we generated revenues of $12,~~697~~360,~~163~~489, an increase of $21,~~794~~660,~~043~~568, or ~~28.2~~16%, from ~~revenues~~the of $910,~~903~~699,~~120~~921 generated in the ~~third~~ first quarter of ~~2009~~2010. This increase in revenue ~~was~~can ~~attributable~~be toattributed ~~the commencement~~primarily ~~of services pursuant~~ to ~~several~~an ~~contracts~~increase ~~which were signed late~~ in ~~2009~~ ~~and~~demand ~~early~~for ~~2010 under which we began to perform~~ our services ~~late~~particularly inamong ~~the first~~our ~~quarter~~core ofcustomers ~~2010~~as ~~and~~well ~~continued~~as toour ~~perform~~expanding ~~services~~health incare ~~the~~and ~~three~~public ~~months ended~~sector ~~September 30, 2010~~businesses.

~~Cost~~Costs of ~~revenue~~ revenues increased in17.6% to $9,253,916 during the three months ended ~~September~~March 3031, ~~2010~~2011, ~~compared~~versus to$7,867,260 for the same period in ~~2009,~~2010. This increase was primarily asattributed to our increase in revenue and, accordingly, a ~~result~~corresponding ofincrease in the ~~start~~billable ofhours ~~projects~~for which ~~began~~ we utilized our work force. However, gross margins for the three months ended March 31, 2011 decreased to 25.1% of revenues from 26.5% in the same period in 2010. ~~This~~ The ~~resulted~~decline in agross $1margins was attributable,~~592~~ in part,~~918~~ ~~increase~~to lower bill rates offered to customers in ~~cost~~an ofeffort ~~revenue~~to increase our customer base in the ~~quarter~~health ~~ended~~care ~~September~~and 30public sector markets. Our gross margins are an important factor in our ongoing business, ~~2010~~and asa ~~compared~~further decline in gross margins could have an adverse effect on our results of operations and financial condition. While we have taken steps to increase our gross margins, such as expanding our offshore operations in the ~~third~~Philippines ~~quarter~~and ~~of 2009~~seeking to increase our average bill rate to customers, there is no assurance that these steps will be effective in increasing our gross margins.

Our selling and marketing expense was $1,584,944 for the quarter ended September 30, 2010, as compared with $1,213,919 during the quarter ended September 30, 2009. This increase resulted from our continued investment in our marketing activities in the third quarter of 2010 compared to the third quarter of 2009.15

~~General~~ Our selling and ~~administrative~~marketing ~~expenses~~expense was $1,385,452 for the ~~third~~ quarter ofended ~~2010~~March ~~were~~31, $12011,~~734,351~~ as compared towith $1,~~921~~365,~~374~~643 induring the ~~third~~ quarter ofended ~~2009,~~March ~~representing a decrease of $187~~31,~~023~~ ~~or 9~~2010.~~7%.~~ This Inslight ~~the~~increase ~~third~~is ~~quarter~~a ofresult ~~2010 there was no expense for stock based compensation for employees and contractors as compared to an expense~~ of ~~$162,987~~ ~~for~~our ~~the~~continued ~~comparable~~investment ~~period~~ in ~~2009. In~~our ~~addition,~~marketing ~~reduced expenses~~activities in ~~several~~order ~~other office related areas such as rent and IT infrastructure also contributed~~ to ~~the~~attract ~~overall~~new ~~reduction~~customers ~~in general~~ and ~~administrative~~ ~~expenses~~retain ~~during~~our ~~the~~existing ~~third~~customer ~~quarter of 2010~~base.

General and administrative expenses for the first quarter of 2011 were $1,823,378 as compared to $1,485,317 in the first quarter of 2010, representing an increase of $338,061, or 22.7%. This increase can be attributed to a slight increase in headcount, an increase in professional fees and an increase in certain license fees in 2011 as compared to 2010.

