----

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**SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C.  20549******

**FORM 10-Q**

**(MarkOne)**
| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|-----------------------------------------------------------------------------------------------|
|   | **For the quarterly period ended June 30, 2001**                                              |
|   | **OR**                                                                                        |
| o      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|   | **For  the transition period from _____ to _____**                                            |

**CommissionFile Number 0-22718**
| **ZAMBA CORPORATION**                                                  |
|------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                |
|                                                                   |
| **Delaware**                                                           | **#41-1636021** |
| (State or other  jurisdiction of  incorporation or organization)       | (I.R.S. Employer  Identification No.) |
|                                                                   |   |
| **3033 Excelsior Boulevard, Suite 200, Minneapolis, Minnesota  55416** |
| (Address of principal executive offices, including zip code)           |
| **(952) 832-9800**                                                     |
| (Registrant's telephone  number, including area code)                  |

Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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      ý                       NO       o

Indicate the number of shares outstandingof each of the issuer's classes of common stock, as of the latest practicabledate.
|                           | Outstanding at |
|--------------------------------|----------------|
| Class                          | August 1, 2001 |
|                                |                |
| Common Stock, $0.01  par value | 34,709,883     |
|                           |           |

----

----

ZAMBACORPORATION

INDEX

| PART I — Financial  Information |                                                                                              |
|--------------------------------------|---------------------------------------------------------------------------------------------------|
|                                 |                                                                                              |
| Item 1.                              | Financial Statements  (Unaudited)                                                                 |   |   |
|                                 |                                                                                              |   |   |
|                                 | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2001  and 2000 |   |   |
|                                 |                                                                                              |   |   |
|                                 | Consolidated Balance  Sheets as of June 30, 2001 and December 31, 2000                            |   |   |
|                                 |                                                                                              |   |   |
|                                 | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000            |   |   |
|                                 |                                                                                              |   |   |
|                                 | Notes to  Consolidated Financial Statements                                                       |   |   |
|                                 |                                                                                              |   |   |
| Item  2.                             | Management's  Discussion and Analysis of Financial Condition and Results of Operations            |   |   |
|                                 |                                                                                              |   |   |
| Item  3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                       |   |   |
|                                 |                                                                                              |   |   |
| PART II — Other  Information    |                                                                                              |
|                                 |                                                                                              |
| Item 1.                              | Legal Proceedings                                                                                 |   |   |
|                                 |                                                                                              |   |   |
| Item 2.                              | Changes in  Securities                                                                            |   |   |
|                                 |                                                                                              |   |   |
| Item 3.                              | Defaults  Upon Senior Securities                                                                  |   |   |
|                                 |                                                                                              |   |   |
| Item  4.                             | Submission  of Matters to a Vote of Security Holders                                              |   |   |
|                                 |                                                                                              |   |   |
| Item 5.                              | Other Information                                                                                 |   |   |
|                                 |                                                                                              |   |   |
| Item 6.                              | Exhibits  and Reports on Form 8-K                                                                 |   |   |
|                                 |                                                                                              |   |   |
| Signatures                           |                                                                                              |   |

**PART I. FINANCIAL INFORMATION**

**Item 1: Financial Statements**

**ZAMBA CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**

**(In thousands, except per sharedata)**

|                                                                                       | **For the three months ended  June 30,**                  |       | **For the six months ended June  30,** |       |
|--------------------------------------------------------------------------------------------|-----------------------------------------------------------|------------|----------------------------------------|------------|
|                                                                                       | ****                                                      |       | ****                                   |       |
|                                                                                       | **2001**                                                  |       | **2000**                               |       | **2001** |   | **2000** | ** ** |
|                                                                                       | ****                                                      |       | ****                                   |       | **** |   | **** |   |
| **Net revenues**                                                                           | **$**                                                     | **8,020**  | ** **                             | **$**      | **9,715** | ** ** | **$** | **19,830** | ** ** | **$** | **17,932** | ** ** |
|                                                                                       |                                                      |       |                                   |       |   |   |   |   |
| **Costs and expenses:**                                                                    |                                                      |       |                                   |       |   |   |   |   |
|                                                                                       | **Project and personnel costs**                           | **5,688**  | ** **                             | **4,775**  | ** ** | **11,768** | ** ** | **9,090** | ** ** |
|                                                                                       | **Sales and marketing**                                   | **1,292**  | ** **                             | **1,133**  | ** ** | **3,185** | ** ** | **2,188** | ** ** |
|                                                                                       | **General and administrative**                            | **4,043**  | ** **                             | **3,363**  | ** ** | **8,900** | ** ** | **6,130** | ** ** |
|                                                                                       | **Restructuring charges**                                 | **2,188**  | ** **                             | **-**      | ** ** | **2,188** | ** ** | **-** | ** ** |
|                                                                                       | **Amortization of intangibles and non-cash compensation** | **76**     |                                   | **1,008**  |   | **168** |   | **2,025** |   |
|                                                                                       |                                                      | ****       |                                   | ****       |   | **** |   | **** |   |
|                                                                                       | **Total costs and expenses**                              | **13,287** | ** **                             | **10,279** | ** ** | **26,209** | ** ** | **19,433** | ** ** |
|                                                                                       |                                                           |       |                                        |       |  |   |  |   |
| **Loss from operations**                                                                   | **(5,267**                                                | **)**      | **(564**                               | **)**      | **(6,379** | **)** | **(1,501** | **)** |
|                                                                                       |                                                      |       |                                   |       |   |   |   |   |
| **Other income (expense):**                                                                |                                                      |       |                                   |       |   |   |   |   |
| **Interest income**                                                                        | **36**                                                    | ** ** | **57**                                 | ** ** | **90** | ** ** | **131** | ** ** |
| **Interest expense**                                                                       | **(55**                                                   | **)**      | **(16**                                | **)**      | **(79** | **)** | **(39** | **)** |
|                                                                                       | ****                                                      |       | ****                                   |       | **** |   | **** |   |
|                                                                                       | **(19**                                                   | **)**      | **41**                                 | ** ** | **11** | ** ** | **92** | ** ** |
|                                                                                       |                                                           |       |                                        |       |  |   |  |   |
| **Net loss**                                                                               | **$**                                                     | **(5,286** | **)**                                  | **$**      | **(523** | **)** | **$** | **(6,368** | **)** | **$** | **(1,409** | **)** |
|                                                                                       |                                                           |       |                                        |       |  |   |  |   |
| **Net loss per share - basic and diluted**                                                 | **$**                                                     | **(0.16**  | **)**                                  | **$**      | **(0.02** | **)** | **$** | **(0.20** | **)** | **$** | **(0.04** | **)** |
|                                                                                       |                                                           |       |                                        |       |  |   |  |   |
| **Weighted average shares outstanding - basic and diluted**                                | **32,340**                                                |       | **31,490**                             |       | **32,258** |   | **31,398** |   |
|                                                                                       |                                                           |       |                                        |       |  |   |  |   |
| **The accompanying notes are an  integral part of the consolidated financial statements.** |
|                                                                                            |                                                           |            |                                        |            |  |  |  |  |  |  |  |  |  |  |

