SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

   [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934.
       For the fiscal year ended DECEMBER 31, 1997.

                                      OR

   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934.
       For the transition period from ___________ to ___________.

                     Commission file number   000-23967

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

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

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

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

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

    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 26, 1998 by non-affiliates of the registrant was
  approximately $ 64,737,493  based on the average bid and asked prices of the
  Common Stock on such date.

  As of March 30, 1998, the  registrant  had  11,729,714  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


<PAGE>

  statements  incorporated  by  reference in Part III of this Form 10-K or any
  amendment to this Form 10-K.  [ ]


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<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.


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ITEM 1.  BUSINESS.

INTRODUCTION

ZMAX Corporation ("ZMAX" or the " Company") focuses on acquiring, building and
operating  companies in the  information  technology  industry.  In 1996,  the
Company  acquired  all of the  stock of  Century  Services,  Inc.  ("CSI"),  a
corporation which provides  re-engineering and information processing services
to users of large-scale  computer systems in North America. CSI specializes in
assisting business  organizations and government agencies with what has become
popularly  known as the "Year 2000 problem." Over the next several years,  CSI
expects to devote substantial  resources to assisting its clients in preparing
for and  implementing  the conversion of their computer systems to allow those
clients to continue operations without interruption in the 21st Century. CSI's
total  system  solution,  known as VISION  2000SM,  encompasses  a  management
methodology,  assembly-line  processes,  and a proprietary  automated software
tool suite to identify and convert  date-sensitive  software  applications  to
Year 2000 compliance.

THE YEAR 2000 PROBLEM

      Throughout most of the history of computer data processing by businesses
and  government,  data  storage  was  severely  limited  both  by  the  design
shortcomings  of the  storage  media  themselves  and by memory  access  speed
considerations.  Consequently,  computer  programmers  typically encoded years
using a two digit format (e.g., "97" for "1997") rather than a complete,  four
digit format.  However,  the use of a two-digit  format makes it impossible to
distinguish between dates in different centuries. Programs required to process
a date after the Year 2000 may  interpret  the date as 100 years  earlier than
the intended date (e.g.,  1905 for 2005); may go to an arbitrary  default date
such as  1985;  or may fail to  process  the date  altogether.  Even  though a
particular program may have the ability to accommodate a 21st Century date, it
may be unable to  communicate  that date to other  application  programs  with
which  it must  interact.  As the Year  2000  approaches,  a  number  of these
programs have begun to operate inaccurately, or have failed completely, due to
their inherent inability to properly interpret dates beyond 1999.

      Many industry analysts see no precedent to the Year 2000 problem,  given
society's   increasing   reliance   on   computing   devices   and   automated
communications  networks.  Indeed,  the very size and  complexity of computing
applications  makes  the Year 2000  problem  as much a  management  issue as a
programming  one.  Large  mainframe  applications,  10 to 20  years  old,  are
referred to as "legacy  systems"  because they have  outlived  generations  of
programmers.  Such systems have patch upon patch of computer code developed by
a succession  of  programmers,  and limited  accurate  documentation.  In some
cases,  the original  source code bears little or no resemblance to the object
code in the current  production  environment  or the original  code is missing
altogether.  This is  problematic  because  source  code must match the object
production code before Year 2000 remediation can be effective.

      Until recently,  many  organizations  have been able to perform specific
tasks that rely on dates after 1999 by using  stand-alone  Year 2000 compliant
applications,  modifying  small  amounts of computer  code or simply  manually
manipulating data. Such solutions are no longer practical as the percentage of


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an organization's applications encountering dates after 1999 increases. As the
millennium draws nearer, more and more applications will be at risk.

      Because a single  application can potentially  corrupt an organization's
entire  information  network by passing on non-compliant  data,  resolving the
Year 2000  problem  requires  individual  identification  and  analysis of all
applications and systems used by the organization.  An organization's  systems
may include internally  developed custom mainframe programs and a large number
of new applications from multiple sources,  leading to an absence of standards
among  highly   integrated  and   interdependent   applications.   Changes  to
applications  may  require  a  corresponding  change to the data used by those
applications.  Computer  hardware  and  operating  systems  generally  include
date-sensitive   programs  or  processing  functions  that  can  be  similarly
affected.

      The Year 2000 problem  affects not only data  processing  functions  but
also process control applications.  For example,  applications such as traffic
regulation,  environmental  control and  factory  automation  commonly  change
programs by date.  While these systems are not typically  affected by the Year
2000  problem   today  (as  they  have  no  current  need  to  process   dates
substantially  in the future),  as the  millennium  approaches,  many of these
process  applications  will have to be  reprogrammed to allow them to function
after the Year 2000.

      The extensive reliance of business firms and governmental  agencies upon
computer-based  information  systems makes it critical for those organizations
to assess and correct their Year 2000 problem. Many organizations will analyze
and modify their existing systems because it may be very difficult for them to
abandon existing systems and replace them with new Year 2000 compliant systems
within the limited time available.  And,  besides  problems arising in its own
systems,  an  organization  may be  directly  affected  by the  date-dependent
programs and databases used by outside organizations.  For example,  suppliers
may  have  software   applications   that  are  directly   integrated  with  a
manufacturer's real-time purchasing application.  With the explosive growth in
electronic data interchange  (EDI),  electronic funds transfer (EFT) and other
forms of electronic  commerce,  the dimensions of the Year 2000 problem become
compounded.

THE MARKET

      The Year 2000 problem is particularly  important to large  organizations
with mainframe  computer systems such as banks,  securities  firms,  insurance
companies,  healthcare  providers,  transportation  companies,  and  the  full
spectrum of federal, state and city government agencies. Solving the Year 2000
problem is essential in order for these  organizations  to continue to operate
without  interruption into the 21st Century.  In some cases, the survivability
of a firm or agency may  depend  upon its  ability  to  resolve  the Year 2000
problem. An average business mainframe computer may consist of approximately 5
million lines of software code. To manually inventory,  analyze, convert, test
and  integrate  even that modest  volume of code would take  several  years to
complete.  The  majority  of software  code is written in the COBOL  language,
which is now  considered to be an obsolete  language,  or in other  antiquated
languages such as Assembler.  To compound the problem,  industry  experts have
stated that there are insufficient  COBOL programmers and programmers  trained
in Assembler  languages to manually  resolve the Year 2000 problem.  There are


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currently  estimated  to be only 500,000  COBOL  programmers  worldwide.  Many
programmers  trained in COBOL have either  retired or have been  retrained  in
more  modern  software  languages  and  are  reluctant  to go  back  to  COBOL
programming for the resolution of the short term Year 2000 problem.

      Gartner Group, Inc., an information  technology research firm, estimates
that the  world-wide  cost of resolving  the Year 2000 problem is between $300
billion and $600  billion and that a typical  Fortune 500 company  could incur
expenses of $50 million to $100 million to resolve its Year 2000 problem.

      The Company believes that many  organizations  will initially attempt to
resolve the Year 2000 problem internally.  Others may simply (and expensively)
eliminate and replace programs and equipment.  However, the Company believes a
large  number of  organizations  will choose to engage a  millennium  services
provider to manage some or all of their conversion  project.  The reasons this
should occur include the substantial  increase in technical personnel required
as well as the shortage of programming expertise as noted above. Some industry
analysts,  including  Gartner Group,  have suggested that the magnitude of the
Year 2000  problem--and the limited time in which to implement a solution--may
cause demand for millennium  services to exceed the  availability of qualified
providers.  The  market  reaction  to the Year 2000  problem  has been slow in
developing  which may result in the resource  demand  peaking in late 1998 and
1999.  This may lessen the amount of time the Company  will be able to provide
its millennium services to potential clients.

STRATEGY

      The Company's  objectives are: (1) initially to maximize growth in sales
of its millennium  services while achieving high profit margins on these sales
and (2) over the long  term  after  the Year  2000,  to  leverage  its  assets
(including its expertise,  client  relationships and detailed knowledge of its
clients' computer systems,  applications and codes) obtained through providing
its millennium  services to develop additional  business  opportunities in the
re-engineering and conversion industry and related areas to assist its clients
and other large business  organizations and governmental agencies to update or
convert their older legacy computer systems into more modern systems to better
serve their needs.  The  Company's  strategy for  achieving  these  objectives
includes the following key elements:

      DISTINGUISH  THE  COMPANY  AS A  FULL  SERVICE  PROVIDER  OF  MILLENNIUM
SERVICES.   The  Company  has  developed   methodologies   for  analyzing  and
re-engineering  information  systems  under a wide variety of  scenarios.  The
Company intends to market this expertise, which enables the Company to provide
the full range of services  typically  necessary  to manage a client's  entire
Year 2000 project, including inventory analysis, impact assessment,  strategic
planning,  conversion,  testing and implementation to production.  The Company
believes that few Year 2000 solution  providers can match the depth,  accuracy
and quality of CSI's full service solution.

      MAINTAIN  TECHNOLOGICAL  LEADERSHIP.  The Company conducts  research and
development  activities  in order to improve the  functionality,  flexibility,
ease of use and  cost-effectiveness  of its millennium  solution.  The Company


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works  closely  with its  strategic  partners  and  customers  to develop  new
features and methodologies to meet their requirements.  The Company intends to
continue  to  independently  market  and  deliver  a number  of  comprehensive
millennium   conversion   solutions  to  enhance   sales,   to  gather  market
information,  and to gain the necessary  expertise to continually  improve its
technology and services.

      ACHIEVE MARKET  PENETRATION  THROUGH  TEAMING  ARRANGEMENTS.  As a small
company,  CSI has only limited resources to undertake  marketing  efforts.  To
maximize  its  marketing  impact,  the  Company  has  endeavored  to team with
established strategic industry participants such as large software developers,
system integration companies, and systems manufacturers.  The Company believes
that teaming  arrangements can provide customers with superior,  comprehensive
millennium conversion solutions. Teaming arrangements also provide the Company
the opportunity to enhance its internal  marketing  efforts by capitalizing on
the existing client  relationships  and ongoing sales and marketing efforts of
its  strategic  partners in various  markets.  To date,  CSI has entered  into
non-exclusive teaming arrangements with EDS Federal,  Hewlett Packard, Hitachi
Data Systems, and First Technology Systems.  Additionally,  CSI has entered in
an  exclusive   arrangement  to  represent  POV,  an  European   company  that
specializes in analysis and remediation of "IDEAL" code, in the North American
marketplace.

      PENETRATE  ADDITIONAL  GEOGRAPHIC  MARKETS.  Initially,  the Company has
targeted the North American market for its millennium  services to be followed
by penetration of selected parts of the Western European  market.  The Company
may pursue  opportunities in other geographic areas either directly or through
its strategic  alliances,  although no specific  plans for such expansion have
been developed.

