SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q

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

                For the Quarterly Period Ended December 31, 1999

                                       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 0-25309
                                    VMIC, INC
             (Exact name of registrant as specified in its charter)

                          ----------------------------

                                DELAWARE 63-0917261
                 (State or other jurisdiction of (I.R.S.Employer
               incorporation or organization) Identification no.)


             12090 S. Memorial Parkway Huntsville Alabama 35803-3308
                                 (256) 880-0444
     (Address, including zip code and telephone number of principal offices)
                          ----------------------------

                                    NO CHANGE
       (Former name, address and fiscal year if changed since last report)
                          ----------------------------

     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 __

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practical date.

                          COMMON STOCK, $.10 PAR VALUE
                4,594,912 shares outstanding on December 31, 1999

<PAGE>
                                   FORM 10-Q
                                   VMIC, Inc.

             QUARTERLY REPORT FOR THE PERIOD ENDED DECEMBER 31, 1999



                                      INDEX


                                                                            Page
                                                                           -----
Part I.   FINANCIAL INFORMATION

Item 1    Financial Statements

          Balance Sheets as of December 31, 1999 (Unaudited)
          and September 30, 1999...............................................3

          Statements of Income for the Three Months Ended
          December 31, 1999 and December 31, 1998 (Unaudited)..................4

          Statements of Cash Flows for the Three Months Ended
          December 31, 1999 and December 31, 1998  (Unaudited).................5

          Notes to Condensed Financial Statements (Unaudited)..................6

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

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........12

Part II.  OTHER INFORMATION

          Signatures..........................................................18

















                                        1
                                     <PAGE>


<PAGE>



PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

VMIC, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>


                                                                                         December 31,      September 30,
                                                                                            1999                1999
                                                                                        (Unaudited)          (Audited)
<S>                                                                                     <C>                <C>
                                      ASSETS
Current assets:
    Cash and cash equivalents                                                             $    202,816            585,883
    Accounts receivable (includes allowance for doubtful accounts of
      $250,381 at December 31, 1999 and September 30, 1999)
                                                                                             5,114,256          5,080,529
    Inventories                                                                              5,133,876          4,658,243
    Prepaid expenses                                                                           167,613            110,483
    Income tax receivable                                                                        5,238            106,553
    Deferred income taxes                                                                            0                  0
                                                                                   -------------------- ------------------

           Total current assets                                                             10,623,799         10,538,691
Property, plant, and equipment, net                                                          8,090,413          8,165,822
Purchased product and software costs, net                                                      684,397            728,630
Software development costs                                                                   1,089,330            836,363
                                                                                   -------------------- ------------------

                                                                                         $  20,487,439         20,269,506
                                                                                   ==================== ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current
liabilities:
    Accounts payable                                                                     $   1,865,108          1,977,284
    Bank overdraft                                                                                   0                  0
    Current portion of notes, mortgages, and capital leases                                  5,753,110          5,735,110
    Accrued liabilities                                                                      1,962,010          2,201,069
                                                                                   -------------------- ------------------

           Total current liabilities                                                         9,580,228          9,931,463
Notes, mortgages, and capital leases, less current portion above                             6,051,545          6,447,808
Deferred income taxes                                                                                0                  0
                                                                                   -------------------- ------------------

           Total liabilities                                                                15,631,773         16,379,271
                                                                                   -------------------- ------------------

Stockholders' equity:
    Common stock, par value $.10 (10,000,000  shares  authorized;  4,594,912 and
      4,580,016 shares issued and outstanding at December 31, 1999
      and September 30, 1999, respectively)                                                    459,789            458,002
    Additional paid-in capital                                                               6,927,815          6,810,314
    Retained earnings                                                                      (2,531,438)        (3,378,081)
                                                                                   -------------------- ------------------

           Total stockholders' equity                                                        4,856,166          3,890,235
                                                                                   -------------------- ------------------

                                                                                         $  20,487,939         20,269,506
                                                                                   ==================== ==================
</TABLE>


See notes to condensed financial statements.
                                        2
                                     <PAGE>

<TABLE>
<CAPTION>

VMIC, Inc.
Condensed Statements of Income(Unaudited)                                  Three months ended
                                                                       December 31,        December 31,
                                                                          1999                1998
<S>                                                             <C>                  <C>

Sales:
Hardware sales                                                         $ 8,152,625         $ 7,504,586
Software sales                                                             200,554             200,511
                                                                -------------------  ------------------

