SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

   [ ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the quarterly period ended  SEPTEMBER 30, 1997
                                         ------------------
                                   OR

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

                For the transition period from _______  to ________

                     Commission file number   000-23967

                               ZMAX CORPORATION
   -------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

            DELAWARE                                     52-2040275
   -------------------------------------------------------------------------
  (State or other jurisdiction of          (IRS Employer Identification No.)
  incorporation or organization)

                   20251 CENTURY BLVD. GERMANTOWN, MD 20874
   -------------------------------------------------------------------------
     (Address of principal executive offices)                (Zip Code)

 Registrant's telephone number, including area code:  (301) 353-9500
                                                      --------------

   -------------------------------------------------------------------------
Former name,  former  address and former  fiscal year,  if changed  since last
report.

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities  Exchange Act of 1934 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 [ ]

APPLICABLE  ONLY  TO  CORPORATE   ISSUERS:   Indicate  the  number  of  shares
outstanding of each of the issuer's  classes of common stock,  as of March 26,
1998, 11,729,714 shares of common stock, $.001 par value per share.

<PAGE>

                               ZMAX CORPORATION

<TABLE>
                                     INDEX

<CAPTION>
                                                                     Page No.
                                                                     --------
<S>                                                                     <C>
PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

Consolidated Balance Sheets - September 30, 1997
    (unaudited) and December 31, 1996                                    1

Consolidated Statements of Operations for the nine
    months ended September 30, 1997 and 1996 (unaudited)                 3

Consolidated Statements of Operations for the three
    months ended September 30, 1997 and 1996 (unaudited)                 4

Consolidated Statements of Cash Flows for the nine
    months ended September 30, 1997 and 1996 (unaudited)                 5

Notes to Consolidated Financial Statements                               6

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                          11

PART II.   OTHER INFORMATION

           Exhibits and Reports on Form 8-K                             15

SIGNATURES                                                              16
</TABLE>


<PAGE>


<TABLE>
                        ZMAX CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                SEPTEMBER 30,                DECEMBER 31,
                                                                     1997                        1996
                                                              ------------------          ------------------
                                                                 (UNAUDITED)

                    ASSETS
<S>                                                           <C>                         <C>
CURRENT ASSETS:
      Cash and cash equivalents                                $     1,511,466             $    4,842,169
      Prepaid expenses and other assets                                524,258                     27,762
                                                              ------------------          -----------------

             Total current assets                                    2,035,724                  4,869,931

      Property, plant and equipment, net                               286,936                     20,871
      Intangible assets, net                                         4,324,447                  2,274,406
      Deferred financing costs, net                                  1,038,270                  1,426,834
      Other assets                                                     986,068                          -
                                                              ------------------          ------------------

             Total assets                                      $     8,671,445             $     8,592,042
                                                              ==================          ==================
</TABLE>


The accompanying notes are an integral part of these balance sheets.


                                       1

<PAGE>

<TABLE>
                    LIABILITIES & SHAREHOLDERS' EQUITY

<CAPTION>
                                                                SEPTEMBER 30,                DECEMBER 31,
                                                                     1997                        1996
                                                              ------------------          ------------------
                                                                 (UNAUDITED)

CURRENT LIABILITIES:
<S>                                                           <C>                         <C>

      Accounts payable and accrued expenses                    $     1,618,343             $       370,175
      Customer deposits                                              1,000,000                           -
      Convertible notes                                                      -                   1,508,592
      Current portion of long-term debt                                539,541                     265,630
                                                              ------------------          ------------------

             Total current liabilities                               3,157,884                   2,144,397
                                                              ------------------          ------------------

      Convertible exchangeable subordinated debentures               5,500,000                   5,500,000
      Long-term debt, net of current portion                                 -                     527,857
                                                              ------------------          ------------------

             Total liabilities                                       8,657,884                   8,172,254
                                                              ------------------          ------------------


Commitments and contingencies (Notes 5 and 6)
Stockholders' equity:

