SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934.
       For the fiscal year ended DECEMBER 31, 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
  incorporation or organization)                     Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

                    Common Stock, Par Value $.001 Per Share
                    ---------------------------------------
                               (Title of Class)

      Indicate by check mark 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 [ ]

      The aggregate market value of the  registrant's  Common Stock, par value
$.001 per share, held as of March 16, 1999 by non-affiliates of the registrant
was $50,829,204  based on the average bid and asked prices of the Common Stock
on such date.

      As of March 30, 1999, the registrant had 13,117,214 shares of its Common
Stock issued and outstanding.

      Indicate by check mark if disclosure of  delinquent  filers  pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of  registrant's  knowledge,  in definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this  Form 10-K or any
amendment to this Form 10-K.[X]


<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE


      The information  called for by Part III of the Form 10-K is incorporated
by reference from the  registrant's  definitive  proxy  statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.


<PAGE>

ITEM 1.     BUSINESS.

INTRODUCTION

      ZMAX  Corporation  ("ZMAX"  or  the  "Company")  focuses  on  acquiring,
building  and  operating  companies  in  the  information   technology  ("IT")
industry.  In 1996, the Company acquired all of the stock of Century Services,
Inc.  ("CSI"),  a corporation  that provides  re-engineering  and  information
processing services to users of large-scale computer systems in North America.
CSI currently  specializes in assisting business  organizations and government
agencies  with what has  become  popularly  known as the "Year  2000  problem"
("Y2K"). In December of 1998, the Company acquired all of the stock of Eclipse
Information  Systems,  Inc.  ("Eclipse"),   a  corporation  that  provides  IT
consulting  services  through  several  practice  areas focused in distributed
client server  technologies.  Over the next several years, the Company expects
to devote  substantial  resources to developing  and expanding its IT services
through internal growth and synergistic acquisitions.

BUSINESS STRATEGY

      The  Company  believes  the  current  market for IT  services is rapidly
changing and expanding,  driven by pressures  placed on companies to: increase
the  productivity of its workforce,  allow management to make better decisions
by having instant access to more  information,  enable customers and suppliers
to interface  electronically,  and to utilize new technologies where they will
help in these efforts.  As a result of these  pressures,  the Company believes
that  there  are  significant  opportunities  for  growth  in the IT  services
marketplace.

      To take advantage of these  opportunities,  the Company's strategy is to
further expand its core expertise,  as previously  developed in performing and
managing Y2K  re-engineering  projects,  into  additional  IT areas  including
client server application  migration  services,  Enterprise  Resource Planning
("ERP") implementation services and E-business solutions. These three practice
groups are  expected  to form the core of the  Company's  expansion  of its IT
consulting  business  beyond Y2K services.  The Company  believes that through
focused  internal  development and further  acquisitions of rapidly growing IT
consulting companies, the Company's existing expertise may be rapidly expanded
in these areas.

      To support these targeted growth plans, the Company's  business strategy
incorporates the concepts of seeding internal growth by opening new offices in
key  geographic  markets  and  selecting   potential   acquisitions  that  can
supplement and expand the Company's technology base and regional exposure. The
Company  believes  that a strong  branch  network of offices will enable it to
have an improved ability to service larger national accounts that may generate
greater revenues.

      The Company's ability to expand successfully by internal development and
strategic  acquisitions depends on many factors,  including the identification
and acquisition of businesses and the successful operation of new offices. Any
difficulties  encountered  in the  expansion of the Company  through  internal
development  and/or  acquisition could have an adverse impact on the Company's
revenues and operating results.


<PAGE>

CLIENTS

      The client base of the Company is located  throughout the United States.
All  Y2K  customers  have  been  serviced  through  the  Germantown,  Maryland
headquarters  facility where the Company's Y2K compliance  factory is located.
The  centralized  control and processing of customers'  computer codes permits
economies of scale and will  continue in 1999 and beyond.  The  Company's  Y2K
clients  represent  a variety of  industries  including:  banking,  utilities,
healthcare, telecommunications,  aerospace, retail, and the public sector. Y2K
commercial clients of the Company include:  Lockheed Martin,  Lehman Brothers,
Alliance Capital, Bessemer Trust, SEI Investments, Ernst & Co., Washington Gas
Light  Corporation,  First National Bankcorp,  United Bankshares,  Westchester
Medical Center, and Harvard Pilgrim  Healthcare.  Y2K public sector clients of
the Company  include:  the States of New  Jersey,  New York,  California,  and
Maryland  and the Federal  agencies of Housing and Urban  Development  and the
Department of Defense.

      With the recent  acquisition of Eclipse in December of 1998, the Company
added approximately eighteen clients of similar size and quality.  Examples of
the Eclipse clients include:  Abbott Labs,  Ameritech,  AON, Baker & McKensie,
Baxter/Allegiance,  Coilcraft,  Elkay Manufacturing,  Hewitt, Nestle, Pampered
Chef, RR Donneley, Spencer Stuart, THK America, Transamerica, Trans Union, and
Wrigley.

      The Company has  historically  derived,  and may in the future derive, a
significant  percentage of its total revenue from a relatively small number of
clients.  During 1998, three customers  represented an aggregate of 73% of the
Company's  total  revenues  for  the  year.   During  1997,   three  customers
represented an aggregate of 60% of the Company's  total revenues for the year.
Due to the nature of the  Company's  business and the relative size of certain
contracts,  the loss of any single significant  customer could have a material
adverse effect on the Company's results of operations.

MARKETING AND SALES

      The  Company  focuses  its  marketing  efforts  on  mid-sized  to  large
corporations with significant IT budgets and  requirements.  While the Company
currently  performs work for companies across many major  industries,  most of
the  Company's  revenues  in 1998 were  derived  from state  governments,  the
financial services industry, the healthcare industry, and utility companies.

      The Company  markets  its  services  through its direct  sales force and
alliances  with a number of  strategic  partners.  The direct  sales  force is
responsible  for  providing  highly  responsive  service and  ensuring  client
satisfaction  with the  Company's  services.  The Company's  partners  provide
additional  access  to  potential  customers  that  would  otherwise  be  more
difficult for the direct sales force to penetrate.


<PAGE>

COMPETITION

      The market  for the IT  services  that the  Company  provides  is highly
competitive,  includes a large number of  competitors  and is subject to rapid
change.  The primary  competitors of the Company include  participants  from a
variety of market segments,  including publicly and privately held firms, "Big
Five"  accounting  firms,   systems  consulting  and   implementation   firms,
application  software firms,  service groups of computer equipment  companies,
and other general management  consulting firms.  Increasingly,  companies from
foreign  countries are also  targeting this market.  The Company  believes its
principal  competitive  advantages  include its software tools, its ability to
quickly  modify  those  tools to address  the  changing  marketplace,  and its
commitment to client satisfaction.

INTELLECTUAL PROPERTY

      The  Company's   intellectual   property   primarily   consists  of  the
methodologies developed for use in its Y2K services and ownership or exclusive
rights  to the use of its  software  tool  suite  known as the  VISION  2000SM
solution.  The Company does not have any patents and relies upon a combination
of trade secret,  copyright and trademark laws and contractual restrictions to
establish  and protect its  ownership  of its  proprietary  methodologies  and
exclusive rights to use its software tool suite. The Company  generally enters
into  non-disclosure  and  confidentiality   agreements  with  its  employees,
independent sales agents, and clients. As the number of competitors  providing
Y2K services  similar to those  offered by the Company  increases,  it is more
likely that  substantially  similar  tools and  methodologies  will be used in
providing such services. Although the Company's software products and services
have  never  been  the  subject  of an  infringement  claim,  there  can be no
assurance that third parties will not assert  infringement  claims against the
Company in the future,  that the  assertion  of such claims will not result in
litigation, or that the Company would prevail in such litigation or be able to
obtain a license for the use of any allegedly infringed  intellectual property
from a third party on commercially reasonable terms. Furthermore,  litigation,
regardless of its outcome, could result in substantial cost to the Company and
divert  management's  attention  from the Company's  operations.  Although the
Company  is not aware of any basis upon which a third  party  could  assert an
infringement  claim, any infringement  claim or litigation against the Company
could therefore materially adversely affect the Company's business,  operating
results, and financial condition.

PERSONNEL

      As of  December  31,  1998,  the  Company  had 137  full-time  employees
including 14 persons in sales,  109 persons in operations and  engineering and
14  persons  in  management  and  administration.  The  Company  also  employs
temporary employees and consultants.


<PAGE>

ITEM 2.     PROPERTIES.

      The  Company's  corporate  headquarters  are  located  at 20251  Century
Boulevard in Germantown,  Maryland,  outside Washington,  D.C. The Company and
its subsidiary, Century Services Incorporated,  currently occupy approximately
13,000  square feet through a sublease that expires  September  30, 2000.  The
Company's annual rent for the property in 1998 was $112,346, and is subject to
annual  upward  adjustment.  The  Company  also  pays  its pro  rata  share of
increases to real estate taxes and operating expenses for the property.

      The Company's newly acquired  subsidiary,  Eclipse Information  Systems,
Inc.("Eclipse"),  currently  occupies  approximately  7,200 square feet at two
locations.  Eclipse leases  approximately 6,000 square feet through a sublease
that expires December 31, 2001 in Oakbrook Terrace, Illinois and approximately
1,200 square feet through a lease that expires June 24, 2003 in  Independence,
Ohio.  Eclipse  was  acquired on  December  14,  1998 and the Company  paid no
material  rents  for the  Eclipse  properties  in 1998.  If  Eclipse  had been
acquired  on  January  1,  1998,  the  Company's  annual  rent  for  Eclipse's
properties would have been approximately  $131,000. The Eclipse properties are
subject to annual  upward  adjustments  and  Eclipse  pays pro rata  shares of
operating expenses for the properties.

      The Company  anticipates  entering into new facilities  and  potentially
expanding its current  facilities to accommodate the expected continued growth
of the  Company.  The  Company  believes  that it can  obtain  the  additional
facilities  required to accommodate its projected needs without difficulty and
at commercially  reasonable prices, although no assurance can be given that it
will be able to do so.

ITEM 3.     LEGAL PROCEEDINGS.

      The Company is not involved in any material legal proceedings  except as
described  below.  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 Oryx
Gold 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  transferabilty  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  continues  to
vigorously defend itself.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS.

      No matters  were  submitted to a vote of the  registrant's  shareholders
during the fourth quarter of 1998.


<PAGE>

                                    PART II

ITEM 5.     MARKET FOR  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
            MATTERS.

      The Company's Common Stock is quoted on the NASDAQ SmallCap Market under
the symbol  "ZMAX" and the  Frankfurt  and Berlin  exchanges  under the symbol
"ZMX".  From August 20, 1997 to May 18, 1998 the  Company's  Common  Stock was
quoted on the NASD OTC  Bulletin  Board  under the symbol  "ZMAX" and prior to
August 20, 1997 the Company's Common Stock was traded on the NASD OTC Bulletin
Board under the trading symbols of "MEDO" and "ORYX".

      The stock prices listed  below,  which have been adjusted for a 1 for 80
reverse  stock  split of the  Company's  Common  Stock as of August 27,  1997,
represent  the high and low closing bid prices of the Common Stock for each of
the periods indicated:

<TABLE>
<CAPTION>
          1998                 High             Low
      ----------------------------------------------
<S>                           <C>             <C>   
      First Quarter           $ 8.11          $ 5.06
      Second Quarter           10.63            5.03
      Third Quarter             7.19            2.75
      Fourth Quarter            5.25            2.63

          1997                 High             Low
      ----------------------------------------------
      First Quarter           $ 4.00          $  .80
      Second Quarter            4.00            1.60
      Third Quarter             6.75            1.25
      Fourth Quarter           16.25            5.00
</TABLE>

      As of March 25,  1999  there  were 153  holders  of record of the Common
Stock.

DIVIDEND POLICY

      The  Company  has never  paid cash  dividends  on its  Common  Stock and
intends to continue  this  policy for the  foreseeable  future.  ZMAX plans to
retain earnings for use in its business.  Any future determination to pay cash
dividends  will be at the  discretion of the Board of Directors of the Company
and will be dependent on ZMAX's  results of operations,  financial  condition,
contractual  and  legal  restrictions  and  any  other  factors  deemed  to be
relevant.


<PAGE>

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL INFORMATION.