      PURSUE ADDITIONAL BUSINESS OPPORTUNITIES.  The Company intends to pursue
additional  business   opportunities  in  the  conversion  industry  including
re-engineering   and  other  related  areas   utilizing  its  software  tools,
experience,  and client  relationships  obtained  while  providing  millennium
services. The Company believes that, while performing millennium  conversions,
it  will  develop  detailed   knowledge  of  its  clients'  computer  systems,
applications  and codes.  This will place the company in the best  position to
assist its clients in the  reengineering  or  conversion of their older legacy
computer systems and applications, as well as discover new information systems
requirements,  such as  migrating  a  client's  application  from a  mainframe
environment  to a client server  environment or developing  enhancements  to a
client's  existing  applications.  In turn, the Company will strive to develop
and market new services and software to meet those requirements.

MILLENNIUM SERVICES

      There are no shortcuts to solving the Year 2000  problem.  It requires a
comprehensive  and  rigorous  management  approach  together  with  a  set  of
integrated  automated  tools.  The  Company  believes  that its VISION  2000SM
solution encompasses dependable  proprietary tools,  methodology and processes
to convert legacy software applications to Year 2000 compliance. VISION 2000SM
consists of two phases:  Phase 1, Global Impact Analysis  (GIA),  and Phase 2,


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Conversion  and  Implementation  (C&I).  Each phase is further  divided into 3
steps that are described below.

VISION 2000SM--GLOBAL IMPACT ANALYSIS

      CSI recognizes that achieving Year 2000 compliance is a management issue
rather than a purely technical issue. Massive software changes must be managed
in a consistent,  cohesive and timely  manner with minimum cost,  interruption
and risk to the organization. CSI's VISION 2000SM Global Impact Analysis (GIA)
is designed  to provide  its clients  with  detailed  and  rigorous  analysis,
assessment and planning tools.  The Company believes that these three elements
are the cornerstones of a successful Year 2000 conversion.

      The first step of the GIA phase is the inventory  analysis.  During this
step the source code of the client's applications  systems--including JCL/ECL,
source library,  copybook,  file definitions,  macros,  etc.--are gathered for
detailed  analysis.  The  primary  functions  of the  inventory  analysis  are
designed to  validate  the  completeness  of the source code and to define the
domain of the conversion project. CSI uses its proprietary tool, VISION 2000SM
Baseline  Inventory  Control (BIC) to  accomplish  these  functions.  BIC is a
robust, mature,  menu-driven,  Windows 95-based software tool that is designed
to parse source code into  component  objects and identify all  data-flow  and
control-flow relationships among systems,  subsystems and program modules. BIC
is designed to identify  missing or overlapping  source modules to be reported
and  addressed  with the  client.  BIC  also  generates  statistical  reports,
reference reports and application  analysis reports. In addition,  the results
from its complexity analysis will become one of the input parameters to VISION
2000SM Strategic Planner (described below) for schedule and resource planning.

      The second step of the GIA phase is the Year 2000 date impact  analysis.
VISION 2000SM utilizes three levels of naming  patterns to identify  potential
date data.  It uses CSI's  extensive  library of generic name  patterns at the
enterprise level; a project development naming standard (if available) at each
application;  and  any  unique  program  specific  naming  conventions  at the
program-module   level.   During  the  data  gathering  and  candidate   field
confirmation   processes,   CSI  collects   information   about  the  physical
characteristics and semantic attributes of each primary date candidate.  These
candidates  become the initial seed from which the VISION  2000SM  proprietary
algorithm performs global data-flow  analysis and computes  equivalent classes
of date-related  objects.  Data-flow analysis is performed at both the program
module level, which identifies all date field data flow  propagations,  and at
the  global  level,  which  identifies  all date  field  usages in  subroutine
parameters  or global  common data  objects  (e.g.,  fields,  databases).  The
evaluation of the data flow  analysis is crucial  since during the  conversion
phase a conversion  rule is assigned and executed to affect  changes  while at
the same time  maintaining  semantic  integrity of the source code. The VISION
2000SM Date  Analyzer is  designed  to target the  identification  of date and
date-related  data from the  collection  of seeds and  produces  reports  that
detail  date-impacted  information,  including the number of date  candidates,
date-related  occurrences and the density of date-related  occurrences  within
each programming unit.


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      The third step of the GIA phase is the development of the strategic plan
to achieve Year 2000  compliance.  This includes a series of assessments  that
provide   conversion    alternatives,    comprehensive   test   criteria   and
recommendations for each critical decision point. CSI documents each strategic
decision  made  by  the  client  in a  comprehensive  strategic  plan.  During
strategic planning, a date conversion strategy (e.g.,  expansion,  compression
or  windowing)  must be  selected  for each  subsystem  and each major file or
database.  Decisions must also be made concerning the conversion of active and
archive files and databases,  including  when the conversion  will take place.
Next, a test  strategy must be selected.  Testing can only uncover  errors but
cannot certify the application is error free. Therefore,  a test strategy must
be selected to maximize the end user's  confidence in the expected  success of
the  conversion,  demonstrate  conversion  quality and balance the cost of the
testing  procedure versus the risk of performing a testing  procedure which is
not broad enough.

      All the  information  gathered  during  these  three steps of the GIA is
entered  into the  VISION  2000SM  Strategic  Planner  to  produce  a  project
implementation  plan. This plan details the schedule,  resource  requirements,
conversion processes, testing processes, responsibilities and costs to execute
the Year 2000 implementation plan.

VISION 2000SM--CONVERSION AND IMPLEMENTATION

      The   Company   believes   that  its  VISION   2000SM   conversion   and
implementation process is an integrated  combination of effective,  secure and
efficient  automated  software tools and methodologies  working in concert and
designed to produce consistent,  high quality conversion  results.  The VISION
2000SM Y2K  Converter was designed and  developed  specifically  for Year 2000
conversion tasks. The VISION 2000SM Y2K Converter is a rule-based toolset that
runs on Windows 95 workstations  networked to an NT server.  It is designed to
convert  numerous  platforms of COBOL (IBM,  UNISYS,  DEC, HP, WANG, etc.) and
PL/1 source  code.  The Y2K  Converter  operates  in two modes of  conversion:
global mode and interactive  mode.  During global mode conversion,  all source
components which directly or indirectly  reference a common global date object
are modified in unison.  The interactive mode is used when human  intervention
is required.  In the  interactive  mode, a programmer  browses the color-coded
source  code and  follows the  recommendation  provided by the Y2K  Converter.
Through  the use of  function  keys,  the  programmer  executes  the  changes,
minimizing  or  eliminating  the  potential  for human  error in  keyboarding.
Whenever  a line of  source  code is  modified,  VISION  2000SM  automatically
duplicates  the  original  source line,  marks the original as a comment,  and
modifies the duplicated line. At the same time, it "audit stamps" the new line
with  information  indicating  who  performed  the  change,  what  rules  were
followed, and when the change was executed.

      After  conversion,  the  next  step  is to  verify  that  the  converted
application  behaves  correctly  through  a series  of  tests.  CSI's  testing
methodology and philosophy is to employ,  to the maximum extent possible,  the
test tools, test cases, and testers already used by the client. CSI test staff
and the client's test personnel together perform the following tests:

      Regression  Test:  This  test  is  designed  to  ascertain  whether  all
      functions  of the  applications  work in the  intended  manner after the
      conversion.


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      Future Date Test: This test is designed to detect  potential errors that
      may exist when the date format is changed to a four-digit  format.  This
      is  similar  to the  regression  test  except  that  the  test  data are
      conditioned to occur in the future.

      Century  Cross  Over  Date  Test:  This  test  is  designed  to  compare
      transactions  and  records  that occur at the end of 1999 and cross over
      into 2000.

      Integration Test: This test is designed to uncover any error that is not
      apparent in each individual component.

      Before  the  successfully   tested   application  is  placed  back  into
production,  CSI uses its bridge  generator  to create  temporary or permanent
bridges  to the  client's  application.  Bridges  are  required  to  provide a
transparent  and  consistent  data  view of the  modified  date  fields to the
converted  application,  as well as to any yet-to-be  converted portion of the
application software.

      VISION 2000SM Baseline Inventory Control is designed to define the scope
of a Year 2000 project. VISION 2000SM Date Analyzer attempts to identify every
occurrence of date and  date-related  objects  within an  application  system.
VISION 2000SM Date Converter works to apply consistent,  rule-based conversion
that minimizes  commission  errors.  The VISION 2000SM solution is designed to
produce quality output and thus reduce the testing effort.

MARKETING

      The Company has initiated a  multi-faceted  marketing plan to ensure the
market place is aware and knowledgeable of the Company's millennium services.

      INTERNET.  The Company maintains a site on the Worldwide Web and is also
listed on the Year 2000  Home  Page,  which  automatically  links  back to the
Company's web site. Potential clients seeking Year 2000 compliance support can
access  the Year  2000  Home  Page and  obtain  information  on the  Company's
millennium  services,  VISION 2000SM, and will be automatically  linked to the
Company's web site to obtain more detailed information on VISION 2000SM.

      TRADE SHOWS. CSI has co-sponsored  Year 2000 conferences and expositions
in concert with the Software  Productivity Group in London,  Toronto, New York
City,  Chicago,  San Francisco,  and Boston.  These Year 2000 conferences have
historically been sold out with attendees numbering in excess of 500. CSI also
participated  at the UNISYS Users Meeting in April and October  1997.  CSI has
found that  participating in Year 2000 trade shows provides a vehicle to reach
a large number of potential clients in a short period of time.

      MARKETING  COMMUNICATIONS.  The Company has contract with Michael Baybak
and Company,  Inc., a public relations and consulting company to enhance media
recognition  of CSI's  millennium  services,  technology  and  expertise.  The
Company  believes  the  positive  name  recognition  of  CSI  with  Year  2000
compliance will further enhance its opportunities in the marketplace.


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      JOINT  MARKETING.  The Company will seek joint  marketing  opportunities
with its  alliance  partners.  To date,  CSI has  entered  into  non-exclusive
teaming arrangements with EDS Federal,  Hewlett Packard, Hitachi Data Systems,
and First  Technology  Systems.  Additionally,  CSI has  entered in  exclusive
arrangements  with POV, an European  company that  specializes in analysis and
remediation of "IDEAL" code. The Company believes that the marketing resources
of its  alliance  partners  will add to the exposure  and  credibility  of the
Company's VISION 2000SM solution.

SALES

      Recognizing  that the window for contacting and winning clients for Year
2000  services is small and closing  with each  passing  day,  the Company has
initiated a very aggressive and  multi-faceted  sales campaign.  Highlights of
the Company's sales campaign are listed below:

      DIRECT  MARKETING.  CSI  implemented  a  mail-out  campaign  to over 300
financial  institutions  that was followed by telephone  contacts to determine
interest and potential buyers of millennium services.

      DIRECT SALES. The Company uses a telemarketing  approach that cold calls
select markets, i.e., financial institutions, communications companies, UNISYS
users,  PL1 systems users,  etc., to introduce CSI's  millennium  services and
arranges a technical  briefing for the potential client.  The Company's senior
sales and technical personnel conduct the technical briefing. This approach is
designed to maximize the use of CSI's employees and shorten the sales cycle by
responding to all the client's  technical issues and concerns at the technical
briefing.