      Preferred stock, $0.001 par value,
        10,000,000 shares authorized, none issued
        and outstanding - - Common stock, $0.001
        par value, 50,000,000 shares authorized,
        7,000,079 and 9,450,514 shares issued and
        outstanding as of September 30, 1997 and
        December 31, 1996, respectively, 775,808
        and 479,801 shares subject to cancellation
        agreements as of September 30, 1997 and
        December 31, 1996,           ,
        respectively (Note 4)                                            9,450                       7,000
      Additional paid-in capital                                    17,108,061                   6,724,964
      Issuable common stock, 904,365  as of December
        31, 1996                                                             -                   5,299,579
      Receivable for stock subscription                                      -                    (105,000)
      Accumulated deficit                                          (17,103,950)                (11,506,755)
                                                              ------------------          ------------------

             Total stockholders' equity                                 13,561                     419,788
                                                              ------------------          ------------------

             Total liabilities and stockholders' equity        $     8,671,445                $  8,592,042
                                                              ==================          ==================
</TABLE>


The accompanying notes are an integral part of these balance sheets.


                                       2

<PAGE>

<TABLE>
                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                                  Nine Months                 Nine Months
                                                                 Ended 9/30/97               Ended 9/30/96
                                                              ------------------          ------------------
                                                                  (Unaudited)                  (Unaudited)
<S>                                                            <C>                         <C>
Revenues                                                       $       512,041             $             -

Operating expenses:

      Cost of revenues                                                 283,332                           -
      Sales and marketing                                              896,464                      45,922
      General and administrative                                     3,069,598                     135,051
      Amortization and depreciation                                    651,937                      78,490
                                                              ------------------          ------------------
             Loss from operations                                   (4,389,290)                   (259,463)

Other Income (expense):
      Interest income                                                  121,893                           -
      Interest expense                                              (1,228,695)                          -
      Other                                                           (101,103)                          -
                                                              ------------------          ------------------
             Net loss before benefit for income taxes               (5,597,195)                   (259,463)

             Benefit for income taxes                                        0                           -
                                                              ------------------          ------------------

Net loss                                                       $    (5,597,195)           $       (259,463)
                                                              ==================          ==================

Net loss per share                                             $         (1.10)            $         (0.65)
                                                              ------------------          ------------------

Weighted average shares outstanding                                  5,079,169                     400,000
                                                              ==================          ==================
</TABLE>


The accompanying notes are an integral part of these statements.


                                       3

<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

<TABLE>
                       CONSOLIDATED STATEMENTS OF INCOME

<CAPTION>
                                                                 Three Months                Three Months
                                                                 Ended 9/30/97               Ended 9/30/96
                                                              ------------------          ------------------
                                                                  (Unaudited)                  (Unaudited)
<S>                                                            <C>                         <C>
Revenues                                                       $       451,291              $            -

Operating Expenses:

      Cost of revenues                                                 226,188                           -
      Sales and marketing                                              243,315                      45,922
      General and administrative                                       875,043                      51,574
      Amortization and depreciation                                    280,284                      47,094
                                                              ------------------          ------------------

             Loss from operations                                   (1,173,539)                   (144,590)

Other Income (expense):
      Interest income                                                   13,805                           -
      Interest expense                                                (188,008)                          -
      Other                                                               (879)                          -
                                                              ------------------          ------------------

             Net loss before benefit for income taxes               (1,348,621)                   (144,590)

             Benefit for income taxes                                        -                           -
                                                              ------------------          ------------------

Net loss                                                       $    (1,348,621)            $      (144,590)
                                                              ==================          ==================

Net loss per share                                             $         (0.23)            $         (0.36)
                                                              ------------------          ------------------

Weighted average shares outstanding                                  5,978,973                     400,000
                                                              ==================          ==================
</TABLE>


The accompanying notes are an integral part of these statements.