      The tables below present selected historical financial data of ZMAX. The
ZMAX  historical data for the years ended December 31, 1998, 1997 and 1996 are
derived  from the  historical  financial  statements  of ZMAX  Corporation  as
audited by Arthur Andersen LLP, included elsewhere in this Form 10-K.

      On December 14, 1998 ZMAX acquired Eclipse Information Systems, Inc. The
accompanying  financial data include the accounts of Eclipse since the date of
acquisition.  A further  description  of this  transaction is set forth in the
Form 8-K/A filed on March 1, 1999 with the Securities and Exchange Commission.

      On November 6, 1996,  ZMAX, which was then a shell company listed on the
OTC Bulletin  Board,  acquired  Century  Services,  Inc.  ("CSI"),  a Maryland
corporation.  CSI was a privately held company formed on December 13, 1995, to
perform  computer  re-engineering  with a focus on providing a solution to the
Year 2000 problem. For financial reporting purposes,  the acquisition has been
treated  as a  recapitalization  of CSI with CSI as the  acquiror  (a  reverse
acquisition).  Accordingly,  the historical financial statements of ZMAX prior
the  November 6, 1996 are the  historical  financial  statements  of CSI.  The
accompanying  selected  financial  data include all of the accounts of CSI and
ZMAX for the period from the acquisition on November 6, 1996, through December
31, 1998. The information  set forth below should be read in conjunction  with
"Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations" and the historical financial statements and notes thereto included
elsewhere herein.


<PAGE>

<TABLE>
<CAPTION>
                                                    For the Year Ended December 31,
                                        ------------------------------------------------------
                                              1998               1997               1996
                                        ---------------    ---------------     ---------------
<S>                                     <C>                <C>                 <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                $  9,916,276       $  1,425,360        $          -
Cost of revenues                           3,478,982            667,098                   -
Research and development expense             473,362                  -                   -
Sales and marketing expense                1,190,548          1,110,655             228,803
General and administrative expense         3,515,391          4,148,421           1,069,681
Employee stock compensation expense          534,384                  -                   -
Depreciation and amortization              1,268,338          1,008,864             193,533
                                        -------------      -------------       -------------
  Loss from operations                      (544,729)        (5,509,678)         (1,492,017)
                                        -------------      -------------       -------------

Other income (expense):
Interest income                              270,337            137,814              14,248
Interest expense                              (9,140)        (1,366,479)         (7,125,386)
Other                                            821         (7,468,356)         (2,903,600)
                                        -------------      -------------       -------------
  Net loss                              $   (282,711)      $(14,206,699)       $(11,506,755)
                                        =============      =============       =============

  Basic and diluted loss per share      $      (0.03)      $      (2.58)       $     (13.45)
                                        =============      =============       =============

  Basic and diluted weighted average
    shares outstanding                    10,638,680          5,502,668             855,712
                                        =============      =============       =============


OPERATING AND OTHER DATA

Revenues                                $  9,916,276       $  1,425,360        $          -

Cost of revenues                           3,478,982            667,098                   -

Gross margin                                   64.9%              53.2%                   -

EBITDA(1)                                  1,257,993         (4,500,814)         (1,298,484)
EBITDA margin                                  12.7%            (315.8%)                  -


                                                            December 31,
                                        ------------------------------------------------------
                                              1998               1997               1996
                                        ---------------    ---------------     ---------------
BALANCE SHEET DATA:
Cash and cash equivalents               $  4,521,126       $  6,405,084        $  4,842,169
Working capital                            5,563,144          5,262,151           2,725,534
Total assets                              17,446,362         11,870,077           8,592,042
Total liabilities                          1,666,309          2,291,697           8,172,254

Accumulated deficit                      (25,996,165)       (25,713,454)        (11,506,755)

Total stockholders' equity                15,780,053          9,578,380             419,788
</TABLE>


Notes to Selected Consolidated Financial and Operating Data:

(1) EBITDA (earnings before interest,  taxes,  depreciation and  amortization,
and certain one-time  charges),  while not a measure under generally  accepted
accounting  principles ("GAAP"),  is a standard measure of performance in many
industries.  EBITDA should not be considered in isolation or as an alternative
to net income (loss), income (loss) from operations, cash flows from operating
activities, or any other measure of performance under GAAP.


<PAGE>

ITEM 7.     MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
            RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

      The  information  set forth below includes  forward-looking  statements.
Certain  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

      ZMAX  Corporation  ("ZMAX"  or the "  Company")  focuses  on  acquiring,
building  and  operating  companies  in  the  information   technology  ("IT")
industry.  In 1996, the Company acquired all of the stock of Century Services,
Inc.  ("CSI"),  a corporation  that provides  re-engineering  and  information
processing services to users of large-scale computer systems in North America.
CSI currently  specializes in assisting business  organizations and government
agencies  with what has  become  popularly  known as the "Year  2000  problem"
("Y2K"). In December of 1998, the Company acquired all of the stock of Eclipse
Information  Systems,  Inc.  ("Eclipse"),   a  corporation  that  provides  IT
consulting  services  through  several  practice  areas focused in distributed
client server technologies. In the next 12 months, the Company intends to make
additional  investments  in  the  expansion  and  further  development  of its
services and markets as it continues  to combine the  subsidiaries'  practices
and technologies  into a singular IT consulting  company.  The Company further
expects to devote  substantial  resources to  developing  and expanding its IT
services through additional synergistic acquisitions.

      On December 14, 1998 ZMAX acquired all of the outstanding  capital stock
of Eclipse. The results of operations of Eclipse are included in the financial
statements  of ZMAX from the date of  acquisition.  Prior to the  acquisition,
Eclipse  was a privately  held  company  with its  headquarters  in  Oakbrook,
Illinois.  A further  description of this transaction is set forth in the Form
8-K/A filed on March 1, 1999 with the Securities and Exchange Commission.

      Eclipse  markets  IT  consulting  services  to a variety  of  commercial
companies  through  a  series  of  technology  practices  that  specialize  in
delivering  solutions  focused  in  distributed  client  server  environments.
Eclipse  provides  services  in ERP  packaged  solutions,  internet & intranet
solutions, network solutions, client server solutions, and AS/400 solutions.

      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 was 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  Y2K  services to a variety of  commercial  and  government
organizations.  The Company  believes  some demand for CSI's Y2K  services may
continue to exist for some time after the Year 2000, although this demand will


<PAGE>

diminish significantly over time and will eventually disappear. However, CSI's
proprietary  computer  software  tools  may be  used  in  conversion  projects
unrelated to Y2K work. CSI plans to pursue business opportunities unrelated to
the Y2K 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.
With the recent  acquisition  of  Eclipse,  the Company  believes  synergistic
benefits may be realized as the two organizations  further develop  additional
services and technologies together.

      In the next 12 months,  the Company intends to integrate the services of
Eclipse's with that of CSI's and other potentially  synergistic  acquisitions.
Further,  the  Company  intends to expand the  services  of both  subsidiaries
through opening other offices in key geographic markets.

      In  the  next  12  months,   the  Company  intends  to  make  additional
investments in the expansion and further development of additional IT services
and  markets.   In  view  of  these   investments  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 the Company increases its investments in non Y2K
services,  it will  incur  training,  salary  and  other  costs  prior  to the
recognition of related revenues.  In addition,  most of the Company's revenues
are  expected to be derived from a  relatively  small  number of  large-scale,
comprehensive  projects.  Consequently,  the Company's  revenues and operating
results may be subject to substantial  fluctuations in any given year and from
quarter to quarter.

      Through  December  31,  1998,  the  Company's  revenues  were  generated
primarily from CSI's consulting and conversion fees and software sales related
to Y2K services.  With the acquisition of Eclipse and its plans to continue to
diversify,  the Company's  future  revenues will be less  concentrated  on Y2K
services.

      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. Amortization and depreciation expenses
relate to property,  equipment and intangible  assets. As a result of its plan
to expand its operations  through internal growth and acquisitions the Company
expects these costs to increase.

      The Company's  profitability depends upon both the volume of service and
the Company's  ability to manage costs.  Because a significant  portion of the
Company's cost structure is fixed, the Company must  effectively  manage these
costs to achieve profitability. In addition, certain of the Company's projects
are priced on a fixed fee basis. The  profitability on an individual fixed fee
project  depends upon  completing the project  within the estimated  number of
staff hours and within the agreed upon time  frame.  To date,  the Company has
been able to maintain its operating margins through  efficiencies  achieved by
the use of the Company's  proprietary  software tools, by completing fixed fee
projects within budget,  by offsetting  increases in consultant  salaries with
increases in consultant  fees, and by effectively  managing  general  overhead
costs.


<PAGE>

RECENT DEVELOPMENTS

ECLIPSE ACQUISITION:

     On December 14, 1998, the Company  acquired all of the outstanding  stock
of Eclipse in a transaction accounted for as a purchase.  The Company acquired
the  stock of  Eclipse  for  $1,450,000  in cash and  1,700,000  shares of the
Company's  common stock. The Company also incurred  approximately  $325,000 in
direct acquisition costs.

     The unaudited pro forma data presented  below reflects the acquisition of
Eclipse as if it had  occurred on January 1, 1997.  The pro forma  results are
not  necessarily  indicative of future  results of operations or of what would
have occurred had the acquisition actually been consummated on that date.

<TABLE>
<CAPTION>
                                                      December 31
                                          -----------------------------------
                                               1998                  1997
                                          -------------         -------------
                                                     (unaudited)
<S>                                       <C>                   <C>         
Revenues                                  $ 17,982,127          $  6,805,439
Cost of Revenues                             8,217,220             4,051,278
Gross margin                                     54.3%                 40.5%
EBITDA(1)                                    2,345,890            (3,607,544)
EBITDA margin                                    13.0%                (53.0%)
Net income (loss)                              177,885           (14,075,429)
Basic and diluted income (loss) per share        $0.01                $(1.95)

<FN>
(1) EBITDA (earnings before interest,  taxes,  depreciation and  amortization,
and certain one-time  charges),  while not a measure under generally  accepted
accounting  principles ("GAAP"),  is a standard measure of performance in many
industries.  EBITDA should not be considered in isolation or as an alternative
to net income (loss), income (loss) from operations, cash flows from operating
activities, or any other measure of performance under GAAP.
</FN>
</TABLE>


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

      REVENUES.   Revenues  for  the  year  ended  December  31,  1998,   were
approximately  $9.9 million,  an increase of  approximately  $8.5 million over
revenues of  approximately  $1.4 million for the year ended December 31, 1997.
The increase was primarily  attributable to increased sales of Y2K remediation
and  consulting  services by CSI during 1998 as compared to 1997.  To a lesser
extent,  the increased revenues during 1998 were attributable to the Company's
first  license of its  proprietary  Y2K software and the revenue  generated by
Eclipse since the date of acquisition, December 14, 1998.

      GROSS  PROFIT.  Gross profit for the year ended  December 31, 1998,  was
approximately $6.4 million, or 64.9% of revenues, an increase of approximately


<PAGE>

$5.7 million  over gross profit of  approximately  $0.7  million,  or 53.2% of
revenues,  for the year ended December 31, 1997. The increase was attributable
to increased revenues and greater realized economies of scale and efficiencies
during 1998 as compared to 1997,  during which the Company had just  commenced
operations.

      RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 1998, were approximately $0.5 million, or 4.8% of revenues.
No research  and  development  expenses  were  incurred  during the year ended
December 31, 1997. The Company initiated efforts during 1998 to refine its Y2K
toolset and to prepare the toolset for potential  licensing to  end-users.  In
the fourth  quarter of 1998,  the  Company  entered  into its first  licensing
agreement for the Y2K toolset.  The Company  expects to continue to market the
licensing of the Y2K toolset during 1999.

      SALES AND  MARKETING.  Sales and  marketing  expenses for the year ended
December 31, 1998 were  approximately $1.2 million,  or 12.0% of revenues,  an
increase  of  approximately  $0.1  million,  from  the  $1.1  million  of such
expenses,  or 77.9% of revenues,  for the year ended  December  31, 1997.  The
increase in sales and marketing  expenses for the year ended December 31, 1998
was  primarily  attributable  to  increased  commission  expenses  and further
investments  in marketing  efforts in 1998.  These  increases  were  partially
offset by a reduction in severance  costs  incurred in the year ended December
31, 1997.

      GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
year ended  December  31,  1998 were $3.5  million,  or 35.5% of  revenues,  a
decrease of $0.6  million,  as compared to $4.1 million of such  expenses,  or
291.0% of revenues,  for the year ended  December  31,  1997.  The decrease in
general and  administrative  expenses in 1998 was primarily  attributable to a
decrease in professional and consulting expenses.