 

**ZAMBA CORPORATION****CONSOLIDATED BALANCESHEETS****(Unaudited)**

**(In thousands, except per sharedata)**

|                                          | **June 30,**                                                                                                                                                         |        | **December 31,** |        |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|------------------|-------------|
|                                          | **2001**                                                                                                                                                             |        | **2000**         | ** **  |
|                                          | ****                                                                                                                                                                 |        | ****             |        |
| **ASSETS**                                    |                                                                                                                                                                 |        |             |        |
| **Current assets:**                           |                                                                                                                                                                 |        |             |        |
|                                          | **Cash and cash equivalents**                                                                                                                                        | **$**       | **4,925**        | ** **  | **$** | **4,843** | ** ** |
|                                          | **Accounts receivable, net**                                                                                                                                         | **3,067**   | ** **       | **5,858**   | ** ** |
|                                          | **Unbilled receivables**                                                                                                                                             | **483**     | ** **       | **426**     | ** ** |
|                                          | **Notes receivable, net**                                                                                                                                            | **1,377**   | ** **       | **1,979**   | ** ** |
|                                          | **Notes receivable - related parties**                                                                                                                               | **338**     | ** **       | **359**     | ** ** |
|                                          | **Prepaid expenses and other current assets**                                                                                                                        | **845**     | ** **       | **660**     | ** ** |
|                                          |                                                                                                                                                                 | ****        |             | ****        |   |
|                                          | **Total current assets**                                                                                                                                             | **11,035**  | ** **       | **14,125**  | ** ** |
|                                          |                                                                                                                                                                 |        |             |        |   |
| **Property and equipment, net**               | **1,931**                                                                                                                                                            | ** **  | **1,650**        | ** **  |
| **Restricted cash**                           | **471**                                                                                                                                                              | ** **  | **264**          | ** **  |
| **Intangible assets, net**                    | **156**                                                                                                                                                              | ** **  | **231**          | ** **  |
| **Other assets**                              | **290**                                                                                                                                                              | ** **  | **243**          | ** **  |
|                                          | ****                                                                                                                                                                 |        | ****             |        |
|                                          | **Total assets**                                                                                                                                                     | **$**       | **13,883**       | ** **  | **$** | **16,513** | ** ** |
|                                          |                                                                                                                                                                 | ****        |             | ****        |   |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**     |                                                                                                                                                                 |        |             |        |
| **Liabilities:**                              |                                                                                                                                                                 |        |             |        |
|                                          | **Line of credit**                                                                                                                                                   | **$**       | **2,000**        | ** **  | **$** | **0** | ** ** |
|                                          | **Current installments of long-term debt**                                                                                                                           | **443**     | ** **       | **607**     | ** ** |
|                                          | **Accounts payable**                                                                                                                                                 | **944**     | ** **       | **1,589**   | ** ** |
|                                          | **Accrued expenses**                                                                                                                                                 | **4,218**   | ** **       | **3,306**   | ** ** |
|                                          | **Deferred revenue**                                                                                                                                                 | **925**     | ** **       | **1,480**   | ** ** |
|                                          |                                                                                                                                                                 | ****        |             | ****        |   |
|                                          | **Total current liabilities**                                                                                                                                        | **8,530**   | ** **       | **6,982**   | ** ** |
|                                          |                                                                                                                                                                 |        |             |        |   |
| **Long-term debt, less current installments** | **333**                                                                                                                                                              | ** **  | **469**          | ** **  |
|                                          | ****                                                                                                                                                                 |        | ****             |        |
| **Commitments**                               |                                                                                                                                                                 |        |             |        |
|                                          | **Total liabilities**                                                                                                                                                | **8,863**   | ** **       | **7,451**   | ** ** |
|                                          |                                                                                                                                                                 | ****        |             | ****        |   |
|                                          |                                                                                                                                                                 |        |             |        |   |
| **Stockholders' equity:**                     |                                                                                                                                                                 |        |             |        |
|                                          | **Common  stock, $0.01 par value, 120,000 shares authorized, 34,710 and 32,164 shares  issued and outstanding at June 30, 2001 and December 31, 2000, respectively** | **347**     |             | **322**     |   |
|                                          | **Additional paid-in capital**                                                                                                                                       | **84,177**  | ** **       | **81,876**  | ** ** |
|                                          | **Note receivable from director**                                                                                                                                    | **(500**    | **)**            | **(500**    | **)** |
|                                          | **Accumulated deficit**                                                                                                                                              | **(79,004** | **)**            | **(72,636** | **)** |
|                                          |                                                                                                                                                                 | ****        |             | ****        |   |
|                                          | **Total stockholders' equity**                                                                                                                                       | **5,020**   | ** **       | **9,062**   | ** ** |
|                                          |                                                                                                                                                                      |        |                  |        |
|                                          | **Total liabilities and stockholders' equity**                                                                                                                       | **$**       | **13,883**       | ** **  | **$** | **16,513** | ** ** |
|                                          | ****                                                                                                                                                                 |        | ****             |        |
|                                               |                                                                                                                                                                      |             |                  |             |  |  |  |  |