                                                                -------------------  ------------------
        Total sales                                                      8,353,179           7,705,097
                                                                -------------------  ------------------

Cost and expenses:
    Cost of products sold                                                3,017,575           2,851,280
    Research and development expense                                     1,285,591           1,577,637
    Selling, general, and administrative expense                         2,971,066           3,540,140
                                                                -------------------  ------------------

                                                                         7,274,232           7,969,057
                                                                -------------------  ------------------

           Operating (loss) income                                       1,078,947           (263,960)

Other income (expense)                                                   (232,307)           (138,302)
                                                                -------------------  ------------------

           (Loss) income before income taxes                               846,640           (402,262)

Benefit (provision) for income taxes                                             0             111,110
                                                                -------------------  ------------------

           Net (loss) income                                            $  846,640        $  (291,152)
                                                                ===================  ==================

Net (loss) income per common and common equivalent share:
    Basic                                                                   $0.184            $(0.065)
                                                                ===================  ==================
    Diluted                                                                 $0.182            $(0.065)
                                                                ===================  ==================

Weighted average common and common equivalent shares outstanding:
      Basic                                                              4,594,912           4,447,586
                                                                ===================  ==================
      Diluted                                                            4,638,821           4,447,586
                                                                ===================  ==================

See notes to condensed financial statements.

</TABLE>












                                        3

<PAGE>


<TABLE>
<CAPTION>

VMIC, Inc.
Condensed Statements of Cash Flows
                                                                              Three months ended
                                                                            December 31,        December 31,
                                                                               1999               1998
<S>                                                                        <C>                <C>

Cash flows from operating activities:
    Net (loss) income                                                           $ 846,640     $ (291,152)
     Adjustments to reconcile net (loss) income to net cash
     (used in) provided by operating activities:
        Depreciation and amortization                                             622,042         733,112
        Provision for losses on accounts receivable                                     0          12,000
        Stock issued in lieu of cash compensation                                  29,813          20,700
        Gain on disposal of property and equipment                                      0        (24,854)
        Change in operating assets and liabilities:
           Accounts receivable                                                     67,589        (39,185)
           Inventories                                                          (475,634)       (481,868)
           Prepaid expenses                                                      (57,130)        (72,807)
           Income tax receivable                                                  101,315       (111,110)
           Accounts payable                                                     (162,459)       (342,145)
           Accrued liabilities                                                  (594,793)       (513,306)
                                                                          ---------------- ---------------
               Total adjustments                                                (469,257)       (819,463)
                                                                          ---------------- ---------------
               Net cash (used in) provided by operating activities                377,383     (1,110,615)
                                                                          ---------------- ---------------

Cash flows from investing activities:
    Capital expenditures                                                        (241,927)       (299,959)
    Software development costs and purchased product and software costs         (208,735)       (846,161)
    Proceeds from dispositions of property, plant,
     and equipment                                                                      0          24,854
                                                                          ---------------- ---------------
               Net cash used in investing activities                            (450,662)     (1,121,266)
                                                                          ---------------- ---------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                            0       1,320,854
    Principal payments on long-term debt                                        (396,263)               0
    Increase in bank overdraft                                                          0         204,139
    Proceeds from issuance of common stock                                         89,475         178,916
                                                                          ---------------- ---------------
               Net cash provided by financing activities                        (306,788)       1,703,909
                                                                          ---------------- ---------------
               Net (decrease) increase in cash and
                  cash equivalents                                              (380,067)       (527,972)
Cash and cash equivalents, beginning of year                                      582,883         527,972
                                                                          ---------------- ---------------

Cash and cash equivalents, end of period                                       $  202,816       $       0
                                                                          ================ ===============

Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                   $  246,895       $ 170,000
                                                                          ================ ===============

    Cash paid during the period for income taxes                               $     0          $       0
                                                                          ================ ===============
</TABLE>

See notes to condensed financial statements.