      INTEREST INCOME  (EXPENSE).  Interest income for the year ended December
31, 1998 was  approximately  $0.3 million,  an increase of approximately  $0.2
million as compared to approximately $0.1 million of such interest income, for
the year ended December 31, 1997. The increase in interest  income in 1998 was
primarily attributable to greater amounts of invested cash. The Company had no
material  interest expense for year ended December 31, 1998.  Interest expense
for the year ended  December  31, 1997 was  approximately  $1.4  million.  The
decrease in interest  expense in 1998 was primarily  attributable to repayment
of the  Company's  long-term  debt and the  elimination  of  interest  expense
related to the  amortization of the deferred  financing costs and the discount
on the Company's convertible notes.

      EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, AND
CERTAIN ONE-TIME  CHARGES).  As a result of the above, the EBITDA for the year
ended December 31, 1998 was  approximately  $1.3 million.  This represented an
increase of  approximately  $5.8  million as  compared  to negative  EBITDA of
approximately  $(4.5)  million for the year ended  December 31, 1997. The loss
from  operations  for the year ended  December 31,  1998,  included a one-time
charge of  approximately  $0.5 million for employee stock  compensation.  This
charge related to the contribution of shares of common stock to the Company by
certain  stockholders  and the  re-issuance  of that stock to an  employee  as
consideration  for  services.  This  transaction  was not dilutive and did not
impact the  Company's  cash flows or  financial  position  and may result in a


<PAGE>

future tax benefit for the Company.

      NET  INCOME(LOSS).  As a result of the above,  the net loss for the year
ended  December  31,  1998 was  approximately  $0.3  million,  a  decrease  of
approximately  $13.9  million,  as compared  to the net loss of  approximately
$14.2 million for the year ended December 31, 1997. Net income,  excluding the
one-time charge for the year ended December 31, 1998, was  approximately  $0.3
million.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Prior to the CSI transaction,  ZMAX was a development stage company whose
activities consisted of efforts to establish a new business and raise capital.
For financial  reporting  purposes,  the CSI transaction has been treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).  The
historical  financial  statements including the results of operations prior to
November 6, 1996 are those of CSI.

     The net loss for the year ended December 31, 1997, was $14.2 million,  or
$2.58 per share. The loss was primarily related to the recapitalization of CSI
and the further  development of operations and infrastructure by CSI. Included
in the loss were several significant non-cash charges including  approximately
$7.4  million  in other  charges  related  to the  conversion  of  debentures,
approximately  $0.6 million in interest  charges were recorded  related to the
amortization of the discount on the Company's $2.1 million  convertible  notes
that  resulted  from an  allocation  of the proceeds of the debt to additional
paid-in  capital to reflect  the  beneficial  conversion  feature on the debt,
approximately  $1.5  million  in  amortization  of  intangibles  and  deferred
financing costs was recorded,  and approximately  $0.5 million in non-employee
stock compensation was charged to expense.  The Company also recognized a loss
of  approximately  $0.1 million upon the conversion of a promissory  note into
common stock.  The remaining  operating loss reflects the costs related to the
increased  operations  of CSI and fees and  expenses  associated  with the CSI
transaction  and related  financing.  During the year ended December 31, 1997,
the Company recognized revenues totaling $1.4 million related to Y2K services.

     CSI was formed on December 13, 1995. Its 1995  activities were limited to
acquiring  the  rights to two of its  software  tools.  In 1996,  the  Company
incurred a net loss of $11.5  million,  or $13.45 per share.  No revenues were
generated during 1996. Included in the loss were several significant  non-cash
charges  including  approximately  $2.9 million of expense  related to the CSI
transaction,  approximately  $7.0 million in interest  charges  related to the
amortization of the discount on the Company's  convertible  debt that resulted
from an allocation of the proceeds of the debt to additional  paid-in  capital
to  reflect  the  beneficial  conversion  feature  on  the  convertible  debt,
approximately  $0.4  million  in  amortization  of  intangibles  and  deferred
financing  costs,  and  approximately   $0.3  million  in  non-employee  stock
compensation  expense.  The remaining expenses were primarily  attributable to
the salaries and  benefits  paid to the  Company's  technical,  marketing  and
administrative   personnel  along  with  other  marketing  and  administrative
expenses.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has,  since  inception,  financed its operations and capital
expenditures through the sale of common stock,  convertible notes, convertible


<PAGE>

exchangeable debentures, the proceeds from the exchange offer and the exercise
of the  warrants  related to the  convertible  exchangeable  debentures.  Cash
provided by operating activities for the year ended December 31, 1998 was $0.4
million,  an  increase  of $4.2  million  over  the  cash  used  in  operating
activities  of $3.8 million for the year ended  December 31, 1997.  Total cash
used for the year ended December 31, 1998 was approximately  $1.9 million,  as
compared to cash  generated of  approximately  $1.6 million for the year ended
December 31, 1997.  The cash used during the year ended  December 31, 1998 was
primarily  a result of the $1.6  million in cash used for the  acquisition  of
Eclipse.  Capital  expenditures  on property and equipment were  approximately
$0.1  million  for  the  year  ended   December  31,  1998,   as  compared  to
approximately  $0.3  million  during the year ended  December  31,  1997.  The
decrease in capital  expenditures  during 1998 was  related  primarily  to the
completion of the start-up equipment requirements of the Company.

      As  of  December   31,  1998,   the  Company  had  working   capital  of
approximately $5.6 million. The Company's primary source of liquidity consists
of approximately  $4.5 million in cash and cash equivalents and  approximately
$2.5 million of accounts receivable.

      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 material 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  Company's  revenue  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 is an information  technology ("IT") company which is in the
business of  performing  evaluation,  testing and  re-engineering  services in


<PAGE>

providing solutions to the Y2K problem.  The Company owns,  markets,  utilizes
and licenses the use by others of its proprietary Y2K software  re-engineering
tools and methodologies.  The Company's management believes that its operating
and  information  systems are Y2K compliant.  The Company  expects no material
impact on its operating and information systems from the Y2K 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,  dependence on its major
customers,  risks associated with rapid technological  change and the emerging
services  market,   potential  fluctuations  in  quarterly  results,  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.


<PAGE>

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      NOT APPLICABLE

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

      The consolidated  financial  statements and schedules required hereunder
and contained herein are listed under Item 14(a) below.

ITEM 9.     CHANGES IN AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

      None.


<PAGE>

                                   PART III.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      Pursuant  to General  Instructions  G(3) of Form 10-K,  the  information
called  for by  this  Item  regarding  directors  is  hereby  incorporated  by
reference from the Company's definitive proxy statement or amendment hereto to
be filed  pursuant to Regulation  14A not later than 120 days after the end of
the fiscal year covered by this report.  Information  regarding  the Company's
executive officers is set forth under Item 4A of this Form 10-K.

ITEM 11.    EXECUTIVE COMPENSATION.

      Pursuant  to  General  Instruction  G(3) of Form 10-K,  the  information
called for by this item hereby  incorporated  by reference  from the Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.

      Pursuant  to  General  Instruction  G(3) of Form 10-K,  the  information
called for by this item hereby  incorporated  by reference  from the Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Pursuant  to  General  Instruction  G(3) of Form 10-K,  the  information
called for by this item hereby  incorporated  by reference  from the Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.


<PAGE>

                                   PART IV.

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.

(a)   FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

(1) FINANCIAL STATEMENTS:


REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS

Consolidated Balance Sheets as of December 31, 1998 and 1997


Consolidated Statements of Operations for the Years 
      Ended December 31, 1998, 1997, and 1996


Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
      December 31, 1998, 1997, and 1996


Consolidated Statements of Cash Flow for the Years
      Ended December 31, 1998, 1997, and 1996

Notes to Consolidated Financial Statements

(2) FINANCIAL STATEMENTS SCHEDULE:

Report of Independent Accountants

Schedule II - Valuation and qualifying accounts

All other  schedules  are omitted  either  because they are not  applicable or
required,  or because the required  information  is included in the  financial
statements or notes thereto:


(b)   REPORTS ON FORM 8-K

      On December 29, 1998,  the Company filed a Form 8-K with the  Securities
      and Exchange Commission  reporting its acquisition on December 14, 1998,
      of Eclipse Information Systems, Inc. On March 1, 1999, the Company filed
      an amendment  to that Form 8-K setting  forth  historical  and pro forma
      financial information relating to that acquisition.


<PAGE>

(c)   EXHIBITS:  The  following  exhibits are filed  herewith or  incorporated
      herein by reference:

  Exhibit No.                             Description
  -----------                             -----------

      2.1         Stock Purchase Agreement among ZMAX Corporation,  Michael C.
                  Higgins and Michael S. Cannon,  dated  November 6, 1996, for
                  the  acquisition  of Century  Services,  Inc.  (Incorporated
                  herein  by  reference  to  Exhibit  2.1 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)

      2.2         Agreement and Plan of Merger  between ZMAX  Corporation  and
                  New ZMAX  Corporation,  dated June 10,  1997.  (Incorporated
                  herein  by  reference  to  Exhibit  2.2 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)

      3.1         Amended and Restated  Certificate of  Incorporation  of ZMAX
                  Corporation.  (Incorporated  herein by  reference to Exhibit
                  3.5 to the Registrant's  Registration  Statement on Form S-4
                  (File No. 333-29833).)

      3.2         Bylaws  of  ZMAX   Corporation.   (Incorporated   herein  by
                  reference  to Exhibit 3.6 to the  Registrant's  Registration
                  Statement on Form S-4 (File No. 333-29833).)

      4.1         Form  of  Warrant   to   Purchase   Common   Stock  of  ZMAX
                  Corporation.  (Incorporated  herein by  reference to Exhibit
                  4.2 to the Registrant's  Registration  Statement on Form S-4
                  (File No. 333-29833).)

     10.1         ZMAX  Corporation  1997 Stock Incentive Plan.  (Incorporated
                  herein by  reference  to  Exhibit  10.1 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)*

     10.2         Form of ZMAX  Corporation  1997  Non-qualified  Stock Option
                  Award  (form of grant and vesting  schedule).  (Incorporated
                  herein by  reference  to  Exhibit  10.2 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)*

     10.3         ZMAX Corporation  1997 Directors  Formula Stock Option Plan.
                  (Incorporated  herein by  reference  to Exhibit  10.3 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)*

     10.4         Form of ZMAX  Corporation  Directors  Formula  Stock  Option
                  Award  (form of grant and vesting  schedule).  (Incorporated
                  herein by  reference  to  Exhibit  10.4 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)*

     *            Management contract or compensatory plan.


<PAGE>

     10.5         Employment  Agreement  between  Century  Services,  Inc. and
                  Michael C. Higgins,  dated  November 6, 1996.  (Incorporated
                  herein by  reference  to  Exhibit  10.5 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)*

     10.6         First Amendment to the Employment  Agreement between Century
                  Services,  Inc. and Michael C. Higgins,  dated May 21, 1997.
                  (Incorporated  herein by  reference  to Exhibit  10.6 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)*

     10.7         Employment  Agreement  between  Century  Services,  Inc. and
                  Joseph Yeh,  dated June 18,  1997.  (Incorporated  herein by
                  reference to Exhibit 10.7 to the  Registrant's  Registration
                  Statement on Form S-4 (File No. 333-29833).)*

     10.8         Separation  Agreement  between  Century  Services,  Inc. and
                  Michael  S.  Cannon,  dated  April 22,  1997.  (Incorporated
                  herein by  reference  to  Exhibit  10.8 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)*

     10.9         Consulting  Agreement among ZMAX Corporation,  MBY, Inc. and
                  Michel Berty, dated April 1, 1997.  (Incorporated  herein by
                  reference to Exhibit 10.9 to the  Registrant's  Registration
                  Statement on Form S-4 (File No. 333-29833).)*

     10.10        Consulting   Agreement  among  ZMAX   Corporation,   Wareham
                  Management Ltd. and G.W. Norman Wareham, dated May 30, 1997.
                  (Incorporated  herein by reference  to Exhibit  10.10 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)*

     10.11        Consulting  Agreement  between ZMAX  Corporation  and Shafiq
                  Nazerali,  dated  May  30,  1997.  (Incorporated  herein  by
                  reference to Exhibit 10.11 to the Registrant's  Registration
                  Statement on Form S-4 (File No. 333-29833).)*

     10.12        Earn Out Stock  Escrow  Agreement  among  ZMAX  Corporation,
                  Michael C. Higgins, Michael S. Cannon and Powell, Goldstein,
                  Frazer &  Murphy,  dated  November  6,  1996.  (Incorporated
                  herein by  reference  to Exhibit  10.12 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)

     10.13        ZMAX  Corporation  Stockholders  Agreement  among Michael C.
                  Higgins,  Michael  S.  Cannon  and ZMAX  Corporation,  dated
                  November  6,  1996.  (Incorporated  herein by  reference  to
                  Exhibit 10.13 to the Registrant's  Registration Statement on
                  Form S-4 (File No. 333-29833).)