For the reasons discussed above, our operating loss in the first quarter of 2011 was $102,257, compared to our operating loss of $18,299 in the comparable prior year period.

Net interest expense increased $176,825, or 51%, to $525,518 in the quarter ended March 31, 2011 from $348,693 in the quarter ended March 31, 2010. In addition to interest on our working capital debt, in the first quarter of 2011 we accrued interest on the $500,000 promissory note we issued to Rockport in May of 2010, and we did not have this interest expense for that same period in 2010. In addition, we recorded interest of approximately $80,000 on the accrued interest from the unpaid interest on the Rockport convertible debt. We recorded an expense of $2,167 in three months ended March 31, 2011 in connection with the increase in fair value of the derivative liability recorded pursuant to the Rockport convertible debt. No such items existed in same period of 2010. In addition we recorded interest expense of $3,031, which represents the portion attributable to the quarter ended March 31, 2011 for the payment made to the IRS in connection with the settlement and release of a tax lien instituted by the IRS following an audit of our tax return for the fiscal year ended December 31, 2007 (see note 5).

On a consolidated basis, the effect of the increases in revenue, selling and marketing expense, general and administrative expense, and an increase in net interest expense discussed above resulted in a loss from continuing operations before income taxes of $627,775 for the quarter ended March 31, 2011 compared to a loss from continuing operations of $366,992 for the comparable period last year.

In the three months ended March 31, 2011 we recorded an income tax provision of zero compared to an income tax provision of $25,000 for the same three month period in 2010.

~~Due~~Deferred income tax assets and liabilities are recognized based on the expected future tax consequences attributable to differences between the ~~increase~~financial instatement ~~revenues~~carrying amounts of existing assets and liabilities and their respective tax bases, ~~offset~~as measured by tax rates that are expected to be in effect in the ~~cost~~periods ofwhen ~~revenues~~the deferred tax assets and ~~selling~~liabilities are expected to be realized or settled. We also assess the likelihood of the realization of deferred tax assets and ~~marketing~~ ~~expenses~~adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, ~~our~~including ~~operating~~recent earnings results, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the ~~third~~required ~~quarter~~valuation allowance are recorded in income in the period such determination is made. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of ~~2010~~pretax ~~was $382~~income (loss),~~738~~ settlements with various tax authorities, ~~compared~~either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. It is our ~~operating~~policy ~~loss~~to recognize the impact of ~~$525,296~~an inuncertain income tax position on our income tax return at the ~~comparable~~largest ~~prior year~~amount ~~period~~that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.

~~Net interest~~As ~~expense~~a ~~decreased~~result ~~$6,071,~~of orthe ~~1.9%~~above, tofor ~~$311,241 in~~ the quarter ended ~~September~~ ~~30,~~March ~~2010 from $317~~31,~~312~~ ~~in the quarter ended September 30~~2011, ~~2009.~~we ~~This resulted~~reported ~~from~~ a ~~decrease~~net inloss ~~working~~of ~~capital borrowings~~$627,775 ~~along with a lower interest rate on the Rockport convertible note as~~ compared to ~~the~~net ~~interest~~loss ~~rate on~~of ~~the~~$391,992 ~~Company’s~~for ~~debt~~the ~~with~~quarter aended ~~related~~March ~~party~~31, ~~in the third quarter of 2009~~2010.

On a consolidated basis, the effect of the increases in revenue, cost of revenue, and in selling and marketing expense, and the decrease in general and administrative expense and net interest expense discussed above resulted in income from continuing operations before income taxes of $382,738 for the quarter ended September 30, 2010 compared to a loss from continuing operations before income taxes of $525,296 for the comparable period last year.

Based upon the accounting principles described in the paragraph below, in the three months ended September 30, 2010 we recorded an income tax benefit of $23,163 compared to an income tax benefit of $24,536 for the same three month period in 2009.