                                        4



<PAGE>




                                   VMIC, Inc.
                     Notes to Condensed Financial Statements


1.       Basis of Presentation

       The accompanying  unaudited condensed financial  statements of VMIC, Inc.
       (the  Company)  have been  prepared  by  management  in  accordance  with
       generally   accepted   accounting   principles   for  interim   financial
       information  and in  conjunction  with the rules and  regulations  of the
       Securities and Exchange  Commission.  In the opinion of  management,  all
       adjustments  necessary for a fair  presentation of the interim  condensed
       financial  statements  have been included,  and all  adjustments are of a
       normal and recurring nature. The condensed financial statements as of and
       for  the  interim  period  ended  December  31,  1999  should  be read in
       conjunction  with the  Company's  financial  statements as of and for the
       year ended  September 30, 1999 included in the Company's  Form-10K  filed
       January 13, 2000.  Operating  results for the three months ended December
       31,  1999  are not  necessarily  indicative  of the  results  that may be
       expected for the year ended  September  30, 2000.  The September 30, 1999
       balance sheet data  presented  herein was derived from audited  financial
       statements  but does not include all  disclosures  required by  generally
       accepted accounting principles.



2.     Stock Options

       No options to  purchase  shares of common  stock were  granted on varying
       dates throughout the quarter to employees under the Employee Stock Option
       Plan,  at the market price as of the  effective  date.  Also,  options to
       purchase 4,429 shares of common stock were exercised during the quarter.



3.    Comprehensive Income

       The Company does not have any  difference  between net income as reported
and comprehensive income.























                                        5



<PAGE>


                                   VMIC, Inc.
               Notes to Condensed Financial Statements (Continued)


4. Earnings Per Share

<TABLE>
<CAPTION>

Earnings Per Share:
A summary  of the  calculation  of basic and  diluted  earnings  per share is as
follows:
                                                           Income              Shares           Per-Share
                                                        (Numerator)         (Denominator)        Amount
<S>                                                 <C>                   <C>                <C>
                                                    --------------------- ------------------ ----------------
                         Three months ended
                          December 31, 1999
Basic EPS:
     Loss available to common stockholders                     $ 846,640          4,594,912          $ 0.184
Effect of dilutive securities:
    Stock options                                                                    43,909


Diluted EPS                                                    $ 846,640          4,638,821          $ 0.182
                                                    --------------------- ------------------ ----------------
                          Three months ended
                          December 31, 1998

Basic EPS:
    Income available to common stockholders                  $ (291,152)          4,447,586        $ (0.065)
Effect of dilutive securities:
    Stock options

Diluted EPS                                                  $ (291,152)          4,447,586        $ (0.065)



</TABLE>

























                                        6
                                     <PAGE>






                                    FORM 10-Q
                                   VMIC, Inc.



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

EXCEPT FOR  HISTORICAL  INFORMATION  CONTAINED  HEREIN,  THIS  QUARTERLY  REPORT
CONTAINS FORWARD-LOOKING  STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934.  SUCH  FORWARD-LOOKING  STATEMENTS  ARE SUBJECT TO VARIOUS
RISKS AND  UNCERTAINTIES  THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER  MATERIALLY
FROM  THOSE  PROJECTED  IN  THE  FORWARD-LOOKING  STATEMENTS.  THESE  RISKS  AND
UNCERTAINTIES  ARE  DISCUSSED  IN  MORE  DETAIL  IN THE  FOLLOWING  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION
AND THE  QUANTITATIVE AND QUALITATIVE  DISCLOSURES  ABOUT MARKET RISK SECTION OF
THIS  QUARTERLY  REPORT.  THESE  FORWARD-LOOKING  STATEMENTS  CAN  BE  GENERALLY
IDENTIFIED AS SUCH BECAUSE THE CONTENT OF THE  STATEMENTS  WILL USUALLY  CONTAIN
SUCH WORDS AS THE COMPANY OR MANAGEMENT  "BELIEVES,"  "ANTICIPATES,"  "EXPECTS,"
"PLANS," OR WORDS OF SIMILAR  IMPORT.  SIMILARLY,  STATEMENTS  THAT DESCRIBE THE
COMPANY'S  FUTURE PLANS,  OBJECTIVES,  GOALS OR STRATEGIES  ARE  FORWARD-LOOKING
STATEMENTS.

OVERVIEW

         VMIC is a supplier of hardware  and  software  products to the embedded
computer  industry.  Embedded  computers  are  different  from desktop and other
computers in that embedded  computers are designed to perform  repetitive tasks,
whereas other computers are more general purpose. Embedded computers are used in
markets such as telecommunications,  medical,  industrial  automation,  test and
measurement,  and  defense.  VMIC  supplies  products  to all of these  markets.
However, the Company's focus for the future is primarily  telecommunications and
Fibre  Channel  storage area  networks  markets.  VMIC has recently  entered the
storage area network,  or SAN market, and the computer  networking industry with
Fibre Channel  products that are also used  throughout  these  markets.  SAN and
computer networking have wide applications throughout the computer industry.