     *            Management contract or compensatory plan.


<PAGE>

     10.14        Stock Pledge and Security  Agreement from Michael C. Higgins
                  in  favor  of ZMAX  Corporation,  dated  November  6,  1996.
                  (Incorporated  herein by reference  to Exhibit  10.14 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)

     10.15        Letter Agreement among ZMAX Corporation,  IMS International,
                  Inc., Wan Hsien Information International Corporation, Ltd.,
                  Multi-Dimension International, and Institute for Information
                  Industry  Regarding the Purchase by ZMAX  Corporation of the
                  "COCACT"   Software   Program,   dated   April   30,   1997.
                  (Incorporated  herein by reference  to Exhibit  10.15 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)

     10.16        Letter Agreement  between ZMAX Corporation and Institute for
                  Information   Industry   Regarding   the  Purchase  by  ZMAX
                  Corporation of the "COCACT"  Software  Program,  dated April
                  30, 1997. (Incorporated herein by reference to Exhibit 10.16
                  to the Registrant's Registration Statement on Form S-4 (File
                  No. 333-29833).)

     10.17        Letter  Agreement  between  ZMAX  Corporation  and Wan Hsien
                  Information  International  Corporation  Ltd.  Regarding the
                  Purchase  by  ZMAX  Corporation  of  the  "COCACT"  Software
                  Program,  dated April 30,  1997,  as amended.  (Incorporated
                  herein by  reference  to Exhibit  10.17 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)

     10.18        Conversion  Agreement  between Fiserv Federal Systems,  Inc.
                  and ZMAX  Corporation,  dated April 28, 1997.  (Incorporated
                  herein by  reference  to Exhibit  10.18 to the  Registrant's
                  Registration Statement on Form S-4 (File No. 333-29833).)

     10.19        Agreement    between   ZMAX    Corporation    and   Investor
                  Communications  Company,  LLC,  dated  as of May  20,  1997.
                  (Incorporated  herein by  reference  to  Exhibit  2.2 to the
                  Registrant's  Registration  Statement  on Form S-4 (File No.
                  333-29833).)

     10.20        Investor   Relations   Consulting   Agreement  between  ZMAX
                  Corporation and Investor  Communications Company, LLC, dated
                  as of May 20,  1997.  (Incorporated  herein by  reference to
                  Exhibit 10.20 to the Registrant's  Registration Statement on
                  Form S-4 (File No. 333-29833).)

     10.21        Agreement and Plan of Merger, dated as of December 14, 1998,
                  by  and  among   ZMAX   Corporation,   Eclipse   Acquisition
                  Corporation,  Eclipse Information  Systems,  Inc., and Frank
                  Schultz,  Mark  Mirabile,  John Schultz,  Scott Shedd,  Brad
                  Adams, Ron Hilicki, Fred Anderson,  Harold Zimmerman,  Chris
                  Gildone,  Dave Vittitow,  Kristina  Palmer,  Tom Carroll and
                  Gary Singer.  (Incorporated herein by reference to Exhibit 2
                  to the Registrant's  Current Report on Form 8-K, as filed on
                  December 29, 1998 (File No. 333-55993).)

     21           Subsidiaries of ZMAX Corporation

     23           Report of Arthur Andersen LLP

     24           Schedule II Valuation and Qualifying accounts

     27           Financial Data Schedule


<PAGE>

                                                    SIGNATURES


      Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant  has duly  caused  this  report to be  signed on its  behalf by the
undersigned thereunto duly authorized.


                                  ZMAX Corporation

Date:  March 30, 1999             /s/MICHAEL C. HIGGINS
                                  ---------------------
                                  Michael C. Higgins
                                  President


Date:  March 30, 1999             /s/JAMES T. MCCUBBIN
                                  --------------------
                                  James T. Mccubbin
                                  Vice President - Principal Financial Officer

      Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this report has been signed below by the following  persons,  on behalf of the
Registrant and in the capacities and on the dates indicated.

Dated:  March 30, 1999            /s/MELVIN A. MCCUBBIN
                                  ---------------------
                                  Melvin A. Mccubbin
                                  Director and Chairman of the Board

Dated:  March 30, 1999            /s/MICHAEL C. HIGGINS
                                  ---------------------
                                  Michael C. Higgins
                                  Director, President and Chief Executive
                                  Officer

Dated:  March 30, 1999            /s/JAMES T. MCCUBBIN
                                  --------------------
                                  James T. Mccubbin
                                  Director, Vice President - Chief Financial
                                  Officer, Assistant Secretary and Treasurer

Dated:  March 30, 1999            /s/G.W. NORMAN WAREHAM
                                  ----------------------
                                  G.w. Norman Wareham
                                  Director, Secretary and Treasurer

Dated:  March 30, 1999            /s/STEVE L. KOMAR
                                  -----------------
                                  Steve L. Komar
                                  Director

Dated:  March 30, 1999            /s/FRANCIS T. SCHULTZ
                                  ---------------------
                                  Francis T. Schultz
                                  Director and Vice President


<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

Report of Arthur Andersen LLP, Independent Public
  Accountants                                                              F-1

Consolidated Balance Sheets as of December 31, 1998
  and 1997                                                                 F-2

Consolidated Statements of Operations for the Years
  Ended December 31, 1998, 1997, and 1996                                  F-4

Consolidated Statements of Changes in Stockholders'
  Equity for the Years Ended December 31, 1998, 1997,
    and 1996                                                               F-5

Consolidated Statements of Cash Flow for the Years
  Ended December 31, 1998, 1997, and 1996                                  F-6

Notes to Consolidated Financial Statements                                 F-7


<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To ZMAX Corporation:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  ZMAX
Corporation (a Delaware  corporation)  and its subsidiaries as of December 31,
1998 and 1997 and the related statements of operations,  stockholders'  equity
and cash flows for each of the three years in the period  ended  December  31,
1998.  These  financial  statements  are the  responsibility  of the Company's
management.  Our  responsibility  is to express an opinion on these  financial
statements based on our audits.

We  conducted  our  audits in  accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable  assurance  about  whether  the  financial  statements  are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial  statements.  An audit
also  includes  assessing  the  accounting  principles  used  and  significant
estimates  made by  management,  as well as evaluating  the overall  financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion,  the financial statements referred to above present fairly, in
all material  respects,  the  financial  position of ZMAX  Corporation,  as of
December  31, 1998 and 1997,  and the results of its  operations  and its cash
flows for each of the three years in the period ended  December  31, 1998,  in
conformity with generally accepted accounting principles.


                                                           ARTHUR ANDERSEN LLP
Washington, D.C.
March 5, 1999


                                     F-1

<PAGE>

                                   ZMAX CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                       -------------------------
                                                         1998               1997
                                                       -------------------------
                                ASSETS:
<S>                                                   <C>              <C>
Current Assets:
  Cash and cash equivalents                           $ 4,521,126      $ 6,405,084
  Accounts receivable, net of
    allowance of $17,160 and $0, respectively           2,545,659        1,067,258
  Prepaid expenses and other assets                       127,952           81,506
                                                      ------------     ------------

    Total current assets                                7,194,737        7,553,848

  Property and equipment, net                             477,870          277,981
  Intangible assets, net                                9,740,217        4,033,265
  Other assets                                             33,538            4,983
                                                      ------------     ------------
    Total assets                                      $17,446,362      $11,870,077
                                                      ============     ============
</TABLE>

  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
                                   SHEETS.


                                     F-2

<PAGE>

                       ZMAX CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                  ----------------------
                                                                     1998          1997
                                                                  ----------------------
          LIABILITIES & STOCKHOLDERS' EQUITY
<S>                                                        <C>              <C>
Current liabilities:
  Accounts payable and accrued expenses                    $  1,596,074     $     826,117
  Current portion of capital lease obligation                    35,519                 -
  Current portion of long-term debt                                   -           539,541
  Customer deposits                                                   -           926,039
                                                           -------------     -------------
  Total current liabilities                                   1,631,593         2,291,697

Capital lease obligation, net of current portion                 34,716                 -
                                                           -------------     -------------
  Total liabilities                                           1,666,309         2,291,697

Commitments and contingencies (Note 11)

Stockholders' equity:
  Preferred stock, $0.001 par value, 10,000,000
    shares authorized, None issued and outstanding                    -                 -
  Common stock, $0.001 par value, 50,000,000
    shares authorized, 13,117,214 and 11,729,714
    shares issued and outstanding as of December 31,
    1998 and December 31, 1997, respectively,
    167,301 and 479,801 shares subject to
    cancellation  agreements as of December 31, 1998
    and  December 31, 1997, respectively (Note 8)                13,117            11,729
  Additional paid-in capital                                 41,763,101        35,280,105
  Accumulated deficit                                       (25,996,165)      (25,713,454)
                                                           -------------     -------------
  Total stockholders' equity                                 15,780,053         9,578,380
                                                           -------------     -------------
Total liabilities & stockholders' equity                   $ 17,446,362      $ 11,870,077
                                                           =============     =============
</TABLE>

  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
                                   SHEETS.


                                     F-3

<PAGE>

                       ZMAX CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                               For the years ended
                                                                                   December 31,
                                                               -------------------------------------------------------
                                                                    1998               1997               1996
                                                               -------------      -------------      -------------
<S>                                                            <C>                <C>                <C>
Revenues                                                        $  9,916,276       $  1,425,360       $          -

Operating expenses:
  Cost of revenues                                                 3,478,982            667,098                  -
  Research and development                                          473,362                  -                  -
  Sales and marketing                                             1,190,548          1,110,655            228,803
  General and administrative                                      3,515,391          4,148,421          1,069,681
  Employee stock compensation expense                               534,384                  -                  -
  Depreciation and amortization                                   1,268,338          1,008,864            193,533
                                                               -------------      -------------      -------------

    Loss from operations                                           (544,729)        (5,509,678)        (1,492,017)

Other income (expenses):
  Interest income                                                   270,337            137,814             14,248
  Interest expense                                                   (9,140)        (1,366,479)        (7,125,386)
  Other                                                                 821         (7,468,356)        (2,903,600)
                                                               -------------      -------------      -------------

Net loss                                                       $   (282,711)      $(14,206,699)      $(11,506,755)
                                                               =============      =============      =============

Basic and diluted loss per share                               $      (0.03)      $      (2.58)      $     (13.45)
                                                               =============      =============      =============

Basic and diluted weighted average shares outstanding            10,638,680          5,502,668            855,712
                                                               =============      =============      =============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.