Deferred income tax assets and liabilities are recognized based on the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. We also assess the likelihood of the realization of deferred tax assets and adjust the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe it is more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. It is our policy to recognize the impact of an uncertain income tax position on our income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.

As a result of the above, for the quarter ended September 30, 2010, we reported net income of $94,660 compared to a net loss of $818,072 for the quarter ended September 30, 2009.

Nine months ended September 30, 2010 versus nine months ended September 30, 2009

Our revenues were $35,155,185 for the nine months ended September 30, 2010 versus revenues of $31,795,705 for the nine months ended September 30, 2009, an increase of $3,359,480 or 9.6%. This increase in revenue can be attributed primarily to the continued focus and success of our sales, delivery and marketing teams. As a result, primarily, of this increase in revenues, costs of revenues also increased by 13.4%. Selling and marketing expenses increased 3.2%, from $4,269,631 in the nine months ended September 30, 2009 to $4,405,101 for the first nine months of 2010.

General and administrative expenses for the first nine months of 2010 were $4,877,705 as compared to $5,620,186 in the first nine months of 2009, representing a decrease of $742,481, or 13.2%. This decrease is a result of stock based compensation of $481,775 expensed in 2009 as compared to no expense in 2010. In addition, reduced expenses in several other office related areas such as rent and IT infrastructure also contributed to the overall reduction in general and administrative expenses during the nine months ended September 30, 2010.

For the reasons discussed above, our operating income in the first nine months of 2010 was $284,299 compared to our operating loss of $652,931 in the comparable prior year period.

Net interest expense increased slightly by $1,505, or .01%, to $961,419 for the nine months ended September 30, 2010 from $959,914 for the same period in 2009. This increase in interest expense was a result of the repayment of debt with a portion of the proceeds from the PDI transaction and cash flow from continuing operations in 2009, but no corresponding repayments were made in 2010. In addition, the interest rate on the Rockport convertible note was less than the interest rate on the related party debt in the corresponding prior period.

In the first nine months of 2010, we recorded an income tax expense of $16,124 versus an income tax expense of $9,600 in the same period last year.

In addition, we recorded an $887,500 gain on the sale of PDI in the nine months ended September 30, 2009, and no similar gain was recorded in the nine months ended September 30, 2010.

As a result of the above, for the nine months ended September 30, 2010, we reported a net loss of $693,244 compared to a net loss of $734,945 for the nine months ended September 30, 2009.

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, as amended, for the year ended December 31, ~~2009~~ 2010 during the first ~~nine~~three months of ~~2010~~2011. 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~~ 30March 31, ~~2010~~2011 we had cash and cash equivalents of $78157,~~270~~805, representing ~~a decrease~~an increase of $~~102~~98,~~328~~333 from the December 31, ~~2009~~2010 year-end balance of $~~180~~59,~~598~~472.

Cash used in operating activities was $~~129~~100,~~173~~632 for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~ 2011 compared to cash ~~used~~provided inby operating activities of $~~574~~923,~~822~~342 for the same period in ~~2009~~2010. The cash used in operating activities of $~~129~~100,~~173~~632 for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 was primarily due to an increase in ~~accounts~~ ~~payable,~~unbilled ~~other liabilities~~revenue, ~~customer~~prepaid ~~deposits~~expenses and ~~deferred~~other ~~revenue,~~ assets which was partially offset by an increase in accounts ~~receivable and accrued expenses~~payable.

Cash used in investing activities was $~~448~~315,~~115~~940 for the ~~nine~~quarter ~~months~~ ended ~~September~~March 3031, ~~2010~~ 2011 compared to cash ~~provided~~used byin investing activities of $~~160~~154,~~347~~923 for the corresponding period in ~~2009~~2010. ~~The 2009 inflow primarily reflected proceeds of $720,833 from the PDI disposition.~~ In ~~2010~~2011 we had additions to property and equipment of $~~383~~200,~~115~~940 as well as $65115,000 of contingent consideration payments in the ~~third~~first quarter of ~~2010~~2011, as compared to $~~317~~107,~~657~~423 and $~~242~~47,~~829~~500, respectively, paid in the ~~third~~first quarter of ~~2009~~2010.