** **

**The accompanying notes are an integral part of theconsolidated financial statements.**

**ZAMBA CORPORATION****CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**

|                                                                |                                                                             |       |       |       |
|---------------------------------------------------------------------|----------------------------------------------------------------------------------|------------|------------|------------|
| **(In thousands)**                                                  | **Six Months Ended June 30,**                                                    |       |
|                                                                | ****                                                                             |       |
|                                                                | **2001**                                                                         |       | **2000**   | ** ** |
|                                                                |                                                                                  |       |            |       |
| **Cash flows from operating activities:**                           |                                                                             |       |       |       |
|                                                                | **Net loss**                                                                     | **$**      | **(6,368** | **)**      | **$** | **(1,409** | **)** |
|                                                                | **Adjustments to reconcile net loss to net cash used in  operating activities:** |       |       |       |   |
|                                                                | **Depreciation and amortization**                                                | **420**    | ** ** | **2,482**  | ** ** |
|                                                                | **Provision for bad debts**                                                      | **641**    | ** ** | **324**    | ** ** |
|                                                                | **Changes in operating assets and liabilities:**                                 |       |       |       |   |
|                                                                | **Accounts receivable**                                                          | **2,596**  | ** ** | **(2,399** | **)** |
|                                                                | **Unbilled receivables**                                                         | **(57**    | **)**      | **(223**   | **)** |
|                                                                | **Notes receivable**                                                             | **156**    | ** ** | **-**      | ** ** |
|                                                                | **Prepaid expenses and other assets**                                            | **(232**   | **)**      | **(538**   | **)** |
|                                                                | **Accounts payable**                                                             | **(645**   | **)**      | **575**    | ** ** |
|                                                                | **Accrued expenses**                                                             | **912**    | ** ** | **(1,427** | **)** |
|                                                                | **Deferred revenue**                                                             | **(555**   | **)**      | **568**    | ** ** |
|                                                                |                                                                             | ****       |       | ****       |   |
|                                                                | **Net cash used in operating activities**                                        | **(3,132** | **)**      | **(2,047** | **)** |
|                                                                |                                                                             |       |       |       |
| **Cash flows from investing activities:**                           |                                                                             |       |       |       |
|                                                                | **Purchase of property and equipment**                                           | **(534**   | **)**      | **(535**   | **)** |
|                                                                | **Restricted cash**                                                              | **(207**   | **)**      | **110**    | ** ** |
|                                                                | **Notes receivable - related parties**                                           | **21**     | ** ** | **(754**   | **)** |
|                                                                |                                                                             | ****       |       | ****       |   |
|                                                                | **Net cash used in investing activities**                                        | **(720**   | **)**      | **(1,179** | **)** |
|                                                                |                                                                             |       |       |       |
| **Cash flows from financing activities:**                           |                                                                             |       |       |       |
|                                                                | **Line of credit, net**                                                          | **2,000**  | ** ** | **-**      | ** ** |
|                                                                | **Proceeds from sale of common stock**                                           | **2,211**  | ** ** | **-**      | ** ** |
|                                                                | **Proceeds from exercises of stock options**                                     | **23**     | ** ** | **647**    | ** ** |
|                                                                | **Payments of long-term debt**                                                   | **(300**   | **)**      | **(282**   | **)** |
|                                                                |                                                                             | ****       |       | ****       |   |
|                                                                | **Net cash provided by financing activities**                                    | **3,934**  | ** ** | **365**    | ** ** |
|                                                                |                                                                             |       |       |       |
|                                                                |                                                                                  |       |            |       |
| **Net increase (decrease) in cash and cash equivalents**            | **82**                                                                           | ** ** | **(2,861** | **)**      |
| **Cash and cash equivalents, beginning of period**                  | **4,843**                                                                        | ** ** | **7,973**  | ** ** |
|                                                                | ****                                                                             |       | ****       |       |
| **Cash and cash equivalents, end of period**                        | **$**                                                                            | **4,925**  | ** ** | **$**      | **5,112** | ** ** |
|                                                                |                                                                                  |       |            |       |
| **Supplemental Schedule of Disclosures of Cash Flow  Information:** |                                                                             |       |       |       |
|                                                                |                                                                             |       |       |       |
|                                                                | **Cash paid during the period for interest**                                     | **$**      | **64**     | ** ** | **$** | **41** | ** ** |
|                                                                |                                                                                  |       |            |       |
|                                                                     |                                                                                  |            |            |            |  |  |  |  |  |  |