      INDEPENDENT SALES REPRESENTATIVES. The Company has recruited independent
sales  representatives  to sell CSI's  VISION  2000SM  solution.  These  sales
representatives  operate  on  a  sale-of-opportunity  basis,  utilizing  their
existing industry contacts,  and are only compensated on successful sales on a
percentage  commission  basis.  These  sales  representatives  pay  their  own
expenses. The Company also employs sales representative who earn a salary plus
a percentage commission.

      TEAMING  ARRANGEMENTS.  CSI has entered into teaming  arrangements  with
major prime  contractors  who are  addressing  the Year 2000 problem or have a
client base in the market segment.  These companies bring a substantial client
base, a national or international  distribution system and provide credibility
that CSI could not match by itself.  At the present time, CSI has  established
non-exclusive teaming arrangements with EDS Federal,  Hewlett Packard, Hitachi
Data Systems and First Technology Solutions.  Although the Company has not yet
received any clients through its teaming  arrangements,  the Company  believes
that as the Year 2000 approaches,  parties with teaming  arrangements with the
Company  will receive  demand from their client base for Year 2000  compliance
support and may call on CSI to provide these services.


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CLIENTS

      CSI has  successfully  performed  Year 2000  assessment  and  conversion
pilots and projects for several large companies. In 1997, CSI entered into six
Year 2000  conversion  services  contracts  with clients that included  Lehman
Brothers Inc., Washington Gas Light Company, The Bessemer Group, Incorporated,
Wisconsin Power & Light Company,  a financial  services  company and a Fortune
100 company. Three of these customers individually accounted for more than 10%
of the Company's  revenues for 1997, but no single existing customer accounted
for more than 25% of revenues for the year ended  December  31, 1997.  CSI has
also submitted proposals as of the year end 1997 to provide its millennium and
other  software   re-engineering  services  to  over  20  other  companies  in
telecommunications,   financial  services,  utilities,  health  care,  retail,
manufacturing  and  related  industries  in  addition  to  state  and  federal
government agencies. All of these proposals are currently pending.

COMPETITION

      The market for millennium services is highly competitive and will become
increasingly  competitive as the Year 2000  approaches.  A number of companies
engaged in millennium services are more established, benefit from greater name
recognition and have substantially greater financial,  technical and marketing
resources than the Company.  The Company  classifies its existing  competitors
addressing the Year 2000 problem into three  categories:  (1) Product Vendors;
(2) Full Service Providers; and (3) Consultants.

      PRODUCT  VENDORS.  Companies  that have  been  providing  legacy  system
support through  software tools have made  modifications  and  enhancements to
their  existing  tools to support  Year 2000  services.  The  majority  of the
available  tools utilized by product  vendors support legacy code analysis for
applications  written in COBOL. The Company believes that product vendors will
continue to proliferate and will offer  piece-meal  solutions to the Year 2000
problem.  Most product  vendors will likely  concentrate  in the assessment of
COBOL based systems and will likely attempt to form  strategic  alliances with
full service providers and consultants since the majority of clients will look
to outsource the Year 2000  solution.  It is also possible that repair product
vendors may even attempt to become full service  providers by acquiring proven
program managers and low cost  converters.  Product vendors that are currently
providing  legacy  system  support for the Year 2000  problem  include:  ADPAC
Corp., Alydaar Software Corp., ISOGON,  Mainware Inc., Quintic Systems,  Inc.,
SEEC, Inc., Trans Century Data Systems, and Viasoft, Inc.

      FULL SERVICE PROVIDERS. Major companies providing information technology
professional  services  to  their  clients,  especially  data  center  related
services (such as programmers and software development),  are developing tools
to provide  analysis and  conversion  support to their  clients with Year 2000
problems. Although there are a limited number of full service providers, their
Year 2000 services  afford them an  opportunity  to penetrate new accounts and
leverage other products and services.  The Company  believes that several full
service  providers  have acquired  off-shore  support to lower their cost. The
Company also  believes that existing  clients of full service  providers  will
seek  assistance from the established  full service  provider  relationship to
resolve  their Year 2000  problems.  The Company  believes  that full  service
providers will remain limited in number and some will form strategic alliances


                                      12

<PAGE>

with product  vendors if the tools offered by product vendors are perceived to
be superior in terms of quality  and cost to those  developed  in-house by the
full service  providers.  Examples of full service  providers  are: Cap Gemini
America,  Computer  Horizons,  EDS,  IBM  ISSC,  IBS  Conversions,  Inc.,  and
Information Management Resources, Inc.

      CONSULTANTS.   The  Company  believes  that  most  companies   providing
information  technology  (IT)  consulting  to their  clients will expand their
services to include Year 2000 support. However, the Company believes that most
of the efforts of IT  consultants  to date have been  focused on the  up-front
segment of the solution,  i.e.,  assisting clients in determining the size and
scope of their Year 2000 problem and  developing  a fixed  strategy to resolve
the Year 2000 problem in concert with their  client's long term IT plans.  The
Company seeks to establish  relationships with IT consultants and thereby work
cooperatively  with  consultants  to resolve their clients' Year 2000 problems
utilizing the Company's  services.  The Company believes that consultants will
continue to leverage existing high level client relationships into a Year 2000
business.  However,  the Company also believes that consultants will typically
seek to form strategic alliances with product vendors. Examples of consultants
are Deloitte Touche and James Martin & Co.

INTELLECTUAL PROPERTY

      The  Company's   intellectual   property   primarily   consists  of  the
methodologies  developed for use in its  millennium  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.  Further,  the  Company
performs  all  of its  conversion  procedures  within  its  controlled  office
environments,  thereby minimizing the potential for any third-party to copy or
replicate  its  software  tools and  VISION  2000SM  solution.  Despite  these
precautions,  it nevertheless may be possible for an unauthorized  third party
to replicate the Company's methodologies or to obtain and use information that
the Company regards as proprietary.

      As the number of competitors  providing  millennium  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


                                      13

<PAGE>

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,  1997,  the  Company  had  38  full-time  employees
including  6 persons  in Sales,  25 persons  in  Operations/Engineering  and 7
persons in Management and  Administration.  The Company also employs temporary
employees and consultants.

ITEM 2.  PROPERTIES.

      The  Company's  corporate  headquarters  are  located  at 20251  Century
Boulevard  in  Germantown,  Maryland,  outside  Washington,  D.C.  The Company
currently  occupies  approximately  13,000 square feet through a sublease that
expires  September 30, 2000. The Company's  annual rent for 1997 was $132,912,
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  anticipates  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
possible as described  below.  On April 17, 1997,  Alan L. Levine and Canadian
Petroleum  Corporation  filed suit in the Third  Judicicial  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  transferablilty  of shares of the Company's
common  stock that had been  issued by the  Company in  payment  oflegal  fees
incurred.  The plaintiffs have computed  damages in the approximate  amount of
$87,000.  The Company  believes the  complaint is without legal merit and will
vigorously defend itself.

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

      (A). On December 7, 1997, an Annual Meeting of Stockholders  was held to
elect directors until the next annual meeting of stockholders,  to approve the
Company's 1997 Stock Incentive Plan, and to approve and adopt an Agreement and
plan of  Merger,  dated  as of June  10,  1997  between  Old ZMAX and New ZMAX
Corporation,  whereby the  Company  changed  its state of  incorporation  from
Nevada to Delaware and reduced its indebtedness through the conversion of $5.5


                                      14

<PAGE>

million of  outstanding  debentures  into shares of Company  Common  Stock and
warrants to purchase additional shares of Company Common Stock.

      (B). The following  Directors  were nominated and elected at such Annual
Meeting of Stockholders:

<TABLE>
<CAPTION>
                         Name                       Age
                         ----                       ---
<S>                                                 <C>
                 Michael Berty ..............       58
                 Michael C. Higgins .........       53
                 G.W. Norman Wareham ........       44
                 Steve L. Komar .............       56
                 Robert H. Miller ...........       44
                 Ted Fine ...................       60
</TABLE>

      (C). On December 7, 1997 the  following  events were  approved:  (i) The
aforementioned director's were elected to serve until the next annual meeting,
(ii) The 1997 Stock  Incentive Plan was approved,  (iii) and The Merger of Old
ZMAX and New ZMAX was approved.  The following  votes for the director's  were
6,951,154 votes for, 2,343 votes against, and o abstained. The following votes
for the 1997 Stock  Incentive  Plan were  6,064,856  votes for,  14,118  votes
against,  and  17,603  abstained.  The  following  votes for the  Merger  were
6,079,019 votes for, 3,083 votes against, and 14,475 abstained.

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.

      The  following  table sets forth  information  regarding  the  Company's
current executive officers:

<TABLE>
<CAPTION>
                                                  Office With                         Appointed
    Name                             Age          the Company                         to Office
    ----                             ---          -----------                         ---------
<S>                                  <C>          <C>                                 <C>
Michael C. Higgins, CEO              53           President, Chief Executive          1996
                                                  Officer and Director

G.W.Norman Wareham                   44           Vice President, Chief,              1996
                                                  Financial Officer,
                                                  Secretary and Treasurer

James T. McCubbin                    34           Vice President,                     1998
                                                  Assistant Secretary and
                                                  Assistant Treasurer
</TABLE>

      MICHAEL C. HIGGINS has served as a Director and the  President and Chief
Executive  Officer of the  Company  since its merger with Old ZMAX in December
1997.  Prior to that time,  Mr. Higgins served as a Director and the President
of Old ZMAX from December 1996 to December  1997. Mr. Higgins also serves as a


                                      15

<PAGE>

director and the  President of CSI, a subsidiary of the Company.  Mr.  Higgins
co-founded CSI in December 1995.  Prior to founding CSI, from 1993 to 1996 Mr.
Higgins was a Vice  President  of  Integrated  Microcomputer  Systems  Inc., a
software  reengineering  company that developed the VISION 2000SM  proprietary
software  tools used by the Company.  From 1991 to 1993,  Mr. Higgins was Vice
President of Anstec Inc., an information technology technical services company
in Fairfax,  Virginia.  Mr. Higgins served from 1986 to 1991, as a director of
Martin  Marietta  Corp.'s  Information   Services  unit  that  specializes  in
providing  information systems services to the U.S. federal  government.  From
1970 to 1986,  Mr.  Higgins  served in  various  executive  positions  at AT&T
including Division Sales Manager and Division Engineering Manager. Mr. Higgins
earned an MBA from Xavier University and a B.S. Degree in Engineering from the
United States Military Academy at West Point.

      G.W.  NORMAN WAREHAM has served as a Director and the Vice President and
Chief  Financial  Officer of the  Company  since its  merger  with Old ZMAX in
December  1997.  Prior to that time,  Mr. Wareham served as a director and the
Vice President and Chief Financial  Officer of Old ZMAX from September 1996 to
December 1997.  Prior to joining Old ZMAX, from 1994 to April 1995 Mr. Wareham
served as the President of Global  Financial  Corporation,  a Turks and Caicos
investment company.  Mr. Wareham currently serves as a director and officer of
Intercap   Resources   Management  Corp.,  an  oil  and  gas  exploration  and
development  company  traded on the  Vancouver  Stock  Exchange  and  Cybernet
Internet Services International Inc., a start up Internet services company. In
addition,  Mr.  Wareham is the  President  of Wareham  Management  Ltd.  which
provides  management  consulting  and  accounting  services  to  Canadian  and
American public companies,  including the Company.  Mr. Wareham is a certified
general accountant and has been engaged in public practice accounting for over
twenty years.