Cash provided by financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~ 2011 was $~~474~~615,~~960~~130 asversus ~~compared~~cash toused ~~cash~~in ~~provided~~financing activities of $51877,~~773~~534 for the same period in ~~2009~~ 2010. This difference ~~resulted~~results from the proceeds from long term borrowings of approximately $~~500~~939,~~000~~378 in ~~short~~the ~~term debt~~first inquarter ~~the~~of ~~second~~2011 ~~quarter~~as well as payments of ~~2010~~debt issuance costs of 347,188 in that same quarter.

In March 2008 the Company sold all of the issued and outstanding common stock of PDI for cash to KOR Electronics. This transaction resulted in a cash payment of $8.7 million with a holdback amount of $875,000 that was paid to the Company on March 17, 2009. With the proceeds from this transaction, the Company repaid in full promissory notes in an aggregate principal amount of $3,000,000 owing to Bruno Guazzoni and approximately $5,000,000 of short term debt.

On ~~December~~ 31January 27, ~~2006~~2011, we entered into a ~~revolving~~Revolving ~~credit~~Credit ~~facility~~and Security Agreement with ~~LaSalle~~PNC Bank , National Association (the “~~LaSalle~~Credit Agreement”). The ~~agreement~~Credit ~~was~~Agreement ~~amended~~allows onfor ~~May~~revolving 31credit borrowings in a principal amount of up to $10.0 million. Borrowings under the Credit Agreement bear interest at either (a) LIBOR plus the applicable margin, ~~2007~~or ~~and November~~(b) 14the Base Rate (as defined in the Credit Agreement) plus the applicable margin. The loan will be used to provide for our business purposes, ~~2007~~including without limitation, to provide for our future working capital requirements. AsThe ~~amended~~Company and Zanett Commercial Services, Inc., the ~~available~~Company’s ~~line~~wholly-owned ofsubsidiary ~~credit~~(“ZCS”) ~~was~~are ~~based~~jointly onand ~~80%~~severally liable for all of ~~eligible~~ ~~accounts~~the ~~receivable~~obligations upof toeach aother ~~maximum~~under ofthe $8Credit ~~million~~Agreement. The ~~line~~loan is secured by substantially all of ~~credit with~~the ~~LaSalle~~assets ~~was~~of ~~further~~the ~~amended~~Company onand ~~March~~ZCS. 18Subject to the PNC's right to accelerate the loan upon the occurrence of an event of default (subject to applicable cure periods), ~~2008~~the atZanett and ZCS must repay the ~~time~~loan on January 27, 2014. Events of default under the ~~sale~~Credit Agreement include, but are not limited to, the following: (a)cross default in respect of ~~PDI.~~ ~~The~~certain ~~Company~~significant ~~paid~~contracts ~~down~~of $5the Company,~~700~~ ZCS,~~000~~ or any of their existing indebtedness that has been subordinated to the ~~outstanding~~loan; ~~balance~~(b) onthe insolvency of the ~~line~~Company or ZCS or the appointment of ~~credit~~ ata receiver or trustee for either of them; (c) unsatisfied judgments in excess of certain threshold amounts; (d) a change of control of the ~~time~~Zanett or ZCS in certain circumstances; and (e) default under any of the ~~amendment~~Zanett’s or ZCS’ covenants under the Credit Agreement. There are financial covenants in the Credit Agreement including a fixed charge coverage ratio covenant under which Zanett and ZCS are required to maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 as of the end of each relevant period. The Company was in compliance with these covenants as of March 31, 2011.