                                       4

<PAGE>

<TABLE>
                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                  Nine Months                 Nine Months
                                                                 Ended 9/30/97               Ended 9/30/96
                                                              ------------------          ------------------
                                                                  (Unaudited)                  (Unaudited)
<S>                                                            <C>                         <C>

Cash flows from operating activities:
      Net loss                                                 $    (5,597,195)               $   (259,463)
      Adjustments to reconcile loss to net cash
             Depreciation and amortization expense                     651,937                      78,490
             Amortization of deferred financing costs                  388,564                           -
             Amortization of discount on Notes and Debentures          591,408                           -
             Expenses related to conversion of Debentures                    -                           -
             Stock compensation expense                                547,500                           -
             Non-cash interest expense on promissory note                8,904                           -
             Loss on conversion of promissory note                     101,442                           -

      Changes in assets and liabilities

             Prepaid expenses                                         (496,496)                          -
             Other assets                                             (986,068)                          -
             Accounts payable and accrued expenses                   1,248,168                     (65,826)
             Customer deposits                                       1,000,000                           -
             Deferred income taxes                                           -                           -
                                                              ------------------          ------------------

                    Net cash used in operating activities           (2,541,836)                   (246,799)
                                                              ------------------          ------------------

      Net cash used in investing activities:
             Purchases of property                                    (257,542)                         -
             Purchases of investments                                        -                          -
             Purchases of software                                    (767,379)                   (831,892)
                                                              ------------------          ------------------

                    Net cash used in investing activities           (1,024,921)                   (831,892)
                                                              ------------------          ------------------

      Net cash provided by financing activities:

             Net proceeds from the issuance of common stock            105,000                           -
             Advances from joint venture and
               ZMAX prior to CSI recapitalization                            -                     560,000
             Net borrowings (payments) on long-term
               obligations                                             131,054                     531,892
                                                              ------------------          ------------------

                    Net cash provided by financing activities          236,054                   1,091,892
                                                              ------------------          ------------------

Net (decrease) increase in cash                                     (3,330,703)                     13,201
                                                              ------------------          ------------------

Cash, beginning of period                                            4,842,169                           -
                                                              ------------------          ------------------

Cash, end of period                                            $     1,511,466             $        13,201
                                                              ==================          ==================
</TABLE>


The accompanying notes are an integral part of these statements.


                                       5

<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:

BASIS OF PRESENTATION

      The unaudited  financial  statements  as of September 30, 1997,  for the
nine months ended  September 30, 1996 and 1997, and for the three months ended
September 30, 1996 and 1997 presented herein have been prepared by the Company
without  audit,  pursuant to the rules and  regulations  of the Securities and
Exchange Commission.  Accordingly,  they do not include all of the information
and  footnotes  required  by  generally  accepted  accounting  principles  for
complete financial  statements.  These financial  statements should be read in
conjunction with the financial statements of ZMAX Corporation,  as of December
31, 1997, and notes thereto included in the Registration Statement on Form S-4
(file no.  333-29833),  as declared  effective by the  Securities and Exchange
Commission  on  November  3,  1997.  The  financial   statements  reflect  all
adjustments (consisting of normal recurring adjustments) which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations and cash flows of the Company as of September 30, 1996 and 1997,
and for the nine months then ended.  The results of  operations  for the three
and nine months ended  September 30, 1997, are not  necessarily  indicative of
the results that may be expected for the year ended December 31, 1997.

      On November 6, 1996, ZMAX Corporation  ("ZMAX"),  a shell company listed
on the OTC Bulletin Board,  acquired 100% of the  outstanding  common stock of
Century Services,  Inc. ("CSI"), a Maryland  corporation.  CSI was a privately
held company formed on December 13, 1995 to perform  computer re-  engineering
with a focus on providing a solution to the Year 2000 problem.

      For financial  reporting  purposes,  the  acquisition of CSI by ZMAX has
been treated as a recapitalization  of CSI with CSI as the acquirer (a reverse
acquisition).  The historical  financial  statements prior to November 6, 1996
are those of CSI. The accompanying  consolidated  financial statements include
all of the  accounts of CSI and the  accounts of ZMAX since  November 6, 1996.
All significant intercompany amounts have been eliminated.

      Prior  to the  three  months  ended  September  30,  1997,  ZMAX and its
subsidiary,  CSI (collectively,  the "Company"),  were considered  development
stage  companies as defined by Statement  of  Financial  Accounting  Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises."

