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  SEPTEMBER 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
   -------------------------------------------------------------------------
            (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
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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 November 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 - September 30, 1998
      (unaudited) and December 31, 1997                                  1

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

Consolidated Statements of Cash Flows for the three and six
      months ended September 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 5.    Exhibits and Reports on Form 8-K                             14

SIGNATURES                                                              15
</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                                           $   4,431,530     $   6,405,084
  Accounts receivable                                2,735,146         1,067,258
  Prepaid and other assets                              95,666            81,506
                                                 --------------    --------------

  Total current assets                               7,262,342         7,553,848

Property, plant & equipment (net)                      282,661           277,981
Intangible assets (net)                              3,159,725         4,033,265
Other assets                                             5,193             4,983
                                                 --------------    --------------

  Total assets                                   $  10,709,921     $  11,870,077
                                                 ==============    ==============

            LIABILITIES & SHAREHOLDERS' EQUITY

Current liabilities
  Accounts payable and accrued expenses          $     860,733     $     826,117
  Current portion of long term debt                          -           539,541
  Contract deposits                                    297,671           926,039
                                                 --------------    --------------

  Total current liabilities                          1,158,404         2,291,697

Commitments and contingencies (Note 4)
Shareholders' 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 September 30, 1998
    and December 31, 1997, 479,801 shares
    subject to Cancellation Agreements
    as of September 30, 1998 and December
    31, 1997. (Note 3).                                 11,729            11,729
  Paid in capital                                   35,280,104        35,280,105
  Retained earnings                                (25,740,316)      (25,713,454)
                                                 --------------    --------------

  Total shareholders' equity                         9,551,517         9,578,380

Total liabilities & shareholders' equity         $  10,709,921     $  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            Nine Months Ended
                                                       September 30                 September 30
                                               ---------------------------   --------------------------
                                                   1998           1997           1998          1997
                                               ------------   ------------   ------------   -----------
                                                       (unaudited)                   (unaudited)
<S>                                            <C>            <C>            <C>            <C>
Revenues                                       $  2,581,139   $    451,291   $  6,608,242   $    512,041

Operating expenses:
  Cost of sales                                     755,387        226,188      2,065,210        283,332
  Research and development                          120,652              -        332,274              -
  Sales and marketing                               298,090        243,315        839,636        896,464
  General & administrative                          734,766        875,043      2,645,398      3,069,598
  Depreciation & amortization                       327,527        280,284        953,408        651,937

    Income (loss) from operations                   344,717     (1,173,539)      (227,684)    (4,389,290)

Other income (expenses):
  Interest income                                    55,483         13,805        198,036        121,893
  Interest expense                                        -       (188,008)         1,990     (1,228,695)
  Other income (expenses)                            20,663           (879)           796       (101,103)
                                               -------------  -------------  -------------  -------------

    Net income (loss) before income taxes           420,863     (1,348,621)       (26,862)    (5,597,195)
    Income taxes benefit                                  -              -              -              -
                                               -------------  -------------  -------------  -------------

Net income (loss)                              $    420,863   $ (1,348,621)  $    (26,862)  $ (5,597,195)
                                               =============  =============  =============  =============

Basic net income (loss) per share              $       0.04   $      (0.23)  $      (0.00)  $      (1.10)
                                               =============  =============  =============  =============

Basic weighted average shares outstanding        11,249,913      5,978,973     10,325,913      5,079,169
                                               =============  =============  =============  =============

Diluted net income (loss) per share            $       0.04   $      (0.23)  $      (0.00)  $      (1.10)
                                               =============  =============  =============  =============

Fully diluted weighted average shares
  outstanding                                    11,250,287      5,978,973     10,325,913      5,079,169
                                               =============  =============  =============  =============
</TABLE>

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

                                      2


<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         Three Months Ended            Nine Months Ended
                                                            September 30                 September 30
                                                    ---------------------------   --------------------------
                                                        1998           1997           1998          1997
                                                    ------------   ------------   ------------   -----------
                                                            (unaudited)                   (unaudited)
<S>                                                 <C>            <C>            <C>            <C>
Cash flows from operating activities:

  Net income (loss)                                 $    420,863   $ (1,348,621)  $    (26,862)  $ (5,597,195)
  Adjustments to reconcile net income (loss)
    to net cash used in operating activities:
      Depreciation and amortization expense              327,527        228,094        953,408        651,937
      Amortization of deferred financing costs                 -        161,464              -        388,564
      Amortization of discount on Notes and 
        Debentures                                             -              -              -        591,408
      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
    Accounts receivable                                 (236,509)             -     (1,667,888)             -
    Prepaid expenses and other assets                     33,634     (1,341,481)       (14,370)    (1,482,564)
    Accounts payable and accrued expenses               (324,910)       665,481         34,675      1,248,168
    Deferred income taxes                                      -         52,190              -              -
    Contract deposits                                   (405,400)     1,000,000       (628,369)     1,000,000
                                                    -------------  -------------  -------------  -------------