** **

**The accompanying notes are anintegral part of the consolidated financial statements.**

ZAMBA CORPORATIONNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)

NoteA.  Basis of Presentation:

             Theunaudited consolidated financial statements of ZAMBA Corporation as of June 30,2001, and for the three and six month periods ended June 30, 2001 and 2000,reflect all adjustments (which include only normal recurring adjustments)necessary, in the opinion of management, to fairly state our financial positionas of June 30, 2001, and our results of operations and cash flows for thereported periods.  The results ofoperations for any interim period are not necessarily indicative of the resultsto be expected for any other interim period or for the full fiscal year.  The year-end balance sheet data was derivedfrom audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.   Certain prior year amounts have been reclassified to conformwith the 2001 presentation.  Thesefinancial statements should be read in conjunction with our auditedconsolidated financial statements and related notes for the year ended December31, 2000, which were included in our 2000 Report on Form 10-K.

Note B. Selected Balance SheetInformation:

| (in  thousands)               | June 30, 2001                                   |   | December 31, 2000 |   |
|-------------------------------|-------------------------------------------------|--------|-------------------|--------|
|                          |                                                 |   |                   |   |
| Accounts  receivable, net:    |                                            |   |              |   |
|                          | Accounts  receivable                            | $      | 3,268             |   | $ | 6,287 |   |
|                          | Less  allowance for doubtful accounts           | (201   | )                 | (429   | ) |
|                          |                                            |        |              |        |   |
|                          | $                                               | 3,067  |              | $      | 5,858 |   |
|                          |                                                 |   |                   |   |
|                          |                                            |   |              |   |
| Notes  receivable, net:       |                                            |   |              |   |
|                          | Notes  receivable                               | $      | 1,823             |   | $ | 1,979 |   |
|                          | Less  allowance for doubtful accounts           | (446   | )                 | -      |   |
|                          |                                            |        |              |        |   |
|                          | $                                               | 1,377  |              | $      | 1,979 |   |
|                          |                                                 |   |                   |   |
|                          |                                            |   |              |   |
| Property  and equipment, net: |                                            |   |              |   |
|                          | Computer  equipment                             | $      | 1,594             |   | $ | 1,406 |   |
|                          | Furniture  and equipment                        | 642    |              | 694    |   |
|                          | Leasehold  improvements                         | 1,201  |              | 931    |   |
|                          |                                            |        |              |        |   |
|                          | 3,437                                           |   | 3,031             |   |
|                          | Less  accumulated depreciation and amortization | (1,506 | )                 | (1,381 | ) |
|                          |                                                 |   |                   |   |
|                          | $                                               | 1,931  |              | $      | 1,650 |   |
|                          |                                                 |   |                   |   |

Note C. Net Loss Per Share:

             Weincurred net losses for the three and six month periods ended June 30, 2001 and2000. The calculation of diluted net loss per common share does not includeapproximately 300,000 potential shares of common stock equivalents as theirinclusion would be anti-dilutive.

Note D. Recent Accounting Standards:

             InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 141 “Business Combinations,” and SFASNo. 142 “Goodwill and Other Intangible Assets,” which change the accounting forbusiness combinations and goodwill. SFAS No. 141 requires that the purchase method of accounting be used forbusiness combinations initiated after June 30, 2001.  Use of the pooling-of-interests method will be prohibited.  SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach.  Amortization of goodwill, including goodwillrecorded in past business combinations, will therefore cease upon adoption ofthe Statement, which for the Company will be January 1, 2002.  The Company is currently evaluating SFAS No.141 and SFAS No. 142, but does not expect that they will have a material effecton its financial statements.

             TheFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard No. 133 “Accounting for Derivative Instruments and HedgingActivities” (SFAS) No. 133, as amended by SFAS No. 138.  SFAS No. 133 establishes accounting andreporting standards for derivative instruments and for hedging activities.  SFAS No. 133 requires companies to recognizeall derivatives as either assets or liabilities, and measure those instrumentsat fair value. The statement is effective beginning after January 1, 2001. Wehave implemented SFAS No. 133, as amended, in fiscal year 2001.  The implementation of this statement did nothave an impact on our financial position, results of operations or cash flows forthe three or six months ended June 30, 2001.

Note E. Restructuring Charges

             In the second quarter of 2001,Zamba recorded restructuring charges of $2.19 million, consisting of $900,000for headcount reductions, $1.20 million for consolidation of facilities andrelated fixed assets, and $90,000 of other related restructuring charges. Thesecharges were taken to align our cost structure with changing market conditions,due principally to a reduction in the demand for information technologyconsulting services, related to a general slowdown in the economy. The planresulted in headcount reduction of approximately 90 employees, which was madeup of approximately 67% professional services staff and 33% non-billable staff.The facilities charges were due to office closures in Pleasanton and Carlsbad,California, and St. Paul, Minnesota.

             Asof the end of the second quarter of 2001, $778,000 of cash was used forrestructuring charges, and the remaining $1.41 million cash outlay is expectedto occur over the next year.