NATURE OF OPERATIONS

      Prior to the CSI transaction,  ZMAX's activities consisted of efforts to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain  financing,  to acquire and develop its proprietary  Year
2000  software  re-engineering  tools and  methodologies,  and to  market  its


                                       6

<PAGE>

services to potential customers. Since the acquisition of CSI, the Company has
been  focused on the computer  software  re-engineering  market.  Although the
Company generated its first revenues during 1997, the Company has no assurance
of future revenues. Even if marketing efforts are successful, substantial time
may pass before  significant  revenues and  profitability may be realized and,
during this period,  the Company may require  additional funds that may not be
available to it.

      The  Company  has  limited  experience  in  providing  its Year  2000 or
"millennium"  services. The Company has not completed a large-scale millennium
conversion  project either alone or together with a strategic  partner.  There
can be no  assurance  that  the  Company  will  be  successful  in  completing
large-scale  conversions,  that the  Company  will not  experience  delays  or
failures in providing its millennium services, or that its millennium services
will be  effective.  The failure of the  Company's  Year 2000  methodology  to
function  properly or the existence of  significant  errors or bugs  following
completion   of   millennium   conversions   could   necessitate   significant
expenditures  by the  Company  to remedy  the  problem.  The  consequences  of
failures,  errors or bugs could  materially and adversely affect the Company's
business, operating results and financial condition.

      The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain and undeveloped
markets for  millennium  services,  current  and  potential  competitors  with
greater financial, technological, production and marketing resources, the need
to develop additional products and services, limited protection of proprietary
information,  the  risk of  third  party  claims  of  infringement,  potential
contract  liability  related  to  the  Company's  access  to  key  aspects  of
customer's computer systems, dependence upon strategic alliances, the need for
additional  technical  personnel,  dependence  on  key  management  personnel,
management  of  growth,  uncertainty  of  future  profitability  and  possible
fluctuations in financial  results.  In addition,  there are risks  associated
with the market activity in ZMAX stock. The potential  volatility of the stock
price is demonstrated by the quoted market price compared to the prices in the
CSI recapitalization transactions.

2.    SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

      Investments  with  original  maturities  of  three  months  or less  are
considered cash equivalents for purpose of these financial statements.

REVENUE RECOGNITION

      Revenues on time-and-materials contracts are recognized based upon hours
incurred  at  contract  rates  plus  direct  costs.  Revenues  on  fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred  in  relation  to  total  estimated  costs.  Anticipated  losses  are
recognized as soon as they become known.


                                       7

<PAGE>

INCOME TAXES

      The Company  accounts for income taxes in accordance  with SFAS No. 109,
"Accounting  for Income  Taxes."  Under SFAS No. 109,  deferred tax assets and
liabilities  are  computed  based  on the  difference  between  the  financial
statement  and income tax bases of assets and  liabilities  using the  enacted
marginal tax rate.  SFAS No. 109  requires  that the net deferred tax asset be
reduced  by a  valuation  allowance  if,  based  on the  weight  of  available
evidence,  it is more  likely  than not that  some  portion  or all of the net
deferred tax asset will not be realized.

NET LOSS PER SHARE

      Net loss per share for the nine  months  ended  September  30,  1997 and
1996,  and the three months ended  September 30, 1997 and 1996, are based upon
the weighted-average number of common equivalent shares outstanding during the
period.  The effects of outstanding  options and convertible  debt on net loss
per  share are not  included  because  such  effects  would be  anti-dilutive.
Outstanding shares subject to cancellation agreements are also not included.

3.    DEBT AND DEFERRED FINANCING COSTS:

The following details the Company's debt obligations:

<TABLE>
<CAPTION>
                                                                       September 30,
                                                                            1997             December 31,
                                                                       (Unaudited)               1996
                                                                       -------------         ------------
<S>                                                                   <C>                  <C>
Promissory note payable to  Fiserv, interest payable
    annually at the prime rate plus 1%.........................       $         -           $   385,000
Amounts due for the purchase of software rights,
    interest imputed at 10%, due in installments of
    $283,333 in January 1998 and May 1998......................           539,541               408,487
Convertible notes, interest payable monthly at 8%                               -             1,508,592
Convertible exchangeable subordinated debentures,
    interest payable semi-annually, at 8%,
    due in December 1999.......................................         5,500,000             5,500,000
                                                                      ------------          ------------
         Total.................................................         6,039,541             7,802,079
Less ---- Current portion......................................          (539,541)           (1,774,222)
                                                                      ------------          ------------
                                                                      $ 5,500,000           $ 6,027,857
                                                                      ============          ============
</TABLE>