      JAMES T. MCCUBBIN was appointed Vice President,  Assistant Secretary and
Assistant  Treasurer of ZMAX Corporation in Febuary 1998. Mr. McCubbin is also
Vice President - Chief  Financial  Officer,  Secretary and Treasurer of CSI, a
subsidiary of the Company. He has been employed by CSI since February 1997 and
prior to that Mr.  McCubbin  was a  consultant  to CSI from  December  1995 to
February 1997.  From 1991 until  February  1997, Mr.  McCubbin was a financial
consultant  for  Marmac   Investments,   a  venture   capital  and  investment
organization. Mr. McCubbin holds a M.S. in International Management and a B.S.
in Finance from the University of Maryland.


                                      16

<PAGE>

                                    PART II

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

      The  Company's  Common  Stock has been  quoted on the NASD OTC  Bulletin
Board under the symbol  "ZMAX" since  August 20,  1996,  and under the trading
symbols of "MEDO" and "ORYX" before that date.  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,  1996,  represent  the high and low closing bid
prices of the Common Stock for each of the periods indicated:

<TABLE>
<CAPTION>
         1997               HIGH                LOW
   -------------------------------------------------------
<S>                       <C>                 <C>
   First Quarter          $ 20.00             $ 10.00
   Second Quarter           17.25               12.12
   Third Quarter            15.50               12.25
   Fourth Quarter           14.56                6.12
</TABLE>

<TABLE>
<CAPTION>
         1996               HIGH                LOW
   -------------------------------------------------------
<S>                       <C>                 <C>
   First Quarter          $  3.99              $  .80
   Second Quarter            4.00                1.60
   Third Quarter             6.75                1.25
   Fourth Quarter           16.25                5.00
</TABLE>

      As of March 26,  1998  there  were 110  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.


                                      17

<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL INFORMATION.

      The tables below presents  selected  historical  financial data of ZMAX.
The ZMAX  historical  data for the years ended December 31, 1997 and 1996, and
for the period from  December 13, 1995 (Date of Inception) to December 31, are
based on the historical financial statements of ZMAX Corporation as audited by
Arthur Andersen LLP, independent public accountants. 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. On November
6, 1996, ZMAX, a shell company listed on the NASD 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  acquiror  (a
reverse  acquisition).  The historical financial statements prior the November
6, 1996 are those of CSI. The accompanying selected financial data include all
of the  accounts  of CSI and the  accounts  of ZMAX  for the  period  from the
acquisition on November 6, 1996, through December 31, 1997.


                                      18

<PAGE>

<TABLE>
<CAPTION>
                                                                                For the Period
                                                                               from December 13,
                                                                                1995 (Date of
                                                                                Inception) to
                                         For the Year Ended December 31,          December 31,
                                        ---------------------------------      ---------------
                                              1997               1996               1995
                                        ---------------    ---------------     ---------------
<S>                                     <C>                <C>                 <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                $    1,425,360     $            -      $            -
Cost of revenues                               667,098                  -                   -
Selling and marketing                        1,110,655            228,803                   -
General and administrative                   4,148,421          1,069,681                   -
Amortization and
     Depreciation                            1,008,864            193,533                   -

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

Other income (expense):
Interest income                                137,814             14,248                   -
Interest expense                            (1,366,479)        (7,125,386)                  -
Other                                       (7,468,356)        (2,903,600)                  -
Income tax benefit                                   -                  -                   -
                                        ---------------    ---------------     ---------------
           Net loss                     $  (14,206,699)    $  (11,506,755)                  -
                                        ===============    ===============     ===============

          Net loss per share            $        (2.58)    $       (13.45)     $            -
                                        ===============    ===============     ===============

          Weighted average number
                 of common stock
                 shares outstanding          5,502,668            855,712
                                        ===============    ===============     ===============
</TABLE>


<TABLE>
<CAPTION>
                                                            December 31,
                                        ------------------------------------------------------
                                              1997               1996               1995
                                        ---------------    ---------------     ---------------
<S>                                     <C>                <C>                 <C>
BALANCE SHEET DATA:
Cash and cash equivalents                   $6,405,084         4,842,169                          -
Working capital (deficit)                    5,262,151         2,725,534                  (110,000)
Total assets                                11,870,077         8,592,042                    110,000
Total liabilities                            2,291,697         8,172,254                    110,000
Accumulated Deficit                        (25,713,454)      (11,506,755)
Total stockholders' equity                   9,578,380           419,788                          -
</TABLE>


                                      19

<PAGE>

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

PRELIMINARY NOTES REGARDING FORWARD LOOKING STATEMENTS

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

OVERVIEW

      On November 6, 1996,  ZMAX, a shell company with its common stock listed
on the OTC Bulletin Board, acquired all of the outstanding stock of CSI. Prior
to that  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   by  ZMAX  of  CSI  has  been   treated   as  a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).  The
historical financial statements prior to November 6, 1996 are those of CSI.

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

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

      The Company  believes  some  demand for CSI's  millennium  services  may
continue to exist for some time after the Year 2000, although this demand will
diminish  significantly over time and will eventually disappear.  However, the
Company's  proprietary  computer  software  tools  may be used  in  conversion
projects  unrelated  to Year  2000  compliance.  The  Company  plans to pursue
businesses and business  opportunities  unrelated to the millennium problem in
the information  services market and to develop  products and services to take
advantage  of these  opportunities,  such as  migrating  a  client's  software
application from a mainframe to a client-server  environment.  However,  there
can be no assurance that the Company will be able to  successfully  expand its


                                      20

<PAGE>

business beyond the millennium conversion market. The failure to diversify and
develop additional products and services could materially and adversely affect
the Company's business, operating results and financial condition

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

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

RECENT DEVELOPMENTS

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

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

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

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


                                      21

<PAGE>

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

      MERGER AND EXCHANGE  OFFER. In November 1997, ZMAX merged (the "Merger")
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").  The  purpose  of the  Merger was to change the state of
incorporation  of the Company from Nevada to Delaware and cause the conversion
of its then outstanding 8% Convertible  Exchangeable  Subordinated  Debentures
(the  "Debentures")  into  shares of  Company  Common  Stock and  warrants  to
purchase  additional  shares of Company  Common  Stock as described in further
detail below. At the time the Merger became effective (the "Effective  Time"),
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 was the surviving  corporation in the Merger, and CSI is thereby a wholly
owned subsidiary of New ZMAX. At the effective time of the Merger, the name of
New ZMAX was changed to "ZMAX Corporation" pursuant to the Merger Agreement.

      In November 1997, the Company offered (the "Exchange Offer") to exchange
all, but not less than all, of the  Debentures  under the terms and conditions
described below. The Exchange Offer was accepted by all the Debenture holders,
and each  Debenture  holder  received 220 shares of Company Common Stock and a
warrant to  purchase an  additional  220 shares of Company  Common  Stock (the
"Warrant  Shares") per $1,000  principal  amount of Debentures  exchanged.  In
December 1997, all $5.5 million in Debentures  outstanding  were exchanged for
1,210,000  shares of Company  Common Stock and warrants to purchase a total of
1,210,000 shares of Company 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
Offer included securities in excess of the securities issuable pursuant to the
original conversion terms of the Debentures, the Company recognized $7,370,000
which has been  recorded  as other  expense at the time of the  exchange.  The
expense  recognized equaled the fair value of the incremental number of shares
of Company  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  Offer,  warrants to  purchase  1,069,200
shares of Company  Common  Stock were  exercised  by the  holders  thereof for
$7,484,000 in proceeds to the Company.  Warrants to purchase 140,800 shares of


                                      22


<PAGE>

Company Common Stock remain outstanding as of December 31, 1997.

      Costs of  $1,261,606  were incurred in  completing  the Exchange  Offer.
These amounts have been reflected as a reduction to additional paid-in capital
in order to offset the  proceeds  of  $7,484,400  related to the  exercise  of
warrants and the exchange of the Debentures into common stock.

RESULTS OF OPERATIONS

      Prior to the CSI transaction, ZMAX was a development stage company whose
purpose  was to obtain  capital  and to seek  out,  investigate,  and  acquire
interests in products,  properties  and business that may have had a potential
for profit.  From the date of its inception  (April 24, 1986) through December
31, 1995, ZMAX incurred a cumulative loss of $1.7 million.  As of December 31,
1995, ZMAX had no assets and $1.4 million of liabilities.

      For financial reporting  purposes,  the CSI transaction was treated as a
recapitalization of CSI with CSI as the acquiror (a reverse acquisition).  The
historical  financial  statements including the results of operations prior to
November 6, 1996 are those of CSI.

      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 loss of $11.5  million,  or $13.45  per share.  No  revenues  were
generated  during this period.  Included in the loss were several  significant
non-cash charges  including  approximately  $2.9 million of expense related to
the  ZMAX-CSI  transaction,  approximately  $7.0  million in interest  charges
related to the amortization of the discount on the Company's  convertible debt
that  resulted  from an  allocation  of the proceeds of the debt to additional
paid-in  capital  to  reflect  the  beneficial   conversion   feature  on  the
convertible  debt,  approximately  $380,000 in amortization of intangibles and
deferred  financing costs, and  approximately  $300,000 in non-employee  stock
compensation expense. The remaining expenses are primarily attributable to the
salaries  and  benefits  paid  to  the  Company's  technical,   marketing  and
administrative   personnel  along  with  other  marketing  and  administrative
expenses.

      Results  for the year  ended  December  31,  1997,  were a loss of $14.2
million,  or $2.58 per share.  The loss was  primarily  related to the further
re-capitalization of ZMAX and the 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 exchange
of the Debentures,  approximately  $590,000 in interest  charges were recorded
related to the  amortization  of the  discount on the  Company's  $2.1 million
Convertible Notes that resulted from an allocation of the proceeds of the debt
to additional paid-in capital to reflect the beneficial  conversion feature on
the debt,  approximately  $1.5  million in  amortization  of  intangibles  and
deferred  financing  costs  was  recorded,   and  approximately   $547,000  in
non-employee  stock  compensation  was  charged to expense.  The Company  also
recognized  a  loss  of  approximately  $101,000  upon  the  conversion  of  a
promissory  note into  shares of Company  Common  Stock.  The  remaining  loss
reflects the costs  related to the  increased  operations  of CSI and fees and


                                      23

<PAGE>

expenses  associated  with the preparation of documents in connection with the
CSI  transaction,  the  Note  Conversions  and the  transactions  contemplated
thereby.  During the year ended  December  31,  1997,  the Company  recognized
revenues totaling $1,425,360, related to the continued growth in projects that
the Company has been awarded.  Direct expenses related to the revenues totaled
$667,098.