             Restructuringactivities as of June 30, 2001 were as follows:

|                                    |   | Severance     |    | Facilities |   |
|-----------------------------------------|--------|---------------|---------|------------|--------|
|                                    |   | and  Benefits |    | and  Other |   |
|                                    |   |               |    |            |   |
|                                    |   |          |    |       |   |
| Provision in second  quarter 2001       |   | $             | 900,000 |       | $      | 1,288,000 |   |
| Amount utilized in  second quarter 2001 |   | $             | 530,000 |       | $      | 248,000 |   |
|                                    |   |               |    |            |   |
| Balance remaining at  June 30, 2001     |   | $             | 370,000 |       | $      | 1,040,000 |   |
|                                    |   |               |    |            |   |

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**Overview**

             ZAMBACorporation is a leading customer relationship management (CRM) consulting andsystems integration company for Global 2000 organizations. We help clientsbetter anticipate, understand and respond to the needs of their current andpotential customers through integrated, multi-channel solutions. Based on ourCRM expertise and experience, we have created an end-to-end blueprint ofindustry-leading solutions addressing each aspect of CRM, including strategy,marketing and analytics, commerce and content, contact center, mobile andwireless, sales, customer experience and support. We also own approximately 33% of the equity in NextNetWireless, Inc., a private corporation engaged in the development of wirelessdata products targeted at wireless DSL. Our vice chairman, Joseph B. Costello, is also the chairman of NextNetWireless, Inc.

             Wecurrently derive most of our revenues from systems integration services,including business case evaluation, system planning and design, softwarepackage implementation, custom software development, training, installation andchange management.

             Ourrevenues and earnings may fluctuate from quarter-to-quarter based on thenumber, size and scope of projects in which we are engaged, the contractualterms and degree of completion of such projects, any delays incurred inconnection with a project, the adequacy of provisions for losses, the accuracyof estimates of resources required to complete ongoing projects, and generaleconomic conditions and other factors. Consequently, the results of operationsdescribed in this report may not be indicative of results to be achieved infuture periods. In addition, revenues from a large client may constitute asignificant portion of our total revenues in any particular quarter.

**Results of Operations**

**Three months ended June 30, 2001, compared to the threemonths ended June 30, 2000**

*Net Revenues*             Net revenues decreased 17% to$8.02 million in 2001 compared to $9.72 million in 2000.  The decrease was due principally to asignificant reduction in the demand for information technology consultingservices, due to a general slowdown in the economy.

*Project and Personnel Costs*             Project and personnel costsconsist primarily of payroll and payroll related expenses for personneldedicated to client assignments, and is directly associated with, and varieswith, the level of client services being delivered.  These costs represent the most significant expense we incur inproviding service.  Project costs were$5.69 million or 71% of net revenues in the second quarter of 2001 compared to$4.78 million or 49% of net revenues in the second quarter of 2000.  The increase in project costs between theseperiods was due primarily to the increase in the number of projectpersonnel.  Project personnel increasedprimarily as a result of an expected increase in the number and size of ourengagements. The increase in these costs as a percentage of revenue is due tothe decline in our overall revenue. We anticipate lower project and personnelcosts in the next two quarters due to a reduction in workforce as a part of ourrestructuring plan, which was implemented due to the reduced demand forconsulting services.*Sales and Marketing*             Sales and marketing costsconsist primarily of salaries, employee benefits and travel expenses of salesand marketing personnel, as well as promotional costs.  Sales and marketing expenses were $1.29million or 16% of net revenues in the second quarter of 2001, compared to $1.13million or 12% of net revenues in the second quarter of 2000.  The increase in both dollar and percentageterms is due primarily to the hiring of additional direct sales personnel.  We anticipate that the dollar amount andpercentage of sales and marketing expenses will increase throughout 2001.
*General and Administrative*             General and administrativecosts consist primarily of expenses associated with our management, informationtechnology, training and recruiting, occupancy costs, and finance andadministrative groups.  General andadministrative expenses were $4.04 million or 50% of net revenues in the secondquarter of 2001, compared to $3.36 million or 35% of net revenues in the secondquarter of 2000. The dollar and percentage increases were due primarily toinvestments we made in attempting to grow the business, which resulted in anincrease in the number of employees hired during the past year, an increase inoccupancy costs related to a significant expansion of our office space, and anincrease in provision for bad debts, which was $546,000 in the second quarterof 2001, as compared to $304,000 in the second quarter of 2000. Due to areduced workforce and consolidation of office space from the realigning of ourcost structure in the second quarter of 2001, we anticipate lower general andadministrative expenses in the next two quarters.

*RestructuringCharges*             We incurred a restructuringcharge of $2.19 million or 27% of net revenues in the second quarter of 2001.These items consist of severance expenses due to layoffs in the second quarterof 2001, as well as costs associated with office consolidations. These chargeswere taken to align our cost structure with changing market conditions, asdescribed in Note E above.

*Amortization of Intangibles and Non-cash Compensation*             Amortization of intangiblesand non-cash compensation was $76,000 in 2001 compared to $1.01 million in2000.  The amortization was mainly dueto the acquisition of The QuickSilver Group, Inc. (“QuickSilver”) in September1998.  The QuickSilver acquisition wasaccounted for using the purchase method of accounting, and the purchase pricewas allocated to tangible and identifiable intangible assets.  The fair value of identifiable intangibleassets was $7.7 million and was allocated to the following categories: peopleand experiences, client references, client lists, and intellectual property anddelivery methodology.  These amounts arebeing amortized over economic useful lives ranging from two to four years.   Approximately 98% of the costs related tothe QuickSilver acquisition have been amortized as of June 30, 2001. Theremaining costs will be amortized through the third quarter of 2002.