~~On January~~The ~~22, 2009, the~~ Company ~~and~~had ~~ZCS~~borrowings ~~entered~~under ~~into~~its arevolving ~~Fifth~~line ~~Amendment and Modification to Loan and Security Agreement and Other Loan Documents with Bank~~ of ~~America,~~credit ~~N.A. (“Bank~~ of ~~America”), as successor-by-merger to LaSalle. The amendment increased the maximum revolving loan limit to~~ $~~6 million from $5 million and modified the fixed charge coverage ratio test required by the loan agreement. As amended~~4,490,865 ~~the loan agreement requires the borrowers~~ to ~~maintain~~PNC ~~a fixed~~as ~~charge coverage ratio~~ of ~~not~~March ~~less than 1.25 to 1.0 for the twelve month period ended on December~~ 31, ~~2008 and each twelve month period ending on the last day of each fiscal quarter thereafter. In addition~~2011, ~~the~~which ~~loan~~is ~~agreement~~reflected ~~also waived the EBITDA covenant for the November 2008 calendar month and terminated the EBITDA covenant~~ as of the date of the amendment. Further, the amendment raised the face amount of the borrowers’ eligible accounts receivable from 60% to 80%. At September 30, 2010, the outstanding loan balance was $4,617,784 with available borrowings of $324,295. The credit facility matured on June 21, 2010 and the Company entered into a ~~forbearance~~current ~~agreement~~liability ~~with Bank of America~~ on ~~June~~ ~~21, 2010 and amended~~ the ~~forbearance~~balance ~~agreement on July 21, 2010, following expiration of the first forbearance term~~sheet. ~~Under~~ Borrowings ~~the~~available ~~first~~under ~~forbearance agreement,~~ the advance rate was reduced from 80% of the face amount of eligible accounts receivable by 2.5% each Tuesday commencing on July 6, 2010, and continuing until the expiration of the forbearance term on August 21, 2010. On September 28, 2010, the Company extended the forbearance agreement to October 31, 2010. Under the forbearance agreement, as amended, the advance rate was reduced from 80% of the face amount of eligible accounts receivable to 62.5% of the face amount of eligible accounts receivable, the maximum revolving ~~loan limit was reduced from $6,000,000 to $5,000,000, and interest on loans under the~~ line of credit ~~was~~were ~~increased by 2.0% to 5.0% per annum over the base rate of the revolving credit facility. To date~~$1, ~~the~~149,173 ~~respective~~as ~~obligations~~ of ~~Bank~~March ~~of America and the Company remain in forbearance pursuant to the forbearance agreement~~31, ~~as amended~~2011.

19Notes

On March 15, 2009, ZCS replaced two promissory notes, one for $1,500,000 and the other for $3,075,000, both entered into on December 30, 2005 with Bruno Guazzoni, with a combined promissory note for $4,575,000 having a maturity date of March 15, 2010. This new note required quarterly payments of interest at the rate of eleven percent (11%) per annum. Principal was repayable at maturity. The ~~Company~~ isnote ~~currently~~could be prepaid without penalty. This was sold February 28, 2010 in ~~discussions~~connection towith ~~replace~~the orRockport ~~refinance~~transaction discussed in Note 7 to the ~~Bank~~condensed ofconsolidated ~~America credit~~financial ~~facility~~statements.

~~The Company~~In ~~had~~May a2010 ~~line~~the ofCompany ~~credit~~issued ~~agreement~~a ~~with~~promissory ~~Bruno~~note ~~Guazzoni~~payable to Rockport in the principal amount of $3500,000~~,000~~. ~~The~~ ~~interest~~This ~~rate~~note onbears ~~the~~interest ~~line~~at of1.5% ~~credit~~per month and was ~~prime~~payable ~~plus two~~on ~~percent~~July 2%27, 2010. ~~This~~ ~~line~~On ~~was~~August ~~available~~13, ~~for~~2010, ~~working~~the ~~capital requirements~~Company and ~~was~~Rockport ~~unrestricted. The~~entered ~~line~~into ~~had~~an aamendment to this note extending the maturity date ~~of March~~to 15October 10, 2010 at the same interest rate. ~~The~~On ~~line~~January of27, ~~credit~~2011, this note was ~~sold~~amended byto ~~Bruno~~extend ~~Guazzoni~~the maturity date to ~~Rockport Investments~~February ~~Ltd~~2014 under the same terms. ~~(“Rockport”)~~In onMay ~~February~~2011 ~~28,~~this ~~2010~~note inwas aamended ~~private~~to ~~transaction~~include ~~and later~~the ~~exchanged~~accrued but unpaid interest for athe ~~convertible~~period ~~note~~from March 31, in2010 ~~each~~to ~~case~~and asincluding ~~described below~~March 31, 2011, the new balance of this note is $588,168.