                                     F-4

<PAGE>

                       ZMAX CORPORATION AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                   Common Stock          Aditional         Issuable
                                                             ------------------------     Paid-In           Common
                                                               Shares        Amount       Capital           Stock
                                                             -----------   ----------  --------------   -------------
<S>                                                          <C>            <C>         <C>              <C>          
Balance, December 31, 1995                                    3,200,000     $  3,200    $     (3,000)    $         -
  Adjustment to record existing capitalization of public
    shell company November 6, 1996, 234,365 shares issuable   3,800,079        3,800         807,964       1,373,379
  Common stock issuable in connection with the CSI
    recapitalization, 320,000 shares                                  -            -               -       1,875,200
  Common stock issuable in connection with the CSI
    recapitalization, 350,000 shares, net of subscription 
    proceeds                                                          -            -               -       2,051,000
  Options granted for services                                        -            -         300,000               - 
  Allocation of proceeds of Notes to beneficial
    conversion feature                                                                       120,000                 
  Allocation of proceeds of Debentures to beneficial
    conversion feature                                                -            -       5,500,000               - 
  Net loss                                                            -            -               -               - 
                                                             -----------    ---------   -------------    ------------
Balance, December 31, 1996                                    7,000,079        7,000       6,724,964       5,299,579 
  Cancellation of shares                                       (296,007)        (296)            296               - 
  Conversion of Notes                                         1,600,000        1,600       2,098,400               - 
  Settlement of a note for common stock                          32,077           32         507,186               - 
  Common stock issued in COCACT purchase                        150,000          150       1,931,100               - 
  Common stock issued for services                               60,000           60         547,440               - 
  Issuance of previously issuable shares                        904,365          904       5,298,675      (5,299,579)
  Exchange of Debentures and exercise of warrants             2,279,200        2,279      18,172,044               - 
  Net loss                                                            -            -               -               - 
                                                             -----------    ---------   -------------    ------------
Balance, December 31, 1997                                   11,729,714       11,729      35,280,105               - 
  Cancellation of shares                                       (312,500)        (312)            312               - 
  Employee stock compensation                                       -              -         534,384               - 
  Common stock issued in Eclipse acquisition                  1,700,000        1,700       5,948,300               - 
  Net loss                                                            -            -               -               - 

                                                             -----------    ---------   -------------    ------------
Balance, December 31, 1998                                   13,117,214     $ 13,117    $ 41,763,101     $         - 
                                                             ===========    =========   =============    ============
</TABLE>
<TABLE>
<CAPTION>
    CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY (Continued)

                                                                Receivable for
                                                                     Stock         Accumulated
                                                                 Subscription        Deficit            Total
                                                                --------------   ---------------   ---------------
<S>                                                               <C>              <C>               <C>
Balance, December 31, 1995                                        $    (200)       $          -      $          -
  Adjustment to record existing capitalization of public
    shell company November 6, 1996, 234,365 issuable                    200                   -         2,185,343
  Common stock issuable in connection with the CSI
    recapitalization, 320,000 shares                                      -                   -         1,875,200
  Common stock issuable in connection with the CSI
    recapitalization, 350,000 shares, net of subscription 
    proceeds                                                       (105,000)                  -         1,946,000
  Options granted for services                                            -                   -           300,000
  Allocation of proceeds of Notes to beneficial
    conversion feature                                                                                    120,000
  Allocation of proceeds of Debentures to beneficial
    conversion feature                                                    -                   -         5,500,000
  Net loss                                                                -         (11,506,755)       (11,506,755)
                                                                   ---------       -------------      -------------
Balance, December 31, 1996                                         (105,000)        (11,506,755)           419,788
  Cancellation of shares                                                  -                   -                  -
  Conversion of Notes                                                     -                   -          2,100,000
  Settlement of a note for common stock                                   -                   -            507,218
  Common stock issued in COCACT purchase                                  -                   -          1,931,250
  Common stock issued for services                                        -                   -            547,500
  Issuance of previously issuable shares                            105,000                   -            105,000
  Exchange of Debentures and exercise of warrants                         -                   -         18,174,323
  Net loss                                                                -         (14,206,699)       (14,206,699)
                                                                   ---------       -------------      -------------
Balance, December 31, 1997                                                -         (25,713,454)         9,578,380
  Cancellation of shares                                                  -                   -                  -
  Employee stock compensation                                             -                   -            534,384
  Common stock issued in Eclipse acquisition                              -                   -          5,950,000
  Net loss                                                                -            (282,711)          (282,711)

                                                                   ---------       -------------      -------------
Balance, December 31, 1998                                         $      -        $(25,996,165)      $ 15,780,053
                                                                   =========       =============      =============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.


                                     F-5

<PAGE>

                       ZMAX CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                               For the years ended
                                                                                   December 31,
                                                          ------------------------------------------------------
                                                                    1998             1997              1996
Cash flows from operating activities:                               ----             ----              ----
<S>                                                             <C>              <C>               <C>          
  Net loss                                                      $  (282,711)     $(14,206,699)     $(11,506,755)
  Adjustments to reconcile loss to net cash provided by
    (used in) operating activities
    Depreciation and amortization expense                         1,315,154         1,008,864           193,533
    Amortization of deferred financing costs                              -           508,363           185,767
    Amortization of discount on Notes and Debentures                      -           591,408         7,008,592
    Non-cash expenses related to CSI recapitalization                     -                 -         2,883,600
    Expenses related to conversion of debentures                          -         7,370,000                 -
    Stock compensation expense                                      534,384           547,500           300,000
    Non-cash interest expense on promissory note                          -             8,904                 -
    Loss on conversion of promissory note                                 -           101,442                 -
  Changes in assets and liabilities:
    Accounts receivable                                             (73,715)       (1,067,258)                -
    Prepaid expenses and other assets                               (15,604)          (58,727)          (27,762)
    Accounts payable and accrued expenses                          (138,405)          455,942            55,570
    Customer deposits                                              (926,036)          926,039                 -
                                                                ------------    --------------      ------------
      Net cash provided by (used in) operating activities       $   413,067      $ (3,814,222)     $   (907,455)
                                                                ------------    --------------      ------------
  Net cash used in investing activities:
    Purchase of Eclipse, net of cash acquired                    (1,647,644)                -                 -
    Purchases of property and equipment                            (109,837)         (326,145)          (21,144)
    Purchase of software                                                  -          (767,379)         (831,892)
                                                                ------------    --------------      ------------
      Net cash used in investing activities                     $(1,757,481)     $ (1,093,524)      $  (853,036)
                                                                ------------    --------------      ------------
  Net cash provided by financing activities:
    Proceeds from issuance of Notes                                       -                 -           120,000
    Proceeds from issuance of Debentures                                  -                 -         5,500,000
    Deferred financing costs                                              -                 -          (675,000)
    Cash acquired in CSI recapitalization                                 -                 -           299,173
    Advances from joint venture and ZMAX prior to the
      CSI recapitalization                                                -                 -           950,000
    Proceeds from the issuance of common stock                            -           105,000                 -
    Net proceeds from the Exchange and exercise of warrants               -         6,234,607                 -
    Net borrowings (payments) on long-term obligations             (539,541)          131,054           408,487
                                                                ------------    --------------      ------------
      Net cash (used in) provided by financing activities       $  (539,541)     $  6,470,661       $ 6,602,660
                                                                ------------    --------------      ------------


                                     F-6

<PAGE>

Net (decrease) increase in cash                                 $(1,883,955)     $  1,562,915       $ 4,842,169
                                                                ------------    --------------      ------------

Cash, beginning of period                                       $ 6,405,084      $  4,842,169       $         -
                                                                ------------    --------------      ------------

Cash, end of period                                             $ 4,521,129      $  6,405,084       $ 4,842,169
                                                                ============    ==============      ============
Supplemantal cash flow information:
  Cash paid for-
    Interest                                                    $    27,125      $    299,668      $     26,599
    Income taxes                                                $         -      $          -      $          -
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.


                                     F-7

<PAGE>

                               ZMAX CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Basis of Presentation

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

For  financial  reporting  purposes,  the  acquisition  has been  treated as a
recapitalization  of CSI with CSI as the  acquirer  (a  reverse  acquisition).
Accordingly,  the historical financial statements of ZMAX prior to November 6,
1996,  are  the  historical  financial  statements  of CSI.  The  accompanying
consolidated  financial  statements include all of the accounts of CSI and the
accounts of ZMAX since the  acquisition  on November 6, 1996.  On December 14,
1998,  ZMAX  acquired  Eclipse  Information  Systems,  Inc.  ("Eclipse").  The
accompanying consolidated financial statements include the accounts of Eclipse
since the date of acquisition. All significant inter-company amounts have been
eliminated.


Merger (the "Merger")

In December 1997,  ZMAX (a Nevada  corporation)  merged with and into New ZMAX
Corporation, a Delaware corporation ("New ZMAX"), pursuant to an Agreement and
Plan of Merger between ZMAX and New ZMAX (the "Merger Agreement"). At the time
the Merger became effective,  each outstanding  share of common stock,  $0.001
par value,  of ZMAX was converted  into one share of common stock,  $0.001 par
value,  of New ZMAX. New ZMAX is the surviving  corporation in the Merger.  At
the  effective  time of the Merger,  the name of New ZMAX was changed to "ZMAX
Corporation" pursuant to the Merger Agreement.


Natyre Of Operations

Prior to the CSI  transaction,  ZMAX's  activities  consisted  of  efforts  to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain  financing,  to acquire and develop its proprietary  Year
2000  software  re-engineering  tools and  methodologies,  and to  market  its
services to potential customers. Since the acquisition of CSI, the Company has
been focused on the software  re-engineering market. During 1998 and 1997, the
Company's revenue was derived  primarily from Year 2000 services.  The Company
also began  licensing a Year 2000  software  tool during 1998;  however,  such


                                     F-8

<PAGE>

licensing  revenue was not significant in 1998. While the Company's revenue to
date has been derived  primarily from its Year 2000 or  "millennium"  services
there can be no assurance  that the Company will  continue to be successful in
completing  large-scale  conversions  or that the Company will not  experience
delays or failures in providing its  millennium  services.  The failure of the
Company's  Year 2000  methodology  to function  properly or the  existence  of
significant errors or problems following completion of millennium  conversions
could  necessitate  significant  expenditures  by the  Company  to remedy  the
problem. The consequences of failures, errors or problems could materially and
adversely  affect the  Company's  business,  operating  results and  financial
condition.

In December 1998, the Company expanded its operations  through the acquisition
of Eclipse.  Eclipse performs  management and information  systems  consulting
services.  Eclipse also resells certain hardware and software  products to its
customers.

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, reliance
on certain significant customers,  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 customers 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. The Company may
also require  additional capital that may not be available to it. In addition,
there are risks associated with the market activity in ZMAX common stock.

2.    SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

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.

Cash and Cash Equivalents

Investments  with original  maturities of three months or less are  considered
cash equivalents for purposes of these financial  statements.  At December 31,
1998, cash and cash equivalents  included $3,611,339 of investments in a money
market fund that invests in short-term U.S. Government securities.


                                     F-9

<PAGE>

Revenue Recognition

Revenue  on  time-and-materials  contracts  is  recognized  based  upon  hours
incurred at contract rates plus direct costs. Revenue on fixed-price contracts
is 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.  Revenue
from the resale of hardware and software products is recognized upon shipment.

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
consist of amounts  incurred which are not yet billable under contract  terms.
At December 31, 1998 and 1997,  unbilled accounts  receivable totaled $410,178
and $180,120, respectively.

Revenue from the sale of perpetual and term software licenses is recognized at
the time of delivery  and  acceptance  of software  products by the  customer,
provided that no significant  vendor obligations remain and that collection is
probable.  Maintenance  revenue that is bundled with an initial license fee is
deferred and recognized ratably over the maintenance period.  Amounts deferred
for maintenance are based on the fair value of equivalent maintenance services
sold separately. The American Institute of Certified Public Accountants issued
Statement of Position 97-2 "Software Revenue  Recognition" ("SOP 97-2"), which
superceded Statement of Position 91-1 "Software Revenue Recognition." SOP 97-2
provides  additional  guidance with respect to multiple element  arrangements;
returns, exchanges, and platform transfer rights; resellers;  services; funded
software  development  arrangements;  and  contract  accounting.  The  Company
recognizes revenue in accordance with SOP 97-2 and Statement of Position 98-9,
"Modification  of SOP 97-2,  Software  Revenue  Recognition,  With  Respect to
Certain  Transactions".  Prior to 1998,  the Company  had no revenue  from the
license of software.

Significant Customers

During 1998,  three  customers  individually  represented  41%, 18% and 11% of
revenue.  During 1997, three customers  individually  represented 24%, 23% and
13% of revenue.  Due to the nature of the Company's  business and the relative
size of certain contracts,  the loss of any single significant  customer could
have a material adverse effect on the Company's results of operations.

Concentrations of Credit Risk

Financial  instruments  that  potentially  subject  the Company to credit risk
consist  of cash  and  cash  equivalents  and  accounts  receivable.  Accounts
receivable include amounts due from relatively large companies in a variety of
industries.  As of December 31, 1998, two customers  individually  represented


                                     F-10

<PAGE>

16% and 13% of accounts  receivable.  As of December 31, 1997, three customers
individually represented 31%, 31% and 17% of accounts receivable.

Income Taxes

The  Company  accounts  for  income  taxes in  accordance  with  Statement  of
Financial Accounting Standard ("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.

Property and Equipment

Property and equipment is carried at cost and  depreciated  over its estimated
useful life, typically three years, using the straight-line method.  Leasehold
improvements  are  depreciated  using  the  straight-line  method  over  their
estimated  useful  life or the  remaining  term  of the  lease,  whichever  is
shorter.