LIQUIDITY AND CAPITAL RESOURCES

      Current assets at December 31, 1997, totaled approximately $7.6 million,
an increase of approximately $2.7 million from December 31, 1996, attributable
primarily to an increase in cash from the  completion  of the Exchange  Offer.
Current liabilities at December 31, 1997, totaled  approximately $2.3 million,
an increase of $1,473,000 from December 31, 1996, including a customer deposit
of approximately 1.0 million.

      Prior to the CSI  transaction,  ZMAX sold 2,800,000 shares of its common
stock for $0.30 per share,  or $840,000 in the aggregate,  issued $1.5 million
of  convertible  notes for cash and issued  $480,000 of  convertible  notes as
satisfaction for certain liabilities. The proceeds from such transactions were
used  to  satisfy  certain   liabilities  of  ZMAX.   Subsequent  to  the  CSI
transaction,  the Company issued an additional  $120,000 in convertible  notes
for cash. In early 1997, the holders of the convertible  notes exercised their
conversion  rights and the $2.1  million in aggregate  Convertible  Notes were
converted  into a total of  1,600,000  shares  of  Company  Common  Stock.  In
December  1996,  the Company  issued $5.5 million in  Debentures  for cash. In
December 1997, the Company exchanged the $5.5 million in Debentures for equity
in the Exchange  Offer and raised an additional  $7.5 million in cash from the
exercise of warrants  attached to the  conversion  of such  Debentures.  As of
December  31, 1997 and 1996,  the Company had  approximately  $6.4 million and
$4.8 million in cash and cash equivalents,  respectively, and $2.7 million and
$5.3 million of working capital,  respectively. The change in cash and working
capital were primarily the result of the net proceeds of the Exchange Offer of
$6.2  million  offset  by cash  used in  operations  of $3.8  million  and the
purchase of software for $0.7 million.

      The nature of the  information  technology  industry,  combined with the
rapidly  growing demand for Year 2000 services  worldwide,  makes it difficult
for the  Company to predict  future  liquidity  requirements  with  certainty.
However,  the Company  believes  that existing  cash and cash  generated  from
operations will be adequate to finance continuing  operations,  investments in
property and equipment,  and  expenditures  for the  development of additional
software improvements in the Company's VISION 2000SM software toolset.

      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 of cash. Additionally, a major expansion , such as
would occur with the acquisition of a major new subsidiary, might also require
external financing that could include additional debt or equity capital.


                                      24

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

      The Company is not subject the  requirement  to file selected  quarterly
financial data under item 302 of Regular S-K.

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


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

      None.


                                      25

<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  director's  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.


                                      26

<PAGE>

                                   PART IV.

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

   EXHIBIT AND REPORTS ON FORM 8-K

   (a)    EXHIBITS

               Exhibit 27 - Financial Data Schedule

   (b)    REPORTS ON FORM 8-K

               None


                                      27

<PAGE>


 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).)*

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).)*

*  Management contract of compensatory plan.


<PAGE>


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).)

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).)


*  Management contract of compensatory plan.

<PAGE>

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).)

21          Subsidiaries of ZMAX Corporation

23          Consent of Arthur Andersen LLP

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, 1998                            /s/MICHAEL C. HIGGINS
                                                 -----------------------------
                                                 Michael C. Higgins
                                                 President

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

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

      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, 1998                           /s/MICHEL BERTY
                                                 -----------------------------
                                                 Michel Berty
                                                 Director and Chairman of the
                                                   Board

Dated:  March 30, 1998                           /s/MICHAEL C. HIGGINS
                                                 -----------------------------
                                                 Michael C. Higgins
                                                 Director,  President and Chief
                                                   Executive Officer

Dated:  March 30, 1998                           /s/G.W. NORMAN WAREHAM
                                                 -----------------------------
                                                 G.W. Norman Wareham
                                                 Director, Vice President -
                                                   Chief Financial Officer,
                                                   Secretary and Treasurer

Dated:  March 30, 1998                           /s/STEVE L. KOMAR
                                                 -----------------------------
                                                 Steve L. Komar
                                                 Director

Dated:  March 30, 1998                           /s/EDWARD YOURDON
                                                 -----------------------------
                                                 Edward Yourdon
                                                 Director

Dated:  March 30, 1998                           /s/TED FINE
                                                 -----------------------------
                                                 Ted Fine
                                                 Director


                                      28

<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

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

Consolidated Balance Sheets as of December 31, 1997
   and 1996                                                                F-2

Consolidated Statements of Operations for the years ended
   December 31, 1997 and 1996, and for the period from
   December 13, 1995 (Date of Inception) to December 31,
   1995                                                                    F-4

Consolidated Statements of Changes in Shareholders' Equity
   for the years ended December 31, 1997 and 1996, and for
   the period from December 13, 1995 (Date of Inception) to
   December 31, 1995                                                       F-5

Consolidated Statements of Cash Flow for the years Ended
   December 31, 1997 and 1996, and for the period from
   December 13, 1995 (Date of Inception) to December 31,
   1995                                                                    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  subsidiary as of December 31,
1997 and 1996 and the related statements of operations,  stockholders'  equity
and cash flows for the years ended  December  31, 1997 and 1996 and the period
from  December  13, 1995 (Date of  Inception)  to  December  31,  1995.  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
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
and its  subsidiary,  as of December 31, 1997 and 1996, and the results of its
operations  and its cash flows for the years ended  December 31, 1997 and 1996
and the period from  December  13, 1995 (Date of  Inception)  to December  31,
1995, in conformity with generally accepted accounting principles.

                                                    ARTHUR ANDERSEN LLP

Washington, D.C.
March 27, 1998


                                      F-1

<PAGE>

<TABLE>
                        ZMAX CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                             DECEMBER 31,
                                                       ----------------------
                                                         1997          1996
                                                       ----------------------
                                ASSETS:
<S>                                                   <C>              <C>
CURRENT ASSETS:
        Cash and cash equivalents                     $ 6,405,084      $ 4,842,169

        Accounts receivable                             1,067,258                -

        Prepaid expenses and other assets                  81,506           27,762
                                                      ------------     ------------
                Total current assets                    7,553,848        4,869,931
                                                      ------------     ------------
        Property, plant and equipment, net                277,981           20,871
        Intangible assets, net                          4,033,265        2,274,406
        Deferred financing costs, net                           -        1,426,834
        Other assets                                        4,983                -
                                                      ------------     ------------
                Total assets                          $11,870,077      $ 8,592,042
</TABLE>


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


                                      F-2

<PAGE>

<TABLE>
                        ZMAX CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS


<CAPTION>
                                                               DECEMBER 31,
                                                       ----------------------------
                                                           1997            1996
                                                       ----------------------------
            LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                   <C>              <C>
CURRENT LIABILITIES:
        Accounts payable and accrued expenses              826,117          370,175

        Customer deposits                                  926,039                -

        Convertible notes                                        -        1,508,892

        Current portion of long-term debt                  539,541          265,330
                                                      -------------    -------------

                Total current liabilities                2,291,697        2,144,397
                                                      -------------    -------------


        Convertible exchangeable subordinated 
          debentures                                             -        5,500,000

        Long-term debt, net of current portion                   -          527,857
        Deferred income taxes                                    -                -
                                                      -------------    -------------

                Total liabilities                        2,291,697        8,172,254
                                                      -------------    -------------


Commitments and contingencies (Notes 5, 9, 10 and 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, 11,729,714 and
          7,000,079 shares issued and outstanding
          as of December 31, 1997 and 1996,
          respectively, 479,801 and 775,808 shares
          subject to cancellation agreements as of
          December 31, 1997, and 1996,
          respectively (Note 8)                             11,729            7,000

          Additional paid-in capital                    35,280,105        6,724,964

        Issuable common stock, 904,365 shares as
          of December 31, 1996 (Note 3)                          -        5,299,579

        Receivable for stock subscription (Note 3)               -         (105,000)
        Accumulated deficit                            (25,713,454)     (11,506,755)
                                                      -------------    -------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      F-3

<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                For the Period
                                                                               from December 13,
                                                                                1995 (Date of
                                                                                Inception) to
                                         For the Year Ended December 31,          December 31,
                                        ---------------------------------      ---------------
                                              1997               1996               1995
                                        ---------------    ---------------     ---------------
<S>                                     <C>                <C>                 <C>
Revenues                                $    1,425,360      $           -      $            -

Operating Expenses: 
        Cost of revenues                       667,098                  -                   -
        Sales and marketing                  1,110,655            228,803                   -
        General and administrative           4,148,421          1,069,681                   -
        Amortization and depreciation        1,008,864            193,533                   -
                                        ---------------    ---------------     ---------------
                Loss from operations         (5,509.68)        (1,492,017)                  -

Other income (expense): 
        Interest income                        137,814             14,248                   -
        Interest expense                    (1,366,479)        (7,125,386)                  -
        Other (Notes 3 and 6)               (7,468,356)        (2,903,600)                  -
                                        ---------------    ---------------     ---------------
                Net loss before benefit
                  for income taxes         (14,206,699)       (11,506,755)                  -

                Benefit for income taxes             -                  -                   -

Net loss                                $  (14,206,699)    $  (11,506,755)     $            -
                                        ---------------    ---------------     ---------------

Basic and Diluted net loss per share    $        (2.58)    $       (13.45)     $            -
                                        ---------------    ---------------     ---------------

Basic and diluted weighted average
  shares outstanding                         5,502,668            855,712             400,000
                                        ===============    ===============     ===============
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     F-4

<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY


<TABLE>
          CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY

<CAPTION>
                                                                  Common Stock
                                                           --------------------------    Paid-In           Common    
                                                              Shares        Amount        Capital          Stock     
                                                           -------------   ----------  --------------   -------------
<S>                                                        <C>             <C>         <C>              <C>          
 Balance, December 13, 1995 (Date of inception)                  -         $   -        $    -           $   -       

       Initial capitalization                                   400,000          400           (200)         -       
                                                           -------------   ----------  --------------   -------------
 Balance, December 31, 1995                                     400,000          400           (200)         -       
       Adjustment to record existing capitalization of
         public shell company November 6, 1996, 234365
         shares  issuable                                     3,800,079        3,800         807,964       1,373,379 
     
       Common stock issued in escrow in connection with
            the CSI recapitalization                          2,800,000        2,800         (2,800)         -       
       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                    -
                                                                -              -             -             2,051,000 
       Stock compensation expense                               -              -             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 connection with the
            COCACT software 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 convertible exchangeable
            subordinated debentures and exercise of           2,279,200        2,279      18,172,044         -       
      warrants
       Net loss                                                 -              -             -               -       
                                                           -------------   ----------  --------------   -------------
 Balance, December 31, 1997                                  11,729,714     $ 11,729    $ 35,280,105     $   -       
                                                           =============   ==========  ==============   =============
</TABLE>
<TABLE>
    CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS' EQUITY (Continued)

