SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

   [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the quarterly period ended  JUNE 30, 1998
                                         -------------
                                   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
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            (Exact name of registrant as specified in its charter)

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

                   20251 CENTURY BLVD. GERMANTOWN, MD 20874
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     (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 August 1,
1998; 11,729,714 shares of common stock, $.001 par value per share.


<PAGE>

                               ZMAX CORPORATION

                                     INDEX

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

Item 1.    Financial Statements

Consolidated Balance Sheets - March 31, 1998
      (unaudited) and December 31, 1997                                  1

Consolidated Statements of Operations for the three and six
      months ended June 30, 1998 and 1997 (unaudited)                    2

Consolidated Statements of Cash Flows for the three and six
      months ended June 30, 1998 and 1997 (unaudited)                    3

Notes to Consolidated Financial Statements                               4

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                           8

PART II.   OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security holders          13

Item 5.    Exhibits and Reports on Form 8-K                             13

SIGNATURES                                                              14
</TABLE>


<PAGE>

                        PART 1. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                        ZMAX CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    June 30,        December 31,
                                                      1998              1997
                                                 -------------     -------------
                                                  (Unaudited)
            ASSETS
<S>                                              <C>               <C>
CURRENT ASSETS:
  Cash                                           $   4,625,988     $   6,405,084
  Accounts Receivable                                2,498,637         1,067,258
  Prepaid and other assets                             129,300            81,506
                                                 --------------    --------------

  Total current assets                               7,253,925         7,553,848

Property, plant & equipment (net)                      309,345           277,981

Intangible assets (net)                              3,450,905         4,033,265

Other assets                                             5,193             4,983
                                                 --------------    --------------

  Total assets                                   $  11,019,368     $  11,870,077
                                                 ==============    ==============

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable and accrued expenses          $   1,185,643     $     826,117
  Current portion of long-term debt                          -           539,541
  Contract deposits                                    703,071           926,039
                                                 --------------    --------------

  Total current liabilities                          1,888,714         2,291,697


Commitments and contingencies (Note 4)
Stockholder's 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,
    11,729,714 shares issued and 
    outstanding as of June 30, 1998
    and December 31, 1997, 479,801 shares
    subject to Cancellation Agreements
    as of June 30, 1998 and December 31,
    1997. (Note 3).                                     11,729            11,729
  Paid in capital                                   35,280,105        35,280,105
  Retained earnings                                (26,161,180)      (25,713,454)
                                                 --------------    --------------

  Total stockholder's equity                         9,130,654         9,578,380

Total liabilities & stockholder's equity         $  11,019,368     $  11,870,077
                                                 ==============    ==============
</TABLE>

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

                                      1


<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Three Months Ended             Six Months Ended
                                                         June 30                      June 30
                                               ---------------------------   --------------------------
                                                   1998           1997           1998          1997
                                               ------------   ------------   ------------   -----------
                                                       (unaudited)                   (unaudited)
<S>                                            <C>            <C>            <C>            <C>
Revenues                                       $  2,502,779   $     60,750   $  4,027,103   $     60,750

Operating expenses:
  Cost of sales                                     843,015         57,144      1,309,823         57,144
  Research and development                           83,935              -        211,622              -
  Sales and marketing                               276,037        495,401        541,546        653,149
  General and administrative                        853,527      1,175,360      1,910,632      2,194,555
  Depreciation and amortization                     304,239        269,113        625,881        423,843

    Income (loss) from operations                   142,026     (1,936,268)      (572,400)    (3,267,941)

Other income (expenses):
  Interest income                                    87,121         58,610        142,552        108,088
  Interest expense                                    8,845       (151,241)         1,990     (1,040,687)
  Other                                              (3,987)      (101,442)       (19,867)      (100,224)
                                               -------------  -------------  -------------  -------------

    Income (loss) before income taxes               234,005     (2,130,341)      (447,726)    (4,300,764)
    Income tax benefit                                    -         26,094              -         52,190
                                               -------------  -------------  -------------  -------------

Net income (loss)                              $    234,005   $ (2,104,247)  $   (447,726)  $ (4,248,574)
                                               =============  =============  =============  =============

Basic net income (loss) per share              $       0.02   $      (0.36)  $      (0.05)  $      (0.92)
                                               =============  =============  =============  =============