COMMON STOCK AND PREFERRED STOCK:

REVERSE STOCK SPLIT

      Effective  July 23, 1996,  ZMAX effected a 1 for 80 reverse split of its
common  stock.  All share  amounts and per share amounts have been restated to


                                       8

<PAGE>

reflect this event.

STOCK SUBJECT TO CANCELLATION

      By an agreement  dated April 27, 1992, ZMAX agreed to acquire all of the
outstanding  common stock of American Oil in consideration for the issuance of
625,000 shares of ZMAX common stock,  5,000,000 shares of ZMAX preferred stock
and the sale of an additional 88,266 shares of ZMAX common stock for $7,062 in
cash.  The shares of ZMAX  preferred  stock were never issued and American Oil
did not  undertake any business or any  financial  transaction  other than the
acquisition  of certain mining rights.  American  Oil's  corporate  status was
suspended by the State of Nevada as of December 1, 1995,  and that  subsidiary
was abandoned by the Company.

      In September 1995, ZMAX entered into stock cancellation  agreements with
certain  stockholders that provided for the cancellation of the aforementioned
shares of ZMAX common  stock.  As of December 31,  1996,  these shares had not
been returned to the Company for cancellation. In March 1997, 296,007 of these
shares were returned to the Company and canceled. An additional 479,801 shares
are  subject to  cancellation  but had not been  returned  to the  Company for
cancellation as of September 30, 1997.

5.    RELATED PARTY TRANSACTIONS:

      In  connection  with the  recapitalization  of CSI, a consultant  to the
Company  and his  affiliate  were  issued an  aggregate  of 320,000  shares of
Company common stock for services  related to the CSI  transaction and related
financing.  This  individual  and  his  affiliate  received  an  aggregate  of
approximately  $563,000  in 1996 from  ZMAX  prior to the CSI  acquisition  as
satisfaction for amounts owed to this individual by ZMAX prior to December 31,
1995.  Proceeds  from  the  Offshore  Placement  were  used  to  satisfy  this
obligation.  This  individual  has been a consultant  to ZMAX since 1994.  The
Company  continues to retain this  individual  as a consultant  at $10,000 per
month. In connection with the  recapitalization of CSI, $280,000 of consulting
fees owed to this individual were satisfied in 1996 by issuing to him $280,000
of convertible  notes.  In addition to incurring  $120,000 in consulting  fees
during 1996,  ZMAX  reimbursed  approximately  $155,000 to this individual for
expenses  incurred  on  behalf  of ZMAX.  Through  September  30,  1997,  this
individual received $90,000 in consulting fees.

6.    COMMITMENTS AND CONTINGENCIES:

LITIGATION

      On April 17, 1997,  Alan  L.Levine and  Canadian  Petroleum  Corporation
filed suit in the Third  Judicial  district  Court of Salt Lake  County,  Utah
against the Company (f/k/a  Mediterranean Oil Corp., f/k/a Pandora,  Inc.) and
John Does.  The complaint  alleges  various common law claims arising from the
alleged untimely failure to remove legends  restricting the transferability of
shares of the  Company's  common  stock that had been issued by the Company in
payment of legal fees incurred.  The plaintiffs  have computed  damages in the
approximate  amount of $87,000.  The Company believes the complaint is without
legal merit and will vigorously defend itself.


                                       9

<PAGE>

      The  Company is  periodically  a party to disputes  arising  from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial  position or future
operating  results of the Company,  and adequate  provision  for any potential
losses has been made in the accompanying financial statements.