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                 December 31,
                                        -----------------------------
                                           1998               1997
                                        ----------         ----------
<S>                                     <C>                <C>      
Furniture and fixtures                  $ 397,600          $ 147,653
Equipment                                 243,685            162,562
Leasehold improvements                     44,151             37,075
Less-Accumulated depreciation            (207,566)           (69,309)
                                        ----------         ----------
                                        $ 477,870          $ 277,981
                                        ==========         ==========
</TABLE>


Software Development Costs

SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or  Otherwise  Marketed,"  requires  the  capitalization  of certain  computer
software  development  costs  incurred  after  technological   feasibility  is
established.  Amounts that could have been  capitalized  under this  statement
were immaterial and have not been capitalized.

Long-Lived Assets

The Company reviews its long-lived  assets,  including property and equipment,
identifiable   intangibles,   and  goodwill  whenever  events  or  changes  in
circumstances indicate that the carrying amount of the assets may not be fully


                                     F-11

<PAGE>

recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets.

Basic and Diluted Net Loss Per Share

In March 1997, the Financial  Accounting  Standards Board ("FASB") issued SFAS
No. 128,  "Earnings  Per Share." SFAS No. 128 requires  dual  presentation  of
basic and diluted earnings per share.  Basic income or loss per share includes
no dilution  and is computed  by dividing  net income or loss by the  weighted
average number of common shares outstanding for the period.  Diluted income or
loss per share includes the potential  dilution that could occur if securities
or other  contracts  to issue common  stock were  exercised or converted  into
common  stock.  The treasury  stock effect of options and warrants to purchase
1,714,300,  1,488,800  and  208,126  shares of  common  stock  outstanding  at
December 31, 1998, 1997, and 1996, respectively,  has not been included in the
calculation  of the net loss per share as such effect would be  anti-dilutive.
Similarly,  because the effect  would have been  anti-dilutive,  common  stock
issuable  upon the  conversion  of the  Company's  convertible  debt  were not
included  in the  calculation  of  diluted  loss per  share for 1997 and 1996.
Outstanding  shares subject to cancellation  agreements have not been included
in either the basic or diluted calculation. As a result, the basic and diluted
loss per share for all periods presented are identical.

New Accounting Pronouncements

The Company has adopted SFAS No. 130, "Reporting  Comprehensive  Income." SFAS
No. 130  establishes  standards  for  reporting  and display of  comprehensive
income and its  components in the financial  statements.  The adoption of SFAS
No. 130 did not have a material impact on the Company's results of operations,
financial position, or cash flows.

The Company  has  adopted  SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise and Related  Information."  SFAS No. 131 establishes  standards for
the way that public business  enterprises  report  information about operating
segments in annual  financial  statements and requires that those  enterprises
report  selected  information  about operating  segments in interim  financial
reports  issued to  shareholders.  It also  establishes  standards for related
disclosures about products and services, geographic areas and major customers.
The  adoption  of SFAS No. 131 has had no impact on the  Company's  results of
operations, financial position or cash flows.

In March 1998, the AICPA issued Statement of Position 98-1 "Accounting for the
Costs of Computer  Software  Developed or Obtained for  Internal  Use",  ("SOP
98-1"). SOP 98-1 requires the Company to capitalize internal computer software
costs  once  the  capitalization  criteria  of the SOP are  met.  SOP  98-1 is
effective January 1, 1999, and is applied to all projects in progress upon the
initial  application of the SOP. The Company has not yet determined the impact
of the adoption of SOP 98-1, however, a percentage of the Company's historical
development expenses may now be required to be capitalized under SOP 98-1.


                                     F-12

<PAGE>

3.    ACQUISITION OF JOINT VENTURE INTEREST  AND CSI RECAPITALIZATION:

In connection with the  recapitalization  of CSI, ZMAX issued 2,800,000 shares
of common stock at $0.30 per share (Note 8),  $2,100,000 of convertible  notes
(Note 6) and $5,500,000 of convertible  exchangeable  subordinated  debentures
(Note 6).

Fiserv Century Services Joint Venture

On April 17, 1996, CSI formed the Fiserv  Century  Services Joint Venture (the
"JV") with Fiserv Federal Systems, Inc., ("Fiserv"). CSI and Fiserv each owned
a 50  percent  interest  in the JV.  The JV was  engaged  in the  business  of
marketing  Year 2000 computer  consulting  services  using  computer  software
exclusively licensed to CSI. As funding for the JV, Fiserv agreed to provide a
credit  facility  of up to  $5,000,000.  All  funds  advanced  to the JV  were
provided under this facility.  In addition,  the JV agreed to provide  monthly
advances to CSI in the amount of $40,000 with a limit of $720,000.  During the
period from April 1996 to August 1996,  Fiserv provided a total of $695,000 in
funding to the JV, $560,000 of which the JV advanced to CSI under the terms of
the agreements described above.

As part of the CSI recapitalization, Fiserv agreed to sell its interest in the
JV to ZMAX.  Effective  September 1, 1996,  NewDominion  Capital  Group,  Inc.
("NewDominion")  acquired  Fiserv's  interest  in the JV.  At this  time,  all
employees and  operations  of the JV were  transferred  to CSI.  NewDominion's
intent was to serve as an  intermediary  in order to assign the joint  venture
interest  to ZMAX  concurrent  with  the  recapitalization  of  CSI.  Fiserv's
interest was assigned to NewDominion for cash  consideration of $310,000 and a
promissory note of $385,000.  In addition to the above  consideration,  Fiserv
was pledged 3 percent of the outstanding  shares of the anticipated  successor
entity to the JV. On September 20, 1996,  NewDominion assigned its interest in
the JV to  ZMAX.  As  consideration  for  the  assignment,  ZMAX  assumed  all
liabilities,  interests,  and  obligations  of  NewDominion  related to the JV
including the $310,000 payable to Fiserv and the $385,000  promissory note. As
the successor  entity (as  described  above),  ZMAX assumed the  obligation to
issue a 3 percent ownership interest in ZMAX to Fiserv.

This  transaction  has been accounted for as a purchase by ZMAX. ZMAX acquired
the 50 percent  interest in the JV for  repayment  of the amounts  advanced by
Fiserv  to the JV  totaling  $695,000  ($310,000  in cash  and  $385,000  note
payable)  and  234,365  shares  of ZMAX  common  stock  with a fair  value  of
$1,373,379  based upon the  quoted  market  price of ZMAX  common  stock.  The
234,365  shares of common stock were not issued until April 1997 and have been
reflected  as issuable as of December 31, 1996.  ZMAX  allocated  the purchase
price to assets and  liabilities  based on their  estimated fair values at the


                                     F-13

<PAGE>

date of acquisition (prior to the CSI transaction).  As a result,  ZMAX (prior
to the CSI  transaction)  allocated  $1,508,379  to goodwill and $560,000 to a
receivable  from CSI related to funding  provided to the JV by Fiserv which in
turn had been advanced to CSI by the JV.

As of September 1, 1996, all  operations,  some of which had  previously  been
performed by the JV, were carried out by CSI. After the CSI transaction,  ZMAX
transferred  all of its  interest in the JV to CSI as of January 1, 1997,  and
CSI as the sole remaining venture partner, terminated the JV.


CSI

On July 16, 1996,  PRCC, Inc.  ("PRCC")  entered into an agreement with CSI to
acquire all of the  outstanding  stock of CSI. On  September  20,  1996,  PRCC
assigned  its rights under the July 16,  1996,  agreement  with CSI to ZMAX in
return for  $20,000 in cash and the right to purchase  350,000  shares of ZMAX
common stock for $0.30 per share.  The $20,000 and the fair value,  based upon
the quoted  market  price of the ZMAX common  stock,  of these shares has been
charged to expense as a cost of the CSI  transaction  and is included in other
expenses in the accompanying  financial statements for the year ended December
31,  1996.  These  shares  were not  issued  until  April  1997 and have  been
reflected  as issuable as of December 31, 1996.  Similarly,  the  subscription
proceeds were not received  until May 1997,  and have been  reflected as stock
subscriptions receivable as of December 31, 1996.

Concurrent with this assignment,  on September 20, 1996, ZMAX made an offer to
purchase all of the outstanding shares of CSI stock. The offer was accepted by
the  stockholders  of CSI and the  agreement  was  announced  to the public on
September 26, 1996. The September 20, 1996,  agreement also provided that ZMAX
would advance amounts to CSI to fund CSI's operations.  During the period from
September 20, 1996, to November 6, 1996,  ZMAX advanced a total of $390,000 to
CSI. On November 6, 1996,  the 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. The  transaction  has
been  accounted for as a  recapitalization  of CSI with CSI as the acquirer (a
reverse acquisition).  At the closing, the former stockholders of CSI retained
400,000  shares  of the  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 based upon the cash flow (as defined) of 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.  In March 1998,  ZMAX and the
former CSI stockholders  reformed certain of the agreements relating to ZMAX's
acquisition of CSI. As a result,  the escrow to hold the Restricted  Stock was
replaced by the former CSI  stockholders  holding  their shares of  Restricted


                                     F-14

<PAGE>

Stock.  The amended  agreements  provide for the lapse of the  restrictions on
transferability  on November 6, 2001,  if such  restrictions  have not already
been released as a result of the CSI cash flow.

In connection with the CSI transaction, the Company incurred $54,678 of direct
costs that were charged to expense in the year ended  December  31, 1996.  The
Company  also  agreed  to  issue  320,000  shares  of ZMAX  common  stock to a
consultant  for  services  related  to the CSI  transaction  and  the  related
financing.  The fair  value,  based upon the quoted  market  price of the ZMAX
common stock, of 160,000 of these shares has been charged to expense as a cost
of the  transaction  and is  included in other  expenses  in the  accompanying
consolidated  financial  statements  for the year ended December 31, 1996. The
fair value of the other 160,000 shares were recognized as a deferred financing
cost.


4.    Eclipse Acquisition:

On December 14, 1998,  the Company  acquired all of the  outstanding  stock of
Eclipse in a transaction accounted for as a purchase. The Company acquired the
stock of Eclipse for $1,450,000 in cash and 1,700,000  shares of the Company's
common  stock.  The Company  incurred  approximately  $325,000 in direct costs
related  to the  acquisition.  The  Company  also  entered  into  non-compete,
employment and shareholder agreements with the former stockholders of Eclipse.
The shareholder  agreements generally restrict the transferability of the ZMAX
Common Stock issued in the transaction under certain circumstances.


The purchase price has been allocated as follows:

<TABLE>
<S>                                                       <C>
Accounts receivable                                       $ 1,404,686
Property and equipment                                        226,091
Other assets                                                   62,724
Intangible assets                                           6,991,593
Deferred tax liability                                       (109,333)
Liabilities assumed and direct acquisition costs           (1,178,117)
                                                          ------------
                                                          $ 7,397,644
                                                          ============
</TABLE>


This purchase  price  allocation  may be subject to adjustment  for changes in
estimates  and to settle  certain  contingencies.  These  adjustments  are not
expected to have a material impact on the Company's financial condition or its
results of future operations.

The unaudited pro forma  information  presented below reflects the acquisition
of Eclipse as if it had  occurred  on January  1, 1997.  The  results  are not
necessarily  indicative of future  results of operations or of what would have
occurred had the acquisition actually been consummated on that date.


                                     F-15

<PAGE>

<TABLE>
<CAPTION>
                                           December 31
                                ------------------------------------
                                    1998                   1997
                                -------------         --------------
                                           (unaudited)
<S>                             <C>                   <C>         
Revenues                        $ 17,982,127          $  6,805,439
Net income (loss)                    177,895           (14,075,429)
Basic income (loss) per share          $0.01                $(1.95)
Diluted income (loss) per share        $0.01                $(1.95)
                                -------------         --------------
</TABLE>


5.    Intangible Assets:

Intangible assets consist of purchased software rights, goodwill acquired as a
result of ZMAX's  purchase  of Fiserv's  interest  in the JV and  identifiable
intangible  assets and  goodwill  from the Eclipse  acquisition.  The software
rights and joint  venture  related  goodwill  are being  amortized  over their
estimated  useful lives of five years.  Identifiable  intangibles  and amounts
allocated  to goodwill  related to the Eclipse  acquisition  will be amortized
over  a   weighted-average   life  of  approximately  25  years.   Accumulated
amortization  totaled  $2,291,004  and $1,237,468 as of December 31, 1998, and
1997, respectively.