Basic weighted average shares outstanding        11,249,913      5,825,241      9,849,913      4,635,822
                                               =============  =============  =============  =============

Diluted net income (loss) per share            $       0.02   $      (0.36)  $      (0.05)  $      (0.92)
                                               =============  =============  =============  =============

Diluted weighted average shares outstanding      11,488,002      5,825,241      9,849,913      4,635,822
                                               =============  =============  =============  =============
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      2


<PAGE>

                       ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                      Three Months                       Six Months
                                                                      Ended June 30,                    Ended June 30,
                                                              ----------------------------------------------------------------
                                                                  1998             1997             1998             19997
                                                              -------------    -------------    -------------    -------------
                                                                        (unaudited)                       (unaudited)
<S>                                                           <C>              <C>              <C>              <C>
Cash flows from operating activities:

  Net income (loss)                                           $    234,005     $ (2,104,247)    $   (447,726)    $ (4,248,574)
  Adjustments to reconcile loss to net cash
    Depreciation and amortization expense                          304,239          269,113          625,881          423,843
    Amortization of deferred financing costs                             -           78,133                -          227,100
    Amortization of discount on Notes and Debentures                     -                -                -          591,408
    Stock compensation expense                                           -          247,500                -          547,500
    Non-cash interest expense on promissory note                         -            8,904                -            8,904
    Loss on conversion of promissory note                                -          101,442                -          101,442

  Changes in assets and liabilities
    Accounts receivable                                         (1,091,327)               -       (1,431,379)               -
    Prepaid expenses and other assets                              (67,951)        (158,732)         (48,004)        (141,083)
    Accounts payable and accrued expenses                          201,555          434,037          359,586          582,687
    Deferred income taxes                                                -          (26,094)               -          (52,190)
    Customer deposits                                             (204,478)               -         (222,968)               -
                                                              -------------    -------------    -------------    -------------

      Net cash used in operating activities                   $   (623,957)    $ (1,149,944)    $ (1,164,610)    $ (1,958,963)
                                                              -------------    -------------    -------------    -------------

  Net cash used in investing activities:
    Purchases of property and equipment                            (20,565)         (82,105)         (74,945)        (254,263)
    Purchases of software                                                -         (767,379)               -         (767,379)
                                                              -------------    -------------    -------------    -------------

      Net cash used in investing activities                   $    (20,565)    $   (849,484)    $    (74,945)    $ (1,021,642)
                                                              -------------    -------------    -------------    -------------

  Net cash provided by financing activities
    Proceeds from the issuance of common stock                           -          105,000                -          105,000
    Net borrowings (payments) on long-term obligations            (274,193)         517,419         (539,541)         387,843
                                                              -------------    -------------    -------------    -------------

      Net cash (used in) provided by financing activities     $   (274,193)    $    622,419     $   (539,541)    $    492,843
                                                              -------------    -------------    -------------    -------------

  Net decrease in cash                                        $   (918,715)    $ (1,377,009)    $ (1,779,096)    $ (2,487,762)
                                                              -------------    -------------    -------------    -------------

  Cash, beginning of period                                   $  5,544,703     $  3,731,416     $  6,405,084     $  4,842,169
                                                              -------------    -------------    -------------    -------------

  Cash, end of period                                         $  4,625,988     $  2,354,407     $  4,625,988     $  2,354,407
                                                              =============    =============    =============    =============
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      3


<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:

BASIS OF PRESENTATION

      The accompanying  unaudited  financial  statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete  financial  statements.  In the opinion of management,
all  adjustments,  consisting  of  normal  recurring  adjustments,  considered
necessary  for  a  fair  presentation  have  been  included.  These  financial
statements should be read in conjunction with the financial statements of ZMAX
Corporation ("ZMAX" or the "Company"),  as of December 31, 1997, and the notes
thereto  included in the Annual  Report on Form 10-K filed by the Company with
the Securities and Exchange Commission.  The results of operations for the six
and  three  months,  respectively  ended  June 30,  1998  are not  necessarily
indicative  of the results that may be expected  for the year ending  December
31, 1998. The common stock of ZMAX is currently  listed on the SmallCap Market
of the National  Association of Securities  Dealers,  Inc. ("NASD")  Automated
Quotation System ("NASDAQ").

