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

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

Overview

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

Results of Operations

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

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

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

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

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

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

In the three months ended September 30, 2008 we recorded an income tax provision of $40,086.

As a result of the above, for the quarter ended September 30, 2008, we reported net income of $134,074 compared to a net loss from continuing operations of $823,237 for the quarter ended September 30, 2007.

Nine months ended September 30, 2008 versus 2007

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

General and administrative expenses for the first nine months of 2008 were $6,121,530 as compared to $5,236,732 in the first nine months of 2007, representing an increase of $884,798, or 17%. This increase is primarily a result of one-time expenses incurred at the corporate level, related to the sale of PDI.

In addition to these one time expenses we have seen an increase in compensation cost as a result of the payment of additional performance based bonuses due the to the Company's improved performance, an increase in amortization as a result of the DBA acquisition. These increases were offset by a decrease in recurring corporate expenses.

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

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

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

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

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

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

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

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

Summary of Critical Accounting Policies; Significant Judgments and Estimates

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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