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 15, 2010 (extended from February 21, 2009) and required quarterly payments of interest at the rate of eleven percent (11%) per annum. Principal was repayable at maturity. The note could be pre-paid without penalty. The proceeds of this note were used to fund the cash portion of consideration paid at closing for the acquisition of DBA. This was sold February 28, 2010 in connection with the Rockport transaction discussed below.18

On ~~March 15~~February 28, ~~2009~~2010, ~~ZCS~~Mr. ~~replaced~~Guazzoni ~~two~~sold ~~promissory~~the ~~notes,~~line ~~one~~of ~~for~~credit ~~$1,500,000~~ and the ~~other for~~promissory ~~$3,075,000,~~notes ~~both~~issued ~~entered~~by ~~into~~ZCS onto ~~December~~Rockport ~~30,~~in ~~2005 with Bruno Guazzoni, with~~ a ~~combined~~private ~~promissory~~transaction. On ~~note~~March ~~for $4~~31,~~575,000~~ ~~having~~2010 awe ~~maturity~~exchanged ~~date~~the ofdebt ~~March~~held ~~15, 2010.~~by ~~This~~Rockport for a new note ~~required~~convertible ~~quarterly~~into ~~payments~~shares of ~~interest~~our atcommon ~~the~~stock ~~rate~~at ~~of eleven~~any ~~percent~~time ~~(11%)~~following ~~per~~stockholder ~~annum.~~approval ~~Principal~~of ~~was~~the ~~repayable~~transaction at ~~maturity.~~the option of the noteholder. The note ~~could~~ behas ~~prepaid~~a ~~without~~principal ~~penalty.~~amount ~~This~~of ~~was~~$7,131,983 ~~sold~~and ~~February~~bears ~~28,~~interest ~~2010~~at ina ~~connection with~~rate ~~the~~of ~~Rockport~~7.95% ~~transaction~~per ~~discussed~~annum, ~~below~~payable quarterly in arrears.

On ~~February~~ 28May 20, ~~2010~~2011, ~~Mr. Guazzoni sold~~ the ~~line~~Company ~~of credit~~ and ~~the~~Rockport ~~promissory~~entered ~~notes issued~~into byan ~~ZCS~~amendment to the Rockport inconvertible anote ~~private~~(the ~~transaction~~“Note Amendment”). OnUnder ~~March~~the 31Note Amendment, ~~2010 we~~interest ~~exchanged~~and ~~the~~penalties ~~debt~~payable ~~held~~under bythe Rockport ~~for~~convertible ~~a new~~ note ~~convertible~~in ~~into~~the ~~shares~~amount of ~~our~~ ~~common~~approximately ~~stock~~$647,128 atwere ~~any~~consolidated ~~time~~in ~~following~~the ~~stockholder~~unsecured ~~approval~~promissory ofnote ~~the~~described ~~transaction at~~in ~~the~~Note ~~option~~1 offor the ~~noteholder,~~period ~~which~~of ~~our~~March ~~stockholders~~31, ~~approved~~2010 atto ~~our~~and ~~May~~including 20March 31, ~~2010~~ ~~annual meeting of stockholders~~2011. ~~The~~Other ~~note~~than ~~has~~the acapitalization ~~principal amount~~ of ~~$7,131,983~~the ~~and~~interest ~~bears~~described ~~interest~~above, atthe aRockport ~~rate~~convertible ofnote ~~7.95%~~remains ~~per~~an ~~annum,~~outstanding ~~payable~~liability ~~quarterly in~~of ~~arrears~~the Company.