NATURE OF OPERATIONS

      On November 6, 1996, ZMAX 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
services with a focus on providing a solution to the Year 2000 problem.

      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
services to potential customers. Since the acquisition of CSI, the Company has
been  focused on the  computer  software  re-engineering  market.  The Company
generated  its first  revenues  during 1997.  The Company must  continue to be
successful in selling it services and recognizing those services as revenue in
order to achieve growth, profitability,  and success in the marketplace. There
is no guarantee that the Company will continue to be successful in selling its
services and developing or acquiring new services to market in the future. The
Company may require additional funds that may not be available to it.

      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.

                                      4


<PAGE>

      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.

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.  Provisions  for estimated  losses on
uncompleted  contracts  are  made in the  period  in  which  such  losses  are
determined.

      Unbilled accounts  receivable on time and materials  contracts represent
costs incurred and gross profit  recognized near the period end but not billed
until the  following  period.  Unbilled  accounts  receivable  on  fixed-price
contracts  consists of amounts  incurred  which are not yet  invoicable  under
contract  terms.  At June  30,  1998,  unbilled  accounts  receivable  totaled
approximately $932,000.

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.

EARNINGS (LOSS) PER SHARE

      The Company has adopted Statement of Financial  Accounting  Standard No.
128,  "Earnings  Per Share"  which  requires  dual  presentation  of basic and
diluted earnings per share.  Basic earnings per share excludes dilution and is
computed  by  dividing  income   available  to  common   stockholders  by  the
weighted-average  number of common shares outstanding for the period.  Diluted
earnings per share  reflects the potential  dilution that occurs if securities
or other  contracts  to issue Common  Stock were  exercised or converted  into

                                      5


<PAGE>

Common  Stock or resulted in the  issuance of Common Stock that then shared in
the earnings of the Company. Options and warrants to purchase shares of Common
Stock were not  included  in the  computation  of loss per share as the effect
would be antidilutive.

      The treasury stock effect of 1,844,000  Options and 140,800  warrants to
purchase shares of Common Stock were included in the computation of income per
share as the effect was dilutive.  Outstanding  shares subject to cancellation
agreements are not included in the calculation of income or loss per share.

NEW ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial  Accounting  Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments
of an Enterprise and Related  Information."  These statements become effective
for the  Company's  1998  financial  statements.  The  adoption  of these  new
pronouncements  did not impact the Company's results of operations,  financial
position or cash flows.

3.    COMMON STOCK AND PREFERRED STOCK:

STOCK SUBJECT TO CANCELLATION

      In September 1995, ZMAX entered into stock cancellation  agreements with
certain  stockholders  that provided for the cancellation of 775,808 shares of
ZMAX common stock. 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 June 30, 1998.

STOCK PURCHASE AGREEMENT

      On November 6, 1996, a Stock Purchase Agreement between CSI and ZMAX was
executed  and  the  transaction  was  consummated.  In  return  for all of the
outstanding  stock of CSI, ZMAX issued 3,200,000 shares of common stock to the
two  stockholders  of CSI.  At the  closing,  the former  stockholders  of CSI
retained  400,000  shares  of such  ZMAX  common  stock  and  deposited  their
remaining  2,800,000 shares of ZMAX common stock (the "Restricted Stock") into
an escrow  subject to quarterly  release of such shares back to the former CSI
stockholders based upon the cash flows (as defined) of CSI. Under the terms of
the Stock Purchase  Agreement,  one share of Restricted Stock will be released
to such stockholders for every $1.25 of cash flow generated by CSI. The former
CSI  stockholders  are entitled to vote the shares of the Restricted  Stock as
well as to receive their  respective  pro rata share of any  distributions  or
dividends  declared  thereon.  The  Restricted  Stock is subject to forfeiture
under   certain   conditions.   The   transaction   was  accounted  for  as  a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).

      In 1998, ZMAX and the former CSI  stockholders  reformed  certain of the
agreements  relating  to ZMAX's  acquisition  of CSI to reflect  the  original
intent of the parties. As a result, the original escrow to hold the Restricted

                                      6


<PAGE>

Stock was  replaced by the former CSI  stockholders  holding  their  shares of
Restricted Stock subject to the same transferability restrictions based on the
cash flows of CSI. The amended agreements,  however,  provide for the lapse of
such restrictions on  transferability on November 6, 2001 if such restrictions
have not already been released as a result of the CSI cash flow.