             Non-cashcompensation is due to stock options granted to non-shareholder employees ofCamworks, Inc. and Fusion Consulting, Inc., following our acquisitions of eachcompany.  These options were grantedwith an exercise price less than fair market value as an incentive to theemployees to continue employment with ZAMBA. The remaining deferred compensation balance related to these options is$389,000 as of June 30, 2001.  The amountof this charge will be approximately $40,000 per quarter for each quarter through2003.

*Interest Income*             Interest income was $36,000in the second quarter of 2001 compared to $57,000 in the second quarter of2000.  The decrease is due to decreasesin our cash and investment accounts, which were used in operating and investingactivities, as well as the overall decline in interest rates in 2001.

*Interest Expense*             Interest expense was $55,000in the second quarter of 2001 compared to $16,000 in the second quarter of2000.  The increase in interest chargesis due to increased borrowings under our line of credit with Silicon ValleyBank, which we established in February 2001.

*Income Taxes*             We have incurred netoperating losses since inception. Because we are uncertain as to whether we will have taxable earnings inthe future, we have not reflected any benefit of such net operating losscarryforwards in the accompanying unaudited consolidated financial statements.

*Net Loss*             Our net loss for the quarterended June 30, 2001 was ($5.29) million, or ($0.16) per share, compared to anet loss for the quarter ended June 30, 2000 of ($523,000), or ($0.02) pershare.

**Six months ended June 30, 2001, compared to the six monthsended June 30, 2000**

*Net Revenues*             Net revenues increased 11% to$19.83 million in the six months ended June 30, 2001 compared to $17.93 millionin the six months ended June 30, 2000. The increase in revenues is principallydue to increases in both the average size and number of client projects, anddue to an increase in the number of billable consultants. Demand for our servicesincreased through the fourth quarter of 2000. However, the demand hassignificantly declined since that time due to a reduction in demand forinformation technology services.

*Project and Personnel Costs*             Project and personnel costsconsist primarily of payroll and payroll related expenses for personneldedicated to client assignments, and is directly associated with, and varieswith, the level of client services being delivered.  These costs represent the most significant expense we incur inproviding service.  Project costs were$11.77 million or 59% of net revenues in the six months ended June 30, 2001compared to $9.09 million or 51% of net revenues in the six months ended June30, 2000.  The increase in project costsbetween these periods was due primarily to the increase in the number ofproject personnel.  Project personnelincreased primarily as a result of an expected increase in the number and sizeof our engagements. The increase in these costs as a percentage of revenue isdue to a decline in our overall utilization. We anticipate lower project andpersonnel costs in the next two quarters due to a reduction in workforce as apart of our restructuring plan, which was implemented due to the reduced demandfor consulting services.

*Sales and Marketing*             Sales and marketing costsconsist primarily of salaries, employee benefits and travel expenses of salesand marketing personnel, as well as promotional costs.  Sales and marketing expenses were $3.19million or 16% of net revenues in the six months ended June 30, 2001, comparedto $2.19 million or 12% of net revenues in the six months ended June 30,2000.  The increase in both dollar andpercentage terms is due primarily to the hiring of additional direct sales personnel.  We anticipate that the dollar amount andpercentage of sales and marketing expenses will increase throughout 2001.

*General and Administrative*             General and administrativecosts consist primarily of expenses associated with our management, informationtechnology, training and recruiting, occupancy costs, and finance andadministrative groups.  General andadministrative expenses were $8.90 million or 45% of net revenues in the sixmonths ended June 30, 2001, compared to $6.13 million or 34% of net revenues inthe six months ended June 30, 2000.  Thedollar and percentage increases were due primarily to investments we made inattempting to grow the business, which resulted in an increase in the number ofemployees hired during the past year, an increase in occupancy costs related toa significant expansion of our office space, and an increase in provision forbad debts, which was $641,000 for the six month period ended June 30, 2001, ascompared to $323,000 for the six month period ended June 30, 2000. Weanticipate lower general and administrative expenses in the next two quartersdue to a reduced workforce and consolidation of office space, due to therealigning of our cost structure.

*RestructuringCharges*             Restructuring charges were$2.19 million or 11% of net revenues. These items consist of severance expensesdue to layoffs in the second quarter of 2001, as well as costs associated withoffice consolidations. These charges were taken to align our cost structurewith changing market conditions, as described in Note E above.

*Amortization of Intangibles and Non-cash Compensation*             Amortization of intangiblesand non-cash compensation was $168,000 in the six months ended June 30, 2001compared to $2.03 million in the six months ended June 30, 2000.  The amortization was mainly due to the acquisitionof The QuickSilver Group, Inc. (“QuickSilver”) in September 1998, as describedin the three month period analysis above.

*Interest Income*             Interest income was $90,000in the six months ended June 30, 2001 compared to $131,000 in the six monthsended June 30, 2000.  The decrease isdue to decreases in our cash and investment accounts, which were used inoperating and investing activities, as well as the overall decline in interestrates in 2001.

*Interest Expense*             Interest expense was $79,000in the six months ended June 30, 2001 compared to $39,000 in the six monthsended June 30, 2000. The increase in interest charges is due to increasedborrowings under our line of credit with Silicon Valley Bank, which weestablished in February 2001.