         VMIC  specializes  in  open  architecture,   nonproprietary,   standard
computer  buses such as VMEbus,  PCI,  CompactPCI,  PMC, and PCoMIP.  These open
architecture  buses  are  supported  by  companies  such  as  Motorola,   Intel,
Hewlett-Packard, Microsoft, Sun, Silicon Graphics, Dell, and Compaq. The Company
manufactures  its own products to enable it to meet its  customers'  demands for
high  quality,  responsiveness,   reliability,  and  low  cost,  while  reducing
time-to-market  and life  cycle  costs.  The  Company's  manufacturing  facility
supports  low-volume,  high-mix  production,  and high-volume  production  using
state-of-the-art  equipment.  The Company  markets its  products in more than 60
countries  through  a  direct  sales  staff  and  a  network  of  manufacturers'
representatives and international distributors.

         The Company's objective is to become a leading supplier of standard bus
board  products and  software to the embedded  computer and storage area network
markets.  In addition,  the Company  believes that its expertise in the embedded
computer  market will provide the stepping stone for success in the  high-growth
Fibre Channel storage area network market with host adapter boards.

         VMIC  continues  to  invest  heavily  in new and  enhanced  technology,
including software,  and has focused its attention on highly vertical markets to
support faster growth, more consistent  profitability,  and enhanced shareholder
value.


                                        7



<PAGE>



MANAGEMENT'S  DISCUSSIONS  AND ANALYSIS OF FINANCIAL  CONDITIONS  AND RESULTS OF
OPERATION

         The Company  experienced  substantial  improvement in profitability for
the first  quarter  ended  December 31, 1999,  and revenue for the first quarter
increased 8.4 percent to $8.35 million, compared to the same period in 1998. Net
income for the first  quarter  increased  390.8  percent to $846,640 and diluted
earnings per share  increased  357 percent to $0.18 per share,  when compared to
first quarter 1998 results.  Profits increased due to reduced  expenses,  higher
operating  margins,  and increased sales.  Orders increased 43.8 percent to $9.0
million for the  three-month  period ended December 31, 1999, as compared to the
same period ended December 31, 1998.  Backlog  increased  465.2 percent to $15.4
million for the  three-month  period ended December 31, 1999, as compared to the
same period ended December 31, 1998. Sales of PC embedded single-board computers
increased 87 percent to $1.8 million as compared to the same period in 1998.

         The Company's development and delivery of new products has been focused
on  PC  embedded  single-board  computers,  Fibre  Channel  host  bus  adapters,
Reflective  Memory,  board-level  software,  and  improvements  in the  PC-based
control  software  package to support the  Company's  sales and marketing of I/O
systems and industrial automation hardware.

         The Company  recently  released nine new products for the Fibre Channel
storage area network market and began  shipments  during the first quarter.  The
SAN market is focused on the networking of computers and storage  devices,  such
as disks and tapes. The Company received its first volume order of more than 460
units  during  the first  quarter  and  expects a rapid  increase  in orders and
shipments of Fibre Channel products.

         VMIC's focus on more vertical  markets and products is showing signs of
success as  customers  such as Litton  Data  Systems,  Divicom,  Battelle/CyTek,
Lucent,  and  Westinghouse  have recently  selected the  Company's  single-board
computers as a compute engine for  applications in defense,  telecommunications,
industrial automation, medical, and digital video broadcasting markets.

         The Company expects volume  shipments to begin during the May/June 2000
time frame for these new opportunities.

         The  Company  also began  negotiations  with  Lucent,  during the first
quarter, for the supply of Reflective Memory boards in telecom applications. The
Company expects a contract award during the second quarter.

         The Company began extensive promotional efforts associated with its new
Fibre Channel  product line during the first quarter.  The company is encouraged
by the initial  response to its new product line. The market for SAN products is
projected  by IDT to grow from $2  billion  in 2000 to more than $23  billion in
2003. These new products,  which have focused on the SAN market,  positioned the
Company to market its  products to  computer  server  companies  such as Compaq,
Dell, Sun, SGI, and others.  The Company is specializing in the host bus adapter
(HBA)  product  area of the Fibre  Channel  market.  HBA  converts  the computer
electronic signals to a Fibre protocol for high-speed,  gigabit  transmission to
other computers and/or storage devices.