~~Because of~~In ~~our~~May ~~net~~2011 ~~loss~~the ~~from~~Company ~~continuing~~issued ~~operations,~~a ~~our~~promissory ~~working~~note ~~capital~~payable ~~deficit,~~to Rockport in the ~~current~~ ~~maturity~~principal ~~date~~amount of ~~our~~approximately ~~revolving credit facility~~$1,212,128. ~~and~~This ~~our~~note ~~limited~~bears ~~access to~~interest ~~additional~~at ~~borrowings~~1.5% ~~under~~per ~~these~~month ~~financing~~and ~~arrangements, there~~ is ~~substantial~~ ~~doubt~~payable ~~about~~on ~~our~~February ~~ability~~1, to2014, ~~continue~~ as afurther ~~going concern. The~~described ~~accompanying~~in ~~condensed~~Note ~~consolidated~~1 ~~financial statements do not include any adjustments relating~~ to the ~~recoverability~~condensed ofconsolidated ~~the~~financial ~~carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern~~statements.

20Because of our net loss from continuing operations in 2010 and the first quarter of 2011, our working capital deficit and our limited access to additional borrowings under our financing arrangements, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.

Management will continue to monitor the Company’s cash position carefully and evaluate ~~its~~ our future operating cash requirements with respect to its strategy, business objectives and performance. However, ~~due~~if tothere ~~the~~are ~~scheduled~~any ~~debt maturities~~unforeseen ~~discussed~~downturns ~~above~~in its business, the Company ~~will~~may require additional capital or other sources of financing in order to meet its commitments. If necessary we will explore other sources of capital to fund future acquisitions and provide additional working capital. We also continue to explore other opportunities that may be available to maximize the Company’s value for its ~~stock holders~~stockholders, including strategic transactions. During the second quarter of 2010, we hired an investment banker to research several potential alternative strategies. These strategies include evaluation of acquisition targets, the potential sale or merger of the Company or ZCS, and/or voluntary delistment off of the Nasdaq exchange. All strategies are being deliberated as a means of enhancing shareholder value. However there is no assurance that any of these strategic alternatives will be accomplished. As a result of tightening of the credit markets and volatility in the equity markets, it may be difficult for us to secure ~~such~~ additional liquidity sources on favorable terms or at all. If we cannot ~~secure~~obtain additional funding, we will be unable to finance our acquisition strategy and/or continue our organic growth, and we may need to reduce the scope of our existing operations and/or curtail some of our present operations.

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, however, 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 our common stock from time to time in open market transactions. As a result of the plan, through September 30, 2010, we have repurchased a total of 14,915 shares of common stock. These shares are reflected as treasury stock on the balance sheet. In the quarters ended September 30, 2010 and 2009, no shares were repurchased.19

~~Recent Accounting~~Our ~~Pronouncements~~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 our common stock from time to time in open market transactions. As a result of the plan, through March 31, 2011, we have repurchased a total of 14,915 shares of common stock. These shares are reflected as treasury stock on the balance sheet. In the quarters ended March 31, 2011 and 2010, no shares were repurchased.

See Note 8 to the Condensed Consolidated 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 - 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 amended (the “Securities Exchange Act”) as of the end of the quarter 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, management concluded that, subject to the ~~Chief~~inherent ~~Executive~~limitations ~~Officer~~identified ~~and~~in ~~Chief~~Item ~~Financial~~4 ~~Officer~~of ~~concluded that~~Part I of this Quarterly Report on Form 10−Q, our disclosure controls and procedures were not effective as of ~~September~~March 3031, ~~2010,~~2011 ~~the~~due ~~design~~to ~~and~~the ~~operation~~existence of a material weakness in our internal control over financial reporting because we did not correctly disclose in prior periods the ~~Company’s disclosure~~IRS ~~controls~~assessments and ~~procedures~~tax ~~were~~lien ~~effective~~resulting from non-payment of tax withholdings on interest payments to a related party, as described in Note 5 of this Quarterly Report on Form 10−Q.