*Income Taxes*             We have incurred netoperating losses since inception. Because we are uncertain as to whether we will have taxable earnings inthe future, we have not reflected any benefit of such net operating losscarryforwards in the accompanying unaudited consolidated financial statements.

*Net Loss*             Asa result of the above, our net loss for the six months ended June 30, 2001 was($6.37) million, or ($0.20) per share, compared to a net loss for the sixmonths ended June 30, 2000 of ($1.41) million, or ($0.04) per share.

**Liquidity and Capital Resources**

             Weinvest predominantly in instruments that are highly liquid, investment gradeand have maturities of less than one year. At June 30, 2001, we hadapproximately $4.9 million in cash and cash equivalents compared to $4.8 millionat December 31, 2000.

             Cashused in operating activities was $3.1 million for the six months ended June 30,2001 and resulted primarily from a loss before amortization, depreciation andother non-cash stock compensation charges of $5.9 million, which was offset by a decrease in accounts receivable of$2.6 million.  Cash used in operatingactivities was $2.0 million for the six months ended June 30, 2000, dueprimarily to income before amortization, depreciation and other non-cash stockcompensation charges of  $1.1 million,an increase in accounts payable of $575,000, and an increase in deferredrevenue of $568,000, but offset by increases in accounts receivable of $2.4million and a decrease in accrued expenses of $1.4 million.

             Cashused in investing activities was $720,000 for the six months ended June 30,2001, and primarily resulted from the purchase of property and equipment of$534,000 and the increase in restricted cash of $207,000.  Cash used in investing activities was $1.2million for the six months ended June 30, 2000 and primarily resulted from thepurchase of property and equipment of $535,000 and the increase in notesreceivable to related parties of $754,000.

             Cashprovided by financing activities was $3.9 million for the six months ended June30, 2001 and consisted primarily of cash received from the line of credit of$2.0 million and cash received from the sale of common stock to Joseph B.Costello, a member of the board of directors, of $2.0 million. Cash provided byfinancing activities was $365,000 for the six months ended June 30, 2000 andconsisted of cash received from the sale of common stock upon the exercise ofstock options of $647,000, which was offset partially by payments ofoutstanding debt of $282,000.

             InFebruary 2001 (and as amended on August 2, 2001), we established a securedrevolving credit facility with Silicon Valley Bank of up to a maximum of $5.0million based on eligible collateral. Borrowings under this line of credit bear interest at the bank’s primerate plus 2.0%, and are payable monthly. This agreement requires that we maintain certain financial covenants andlevels of tangible net worth.  Thisfacility is renewable annually. $2.0 million was outstanding under the SiliconValley Bank line of credit as of June 30, 2001.

             OnJune 29, 2001, Zamba Corporation sold 2,352,942 shares of common stock atmarket value, to Joseph B. Costello, our Vice Chairman, for $2.0 million.  In connection with this transaction, we alsoissued a warrant to Mr. Costello that entitles him to purchase up to 1,176,471shares of our common stock, at an exercise price of $1.0625 per share.  The warrant exercise price represents 125%of the per share price of our common stock on the date of issuance. Nocompensation cost will be recognized for these warrants. Compensation cost,using the Black-Scholes option-pricing model, would be $51,000 per quarterthrough June of 2005, if it were necessary to record such charges.

             Asof June 30, 2001, we had no significant capital spending or purchase commitments,except for a commitment of approximately $325,000 relating to professionalservices software.  We had cash and cashequivalents totaling $4.9 million and working capital of $2.5 million.  We also have a secured revolving creditfacility with Silicon Valley Bank that allows us to withdraw up to $5.0 millionbased on eligible accounts receivable. Under the secured revolving credit facility, we must be in compliancewith certain tangible net worth covenants. We believe that our existing cashand cash equivalents, together with cash provided from operations and oursecured revolving credit facility, should be sufficient to meet our workingcapital and capital expenditure requirements in the near term.  We will also continue to explorepossibilities for additional financing, which may include debt, equity, orother forms of financing.  We cannot becertain that additional financing will be available to us on favorable terms ifrequired, or at all. If our financial performance causes us to violate the covenantsin our secured revolving credit facility or adversely affects the amount of oureligible accounts receivable, and we are unable to obtain additional financing,we may not be able to meet our near term cash requirements. 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

             Weare exposed to market risk from changes in security prices and interest rates.Market fluctuations could impact our results of operations and financialcondition. We are exposed to certain market risks based on our outstanding debtobligations of $776,000 at June 30, 2001, as well as our line of credit withSilicon Valley Bank, under which $2.0 million was outstanding at June 30, 2001.The interest rates charged on our long-term debt obligations range from 6.0% to10.5%, and the obligations mature monthly and quarterly through December2003.  We do not invest in anyderivative financial instruments. Excess cash is invested in short-termlow-risk vehicles, such as money market investments. Changes in interest ratesare not expected to have a material adverse effect on our business, financialcondition or results of operations.

             OnFebruary 27, 2001 (and as amended on August 2, 2001), we established a securedrevolving credit facility with Silicon Valley Bank. Borrowings under this lineof credit bear interest at the bank’s prime rate plus 2.0%. The interest ispayable monthly.