         In addition to the nine released  products focused on the SAN industry,
the Company is  developing  additional  software and hardware  products for this
market.

         The Company has  recently  developed a new Web site  focused on the SAN
product line at www.vmicnet.com.

         The Company has currently  limited  production of its Fibre Channel HBA
to beta test sites and shipped small  quantities for customer  evaluations,  but
anticipates volume shipments to begin during the second and third quarters.  The
Company recently won design-ins with several  customers who we expect will begin
placing volume orders soon.
                                        8
                                     <PAGE>

         Marketing  activities  for the Fibre  Channel  product line includes an
extensive  list of trade  shows  focused on the SAN  market,  as well as Web and
direct  mail  promotional  activities.  The  Company  recently  joined the Fibre
Channel  Industry  Association  (FCIA) and the Storage Area Networking  Industry
Association (SNIA).

SALES
         Sales increased 8.41 percent to $8.4 million for the three-month period
ended  December  31, 1999 from $7.7  million for the  three-month  period  ended
December 31,  1998.  Single-board  computer  sales  increased  87.9 percent from
$964,000 for the three-month  period ended December 31, 1998 to $1.8 million for
the same period in 1999.  Input/output  sales  decreased  8.9 percent from $3.97
million for the  three-month  period ended December 31, 1998 to $3.6 million for
the three-month period ended December 31, 1999.  Reflective Memory sales for the
first  quarter  2000 were flat in  comparison  to the first  quarter  of 1999 at
approximately $2.15 million.  Other sales of product lines for the first quarter
of 2000  were  relatively  flat in  comparison  to the  first  quarter  of 1999.
Software sales for the three-month period ended December 1999 were $200,511,  as
compared  to  $200,554  for the same  period in 1998.  International  sales as a
percent of total sales  decreased from 26.8 percent for the  three-month  period
ended  December  1998, as compared to 18.3 percent for the period ended December
31, 1999.


GROSS MARGINS
         The  Company's  average gross margin  increased  from 63 percent in the
three-month  period ended  December 31, 1998 to 64.2 percent in the  three-month
period ended December 31, 1999. This increase is attributed to increased  prices
and  decreased  software   amortization  costs  associated  with  the  Company's
capitalized  software costs. The sales mix of high-margin products was higher in
the quarter  ended  December 31, 1999 as compared to December  31,  1998.  Gross
margins for  software  increased  from 34.5 percent for the  three-month  period
ended  December  31,  1998 to 92.9  percent  for the  three-month  period  ended
December 31, 1999 primarily due to decreased  software  amortization as a result
of the write-off for the year ended September 30, 1999.


COST OF SALES
         Cost  of  sales  decreased  31.6  percent  to  35.84  percent  for  the
three-month  period ended December 31, 1999 as compared to 37.01 percent for the
period ended December 31, 1998. Cost of sales decreased  because of a higher mix
of  higher  gross  margin  products,   increased  prices,   and  lower  software
amortization costs.


GROSS PROFIT
         Gross  profit  for the  three-month  period  ended  December  31,  1999
increased  9.5 percent to $5.36  million as  compared  to $4.85  million for the
period ended  December  31, 1998.  Gross  profits  increased  because of reduced
software  amortization,  increased  prices for selected  products,  and a higher
sales mix of higher margin products.


SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
         For the three-month period ended December 31, 1999,  selling,  general,
and  administrative  (SG&A) expenses decreased 14.3 percent from $3.5 million to
$3.0 million for the period ended  December 31, 1998. The decrease is attributed
to substantially reduced costs in sales and marketing.


RESEARCH AND DEVELOPMENT EXPENSES
         For the  three-month  period  ended  December  31,  1999,  research and
development expenses decreased 12.8 percent from $1.48 million (20.48 percent of
sales) for the  three-month  period  ended  December  31, 1998 to $1.29  million
(15.39  percent of sales) for the period ended  December  31, 1999.  Capitalized
software costs for the  three-month  period ended December 31, 1999 decreased to
$252.900,  as compared to $653,000 for the three-month period ended December 31,
1998.
                                        9
                                     <PAGE>



INTEREST EXPENSES
         Interest  expenses   increased  44.9  percent  from  $170,400  for  the
three-month  period  ended  December  31, 1998 to $246,900  for the  three-month
period ended December 31, 1999. This increase is attributed to capital equipment
and investments for machinery,  computers, and interest on the Company's line of
credit.