      Net cash used in operating activities         $   (184,795)  $   (582,873)  $ (1,349,405)  $ (2,541,836)
                                                    -------------  -------------  -------------  -------------

  Net cash used in investing activities:
    Purchase of property and equipment                    (9,663)        (3,279)       (84,608)      (257,542)
    Purchase of software                                       -              -              -       (767,379)
                                                    -------------  -------------  -------------  -------------

      Net cash used in investing activities         $     (9,663)  $     (3,279)  $    (84,608)  $ (1,024,921)
                                                    -------------  -------------  -------------  -------------

  Net cash provided by financing activities
    Proceeds from the issuance of common stock                 -              -              -        105,000
    Net (payments) borrowings on long-term
      obligations                                              -       (256,789)      (539,541)       131,054
                                                    -------------  -------------  -------------  -------------

      Net cash (used in) provided by financing
        activities                                             -   $   (256,789)  $   (539,541)  $    236,054
                                                    -------------  -------------  -------------  -------------

  Net decrease in cash                              $   (194,458)  $   (842,941)  $ (1,973,554)  $ (3,330,703)
                                                    -------------  -------------  -------------  -------------

  Cash, beginning of period                         $  4,625,988   $  2,354,407   $  6,405,084   $  4,842,169
                                                    -------------  -------------  -------------  -------------

  Cash, end of period                               $  4,431,530   $  1,511,466   $  4,431,530   $  1,511,466
                                                    =============  =============  =============  =============
</TABLE>

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

                                      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
three and nine months ended September 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.  For
financial  reporting   purposes,   the  acquisition  has  been  treated  as  a
recapitalization of CSI.

      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 its 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,
dependence on  significant  customers,  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 the 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 during the period presented but not
billed until the following period. Unbilled accounts receivable on fixed-price
contracts  consists  of  amounts  incurred  which are not yet  billable  under
contract terms. At September 30, 1998,  unbilled accounts  receivable  totaled
approximately  $1,874,000, of which approximately $1,740,000 was billed during
October 1998.

SIGNIFICANT CUSTOMERS

      For the nine months ended  September 30, 1998,  sales to three customers
represented 51%, 15% and 14% of total revenues.  As of September 30, 1998, 76%
and 15% of the outstanding  receivable balances are owed to the Company by two
customers.

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

                                      5


<PAGE>

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 Standards 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
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 options to purchase  1,844,000  shares of
common  stock and  warrants to purchase  140,800  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.    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 September 30,
1998. The Company is currently undertaking action to have the shares canceled.


4.    COMMITMENTS AND CONTINGENCIES:

SETTLEMENT AGREEMENT

      In October 1998, the Company, its subsidiary (CSI), certain stockholders
of the  Company  and an employee  of the  Company  entered  into a  settlement
agreement.  The stockholders were the former sole stockholders of CSI prior to
November 6, 1996,  at which time ZMAX acquired all the  outstanding  shares of
CSI in a  transaction  accounted  for  as the  recapitalization  of  CSI.  The

                                      6


<PAGE>

employee had asserted a claim that the  stockholders  had agreed to compensate
the employee for services rendered in connection with the recapitalization and
subsequent  financing of CSI by ZMAX.  No such  compensation  had been paid or
accrued as of September 30, 1998. In recognition  of the  employee's  previous
and  continued  service to the  Company,  the  parties  have  entered  into an
agreement to resolve this matter..

      Under the  terms of the  settlement  agreement,  the  stockholders  have
agreed to transfer an aggregate of 180,000  shares of ZMAX Common Stock to the
Company.  In turn, the Company has agreed to issue such shares to the employee
in  satisfaction  of all claims  that the  employee  may have had  against the
stockholders  or the  Company  and its  subsidiary.  The shares of ZMAX Common
Stock to be issued by the Company to the employee are  restricted  and subject
to  forfeiture  and must be  returned  to the  Company  in the event  that the
employee  breaches  certain   non-competition   provisions  contained  in  the
settlement agreement. The term of the non-compete is one year.

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  intends  to  vigorously  defend  itself.  In the  opinion of
management,  resolution of this matter will not have a material adverse effect
upon the financial position of future operating results of the Company.

      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  projected  results  that may differ from  actual  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).