During 1996,  CSI licensed the rights to three  software  tools for a total of
$1,010,000.  Two of the licenses  provide for the exclusive  rights to use and
modify the software for a term of 20 years. The third license,  for the Change
of Century Analysis and Conversion Tool ("COCACT"), provided for the exclusive
rights to use the  software  in North  America  for a term of ten  years  (the
"North American COCACT  License").  During 1996, the Company paid $560,000 for
the software tools, with the remaining $450,000  originally due in three equal
installments  during 1997 and 1998. Interest on this obligation was imputed at
a rate of 10 percent.  During 1997, the Company made one additional payment of
$150,000.  As of April 30, 1997,  $300,000  under the original  North American
COCACT License remained unpaid. On April 30, 1997, the Company entered into an
agreement  to purchase  all rights,  title and interest to COCACT (the "COCACT
Purchase Agreement").  Under the terms of the COCACT Purchase Agreement,  ZMAX
had the right to  terminate  and  cancel  the North  American  COCACT  License
including the obligation to pay any remaining license fees. The purchase price
under the COCACT Purchase Agreement was $1,100,000, paid in installments, plus
150,000 shares of common stock of the Company. Interest on this obligation was
imputed at a rate of 10 percent.  As of December 31, 1998, all amounts due for
the purchase of COCACT had been paid.

6.    Debt and Deferred Financing Costs:

Promissory Note Payable

In September 1996, the Company  assumed a $385,000  promissory note payable to
Fiserv as  consideration  for the purchase of a 50 percent interest in the JV.
In May 1997,  the $385,000  note payable and the related  accrued  interest of
$20,776 were  settled by the Company by the issuance of 32,077  shares of ZMAX


                                     F-16

<PAGE>

common stock to Fiserv. During 1997, a loss of $101,442 was recognized on this
conversion as the fair value of the ZMAX common  stock,  based upon the quoted
market price at that time,  exceeded the  carrying  amount of the  outstanding
principal and accrued interest.

Convertible Notes

In connection  with the CSI  recapitalization,  from September 1996 to October
1996,  ZMAX issued a total of $1,980,000 in  convertible  notes (the "Notes").
After  the date of the CSI  transaction,  the  Company  issued  an  additional
$120,000  in Notes.  In April  1997,  all of the  Notes  were  converted  into
1,600,000 shares of common stock.

On the respective  dates of issuance of the Notes, the conversion price of the
Notes was less than the quoted  market  price of the ZMAX common stock at that
time.  Accordingly,  because the intrinsic value of this beneficial conversion
feature  exceeded  the  amount  of the  proceeds  of  the  Notes,  the  entire
$2,100,000  in proceeds from the Notes were  allocated to  additional  paid-in
capital to recognize this beneficial  conversion feature.  The discount on the
Notes  resulting from the allocation of proceeds to the beneficial  conversion
feature was reflected as a charge to interest  expense and was recognized over
the  period  until the Notes  became  convertible.  A total of  $1,508,592  in
interest expense was recognized for the year ended December 31, 1996,  related
to  the  discount  resulting  from  the  beneficial  conversion  feature.  The
remaining  $591,408  in  interest  expense  was  recognized  in the year ended
December 31, 1997.

Convertible Exchangeable Subordinated Debentures

On December 6, 1996, the Company issued $5,500,000 in convertible exchangeable
subordinated  debentures  (the  "Debentures").  Prior to the maturity  date or
redemption  by the  Company,  a holder  had the right to  convert  the  entire
principal  balance  of their  Debenture  into  shares  of  common  stock.  The
$5,500,000  in  Debentures  were  convertible  into an  aggregate of 1,100,000
shares of common stock.

On the  date of  issuance  of the  Debentures,  the  conversion  price  of the
Debentures  was less than the  quoted  market  price of the  Company's  common
stock. Accordingly,  because the intrinsic value of this beneficial conversion
feature  exceeded  the amount of the  proceeds of the  Debentures,  the entire
$5,500,000  in  proceeds  was  allocated  to  additional  paid-in  capital  to
recognize this beneficial  conversion feature. The discount resulting from the
allocation of proceeds to the beneficial conversion feature has been reflected
as a charge to interest expense and has been recognized in December 1996 since
the  Debentures  were  immediately  convertible  by the  holders.  A total  of
$5,500,000 in interest expense has been recognized for the year ended December
31, 1996,  related to the discount  resulting from the  beneficial  conversion
feature.

In November 1997, the Company offered to exchange (the  "Exchange") all of the
Debentures in accordance  with the terms of the  Debentures.  The Exchange was


                                     F-17

<PAGE>

accepted by all of the Debenture holders and, in December 1997, all $5,500,000
in Debentures  outstanding were exchanged for 1,210,000 shares of common stock
and  warrants to purchase a total of  1,210,000  shares of common  stock.  Any
accrued but unpaid interest from June 1, 1997, to the date of the Exchange was
waived by the Debenture holders.

Because the securities  issued pursuant to the terms of the Exchange  included
securities  in excess of the  securities  issuable  pursuant  to the  original
conversion  terms of the  Debentures,  the Company  recognized  $7,370,000  as
expense at the time of the Exchange.  The amount  recognized  equaled the fair
value of the  incremental  number  of shares  of  common  stock  issued in the
Exchange in excess of the number of shares  issuable  upon  conversion  of the
Debentures in accordance  with their terms plus the fair value of the warrants
issued in the Exchange.

Concurrent with the Exchange,  warrants to purchase 1,069,200 shares of common
stock were  exercised for  $7,484,400 in proceeds to the Company.  Warrants to
purchase  140,800  shares of common stock with an exercise  price of $8.00 per
share remain  outstanding  as of December 31, 1998. The  outstanding  warrants
expire in December 1999.  Costs of $1,261,606  were incurred in completing the
Exchange.  These  amounts have been  reflected  as a reduction  to  additional
paid-in capital as an offset to the proceeds of the warrant  exercises and the
exchange of the Debentures.

Deferred Financing Costs

Deferred  financing costs, which were incurred in connection with the issuance
of the Notes  and the  Debentures,  were  charged  to  expense  as  additional
interest  expense  over the  life of the  debt,  using  the  interest  method.
Amortization  of the deferred  financing  costs totaled  $185,767 for the year
ended December 31, 1996.  During the year ended December 31, 1997,  additional
amortization  expense of $508,363 was recorded  prior to the conversion of the
Notes  and  Debentures.  As a result  of the  Exchange,  unamortized  deferred
financing  costs of  $918,471  were  reflected  as a reduction  in  additional
paid-in capital.

7.    Income Taxes:

No provision  for income taxes has been  recorded as a result of the operating
losses incurred by the Company.  The components of the provision (benefit) for
income taxes consist of the following:


<TABLE>
<CAPTION>
                                                       For the Years Ended
                                                           December 31
                                          ----------------------------------------------
                                              1998             1997             1996
                                          ------------     ------------     ------------
<S>                                       <C>              <C>              <C>        
Income tax provision (benefit):
  Current-                                $   239,040      $         -      $         -
  Deferred-                                  (919,326)      (2,215,838)        (556,133)
  Valuation allowance                         680,286        2,215,838          556,133
                                          ------------     ------------     ------------
                                          $         -      $         -      $         -
                                          ============     ============     ============
</TABLE>


                                     F-18

<PAGE>

The provision  for income taxes  results in effective  rates which differ from
the Federal statutory rate as follows.

<TABLE>
<CAPTION>
                                                       For the Years Ended
                                                           December 31
                                          ----------------------------------------------
                                              1998             1997             1996
                                          ------------     ------------     ------------
<S>                                          <C>              <C>              <C>        
Statutory federal income tax rate            (35.0)%          (35.0)%          (35.0)%

Effect of graduated rates                      1.0              1.0              1.0
Net operating losses                          50.6             13.2              4.2
Other increases in valuation allowance         4.3              1.5               -
Non-deductible expenses                      (20.9)            19.3             29.8
                                          ------------     ------------     ------------
                                               -%               -%               -%
</TABLE>


The deferred tax assets (liabilities)  consist of the following as of December
31, 1998 and 1997 (in thousands).

<TABLE>
<CAPTION>
                                                                     December 31
                                                           -----------------------------
                                                               1998             1997
                                                           ------------     ------------
<S>                                                        <C>              <C>        
Deferred tax assets:
  Net operating loss carryforwards                         $ 3,909,685      $ 3,344,084
  Depreciation and amortization                                 41,579          245,783
  Other non deductible expenses                                502,324           15,824
                                                           ------------     ------------
    Total deferred tax assets                                4,453,588        3,605,691
Deferred tax liabilities:                                  ------------     ------------
  Depreciation and amortization                               (276,135)         (15,660)
  Other                                                        (16,468)            -
                                                           ------------     ------------
    Total deferred tax liabilities                           (292,603)          (15,660)
                                                           ------------     ------------
Net deferred tax asset                                       4,160,985        3,590,031
Less-Valuation allowance                                    (4,160,985)      (3,590,031)
                                                           ------------     ------------
                                                           $         -      $         -
                                                           ============     ============
</TABLE>


The Company has determined that its net deferred tax asset did not satisfy the
recognition criteria set forth in SFAS No. 109, and accordingly, established a
valuation allowance for 100 percent of the net deferred tax asset.

For  income  tax  purposes,  the  CSI  transaction  has  been  treated  as the
acquisition  of CSI by ZMAX.  As of  December  31,  1998,  the Company had net
operating loss  carryforwards  of  approximately  $10,200,000 to offset future
taxable income.  These carryforwards  expire in years 2001 through 2012. Under
the provisions of the Tax Reform Act of 1986,  when there has been a change in
an entity's  ownership of 50 percent or greater,  utilization of net operating
loss carryforwards may be limited. As a result of ZMAX's equity  transactions,
including the CSI  transaction,  the  Company's  net operating  losses will be
subject to such  limitations  and may not be available to offset future income
for tax purposes.

8.    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. As of December 31, 1996,  these shares of ZMAX common stock
had not been returned to the Company for cancellation.  In March 1997, 296,007
of these  shares were  returned to the Company  and  canceled.  An  additional
312,500  shares were returned to the Company and canceled in December 1998. As
of December 31, 1998,  167,301 shares remain  outstanding  that are subject to
cancellation agreements.

OffShore Placement

In September 1996, ZMAX sold 2,800,000 shares of ZMAX common stock at $.30 per
share to offshore investors (the "Offshore  Placement").The proceeds were used
to repay existing debt of ZMAX (Note 10).

9.    Stock Options and Stock-Based Compensation:

EMPLOYEE STOCK COMPENSATION

In October 1998,  two of the Company's  principal  stockholders  entered in an
agreement with a employee to transfer 180,000 shares of restricted ZMAX common
stock held by the stockholders to the employee as consideration  for services.
The  stockholders  transferred  the  180,000  shares  of  common  stock to the
Company,  and the Company, in turn,  reissued the shares to the employee.  The



                                     F-19

<PAGE>

shares  issued  to  the  employee  are  subject  to  certain  restrictions  on
transferability for a period of one year and are subject to forfeiture back to
the Company should the employee violate non-compete provisions included in the
agreement.  The Company  recognized  $534,384 of employee  stock  compensation
expense related to this  transaction,  based upon the fair value of the shares
issued to the employee as of the date of the agreement.

Non-Employee Stock Compensation

In September  1996,  ZMAX granted  options to purchase an aggregate of 200,000
shares of ZMAX common  stock to a  consultant  under the terms of a consulting
agreement.  The Company recorded  $300,000 of expense related to these options
for the year ended  December 31, 1996 based upon the fair value of the options
on the date of grant  and the  vesting  period.  In May 1997,  the  consulting
agreement was amended such that the consultant's options were canceled and the
consultant  was  granted  60,000  shares  of the  Company's  common  stock for
services performed from September 1996 to May 1997. The difference between the
fair  value of the  shares  issued  and the  cumulative  compensation  expense
recorded as of the date that the  agreement was amended was charged to expense
in May 1997.

1997 Stock Incentive Plan

In May 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive
Plan").   The  purpose  of  the  Incentive  Plan  is  to  provide   additional
compensation to employees,  officers, directors and consultants of the Company
or its affiliates.  Under the terms of the Incentive Plan, 1,700,000 shares of
common stock have been  reserved  for  issuance as incentive  awards under the
Incentive  Plan. The number of shares of Company common stock  associated with
any forfeited  stock incentive will be added back to the number of shares that
can be issued under the Incentive  Plan.  Awards under the Incentive  Plan and
their terms are  determined  by a committee  (the  "Committee")  that has been
selected by the Board of Directors.  The Incentive  Plan permits the Committee
to make awards of a variety of equity-based incentives  (collectively,  "Stock
Incentives").