<CAPTION>

                                                                Stock         Accumulated
                                                            Subscription        Deficit            Total
                                                           --------------   ---------------   --------------
<S>                                                        <C>              <C>               <C>
 Balance, December 13, 1995 (Date of inception)            $     -          $     -           $     -

       Initial capitalization                                     (200)           -                 -
                                                          --------------   ---------------   --------------
 Balance, December 31, 1995                                       (200)           -                 -
       Adjustment to record existing capitalization of
         public shell company November 6, 1996, 234365
         shares  issuable                                          200            -              2,185,343
     
       Common stock issued in escrow in connection with
            the CSI recapitalization                             -                -                 -
       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                  (105,000)           -              1,946,000
       Stock compensation expense                                -                -                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 connection with the
            COCACT software purchase                             -                -              1,931,250
       Common stock issued for services                          -                -                547,500
       Issuance of previously issuable shares                  105,000            -                105,000
       Exchange of convertible exchangeable
            subordinated debentures and exercise of              -                -             18,174,323
      warrants
       Net loss                                                  -           (14,206,699)      (14,206,699)
                                                          --------------   ---------------   --------------
 Balance, December 31, 1997                                $     -          $(25,713,454)     $  9,578,380
                                                          ==============   ===============   ==============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      F-5

<PAGE>

                        ZMAX CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                            For the Period
                                                                                           from December 13,
                                                                                            1995 (Date of
                                                                                            Inception) to
                                                     For the Years Ended December 31,         December 31,
                                                    ---------------------------------      ---------------
                                                          1997               1996               1995
                                                    ---------------    ---------------     ---------------
<S>                                                 <C>                <C>                 <C>
Cash flows from operating activities:
    Net loss                                        $(14,206,699)      $(11,506,755)       $     -
    Adjustments to reconcile loss to net cash
         Depreciation and amortization expense         1,008,864            176,137              -
         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              -
         Expense related to conversion of Debentures   7,370,000               -                 -
         Stock compensation expense                      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                          (1,067,258)              -                 -
         Prepaid expenses and other assets               (58,727)           (27,762)             -
         Accounts payable and accrued expenses           455,942             72,966           110,000
         Customer deposits                               926,039               -                 -
                                                    -------------      --------------      -------------

              Net cash (used in) provided by
               operating activities                   (3,814,222)          (907,455)          110,000
                                                    -------------      --------------      -------------

    Net cash used in investing activities:
         Purchases of property and equipment            (326,145)           (21,144)               -
         Purchases of software                          (767,379)          (831,892)         (110,000)
                                                    -------------      --------------      -------------

              Net cash used in investing activities   (1,093,524)          (853,036)         (100,000)
                                                    -------------      --------------      -------------

    Net cash provided by financing activities:
         Proceeds from issuance of convertible notes        -               120,000              -
         Proceeds from issuance of convertible    
          exchangeable Subordinated debentures              -             5,500,000              -
         Proceeds from the issuance of common stock      105,000               -                 -
         Net proceeds from the exchange and exercise
            of warrants                                6,234,607               -                 -
         Deferred financing costs                           -              (675,000)             -
         Net borrowings (payments) on long-term debt     131,054            408,487              -
         Cash acquired in CSI recapitalization              -               299,173              -
         Advances from joint venture and ZMAX prior   
          to the CSI recapitalization                       -               950,000              -

              Net cash provided by financing
               activities                              6,470,661          6,602,660              -
                                                    -------------

Net increase in cash                                   1,562,915          4,842,169              -
                                                    -------------

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

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

         Supplemental cash flow information:
           Cash paid for-
                   Interest                         $    299,668       $     26,599        $     -
                   Income taxes                     $       -          $       -           $     -
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      F-6

<PAGE>


                               ZMAX CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

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

BASIS OF PRESENTATION

On November  6, 1996,  ZMAX  Corporation  ("ZMAX" or the  "Company"),  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).  The
historical  financial  statements prior to November 6, 1996, are those of CSI.
The accompanying consolidated financial statements include all of the accounts
of CSI and the accounts of ZMAX since the acquisition on November 6, 1996. All
significant inter-company amounts have been eliminated.

Prior to the year  ended  December  31,  1997,  ZMAX and its  subsidiary,  CSI
(together the  "Company"),  were  considered  development  stage  companies as
defined  by  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 7,
"Accounting and Reporting by Development Stage Enterprises."

ORGANIZATION OF ZMAX

ZMAX was originally  incorporated  as a Nevada  corporation on April 24, 1986,
under  its  prior  name of  Pandora,  Inc.  ("Pandora"),  for the  purpose  of
obtaining capital to seek out,  investigate and acquire interests in products,
properties and businesses  which,  in the opinion of management,  may have had
potential for profit.  Until May 4, 1992, Pandora transacted no business other
than the  investigation  of various  business  opportunities.  On May 4, 1992,
Pandora amended its Articles of  Incorporation to change its name to Oryx Gold
Corporation  ("Oryx")  in  connection  with a  reorganization  in  which  Oryx
acquired 100 percent ownership of American Oil and Gas Corporation  ("American
Oil").  American  Oil  was  organized  on  November  22,  1991,  as  a  Nevada
corporation,  and  conducted  no  business  other than the  acquisition  of an
interest in certain  unpatented placer mining claims in Nevada.  Oryx intended
to develop the mining claims and other  acquired  interests and, on August 16,
1995, changed its name to Mediterranean Oil Corporation  ("Mediterranean")  to
more accurately reflect the nature of its business.  However,  the Company did
not  subsequently  pursue that business.  American Oil's corporate  status was
suspended by the Secretary of State of Nevada as of December 1, 1995, and that
subsidiary has been abandoned.  On August 9, 1996,  Mediterranean  changed its
name to ZMAX Corporation.


                                      F-7

<PAGE>

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,  and
CSI is thereby a wholly owned subsidiary of New ZMAX. At the effective time of
the Merger, the name of New ZMAX was changed to "ZMAX Corporation" pursuant to
the Merger Agreement.

NATURE OF OPERATIONS

Prior to the CSI  transaction,  ZMAX's  activities  consisted  of  efforts  to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain  financing,  to acquire and develop its proprietary  Year
2000  software  re-engineering  tools and  methodologies,  and to  market  its
services to potential customers. Since the acquisition of CSI, the Company has
been  focused on the  software  re-engineering  market.  Although  the Company
generated  its first  revenues  during  1997,  the Company has no assurance of
future revenues.  Even if marketing  efforts are successful,  substantial time
may pass before  significant  revenues and profitability will be realized and,
during this period,  the Company may require  additional funds that may not be
available to it.

The Company has limited  experience in providing its Year 2000 or "millennium"
services.  The Company has not completed a large-scale  millennium  conversion
project  either alone or together  with a strategic  partner.  There can be no
assurance  that the  Company  will be  successful  in  completing  large-scale
conversions,  that the  Company  will not  experience  delays or  failures  in
providing its millennium  services,  or that its  millennium  services will be
effective.  The failure of the  Company's  Year 2000  methodology  to function
properly  or  the  existence  of  significant  errors  or  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.

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


                                      F-8

<PAGE>

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,
1997, cash and cash equivalents  included a $5,003,501 federal agency discount
note that is carried at an amount approximating market value.

REVENUE RECOGNITION

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

Unbilled accounts  receivable on time and materials  contracts represent costs
incurred and gross profit  recognized near the period end but not billed until
the following period.  Unbilled accounts  receivable on fixed-price  contracts
consist of amounts  incurred which are not yet billable under contract  terms.
At December 31, 1997, unbilled accounts receivable totaled $180,120.

SIGNIFICANT CUSTOMERS

Net revenues from individual customers greater than 10 percent of revenues for
the year ended December 31, 1997 were as follows:

<TABLE>
<S>                                <C>
     Customer A                    24%
     Customer B                    23%
     Customer C                    13%
</TABLE>


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.


                                      F-9

<PAGE>

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.  Accounts  receivable from  individual  customers that are greater
than 10  percent of  consolidated  accounts  receivable  were as follows as of
December 31, 1997:

<TABLE>
<S>                                <C>
     Customer A                    31%
     Customer B                    31%
     Customer C                    17%
</TABLE>


INCOME TAXES

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

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
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.

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.

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 is  effective  for  financial
statements  issued for periods ending after December 15, 1997. The Company has
implemented  SFAS No. 128 for 1997 and has restated  prior year amounts.  SFAS


                                     F-10

<PAGE>

No. 128 requires dual  presentation  of basic and diluted  earnings per share.
Basic loss per share includes no dilution and is computed by dividing net loss
by the weighted  average number of common shares  outstanding  for the period.
Diluted 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.  For the years ended December 31, 1997 and 1996,
the  Company  had  a  loss,   therefore  the  1,248,000  and  208,126  options
outstanding  as of those dates were not included in  calculating  diluted loss
per share as their effect would have been  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 until such debt was
converted  and  the  shares  were  issued.   Outstanding   shares  subject  to
cancellation  agreements  are also not included in either the basic or diluted
calculation. As a result, the basic and diluted loss per share for all periods
presented are identical.

RECLASSIFICATIONS

Certain amounts have been reclassified in the prior year financial  statements
to conform with current year presentation.

3.    CSI RECAPITALIZATION AND ACQUISITION OF JOINT VENTURE INTEREST:

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
million with interest  payable  monthly on the  outstanding  balance at a rate
equal to the prime rate plus 2 percent. A security interest in the JV's assets
was granted to Fiserv as security  for payment of the  obligations.  All funds
advanced to the JV were provided  under this  agreement.  In addition,  the JV
agreed to provide  monthly  advances  to CSI in the  amount of $40,000  with a
limit of $720,000.  No stated  interest was due on those advances  pursuant to
the  agreement.  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.


                                     F-11

<PAGE>

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.  The fair value of these shares
is included in stockholders'  equity in the accompanying  financial statements
as of December 31, 1996.

ZMAX  allocated the purchase  price to assets and  liabilities  based on their
estimated  fair  values  at  the  date  of  acquisition   (prior  to  the  CSI
transaction).  As a  result,  ZMAX  (prior ot the CSI  transaction)  allocated
$1,508,379  to goodwill and  $560,000 to a  receivable  from the JV related to
funding provided to the JV by Fiserv which in turn had been advanced to CSI by
the JV. ZMAX had previously recognized a deferred tax liability related to the
differences between the financial statement and tax basis of intangible assets
acquired  as a result of the  purchase  of the  joint  venture  interest.  The
Company has subsequently  determined that no such basis  differences exist and
his  reclassified  the deferred tax liability  against the related  intangible
asset in the  accompanying  financial  statements  as of December 31, 1997 and
1996.

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.