INCOME TAXES
         Income  taxes as a  percentage  of  income  were  27.6  percent  in the
three-month  period  ended  December  31,  1998,  as  compared  to  zero  in the
three-month  period  ended  December  31,  1999.  No taxes  were  levied for the
three-month  period ended  December  31, 1999 because of the loss carry  forward
from the fiscal year ended September 30, 1999.


EARNINGS PER SHARE
         For the  three-month  period  ended  December  31,  1998,  net loss per
weighted  average common and common  equivalent share was $0.065 per basic share
compared  to net income of $0.184  per basic  share for the  three-month  period
ended December 31, 1999. For the three-month period ended December 31, 1998, net
loss per weighted average common and common equivalent share, assuming dilution,
was $0.065 per diluted share  compared to net income of $0.182 per diluted share
for the three-month period ended December 31,1999.


CAPITALIZED SOFTWARE DEVELOPMENT COSTS
         At December 31, 1999,  VMIC had five  categories  of software  products
under development as follows:

Software Product                        Capitalized Amount
----------------                        ------------------
IOWorks(R)                                 $151,951
Reflective Memory                            20,295
CPU Related                                  14,813
Communications                               29,426
I/O Products                                 12,262
                                             ------
Total                                      $228,747


EFFECTS OF INFLATION
         Substantially  all  contracts  awarded  to  VMIC  have  been  based  on
proposals which reflect estimated cost increases due to inflation. Historically,
inflation has not had a significant impact on VMIC's revenues or costs.


LIQUIDITY AND CAPITAL RESOURCES
         Historically,  VMIC's cash flow from  operations  and available  credit
facilities  have provided  adequate  liquidity and working capital to fully fund
VMIC's  operational  needs.  As of December 31, 1999,  VMIC's  variable  line of
credit for working  capital was $8.0  million,  of which $4.1  million was used.
VMIC's $2.0 million equipment line of credit availability was $1.0 million.  The
line of credit  expires March 1, 2000;  however,  VMIC expects to renew the line
for a one-year  term.  The  Company  also  expects to execute an  additional  $2
million equipment line of credit.

         The lines of credit  require  the  Company  to  maintain  certain  loan
covenants  and, as of December  31, 1999,  the Company was either in  compliance
with such covenants or had obtained waivers.

         Working  capital was $1.0  million at December 31, 1999 and $607,228 at
September 30, 1999. Included in working capital are cash and cash equivalents of
$202,800 at December 31, 1999 compared to $585,883 at September 30, 1999.  Total
working capital increased as a result of the profit experienced for

                                       10



<PAGE>


the  quarter  ended  December  31,  1999 and  changes  in  operating  assets and
liabilities. Current liabilities were $9.6 million at December 31, 1999 compared
to $9.9 million at September 30, 1999.  Operating activities for the three-month
period ended  December  31, 1999  provided  $0.3 million of cash.  Cash used for
investing  activities  was $0.4 million for the three months ended  December 31,
1999, of which $0.4 million was used for capital expenditures.  Cash provided by
financing  activities  was $0.0  million and $1.7  million for the three  months
ended December 31, 1999 and December 31, 1998, respectively.

         Inventory  turnover for the three  months  ended  December 31, 1999 was
approximately 153 days compared to approximately 171 days for the same period in
1998. This decrease was  attributable to increased sales and improved  inventory
management.  Accounts  receivable  from  customers  were  outstanding on average
approximately  53 days for the three months ended  December 31, 1999 compared to
approximately 51 days for the same period in 1998.

         VMIC believes that its financial  resources,  including its  internally
generated  funds and debt  capacity,  will be  sufficient to finance its current
operations and capital expenditures for the next 12 months. However,  management
is examining several options to raise additional working capital.

YEAR 2000 READINESS DISCLOSURE

OVERVIEW.
         Historically,  certain  computerized systems have had two digits rather
than  four  digits  to  define  the  applicable  year,  which  could  result  in
recognizing  a date using "00" as the year 1900 rather than the year 2000.  This
could cause significant  software failures or  miscalculations  and is generally
referred to as the "Year 2000" problem.