The  Incentive  Plan  allows  for the grant of  incentive  stock  options  and
non-qualified  stock  options.  The  exercise  price  of the  options  will be
established by the  Committee.  The term of an option will be specified in the
applicable  agreement;  provided,  however, that no option may be exercised 10
years after the date of grant.  In addition to stock  options,  the  Incentive
Plan also  allows for the grant of other  Stock  Incentives,  including  stock
appreciation   rights,   stock  awards,   phantom  shares,   performance  unit
appreciation  rights and dividend  equivalent  rights.  These Stock Incentives
will be subject to the terms  prescribed by the  Committee in accordance  with
the provisions of the Incentive Plan.

In  February  1998,  the  Company  amended  the  Incentive  Plan to permit the
adjustment of the terms and conditions of outstanding  options. In March 1998,
the  Company and the four  optionees  holding  options to  purchase  1,300,000


                                     F-20

<PAGE>

shares of common stock at prices ranging from $12.44 to $14.31 per share under
the Incentive Plan entered into  amendments to such stock options  whereby the
option exercise price was reduced to $5.75 per share, the fair market value of
the  Company's  common stock on that date,  and the number of shares of common
stock underlying each such option was reduced by 25%.  Further,  two optionees
who  previously  had the right to exercise a portion of the shares  underlying
their  options  agreed  that  such  portions  of their  options  would  not be
exercisable until January 1, 1999.

1997 Directors Formula Stock Option Plan

In May 1997, the Company adopted the 1997 Directors  Formula Stock Option Plan
(the  "Director  Plan"),.  The Company has reserved  120,000  shares of common
stock to underlie  stock options  granted under the Director  Plan. Any shares
associated  with any forfeited  options are added back to the number of shares
that can underlie stock options to be granted under the Director Plan.

The awards of stock  options  under the Director  Plan are  determined  by the
express terms of the Director Plan. Generally,  only non-employee directors of
the  Company  who do not perform  services  for the  Company  are  eligible to
participate in the Director Plan. The Director Plan provides for option grants
to  purchase  12,000  shares of common  stock upon a  non-employee  director's
initial  appointment  to  the  Board  of  Directors.   The  option  will  vest
immediately as to 8,000 shares of common stock  underlying  such option,  will
vest as to an additional  2,000 shares after the director's  completion of the
first  year of  continued  service  to the  Company  and  will  vest as to the
remaining  2,000 shares after the  completion  of the second year of continued
service to the Company. Each option granted pursuant to the Director Plan will
be evidenced by an agreement  and will be subject to  additional  terms as set
forth in the agreement.  Options become  exercisable when vested and expire 10
years  after the date of grant,  subject  to any  shorter  period  that may be
provided in the agreement.


                                     F-21

<PAGE>

The following is a summary of ZMAX options  granted prior to and since the CSI
recapitalization.

<TABLE>
<CAPTION>
                                                                           Weighted-
                                         Number of         Option       Average Exercise
                                          Shares         Price Range         Price
                                        -----------     ------------        ------
<S>                                     <C>             <C>                 <C>   
Outstanding, December 31, 1995              22,505      $      40.00        $40.00
  Granted                                  200,000        5.00-15.00          9.82
  Canceled                                 (14,379)            40.00         40.00
                                        -----------     ------------        ------
Outstanding, December 31, 1996             208,126        5.00-40.00         11.00
  Granted                                1,348,000       12.00-14.31         14.14
  Canceled or expired                     (208,126)       5.00-40.00         11.00
                                        -----------     ------------        ------
Outstanding, December 31, 1997           1,348,000       12.00-14.31         14.14
  Granted                                1,932,000        2.69-6.125          5.19
  Canceled or expired                   (1,706,500)       5.75-14.31         12.27
                                        -----------     ------------        ------
Outstanding, December 31, 1998           1,573,500      $ 2.69-14.06        $ 5.18
                                        ===========     ============        ======
</TABLE>


As of December 31, 1998,  options to purchase  270,000  shares of common stock
were  exercisable  with  a  weighted-average  exercise  price  of  $5.98.  The
weighted-average remaining contractual life of options outstanding at December
31, 1998, was 6.10 years.  The weighted  average fair value of options granted
in 1998 was $4.55.

In October  1995,  the FASB issued SFAS No. 123,  "Accounting  for Stock Based
Compensation".  SFAS No. 123 defines a "fair value based method" of accounting
for stock-based compensation.  Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized  over the  service  period.  Prior  to  issuance  of SFAS No.  123,
stock-based  compensation was accounted for under the "intrinsic value method"
as defined by APB Opinion No. 25,  "Accounting for Stock Issued to Employees."
Under the intrinsic value method,  compensation is the excess,  if any, of the
market  price of the stock at grant  date or other  measurement  date over the
amount an employee must pay to acquire the stock.

SFAS No. 123 allows an entity to continue to use the  intrinsic  value method.
However,  entities  electing  the  accounting  in Opinion No. 25 must make pro
forma  disclosures  as if the fair value based method of  accounting  had been
applied.   The   Company   applies   APB   Opinion  No.  25  and  the  related
interpretations in accounting for its stock-based compensation.

Under the  provisions of SFAS No. 123,  transactions  with persons who are not
employees  and in  which  services  are  the  consideration  received  for the
issuance of equity securities shall be accounted for based upon the fair value
of the  consideration.  The only  options  granted  in 1996 were  granted to a
consultant and were accounted for under the fair value based method;  however,
the employee and director  options granted in 1998 and 1997 were accounted for
under  the  intrinsic   value  method  as  defined  by  APB  Opinion  No.  25.
Accordingly, pro forma disclosures are presented for 1998 and 1997 only.


                                     F-22

<PAGE>

Had  compensation  expense  been  determined  based on the  fair  value of the
options at the grant dates consistent with the method of accounting under SFAS
No.  123,  the  Company's  net loss and net loss per  share  would  have  been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                               For the Years Ended
                                                                    December 31
                                                         -------------------------------
                                                               1998            1997
                                                         -------------     -------------
<S>                                                      <C>               <C>
Net loss:
  As reported                                            $   (282,711)     $(14,206,699)
  Pro forma                                              $   (957,021)     $(15,465,379)
Pro forma basic and diluted net loss per share:
  As reported                                            $      (0.03)     $      (2.58)
  Pro forma                                              $      (0.09)     $      (2.81)
</TABLE>


The fair  value of each  option is  estimated  on the date of grant  using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield,  expected  volatility from 70% to 110%,  risk-free  interest rates from
4.10% to 6.84% and an expected term from 3 to 7 years.

10.   Related Party Transactions:

In connection  with the  recapitalization  of CSI, a consultant to the Company
and his affiliate  were issued an aggregate of 320,000 shares of the Company's
common stock for services related to the CSI transaction and related financing
(Note  3).  This  individual  and  his  affiliate  received  an  aggregate  of
approximately  $563,000  in 1996 from  ZMAX  prior to the CSI  acquisition  as
satisfaction for amounts owed to this individual by ZMAX prior to December 31,
1995.  Proceeds  from  the  Offshore  Placement  were  used  to  satisfy  this
obligation.  This individual  served as a consultant to ZMAX through  December
1997. In connection with the  recapitalization  of CSI, $280,000 of consulting
fees owed to this individual were satisfied in 1996 by issuing to him $280,000
principal  amount of notes.  In addition to incurring  $120,000 in  consulting
fees during 1996,  ZMAX reimbursed  approximately  $155,000 to this individual
for expenses incurred on behalf of ZMAX. During 1997, this individual received
$120,000 in consulting fees and was also reimbursed  approximately  $8,700 for
expenses incurred on behalf of ZMAX.

In connection with the assignment of  NewDominion's  interest in the JV to the
Company,  the Company retained an affiliate of NewDominion as a consultant and
a director.  The Company incurred approximately $28,000 in consulting expenses
for services rendered for the year ended December 31, 1996.


                                     F-23

<PAGE>

11.   Commitments and Contingencies:

LEASES

The Company  leases office space and  equipment  under  operating  leases that
expire on various  dates through  2003.  The Company also leases  computer and
office  equipment  under capital  leases that expire  through 2002. The future
minimum lease  obligations  under  operating and capital leases as of December
31, 1998, are as follows:

<TABLE>
<CAPTION>
   Year Ended                               Operating      Capital
  December 31                                 Leases        Leases
  -----------                               ---------     ---------
<S>                                         <C>           <C>      
      1999                                  $ 325,287     $  42,584
      2000                                    280,463        17,684
      2001                                    141,528        17,684
      2002                                     20,928         3,500
      2003                                     10,464             -
                                            ---------     ---------
                  Total                     $ 778,670     $  81,452
                                            =========
      Amount representing interest                           11,217
                                                          ---------
                                                          $  70,235
                                                          =========
</TABLE>


Employment and Consulting Agreements

In November  1996, the Company  entered into  employment  agreements  with two
executives who were the former  stockholders  of CSI. The agreements  provided
for a base salary plus a bonus. One of the former stockholders of CSI resigned
as an  employee  of the  Company in April  1997.  Pursuant to the terms of his
employment  agreement  and a separation  agreement  with CSI, he is collecting
severance payments from the Company in the amount of $100,000 per year through
November  1999.  The other  former  stockholder  of CSI remains an officer and
director of the Company.  In May 1997, his  employment  agreement was amended.
Under  the terms of his  amended  employment  agreement,  this  employee  will
receive a base salary plus a bonus based upon the  performance of the Company.
The  employment  agreement  also  provides for  severance  payments in certain
instances.   The   executive   is   subject   to   certain   non-compete   and
non-solicitation provisions for a period of two years after termination of his
employment agreement.

In April 1997, the Company  entered into a consulting  agreement with its then
Chairman of the Board of Directors.  In November 1998,  the Chairman  resigned
his position and entered into a settlement and release agreement (the "Release
Agreement") with the Company.  Under the terms of the Release  Agreement,  the
original  consulting  agreement was amended and the Company  agreed to pay the
former chairman $20,000 per month through October 1999. The Release  Agreement
also contains  non-compete and non-solicitatio  provisions that extend through
October 1999.


                                     F-24

<PAGE>

Stockholders' Agreement

In November 1996, the former  stockholders of CSI entered into a Stockholders'
Agreement with the Company. Under this agreement,  the former CSI stockholders
generally may not sell,  transfer or otherwise dispose of any of the 3,200,000
shares  of common  stock  received  by them from ZMAX in the CSI  transaction,
unless such person  complies  with the terms of the  agreement  or obtains the
prior  written  consent  of  the  Company.  In  the  event  that  either  such
stockholder  receives a qualified  offer (as defined in the agreement)  from a
third-party  purchaser,  that stockholder must notify the Company of the offer
and the  Company  has an  option  to  elect  to  purchase  from  that  selling
stockholder  the shares of Company  common  stock which are the subject of the
qualified offer and under the same terms contained in the qualified  offer. In
the event that either such stockholder  dies, the Company will have the option
to purchase,  and that  stockholder's  estate will be required to sell, all of
the stock of such stockholder at the current value price (as defined).

The stockholders had also entered into employment agreements with the Company.
If the  employment of either of the  stockholders  is terminated for cause (as
defined) or if following the  termination  of the  employment  agreement,  the
stockholder  is determined to have breached any covenants or  restrictions  in
his employment agreement,  the stockholder must offer to sell all of his stock
to the  Company.  The Company has the option to elect to purchase the stock at
its then current value price (as defined).  If the employment of either of the
stockholders  is  terminated  for a  reason  other  than for  cause  excluding
expiration  of the  employment  agreement  by its  terms,  or if the  employee
becomes permanently disabled, the stockholder must offer his stock for sale to
the Company at a price designated by the offering  stockholder and the Company
will have an option to elect to  purchase  the stock at the offer price or, if
the offering  stockholder  does not designate a price,  the then current value
price (as defined).


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 Oryx Gold  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


                                     F-25

<PAGE>

transferability  of shares of the Company's  common stock. The plaintiffs have
alleged damages in the approximate amount of $87,000. The Company believes the
complaint is without legal merit and will vigorously defend itself.

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.


                                     F-26