4.    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. The Company accrued $40,000 for
legal expenses related to this issue in 1997. As of June 30, 1998, $11,248 had
been incurred for this matter.

      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.

                                      7


<PAGE>

ITEM 2.     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 the  Company's  Annual  Report on Form 10-K for the year
ended December 31, 1997.

      The  information  set forth below  includes  forward-looking  statements
relating  to actual  results  that may differ  from  projected  results.  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 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 software re-engineering and 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  software  re-engineering  and  millennium  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 re-engineering and 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 projects.
Consequently,   CSI's  revenues  and  operating  results  may  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 and
re-engineering  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


                                      8

<PAGE>

client's software application from a mainframe to a client-server environment.
However,  there  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.  The
amortization  and  depreciation  expenses relate 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 may depend upon
the 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 may depend upon completing the project within the estimated
number of staff hours and within the agreed time frame.

RESULTS OF OPERATIONS

FOR THE THREE  MONTHS  ENDED JUNE 30, 1998  COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997

      REVENUES. Revenues for the three months period ended June 30, 1998, were
approximately   $2,503,000,  an  increase  of  approximately  $2,442,000  over
revenues of  approximately  $61,000 for the three months period ended June 30,
1997. The increase in revenues  during the second quarter of 1998 was a result
of increased sales activity of Year 2000  remediation and consulting  services
by CSI during such period.

      GROSS PROFIT.  Gross profit for the three months ended June 30, 1998 was
approximately $1,660,000, an increase of approximately $1,656,000,  over gross
profit of  approximately  $4,000 for the three months ended June 30, 1997. The
increase in  profitability  during the three  months ended June 30, 1998 was a
result of increased  sales  activity of Year 2000  remediation  and consulting
services by CSI during such period.

      RESEARCH  AND  DEVELOPMENT.  Research and  development  expenses for the
three months ended June 30, 1998, were approximately  $84,000. No research and
development  expenses  were  incurred in the three months ended June 30, 1997.
The Company  initiated  efforts  during the first six months of 1998 to refine
its Year 2000  toolset and to prepare the toolset for  potential  licensing to
end-users.

      SALES AND MARKETING.  Sales and marketing  expenses for the three months
ended June 30, 1998 were approximately  $276,000,  a decrease of approximately
$219,000,  from the  approximately  $495,000  in such  expenses  for the three
months ended June 30, 1997.  The decrease in sales and marketing  expenses for
the  three  months  of 1998  was  primarily  attributable  to a  non-recurring
severance charge that occurred during the three months of 1997.

                                      9


<PAGE>

      GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
three  months  ended June 30, 1998 were  approximately  $854,000 a decrease of
approximately  $321,000,  as  compared  to  approximately  $1,175,000  of such
expenses  incurred by the Company for the three  months  period ended June 30,
1997. The decrease in general and administrative expenses for the three months
ended 1998 was  primarily  attributable  to a  decrease  in  professional  and
consulting expenses.

      OTHER INCOME (EXPENSE).  Interest income for the three months ended June
30, 1998 was approximately  $87,000,  an increase of approximately  28,000, as
compared to approximately $59,000 of such interest income for the three months
ended June 30,  1997.  The  increase in interest  income for the three  months
ended June 30, 1998 was  primarily  attributable  to greater  amounts of cash.
Interest  expense for the three months  ended June 30, 1998 was  approximately
($9,000),  a decrease of  approximately  $160,000 as compared to approximately
$151,000 of such  interest  expense for the three  months ended June 30, 1997.
The decrease in interest expense for the three months ended 1998 was primarily
attributable   to  the   elimination  of  interest   expense  related  to  the
amortization  of the  deferred  financing  costs  and  the  amortization  of a
discount on the convertible  notes. The convertible  notes were converted into
common stock in April 1997.