                                     F-12

<PAGE>

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.  The fair value of these shares
is included in stockholders'  equity in the accompanying  financial statements
for the year ended 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,  CSI would enter into
employment agreements with certain executives who were the former stockholders
of CSI that would provide for  compensation  at specified  levels.  During the
period from September 20, 1996, to November 6, 1996,  ZMAX advanced a total of
$390,000 to CSI under two promissory notes totaling  $200,000 and under a line
of credit agreement totaling $190,000. 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.  At the
closing,  the former  stockholders of CSI retained 400,000 shares of such ZMAX
common stock and deposited  their  remaining  2,800,000  shares of ZMAX common
stock (the "Restricted  Stock") into an escrow subject to quarterly release of
such shares back to the former CSI  stockholders  based upon the cash flow (as
defined) of CSI. Under the terms of the Stock Purchase Agreement, one share of
Restricted  Stock was to be released to such  stockholders  for every $1.25 of
cash flow generated by CSI. The former CSI  stockholders  are entitled to vote
the shares of the Restricted  Stock as well as to receive their respective pro
rata share of any distributions or dividends declared thereon.  The Restricted
Stock is  subject to  forfeiture  under  certain  conditions  (Note  11).  The
transaction  has been accounted for as a  recapitalization  of CSI with CSI as
the acquirer (a reverse acquisition).

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


                                     F-13

<PAGE>

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

In connection with the CSI transaction, the Company incurred $54,678 of direct
costs that have been  charged to  expense.  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  financial statements for the year ended December
31, 1996. The fair value of the other 160,000 shares has been  recognized as a
deferred financing cost in the accompanying financial statements.

4.    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,
                                                       ----------------------------
                                                           1997            1996
                                                       ----------------------------
<S>                                                    <C>               <C>
          Furniture and fixtures                       $ 147,653         $  17,989
          Equipment                                      162,562             3,155
          Leasehold improvements                          37,075              -
          Less- Accumulated depreciation                 (69,309)             (273)
                                                       ----------        ----------
          Property and equipment, net of               $ 277,981         $  20,871
          accumulated depreciation
</TABLE>


5.    INTANGIBLE ASSETS:

Intangible  assets consist of purchased  software rights and goodwill acquired
as a result of ZMAX's  purchase of Fiserv's  interest in the JV. The  software
rights and goodwill are being amortized over their  estimated  useful lives of
five years.  Accumulated  amortization  totaled  $1,237,468 and $193,261 as of
December 31, 1997, and 1996, 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 on this obligation,  with the remaining
$450,000  due in three equal  installments  during 1997 and 1998.  Interest on
this  obligation  has been imputed at a rate of 10 percent.  During 1997,  the
Company made one additional payment of $150,000.

On April 30,  1997,  the Company  entered  into an  agreement  to purchase all
rights,  title and  interest  to COCACT  (the  "COCACT  Purchase  Agreement").
Conditions of the purchase  included a software  development  and  enhancement
project to bring COCACT to the required  level of  performance as specified in
the  agreement.  The purchase  price under the COCACT  Purchase  Agreement was
$1,100,000,  of which  $250,000 was paid in May 1997,  plus 150,000  shares of
common stock of the  Company.  The first  installment  payment of $283,333 was
made in September  1997.  The  remaining  installments  of $283,333 are due in
January 1998 and May 1998.  Interest on this  obligation has also been imputed
at a rate of 10 percent.

As of April 30,  1997,  $300,000  under the  original  North  American  COCACT
License  remained  unpaid.  Under the terms of the COCACT Purchase  Agreement,
ZMAX has the right to terminate and cancel the North  American  COCACT License
including the obligation to pay any remaining  license fees. ZMAX also has the
right to cancel the COCACT  Purchase  Agreement  in the event the  enhancement
project is not completed  successfully.  In the event that ZMAX  exercises its
right to  cancel  the  COCACT  Purchase  Agreement,  termination  of the North
American COCACT License would be  automatically  rescinded,  whereupon  ZMAX's
right and  obligations  under  the  North  American  COCACT  License  would be
reinstated retroactively.


                                     F-14

<PAGE>

6.    DEBT AND DEFERRED FINANCING COSTS:

The following details the Company's debt obligations:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                       ----------------------------
                                                           1997            1996
                                                       ----------------------------
<S>                                                    <C>               <C>
Promissory note payable to Fiserv,
interest payable annually at the
prime rate plus 1%                                     $     -              385,000
                                                       -----------       -----------
Amounts due for the purchase of
software rights, interest imputed at
10%, due in installments of $283,333
in  January 1998 and May 1998                             539,541           408,487

Convertible notes, interest payable                          -            1,508,592
monthly at 8%

Convertible exchangeable subordinated
debentures, interest payable
semi-annually, at 8%                                         -            5,500,000
                                                       -----------       -----------
Total                                                     539,541         7,802,079
                                                       -----------       -----------
Less- Current portion                                     539,541        (1,774,222)
                                                       -----------       -----------
                                                       $     -           $6,027,857
                                                       ===========       ===========
</TABLE>


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
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.  The Notes were  convertible,  at the option of the holder,
into a total of 1,600,000 shares of the Company's common stock. In early 1997,
all of the holders exercised their conversion rights. In March 1997, the Board
of Directors  approved the conversion and in April 1997, all of the Notes were
converted into 1,600,000 shares of Company 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.


                                     F-15

<PAGE>

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.  The Company had the right to redeem or
prepay the  Debentures  provided  that the Company had offered to exchange the
Debentures for the Company's common stock and a warrant to purchase additional
common  stock and the Company had filed an  effective  registration  statement
pursuant to the Securities Act of 1933, as amended, pertaining to the exchange
offer.

In the  event  the  exchange  offer  was made  during  the  first  six  months
immediately  following the date of issuance of the  Debentures,  each $5.00 of
principal would have been  exchangeable  for one share of Company common stock
plus a warrant to purchase one share of Company common stock.  In the event an
exchange offer was made after the first six months  immediately  following the
date of issuance of the  Debentures,  each $5.00 of principal  would have been
exchangeable for one and one-tenth (1.1) share of Company common stock plus an
equivalent number of warrants.

Upon exchange,  the holder  receives ZMAX common stock plus, for each share of
ZMAX common stock received, a warrant to purchase one additional share of ZMAX
common stock at $7.00 per share if exercised prior to the first anniversary of
the date of issuance of the warrant or at $8.00 per share if  exercised  after
the  first  anniversary  of the  date of  issuance  but  prior  to the  second
anniversary.  The  warrants  expire on the second  anniversary  of the date of
issuance.

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.

EXCHANGE OFFER

In November 1997, the Company  offered (the "Exchange  Offer") to exchange all
of the Debentures under the terms and conditions described above. The Exchange
Offer was accepted by all of the Debenture holders,  and each Debenture holder
received  220 shares of Company  common  stock and a warrant  to  purchase  an
additional  220 shares of Company  common  stock (the  "Warrant  Shares")  per
$1,000  principal amount of Debentures  exchanged.  In December 1997, all $5.5
million in Debentures  outstanding  were  exchanged  for  1,210,000  shares of
Company  common stock and warrants to purchase a total of 1,210,000  shares of
Company  common stock.  Any accrued but unpaid  interest from June 1, 1997, to
the date of the Exchange was waived by the Debenture holders.


                                     F-16

<PAGE>

Because the  securities  issued  pursuant to the terms of the  Exchange  Offer
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 Company  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 Company
common  stock were  exercised  for  $7,484,400  in  proceeds  to the  Company.
Warrants to purchase  140,800 shares of common stock remain  outstanding as of
December  31,  1997.  Costs of  $1,261,606  were  incurred in  completing  the
Exchange Offer. 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 into common stock.

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  of  the  debentures,
unamortized deferred financing costs of $918,471 were reflected as a reduction
in additional paid-in capital.

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 for income
taxes consist of the following:


                                     F-17

<PAGE>

<TABLE>
<CAPTION>
                                                                                            For the Period
                                                                                           from December 13,
                                                                                            1995 (Date of
                                                                                            Inception) to
                                                     For the Year Ended December 31,          December 31,
                                                    ---------------------------------      ---------------
                                                          1997               1996               1995
                                                    ---------------    ---------------     ---------------
<S>                                                 <C>                <C>                 <C>
          Income tax benefit:
          Current-
             Federal                                $      -           $      -            $      -
             State                                         -                  -
          Deferred-
             Federal                                (1,865,957)           (468,323)               -
             State                                    (349,881)            (87,810)               -
                 Valuation allowance                 2,215,838             556,133                -
                                                   ============        ============        =============
                                                   $       -           $      -            $      -
                                                   ============        ============        =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                            For the Period
                                                                                           from December 13,
                                                                                            1995 (Date of
                                                                                            Inception) to
                                                     For the Year Ended December 31,          December 31,
                                                    ---------------------------------      ---------------
                                                          1997               1996               1995
                                                    ---------------    ---------------     ---------------
<S>                                                 <C>                <C>                 <C>
     Statutory federal income tax rate               (35.0)%           (35.0%)                -%
     Effect of graduated rates                         1.0               1.0                  -
     Net operating losses for
      which no tax benefit is                         13.2               4.2                  -
      currently available
     Other increases in valuation allowance            1.5               -                    -
    
     Non-deductible expenses                          19.3              29.8                  -
                                                     ------            ------               -----
                                                       - %               - %                  - 
</TABLE>


The components of the net deferred tax assets (liabilities) were as follows as
of December 31, 1997 and 1996 (in thousands).


                                     F-18
<PAGE>

<TABLE>
<CAPTION>
                                                       ----------------------------
                                                           1997            1996
                                                       ----------------------------
<S>                                                    <C>            <C>
     Deferred tax assets:

        Net operating loss carryforwards               $ 3,344,084     $ 1,380,968
        Amortization of Intangible                         245,783
        Other                                               15,824            -
                                                       ------------    ------------
          Total deferred tax assets                      3,605,691       1,380,968
     Deferred tax liabilities:
        Depreciation and amortization                      (15,660)         (6,775)
                                                       ------------    ------------
     Net deferred tax asset                              3,590,031       1,374,193
     Less- Valuation allowance                          (3,590,031)     (1,374,193)
                                                       ------------    ------------
                                                       $      -        $      -
                                                       ============    ============
</TABLE>

The Company has  determined  that its  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 a result of December 31, 1997, the Company had
net operating losses of approximately $8,800,000 carryforward to offset future
taxable income.  These carryforwards  expire in years 2001 through 2012. Under
the  provision 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
occurring  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.  The Company also has  approximately  $400,000 in net
operating loss  carryforwards as a result of the CSI acquisition that may also
be subject to certain limitations.

8.    COMMON STOCK AND PREFERRED STOCK:

REVERSE STOCK SPLIT

Effective  July 23, 1996,  ZMAX effected a 1 for 80 reverse  stock split.  All
share  amounts  and per share  amounts  have been  retroactively  restated  to
reflect this event.

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 (see Note 10 for a discussion of related party
transactions).


                                     F-19

<PAGE>

STOCK SUBJECT TO CANCELLATION

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

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

RESERVED SHARES

The Company has reserved  1,820,000  shares of Common Stock for issuance under
its stock incentive and option plans and executive bonus program (see Notes 11
and 11).