      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.  CSI
anticipates a toolset for  validation  and  verification  of certain  software
languages  will be available for licensing to end-users in the fourth  quarter
of 1998. 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

                                      8


<PAGE>

to pursue 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
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  SEPTEMBER  30, 1998  COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997

      REVENUES.  Revenues for the three month period ended September 30, 1998,
were approximately  $2,581,000,  an increase of approximately  $2,130,000 over
revenues of approximately  $451,000 for the three month period ended September
30,  1997.  The  increase in revenues  during the third  quarter of 1998 was a
result of increased  sales  activity of Year 2000  remediation  and consulting
services by CSI during this period.

      GROSS PROFIT. Gross profit for the three months ended September 30, 1998
was approximately $1,826,000, or 71% of revenues, an increase of approximately
$1,601,000 over gross profit of  approximately  $225,000,  or 50% of revenues,
for the  three  months  ended  September  30,  1997.  The  increase  in  gross
profitability during the three months ended September 30, 1998 was a result of
increased  efficiencies  and  productivity  gains  realized from the Company's
workforce, management, and proprietary methodologies and tools.

      RESEARCH  AND  DEVELOPMENT.  Research and  development  expenses for the
three months ended September 30, 1998, were approximately  $120,000,  or 5% of
revenues.  No research and  development  expenses  were  incurred in the three
months ended  September 30, 1997.  The Company  initiated  efforts  during the
first nine  months of 1998 to refine its Year 2000  toolset and to prepare the
toolset for  potential  licensing  to  end-users.  The Company  anticipates  a
validation  and  verification  tool for certain  mainframe  languages  will be
available in the fourth quarter of 1998.

                                      9


<PAGE>

      SALES AND MARKETING.  Sales and marketing  expenses for the three months
ended September 30, 1998 were approximately  $298,000,  or 12% of revenues, an
increase  of  approximately  $55,000,  from  approximately  $243,000  of  such
expenses,  or 54% of revenues,  for the three months ended September 30, 1997.
The increase in sales and marketing  expenses for the three months of 1998 was
primarily  attributable  to  commission  expenses  related to increased  sales
revenue and further  investments in marketing efforts related to the Company's
services.

      GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
three months ended September 30, 1998 were approximately  $735,000,  or 29% of
revenues, a decrease of approximately  $140,000,  as compared to approximately
$875,000 of such  expenses,  or 194% of revenues,  incurred by the Company for
the three  months  ended  September  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 related to
the Company's corporate financing and registration expenses.

      DEPRECIATION AND  AMORTIZATION.  Depreciation and amortization  expenses
for the three months ended September 30, 1998 were approximately  $328,000, or
13% of  revenues,  an  increase  of  approximately  $48,000,  as  compared  to
approximately  $280,000 of such expenses, or 62% of revenues,  incurred by the
Company  for the three  months  ended  September  30,  1997.  The  increase in
depreciation  and  amortization  expenses for the three months ended 1998 were
primarily attributable to an increase in depreciable assets and intangibles.

      OTHER  INCOME  (EXPENSE).  Interest  income for the three  months  ended
September 30, 1998 was approximately  $55,000, or 3% of revenues,  an increase
of approximately $41,000 of such interest income, as compared to approximately
$14,000, or 4% of revenues, for the three months ended September 30, 1997. The
increase in interest  income for the three months ended September 30, 1998 was
primarily  attributable  to  greater  amounts of cash.  There was no  interest
expense for the three months ended  September 30, 1998.  Interest  expense for
the three months ended  September  30, 1997 was  approximately  $188,000.  The
decrease in interest expense for the three months ended September 30, 1998 was
primarily   attributable  to  the  elimination  of  interest  related  to  the
amortization of the deferred financing costs.

      INCOME FROM OPERATIONS.  Income from operations,  excluding depreciation
of approximately  $328,000,  for the three months ended September 30, 1998 was
approximately $672,000, an increase of approximately  $1,511,000,  as compared
to the  loss  from  operations  excluding  depreciation  and  amortization  of
approximately $839,000 for the three months ended September 30, 1997 (excludes
approximately $280,000 in depreciation and amortization).

      NET  INCOME  (LOSS).  As a result of the  above,  the net income for the
three months ended September 30, 1998 was  approximately  $421,000,  or 17% of
revenues, an increase of approximately $1,769,000, as compared to the net loss
of approximately $1,348,000 for the three months ended September 30, 1997.

                                      10


<PAGE>

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997

      REVENUES.  Revenues for the nine months ended  September 30, 1998,  were
approximately   $6,608,000,  an  increase  of  approximately  $6,096,000  over
revenues of  approximately  $512,000 for the nine months ended  September  30,
1997. The increase was  attributable  to increased sales activity of Year 2000
remediation  and consulting  services by CSI during the nine months of 1998 as
compared to the nine months of 1997.