21For the year ended December 31, 2010, management had concluded that, subject to the inherent limitations identified in Item 9A of Part II of the Annual Report to the Form 10-K, our disclosure controls and procedures were not effective due to our independent registered public accounting firm identifying the existence of a material weakness in our internal control over financial reporting because we did not correctly account for the conversion feature in the convertible note issued to Rockport on March 31, 2010, as further described in Item 9A of Part II of the Annual Report on Form 10-K.

~~During the~~A ~~fiscal~~material ~~quarter~~weakness ~~covered~~is bya ~~this quarterly report~~deficiency, ~~there~~or ~~have~~combination ~~been~~of nodeficiencies, ~~changes~~ in ~~the Company’s~~ internal control over financial reporting such that ~~have~~there ~~materially affected,~~is ora ~~are~~reasonable ~~reasonably~~possibility ~~likely~~that toa ~~materially~~material ~~affect,~~misstatement of the Company’s ~~internal control~~annual ~~over~~or interim consolidated financial ~~reporting~~statements will not be prevented or detected on a timely basis.

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies. We cannot be certain that our remediation efforts will ensure that our management designs, implements and maintains adequate controls over our financial processes and reporting in the future or will be sufficient to address and eliminate the material weakness identified. Our inability to remedy the identified material weakness or any additional deficiencies or material weaknesses that may be identified in the future could, among other things, have a material adverse effect on our business, results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and other reporting requirements under the Securities Exchange Act of 1934 in a timely manner, and require us to incur additional costs and to divert management resources.

During the first fiscal quarter covered by this Quarterly Report on Form 10−Q, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 6 – Exhibits

3.1 (2)		Certificate of Incorporation, as amended
3.1(1)		Certificate of Incorporation
3.2 (1)		Bylaws
3.2(2)		Bylaws
31.1 (4)		Certification of the Chief Executive Officer pursuant to Rule 13a
31.1(3)		Certification of the Chief Executive Officer pursuant to Rule 13a 14(a)/15d-14(a)
		14(a)/15d-14(a)
31.2(3)		Certification of the Chief Financial Officer pursuant to Rule 13a 14(a)/15d(a)
31.2 (4)		Certification of the Chief Financial Officer pursuant to Rule 13a
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
		14(a)/15d(a)
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
32.1 (3)		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 (3)		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~~Quarterly Report on Form 10-KQ for the ~~year~~ quarter ended ~~December~~June 3130, ~~2009~~2010.

(2) Incorporated by reference to the Company’s ~~Quarterly~~Annual Report on Form 10-QK for the ~~quarter~~ year ended ~~June~~December 3031, ~~2010~~2009.

(3) ~~Furnished~~ Filed herewith.

(4) ~~Filed~~ Furnished herewith.

2221

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 15, 2010	/s/ Claudio M. Guazzoni
Dated: June 8, 2011	/s/ Claudio M. Guazzoni
	Claudio M. Guazzoni, Chairman and Chief Executive Officer (Principal Executive Officer)
	Claudio M. Guazzoni, Chairman and Chief
Dated: November 15, 2010	/s/ Dennis J. Harkins
	Executive Officer (Principal Executive
	Dennis J. Harkins, President and Chief Financial Officer (Principal Accounting and Financial Officer)
	Officer)

Dated: June 8, 2011	/s/ Dennis J. Harkins
	Dennis J. Harkins, President and Chief
	Financial Officer (Principal Accounting and
	Financial Officer)

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