**Cautionary Statement for Purposes of the ‘Safe Harbor’Provisions of the Private Securities Litigation Reform Act of 1995**

             Certain statements in this Quarterly Report on Form 10-Qare "forward-looking statements" within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Whenused in this Quarterly Report on Form 10-Q, the words “may,” “should,”“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“intends,” “potential” or “continue” and similar expressions are generallyintended to identify forward-looking statements. Because these forward-lookingstatements involve risks and uncertainties, actual results could differmaterially from those expressed or implied by these forward-looking statements.These statements are only predictions. Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance and/orachievements.

             Factors that may impact forward-looking statementsinclude, among others, the growth rate of the marketplace for customer-centricsolutions, our ability to develop skills in implementing customer-centricsolutions, the ability of our partners to maintain competitive products, theimpact of competition and pricing pressures from actual and potentialcompetitors with greater financial resources, our ability to obtain large-scaleconsulting services agreements, client decision-making processes, changes inexpectations regarding the information technology industry, our ability to hireand retain competent employees, our ability to make acquisitions underadvantageous terms and conditions, our success in integrating acquisitions intoour business and our culture and possible costs incurred related to theintegration, our ability to grow revenues from acquired companies, possiblechanges in collections of accounts receivable and notes receivable, changes ingeneral economic conditions and interest rates, andother factors identified in our filings with the Securities and ExchangeCommission, including those identified in Exhibit 99 to our Annual Report onForm 10-K. We disclaim any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

**PART II.  OTHERINFORMATION**

Item1.  Legal Proceedings

             Weare subject to various legal proceedings and claims that arise in the ordinarycourse of business.  We currentlybelieve that resolving these matters will not have a material adverse effect onour business, financial condition or results of operations.

Item 2.  Changes in Securities

             On June 29, 2001, Zamba Corporationsold 2,352,942 shares of common stock to Joseph B. Costello, our Vice Chairman,for $2,000,000.  In connection with thistransaction, we also issued a warrant to Mr. Costello that entitles him topurchase up to 1,176,471 shares of our common stock, at an exercise price of$1.0625 per share.  The warrant exerciseprice represents 125% of the per share price of our common stock on the date ofissuance.  Because the transaction didnot involve a public offering, the shares of our common stock were deemed to beissued pursuant to an exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended.

Item 3.  Defaults Upon Senior Securities             None

Item4.  Submission of Matters to a Vote ofSecurity Holders

             Zambaheld its Annual Meeting on May 17, 2001. Two proposals were presented at theAnnual Meeting for voting by the stockholders: (i) the election of directors;and (ii) the approval of an increase in the authorized number of shares ofcommon stock. The stockholders approved both proposals.

             Eachperson nominated for director was elected. For Joseph B. Costello, 24,911,873 votes were cast in favor of hiselection, and 2,972,304 votes were withheld. For Dixon R. Doll, 26,564,035 votes were cast in favor of his election,and 1,320,142 votes were withheld.  ForPaul D. Edelhertz, 25,217,688 votes were cast in favor of his election, and2,666,489 votes were withheld.  ForDouglas M. Holden, 25,176,034 votes were cast in favor of his election, and2,708,143 votes were withheld.  For JohnOlsen, 24,901,947 votes were cast in favor of his election, and 2,982,230 voteswere withheld. For Sven A. Wehrwein, 26,561,744 votes were cast in favor of hiselection, and 1,322,433 votes were withheld.

             Atotal of 24,923,201 votes were cast in favor of the proposal to approve thenumber of authorized shares of common stock, 2,798,130 votes were cast against,162,846 votes were abstentions, and there were no broker non-votes.

Item5.  Other Information             None

Item 6.  Exhibits and Reports on Form 8-K

(a)         Exhibits: (See attached exhibit index)

(b)        Reports on Form 8-K:

OnMay 23, 2001 we filed a report on Form 8-K to report a reduction in the numberof personnel and stating that revenues and earnings for the second fiscalquarter would be lower than previously expected.

On July 2, 2001, we filed a report onForm 8-K to report the purchase of 2,352,942 shares of common stock by JosephB. Costello, our Vice Chairman. We also issued a warrant to Mr. Costello thatentitles him to purchase up to 1,176,471 shares of common stock at an exerciseprice of $1.0625 per share.

SIGNATURES

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
  ZAMBA  CORPORATION By:/s/ Douglas M. Holden  Douglas  M. Holden  President  and Chief Executive Officer    By:/s/  Michael H. Carrel  Michael  H. Carrel  Executive  Vice President and Chief Financial Officer    Dated: August 8, 2001
EXHIBITINDEX

 
EXHIBIT NUMBERTITLE10.01Press release dated May  22, 2001 (Incorporated by reference to Exhibit 99 to the Registrant’s Current  Report on Form 8-K dated May 23, 2001)10.02Stock Purchase Agreement  dated June 29, 2001, between Zamba Corporation and Joseph B. Costello  (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report  on Form 8-K dated July 2, 2001)10.03Warrant to Purchase  Shares of Common Stock issued by Zamba Corporation to Joseph B. Costello  (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report  on Form 8-K dated July 2, 2001)10.04Press release dated July  2, 2001 (Incorporated by reference to Exhibit 99 to the Registrant’s Current  Report on Form 8-K dated July 2, 2001)10.05Settlement and Release  Agreement dated August 2, 2001, between the Registrant and Paul Edelhertz10.06Amendment to Loan  Document as of June 30, 2001, between the Registrant and Silicon Valley Bank10.07Warrant to Purchase  Stock dated August 2, 2001, between the Registrant and Silicon Valley Bank10.08Fifth Amended and  Restated Certificate of Incorporation of Zamba Corporation, dated August 3,  2001.