                                      10

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following  discussion  and analysis of the  financial  condition and
results of operations of the company  should be read in  conjunction  with the
financial  statements  and the notes  thereto  which appear  elsewhere in this
quarterly  report and its  registration  statement  on Form S-4,  for the year
ended December 31, 1996.

      The  information  set forth below includes  forward-looking  statements.
Some  factors  that  could  cause  results  to differ  materially  from  those
projected in the forward-looking  statements are set forth below.  Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to update  publicly  these  forward-looking
statements,  whether  as  a  result  of  new  information,  future  events  or
otherwise.

OVERVIEW

      On  November  6,  1996,  ZMAX,  a shell  company  listed on the NASD OTC
Bulletin  Board  acquired all of the  outstanding  stock of CSI. Prior to this
transaction, ZMAX had no operations and its activities consisted of efforts to
establish or acquire a new business and to raise capital.  CSI was a privately
held company  formed on December 13, 1995. For financial  reporting  purposes,
the acquisition has been treated as a recapitalization  of CSI with CSI as the
acquirer (a reverse acquisition). The historical financial statements prior to
November 6, 1996 are those of CSI.

      CSI  markets  millennium   services  to  a  variety  of  commercial  and
government  organizations.  In the next 12 months, the Company intends to make
additional  investments  in the further  development  and  marketing  of CSI's
millennium services and other software  re-engineering  services. In addition,
the  Company  currently  intends  to pursue  acquisitions  in the  information
technology industry that will complement CSI.

      In view of the development costs relating to CSI's millennium  services,
the Company believes the period-to-period comparisons of its financial results
are not necessarily  meaningful and should not be relied upon as an indication
of future performance.  Specifically,  as CSI increases its workforce in order
to meet the future demand for its millennium services, it will incur training,
salary  and other  costs  prior to the  recognition  of related  revenues.  In
addition,  most of CSI's revenues are expected to be derived from a relatively
small number of large-scale,  comprehensive  millennium  conversion projects .
Consequently,  CSI's revenues and operating results are expected to be subject
to substantial variations in any given year and from quarter to quarter.

      The Company  believes  some  demand for CSI's  millennium  services  may
continue to exist for some time after the year 2000, although this demand will
diminish  significantly over time and will eventually disappear.  However, the
Company's  proprietary  computer  software  tools  may be used  in  conversion
projects  unrelated  to Year  2000  compliance.  The  Company  plans to pursue
businesses and business  opportunities  unrelated to the millennium problem in
the information  services market and to develop  products and services to take
advantage  of these  opportunities,  such as  migrating  a client' s  software
application from a mainframe to a client-server  environment.  However,  there


                                      11

<PAGE>

can be no assurance that the Company will be able to  successfully  expand its
business beyond the millennium conversion market. The failure to diversify and
develop additional products and services could materially and adversely affect
the Company's business, operating results and financial condition

      Most of the Company's current cost structure is fixed.  Expenses consist
primarily  of the  salaries  and  benefits  paid to the  Company's  technical,
marketing and administrative  personnel and benefits,  travel,  promotions and
trade  show  expenses,  office  expenses  and other  general  overhead  costs.
Amortization and  depreciation  expenses relates to property and equipment and
intangible  assets.  As a result of its plan to expand its  operations  and to
offer a wider range of information  services,  the Company expects these costs
to increase.

      Margins for the Company's  millennium services business will depend upon
volume  of  service  because  a  significant  portion  of the  Company's  cost
structure is fixed. Most of the Company's  millennium  conversion projects are
expected to be priced on a fixed fee basis. Therefore, the profitability of an
individual  project  will  depend  upon  completing  the  project  within  the
estimated number of staff hours and within the agreed time frame.

RECENT DEVELOPMENTS

      CONVERSION OF $2.1 MILLION NOTES.  From September 1996 to November 1996,
the  Company  issued  a total  of $2.1  million  in  convertible  notes to six
non-U.S.  accredited investors and financial institutions.  The notes were due
in  January  and  March of 1997 and were  convertible,  at the  option  of the
holder,  into a total of 1,600,000 shares of Company common stock. All holders
of the  convertible  notes  notified  the  Company  of the  exercise  of their
conversion rights in early 1997, prior to the due dates of the notes. In March
1997, the Board of Directors  approved the conversion  and, in April 1997, all
$2.1  million  of  convertible  notes  were  converted  into an  aggregate  of
1,600,000 shares of ZMAX common stock (the "Note Conversions").