      NET  INCOME  (LOSS).  As a result of the  above,  the net income for the
three months ended June 30, 1998 was  approximately  $234,000,  an increase of
approximately  $2,338,000,  as  compared  to the  net  loss  of  approximately
$2,104,000 for the three months ended June 30, 1997. Earnings before interest,
income taxes, depreciation,  amortization,  and excluding other income expense
("EBITDA")  for the  three  months  ended  June  30,  1998  was  approximately
$446,000, an increase of approximately  $2,113,000,  as compared to the EBITDA
of ($1,667,000) for the three months ended June 30, 1997.

FOR THE SIX MONTHS  ENDED JUNE 30, 1998  COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1997

      REVENUES.  Revenues  for  the six  months  ended  June  30,  1998,  were
approximately  $4,027,000,  an  increase  of  approximately  $3,966,000,  over
revenues of approximately  $61,000 for the six months ended June 30, 1997. The
increase was attributable to increased sales activity of Year 2000 remediation
and consulting services by CSI during the first six months of 1998 as compared
to the first six months of 1997 during  which the  Company had just  commenced
operations.

      GROSS PROFIT.  Gross profit for the six months ended June 30, 1998,  was
approximately $2,717,000, an increase of approximately $2,713,000,  over gross
profit of  approximately  $4,000 for the six months ended June 30,  1997.  The
increase was  attributable  to increased  sales activity  during the first six
months of 1998 as compared  to the first six months of 1997  during  which the
Company had just commenced operations.

      RESEARCH AND DEVELOPMENT.  Research and development expenses for the six
months  ended June 30,  1998,  were  approximately  $212,000.  No research and
development  expenses were incurred in the six months ended June 30, 1997. The
Company  initiated  efforts  during the first six months of 1998 to refine its
Year 2000  toolset  and to prepare  the toolset  for  potential  licensing  to
end-users.

                                      10


<PAGE>

      SALES AND  MARKETING.  Sales and  marketing  expenses for the six months
ended June 30, 1998 were approximately  $542,000,  a decrease of approximately
$111,000,  from the approximately $653,000 in such expenses for the six months
ended June 30,  1997.  The  decrease in sales and  marketing  expenses for the
first  six  months  of 1998  was  primarily  attributable  to a  non-recurring
severance charge that occurred during the first six months of 1997.

      GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
six months ended June 30, 1998 were  approximately  $1,911,000,  a decrease of
approximately  $284,000,  as  compared  to  approximately  $2,195,000  of such
expenses  incurred  by the Company  for the six months  period  ended June 30,
1997.  The decrease in general and  administrative  expenses for the first six
months of 1998 was primarily  attributable to a decrease in  professional  and
consulting expenses.

      OTHER INCOME  (EXPENSE).  Interest  income for the six months ended June
30, 1998 was approximately  $143,000,  an increase of approximately 34,000, as
compared to approximately  $108,000 of such interest income for the six months
ended June 30, 1997. The increase in interest  income for the first six months
of 1998 was  primarily  attributable  to  greater  amounts  of cash.  Interest
expense for the six months ended June 30, 1998 was approximately  ($2,000), an
decrease of approximately  $1,042,000, as compared to approximately $1,040,000
of such interest  expense for the six months ended June 30, 1997. The decrease
in  interest   expense  for  the  first  six  months  of  1998  was  primarily
attributable   to  the   elimination  of  interest   expense  related  to  the
amortization  of the  deferred  financing  costs  and  the  amortization  of a
discount on the convertible  notes. The convertible  notes were converted into
common stock in April 1997.

      NET INCOME  (LOSS).  As a result of the above,  the net loss for the six
months  ended  June  30,  1998  was  approximately  $448,000,  a  decrease  of
approximately  $3,801,000,  as  compared  to the  net  loss  of  approximately
$4,249,000 for the six months ended June 30, 1997.  Earnings before  interest,
income taxes, depreciation,  amortization,  and excluding other income expense
("EBITDA") for the six months ended June 30, 1998 was  approximately  $54,000,
an  increase  of  approximately  $2,898,000,  as  compared  to the  EBITDA  of
($2,844,000) for the six months ended June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

      The Company,  since  inception has financed its  operations  and capital
expenditures  through  the  sale  of  stock,  convertible  notes,  convertible
exchangeable  debentures and the proceeds from the exchange offer and exercise
of the warrants related to the convertible exchangeable debentures.  Cash used
in  operations  during  the  quarter  ended  June 30,  1998 was  approximately
$624,000,  as compared to  approximately  $1,150,000  during the quarter ended
June 30,  1997.  The  decrease  in cash used in  operations  during the second
quarter of 1998 was  primarily  a result of the  generation  of gross  profit.
Capital expenditures were approximately $39,000 for the quarter ended June 30,
1998, as compared to  approximately  $80,000 during the quarter ended June 30,
1997. The reduction in capital  expenditures  during 1998 is related primarily
to the leveling off of the initial equipment requirements of the Company.