9.    STOCK OPTIONS AND STOCK-BASED COMPENSATION:

ZMAX OPTIONS

Prior to the CSI  recapitalization,  ZMAX  granted  options  to certain of its
officers  and  directors,  some of which were  outstanding  as of December 31,
1996. In September  1994, the Company granted options to purchase 6,565 shares
of  ZMAX  common  stock  to its  officers  and  directors.  The  options  were
contingent  upon  the  optionee  providing  services  to ZMAX  as a  director,
officer, employee or consultant to the Company. As a result of the termination
of those  individuals,  all of these  options were  canceled in 1996.  In June
1995, the Company also granted additional options to purchase 15,940 shares of
ZMAX common stock to its officers and directors. During 1996 and 1997, options
to purchase  7,814 and 8,126  shares,  respectively,  were either  canceled or
expired,  leaving no options outstanding under these issuances at December 31,
1997.

NON-EMPLOYEE OPTIONS

In September  1996,  ZMAX granted  options to purchase an aggregate of 200,000
shares of ZMAX common stock to a consultant  at exercise  prices  ranging from
$5.00 to $15.00 under the terms of a one-year consulting agreement.  Under the
terms  of the  agreement,  the  options  vested  ratably  over the term of the
agreement.  The Company recorded  $300,000 of compensation  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 the agreement was amended  charged to expense
in May 1997.


                                     F-20

<PAGE>

1997 STOCK INCENTIVE PLAN

In May 1997, the Board of Directors adopted the 1997 Stock Incentive Plan (the
"Incentive Plan").  The Stock Incentive Plan was subsequently  approved by the
Company's  stockholders in December 1997. 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 Company 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 as described below (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 exercise price of an incentive stock option
may not be less than the fair market  value of the Common Stock on the date of
the  grant  (or not less  than 110  percent  of the fair  market  value if the
participant  controls  more than 10 percent of the voting power of the Company
or a  subsidiary).  Non-qualified  stock options may be made  exercisable at a
price  equal to,  less than or more than the fair  market  value of the Common
Stock on the date that the option is  awarded.  The term of an option  will be
specified in the applicable stock incentive 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 April
1997, the Company granted  non-qualified  stock options to purchase  1,200,000
shares of Company  common stock under the Incentive  Plan to certain  officers
and employees. These options had an exercise price of $14.31 per share, expire
ten years after the date of grant,  and will become  fully  vested after seven
years,  although  vesting may be  accelerated  provided  that certain  revenue
targets are  achieved by the  Company.  As of December  31,  1997,  options to
purchase  100,000  shares of Company  common stock were vested.  ("See Note 13
Subsequent Event herein for information regarding an amendment for this plan")

On February 4, 1998 the Company's  Board of  Director's  amended the Incentive
Plan to permit  the  adjustment  of the terms and  conditions  of  outstanding
options.  On March 13, 1998, the Company and the four  optionees  holding such
option  agreements to purchase  1,200,000  shares of Company  common stock for
$14.31  per share  under the  Company's  Stock  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 reduced the number of shares of Company common stock underlying
each such option  being  reduced by 25 percent.  Further,  two  optionees  who
previously  had the right to exercise a portion their options agreed that such
options would not be exercisable until January 1, 1999


                                     F-21

<PAGE>

1997 DIRECTORS FORMULA STOCK OPTION PLAN

In May 1997, the Board of Directors  adopted the 1997 Directors  Formula Stock
Option  Plan (the  "Director  Plan"),.  The Board of  Directors  has  reserved
120,000 shares of Company 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.  The Director Plan is  administered  by a
committee (the  "Committee"),  the members of which have been appointed by the
Board  of  Directors.  The  Committee  consists  of  members  of the  Board of
Directors  who will not receive a grant of an option under the  Director  Plan
and who are not  currently  eligible to receive a grant of an option under the
Director  Plan.  The  Committee  has the  authority in its sole  discretion to
interpret the Director Plan and to make all other  determinations  and to take
all other actions it deems necessary or advisable for the  implementation  and
administration 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 Company
common stock upon a non-employee  director's initial appointment after May 20,
1997,  to  the  Board  of  Directors.  The  non-employee  director  will  vest
immediately as to 8,000 shares of Company common stock  underlying such option
and 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.  On May 20,  1997,  stock  options to purchase an
aggregate of 36,000  shares of Company  common  stock were  granted  under the
terms of the Director Plan to three eligible directors.  The exercise price of
these options was $14.06 per share. On December 8, 1997, an additional  option
to  purchase  12,000  shares of Company  common  stock was  granted to another
director with an exercise price of $12.00 per share.  The vesting schedule and
exercise  period  is in  accordance  with the  terms  described  above.  As of
December 31, 1997,  stock options to purchase  32,000 shares of Company common
stock were fully vested in accordance with the terms of the Director Plan.

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

<TABLE>
<CAPTION>
                                                                                            Weighted
                                                                                            Average
                                                         Number of      Option Price     Exercise Price
                                                          Shares            Range
                                                       ============== ================== ===============
<S>                                                    <C>            <C>                <C>
          Outstanding, December 31, 1994                       6,565    $         40.00          $40.00
          Granted                                             15,940              40.00           40.00
                                                       -------------- ------------------ ---------------
          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                                          1,248,000        12.00-14.31           14.28
          Canceled or expired                              (208,126)         5.00-40.00           11.00
                                                       ============== ================== ===============
          Outstanding, December 31, 1997                   1,248,000       $12.00-14.31          $14.28
                                                       ============== ================== ===============
</TABLE>


                                     F-22

<PAGE>

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 1997 were accounted for under the
intrinsic value method as defined by APB Opinion No. 25. Accordingly, proforma
disclosures are presented for 1997 option grants only.

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
                                                      Year Ended
                                                  December 31, 1997
                                                  -----------------
<S>                                                   <C>
          Net loss:
          As reported                                 $(14,206,699)
          Pro forma                                   $(15,465,379)

          Pro forma basic and diluted
             net loss per share:
          As reported                                 $(2.58)
          Pro forma                                   $(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  used for
grants during the year ended  December 31, 1997: no dividend  yield,  expected
volatility of 70 percent,  risk-free  interest rates from 5.87 percent to 6.84
percent and an expected term from 3 to 7 years.


                                     F-23

<PAGE>

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  has been a consultant  to ZMAX since 1994.  The
Company  retained this individual as a consultant at $10,000 per month 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 of  convertible  notes.  In addition  to  incurring  $120,000 in
consulting fees during 1996, ZMAX  reimbursed  approximately  $155,000 to this
individual  for  expenses  incurred  on  behalf  of ZMAX.  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.

The  Company  has  engaged  an  affiliate  of an  officer/director  to provide
accounting services to the Company under a consulting agreement with a monthly
fee of approximately  $3,500.  For the years ended December 31, 1997 and 1996,
the Company  incurred  approximately  $42,000 and  $12,000,  respectively,  in
consulting expenses for services rendered.

11.   COMMITMENTS AND CONTINGENCIES:

LEASES

The Company is party to a sub-lease  which  commenced  in 1996 for a four year
term  for  space  at its  Germantown,  Maryland  headquarters.  The  remaining
payments due as a result of this obligation are as follows:

<TABLE>
<S>                                <C>
          1998                     $154,203
          1999                      163,254
          2000                      135,755
          Total                    $453,212
                                  =========
</TABLE>


EMPLOYMENT AND CONSULTING AGREEMENTS

In November 1996, CSI entered into  employment  agreements with two executives
who were the former  stockholders  of CSI. The agreements  provided for a base
salary plus a bonus based upon CSI's cash flow (as defined in the  agreement).
The term of the  agreements  extend for a period of three years until November
1999.

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.  This
individual is still  entitled to receive his pro rata share of the  Restricted
Stock as it is released from its  restrictions  on transfer,  provided that he
does not violate the non-compete, non-solicitation, or proprietary information
restrictions contained in his original employment agreement.

The other  former  stockholder  of CSI remains an officer and  director of the
Company.  In May 1997, his employment  agreement was amended effective January
1, 1997. Under the terms of his amended  employment  agreement,  this employee
will  receive  a base  salary  plus a bonus of up to 100  percent  of his base
salary,  if the  Company  reaches  certain  specified  levels of  revenue  and
profitability.  No such  bonus was earned in 1997.  For fiscal  years 1998 and
1999,  the  Compensation  Committee  of the Company  will set new  performance
criteria  and  establish  the  percentage  of the  bonus to be paid in cash or
options  for that  year.  In the  event  that  this  employment  agreement  is
terminated by the death or permanent  disability (as defined in the agreement)
of  this  executive  or by  the  Company  without  cause  (as  defined  in the
agreement), severance payments at an annual rate of $100,000 for the remaining
term of the agreement will be due to the executive or the executive's  estate.
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 order to ensure  that CSI had  adequate  funds to pay the  compensation  of
these two persons  under their  original  employment  agreements,  the Company
placed  $200,000 in escrow in November 1996.  Each month beginning in December
1996,  $16,667 was released from escrow to the operating account of CSI to pay
the monthly amount due to these two persons.  Accordingly,  as of December 31,
1996, $184,016 represents restricted cash and is included in the cash balance.
As of December 31, 1997, all amounts had been released from escrow.


                                     F-24

<PAGE>

In June 1997, the Company entered into a three-year  employment agreement with
its Senior Vice President, Technology. Under the terms of such agreement, this
employee  will  receive a bonus of up to 100 percent of his base salary if the
Company reaches certain  specified  levels of financial  performance.  No such
bonus was earned in 1997.  For fiscal  years 1998 and 1999,  the  Compensation
Committee of the Company will set new  performance  criteria and establish the
percentage of the bonus to be paid in cash or options for that year.

In April 1997, the Company entered into a three-year consulting agreement with
the Chairman of the Board of Directors. Under the terms of such agreement, the
consultant  will be  compensated  at $20,000 per month.  This agreement can be
terminated  by the  Company  at  any  time;  however,  if  the  consultant  is
terminated  without  cause,  the  Company is  required  to continue to pay the
consultant  for the  shorter of either one year or the  remaining  term of the
agreement.  The  agreement  also  contains  non-compete  and  non-solicitation
provisions  extending from the  commencement  of the agreement until two years
after the termination of the agreement.

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
may not sell,  pledge,  encumber,  give,  bequeath,  or otherwise  transfer or
dispose of any of the 3,200,000 shares of Company common 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
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.

The stockholders also previously  entered into employment  agreements with CSI
as  described  above.  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).

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).
Any Restricted Stock subsequently  received by a stockholder's  estate will be
subject  to  this  provision  at the  time  of  the  release  of the  transfer
restrictions applicable to such shares of Restricted Stock.

Under the terms of the stockholders' agreement, the Company common stock owned
by these two  stockholders  may only be offered for sale,  sold or transferred
pursuant to an effective  registration  under the Securities Act of 1933 or an
exemption therefrom.  The term of this restriction is for three years from the
date of the agreement,  being November 6, 1996. The restrictions  apply to any
additional  shares of Company common stock acquired after the execution of the
stockholders' agreement.

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
transferability  of shares of the Company's  common stock. The plaintiffs have
alleged damages of approximate  $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-25