      ISSUANCE OF FINDERS FEE SHARES.  In connection  with the CSI transaction
and related  financing,  ZMAX agreed to issued  320,000  shares of ZMAX common
stock to Shafiq  Nazerali as a fee for his  services.  At the direction of Mr.
Nazerali,  these shares were issued to  Valorinvest  Ltd. In April 1997,  ZMAX
also  agreed to grant  350,000  shares of ZMAX  common  stock to the  original
finder of the CSI  transaction  for $0.30 per share in order to  acquire  such
finder's  rights  to  the  transaction.  These  shares  were  issued  and  the
consideration received in May 1997.

      CONVERSION  OF FISERV  DEBT.  As part of the CSI  recapitalization,  the
Company  acquired the interest of Fiserv,  Inc. in the Fiserv Century Services
Joint Venture in exchange for, among other  consideration,  ZMAX's  promissory
note for $385,000.  This promissory note has been converted into 32,077 shares
of ZMAX common stock issued to Fiserv, Inc. in May 1997.

      ACQUISITION OF COCACT SOFTWARE.  On April 30, 1997, ZMAX entered into an
agreement  with Taiwan's  Institute for  Information  Industry to purchase all
right,  title and interest to the Change of Century  Analysis  and  Conversion
Tool  (COCACT)  software  program,  an integral  part of CSI's  VISION  2000SM
solution. Conditions of the purchase agreement included a three month software


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<PAGE>

development and  enhancement  project to bring COCACT to the required level of
performance.  The  purchase  price for the COCACT  software is $1.1 million in
cash plus 150,000  shares of ZMAX common stock  issuable upon  completion  and
testing of certain  COCACT  enhancements  to be performed  by the seller.  The
first  installment of the purchase price in the amount of $250,000 was paid in
May 1997. The  enhancements  were completed and accepted by CSI in August 1997
and the 150,000 shares were issued to the seller in September 1997. The second
installment was paid in September 1997. The balance of the purchase price will
be paid in equal installments on January 1, 1998 and May 1, 1998.

RESULTS OF OPERATIONS

      Prior to the third  quarter of 1997,  CSI was  considered a  development
stage company.  CSI was formed on December 13, 1995 and 1995  activities  were
limited to acquiring  the rights to two of its software  tools.  In 1996,  the
Company  incurred a loss of $11.5  million,  or $13.45 per share.  No revenues
were  generated  during  this  period.  Included  in  the  loss  were  several
significant  non-cash charges including  approximately $2.9 million of expense
related to the CSI transaction, approximately $7.0 million in interest charges
related to the amortization of the discount on the Company's  convertible debt
that  resulted  from an  allocation  of the proceeds of the debt to additional
paid-in  capital  to  reflect  the  beneficial   conversion   feature  on  the
convertible  debt,  approximately  $380,000 in amortization of intangibles and
deferred  financing costs, and  approximately  $300,000 in non-employee  stock
compensation expense. The remaining expenses are primarily attributable to the
salaries  and  benefits  paid  to  the  Company's  technical,   marketing  and
administrative   personnel  along  with  other  marketing  and  administrative
expenses.

      Results for the nine months ended  September  30,  1996,  were a loss of
approximately  $259,000, or $0.65 per share. The loss was primarily related to
the  commencement  of  operations  by CSI in early 1996.  Results for the nine
months ended September 30, 1997, were a loss of approximately $5.6 million, or
$1.10 per share.  Included in the 1997 loss were several significant  non-cash
charges.  Approximately  $590,000 in interest charges were recorded related to
the  amortization  of the discount on the Company's  $2.1 million  convertible
notes  that  resulted  from  an  allocation  of the  proceeds  of the  debt to
additional paid-in capital to reflect the beneficial conversion feature on the
debt.  Approximately  $636,000 in  amortization  of  intangibles  and deferred
financing costs was recorded.  Approximately  $547,000 in  non-employee  stock
compensation  was charged to expense.  The Company  also  recognized a loss of
approximately  $101,000 upon the  conversion of a promissory  note into common
stock.  The  remaining  loss  reflects  the  costs  related  to the  increased
operations  of CSI.  During the nine months  ended  September  30,  1997,  the
Company  recognized  revenues totaling $512,041 related to the commencement of
several projects. Direct expenses related to the revenues totaled $283,332.