      GROSS PROFIT. Gross profit for the nine months ended September 30, 1998,
was approximately  $4,543,000 or 69% of revenues, an increase of approximately
$4,314,000 over gross profit of  approximately  $229,000,  or 45% of revenues,
for the nine months ended September 30, 1997. The increase was attributable to
increased  sales  activity  and  greater  realized   economies  of  scale  and
efficiencies made by the Company during the nine months of 1998 as compared to
the  nine  months  of  1997  during  which  the  Company  had  just  commenced
operations.

      RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
months  ended  September  30,  1998,  were  approximately  $332,000,  or 5% of
revenues.  No research  and  development  expenses  were  incurred in the nine
months ended September 30, 1997. The Company initiated efforts during the nine
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 nine months
ended September 30, 1998 were approximately  $840,000,  or 13% of revenues,  a
decrease of approximately  $56,000,  from the  approximately  $896,000 of such
expenses,  or 175% of revenues,  for the nine months ended September 30, 1997.
The decrease in sales and  marketing  expenses for the nine months of 1998 was
primarily  attributable  to a  non-recurring  severance  charge that  occurred
during the second  quarter of 1997  which was  partially  offset by  increased
commission  expenses related to increased  revenue and further  investments in
marketing efforts related to the Company's services.

      GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
nine months ended September 30, 1998 were approximately  $2,645,000, or 40% of
revenues, a decrease of approximately  $425,000,  as compared to approximately
$3,070,000 of such expenses, or 600% of revenues,  incurred by the Company for
the nine months period ended  September 30, 1997.  The decrease in general and
administrative expenses for the nine months of 1998 was primarily attributable
to a decrease in professional and consulting expenses related to the Company's
corporate financing and registration expenses.

      OTHER  INCOME  (EXPENSE).  Interest  income  for the nine  months  ended
September 30, 1998 was approximately  $198,000, or 3% of revenues, an increase
of  approximately  $76,000  as  compared  to  approximately  $122,000  of such
interest income,  or 24% of revenues,  for the nine months ended September 30,
1997.  The  increase  in  interest  income  for the  nine  months  of 1998 was
primarily  attributable to greater amounts of cash.  Interest  expense for the
nine months ended September 30, 1998 was approximately ($2,000), a decrease of
approximately  $1,231,000  as compared  to  approximately  $1,229,000  of such
interest expense for the nine months ended September 30, 1997. The decrease in
interest expense for the nine months of 1998 was primarily attributable to the

                                      11


<PAGE>

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.

      INCOME FROM OPERATIONS.  Income from operations,  excluding depreciation
and  amortization  of  approximately  $953,000,  for  the  nine  months  ended
September 30, 1998 was  approximately  $726,000,  an increase of approximately
$4,463,000, as compared to the loss from operations excluding depreciation and
amortization of  approximately  $3,737,000 for the nine months ended September
30, 1997 (excludes approximately $652,000 in deprecation and amortization).

      NET INCOME (LOSS).  As a result of the above,  the net loss for the nine
months  ended  September  30, 1998 was  approximately  $27,000,  a decrease of
approximately  $5,570,000,  as  compared  to the  net  loss  of  approximately
$5,597,000 for the nine months ended September 30, 1997.


LIQUIDITY AND CAPITAL RESOURCES

      The Company has,  since  inception,  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  September 30, 1998 was  approximately
$185,000,  as  compared to  approximately  $583,000  during the quarter  ended
September 30, 1997.  The decrease in cash used in operations  during the third
quarter of 1998 was  primarily  a result of the  generation  of gross  profit.
Capital  expenditures  were  approximately   $10,000  for  the  quarter  ended
September  30, 1998,  as compared to  approximately  $3,000 during the quarter
ended September 30, 1997. The increase in capital  expenditures during 1998 is
related primarily to the ongoing purchase  requirements of computer  equipment
for Company personnel.

      As  of  September  30,  1998,   the  Company  had  working   capital  of
approximately  $6,100,000.  The Company's primary source of liquidity consists
of  approximately  $4,400,000 in cash and cash  equivalents and  approximately
$2,700,000 of contract receivables.

      The market for the  Company's  products is expanding  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

                                      12


<PAGE>

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 is an information  technology ("IT") corporation which is in
the business of performing evaluation,  testing and re-engineering services in
providing  solutions  to the Year 2000  problem.  The Company  owns,  markets,
utilizes and licenses the use by others of its proprietary  Year 2000 software
re-engineering tools and methodologies. 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.

                                      13


<PAGE>

PART II. OTHER INFORMATION

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


<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:  November 13, 1998           /s/MICHAEL C. HIGGINS
                                 ---------------------
                                 Michael C. Higgins
                                 President


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