                                      11


<PAGE>

      As of June 30, 1998,  the Company had working  capital of  approximately
$5,365,000.   The   Company's   primary   source  of  liquidity   consists  of
approximately  $4,626,000  in cash  and  cash  equivalents  and  approximately
$2,499,000 in contract receivables.

      The  market  for the  Company's  products  is  growing  rapidly  and the
Company's  business   environment  is  characterized  by  rapid  technological
changes.  The  Company  requires  substantial  working  capital  to  fund  its
business,  particularly to finance  accounts  receivable,  sales and marketing
efforts,  research  and  development,  and capital  expenditures.  The Company
currently has no commitments for capital  expenditures.  The Company's  future
capital requirements will depend on many factors including the rate of revenue
growth,  if any,  the timing and extent of  spending to support  research  and
development,  technological  changes and market  acceptance  of the  Company's
services. The Company believes that its current cash position is sufficient to
meet its capital  expenditure  and working capital  requirements  for the near
term; however,  the growth and technological  change make it difficult for the
Company to predict future  liquidity  requirements  with  certainty.  Over the
longer  term,  the  Company  must  successfully  execute its plans to generate
significant positive cash flows if it is to sustain adequate liquidity without
impairing  growth or requiring the infusion of additional  funds from external
sources.  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.  There  can be no
assurance  that  additional  financing,  if  required,  will be  available  on
acceptable terms, if at all.

OTHER

      Inflation has not had a significant effect on the Company's  operations,
as  increased  costs to the Company  have  generally  been offset by increased
prices of products and services sold.

      The  preparation  of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to make  estimates and
assumptions  that affect the reported  amounts of assets and  liabilities  and
disclosure of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

      The Company's  management  believes  that its operating and  information
systems are Year 2000 compliant. The Company expects no material impact on its
operating and information systems from the Year 2000 issue.

      This  report  contains  forward-looking  statements  setting  forth  the
Company's   beliefs  or   expectations   relating  to  future   revenues   and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's  products and services,
uncertainties relating to the results of operations,  the Company's ability to
implement its provider  deployment model, its lengthy sales cycle,  dependence
on its major customers,  risks associated with rapid technological  change and
the emerging services market, potential fluctuations in quarterly results, its
dependence on sole and limited source  suppliers and fluctuations in component
pricing and its dependence on key employees and other risks and  uncertainties
affecting the technology industry generally.  The Company disclaims any intent
or obligation to up-date publicly these forward-looking statements, whether as
a result of new information, future events or otherwise.

                                      12


<PAGE>

PART II.    OTHER INFORMATION

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

      The Company's Annual Meeting of Stockholders was held on May 5, 1998.

      The following three persons were elected by the following votes to serve
as Class I directors of the Board of Directors  for three years or until their
successors are elected and qualified:

<TABLE>
<CAPTION>
     Name                    Votes For      Votes Withheld
     ----                    ---------      --------------
<S>                          <C>                <C>  
Michael C. Higgins           5,817,695          8,988
G.W. Norman Wareham          5,817,695          8,988
Melvin A. McCubbin           5,817,695          8,988
</TABLE>


      Shareholders  ratified  the  selection  of  Arthur  Anderson  LLP as the
independent  accountants  for the Company for the current  fiscal  year.  Such
proposal  was approved by a vote of  5,651,415  shares for and 166,265  shares
against, with 9,003 shares abstaining.


ITEM 5.     EXHIBITS AND REPORTS ON FORM 8-K

(a)   EXHIBITS

            The following exhibits are filed herewith:
            11 - Computation of Net Income Per Share
            27 - Financial Data Schedule

(b)   REPORTS ON FORM 8-K

            None

                                      13


<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:  August 14, 1998           /s/MICHAEL C. HIGGINS
                                 ---------------------
                                 Michael C. Higgins
                                 President


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