LIQUIDITY AND CAPITAL RESOURCES

      Current  assets  at  September  30,  1997,  totaled  approximately  $2.0
million,  a decrease of  approximately  $2.8 million  from  December 31, 1996,
attributable primarily to a decrease in cash that was used for operations, the
purchase of property and equipment,  professional expenses associated with the
Debenture Exchange,  and payment on the Company's long-term obligation related
to its purchase of the COCACT software tools. Current liabilities at September
30, 1997, totaled approximately $3.2 million an increase of approximately $1.0


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<PAGE>

million from December 31, 1996,  attributable  primarily to a customer deposit
received in September 1997.

      Prior to the CSI  transaction,  ZMAX sold 2,800,000 shares of its common
stock for $0.30 per share,  or $840,000 in the aggregate,  issued $1.5 million
of  convertible  notes for cash and issued  $480,000 of  convertible  notes as
satisfaction for certain liabilities. The proceeds from such transactions were
used  to  satisfy  certain   liabilities  of  ZMAX.   Subsequent  to  the  CSI
transaction,  the Company issued an additional  $120,000 in convertible  notes
for cash. In early 1997, the holders of the convertible  notes exercised their
conversion  rights and the $2.1  million in aggregate  convertible  notes were
converted  into a total of  1,600,000  shares  of  Company  common  stock.  In
December 1996,  the Company  issued $5.5 million in  convertible  exchangeable
subordinated  debentures  for cash.  As of December 31, 1996 and September 30,
1997,  the Company had  approximately  $4.8  million and $1.5 million in cash,
respectively.  As of December  31,  1996 the  Company  had working  capital of
approximately  $2.7  million  while at September  30, 1997,  the Company had a
working deficit of $1.1 million. The change was primarily a result of the $3.3
million  decrease in cash and cash  equivalents and the $1.0 million  customer
deposit received in September 1997.

      The nature of the  information  technology  industry,  combined with the
rapidly  growing demand for Year 2000 services  worldwide,  makes it difficult
for the  Company to predict  future  liquidity  requirements  with  certainty.
However,  the Company  believes  that existing  cash and cash  generated  from
operations, together with the proceeds from the exchange of the debentures and
warrant exercises,  which provided  approximately $6.2 million in net proceeds
in  December  1997,  will  be  adequate  to  finance  continuing   operations,
investments in property and equipment, and expenditures for the development of
additional software improvements in the Company's VISION 2000SM toolset.

      Over the longer term, the Company must successfully execute its plans to
generate  significant  positive  cash  flows  if  its is to  sustain  adequate
liquidity  without  impairing  growth or requiring  the infusion of additional
funds from external sources of cash. Additionally,  a major expansion, such as
would occur with the acquisition of a major new subsidiary  might also require
external financing that could include additional debt or equity capital.


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<PAGE>

                          PART II. OTHER INFORMATION

EXHIBIT AND REPORTS ON FORM 8-K

     EXHIBITS

             Exhibit 27 - Financial Data Schedule

     REPORTS ON FORM 8-K

             None


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<PAGE>

                                  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.

                                                 ZMAX Corporation

Date:  March 31, 1998                            /s/MICHAEL C. HIGGINS
                                                 -----------------------------
                                                 Michael C. Higgins
                                                 President

                                                 /s/G.W. NORMAN WAREHAM
                                                 -----------------------------
                                                 G.W. Norman Wareham
                                                 Vice President -
                                                   Principal Financial Officer

                                                 /s/JAMES T. MCCUBBIN
                                                 -----------------------------
                                                 James T. McCubbin
                                                 Vice President -
                                                   Principal Accounting Officer


                                      16