         The company recognizes that the impact of the Year 2000 problem extends
beyond  its  computer   hardware  and  software  and  may  affect   utility  and
telecommunication  services,  as well as the system of customers and  suppliers.
The Year 2000  problem was  addressed  by a team within the Company and progress
was reported periodically to management. The Company believes that a majority of
its  products  and  systems  are  Year  2000  compliant  and  VMIC   anticipates
maintaining  compliance  in future  revisions of any product or systems that are
currently  compliant.  The Company has surveyed all of its internal  systems and
software  for  Year  2000  compliance  and has  received  Year  2000  compliance
certification from the suppliers of the systems and software that are compliant.
Non-compliant  systems and  software  have been  upgraded or replaced to achieve
compliance.  The Company  believes  that it is Year 2000  compliant  and has not
suffered any Year 2000 related failure as of February 10, 2000.

COST FOR YEAR 2000 COMPLIANCE.
     The Company spent  approximately  $75,000 on becoming Year 2000  compliant;
this  was not  material  to the  Company's  operations,  liquidity  or  capital
resources.












                                       11
                                     <PAGE>
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's  business and financial  performance are subject to risks
and uncertainties, including those discussed below.

The  company  may not be able to compete  effectively  in its  current or future
markets.
         The standard bus embedded computer  industry is highly  competitive and
fragmented, and the Company faces significant competition in each of its product
markets. The Company's  competitors differ depending on product type, geographic
market, and application type. Several of VMIC's competitors are well established
and have greater  assets and  financial  resources  than the  Company,  and have
larger marketing and research and development budgets.  Several of the Company's
competitors also have larger service organizations.

         Competition in the Company's  business areas is influenced by technical
capacity,  customer support, product longevity,  supplier stability,  breadth of
product offerings, reliability,  performance, and price. Accordingly, even small
competitors  who  develop  technologically  similar or advanced  products  could
successfully  compete  with the  Company.  Other  competitors  have  established
relationships  with  customers  or  potential   customers  that  afford  them  a
competitive  advantage.  There can be no assurance that the Company will be able
to compete effectively in its current or future markets or whether the Company's
technology and designs will be viable in the marketplace in the future.



The  Company  recently  entered  into new  product  markets and may be unable to
develop  the  technologies  or market  presence  necessary  to  succeed in these
markets.

         VMIC's  recent  entry  into  vertically   integrated  markets  such  as
Industrial  Automation  and storage  area  networks  has required the Company to
develop new hardware and software products.  However, these new products,  while
offering potential new revenue sources,  may not achieve market acceptance,  and
the failure to succeed in these  markets could  materially  impact the financial
condition of VMIC.



The Company has diverted  research and development  resources from core products
to new technologies.

         The  Company  has   recently   undertaken   substantial   research  and
development  efforts  outside of its core business with the intent of increasing
its  revenue  base and growth  potential.  This is  reflected  in the  Company's
strategy of offering  PC-based  control  software or IOWorks,  embedded PC board
products,  and  communication  products,  such as Fibre  Channel and  Reflective
Memory to the Storage Area Network, Industrial Automation and Telecommunications
markets  and  other  more  vertically  integrated  markets.  To  implement  this
strategy,  the Company reduced its research and  development  investments in its
core business while significantly  increasing its investment in the new products
designed to address these more vertical markets.  If the Company is unsuccessful
in these new  markets,  it will be  dependent  on its core  business to maintain
historical  operating  results.  VMIC may not be able to maintain its historical
operating results,  however,  because it has substantially  reduced its research
and development investments in its core business.


Sales of the  Company's  new products may not meet the growth  objectives of the
Company.
         Some of the  Company's  new  hardware  products  will be sold at  lower
profit margins,  and the Company requires significant market acceptance of these
products  to meet the growth  objectives  of the  Company.  While there has been
significant  customer  interest in these new products,  and  Reflective  Memory,
Fibre Channel and PC-based  products  generated a significant  percentage of the
Company's  revenues in 1999,  there can be no assurance  that these new products
will be successful to the extent necessary to meet VMIC's growth objectives.  If
these new products  are not  successful,  the  Company's  operating  results and
financial condition could be materially adversely affected.

                                       12
                                     <PAGE>

The Company has increased its debt level and working capital requirements

         Traditionally,  the Company has  utilized  long-term  liabilities  as a
major financing source. Long-term debt of the Company rose from $200 thousand in
1986 to  approximately  $6.4  million as of December  31,  1999.  The  Company's
utilization  of long-term  debt is somewhat  higher than the average  company in
this industry.  A primary reason for the increase in long-term debt was the need
for the Company to manage its growth.  The Company  believes its current revenue
level will be sufficient to service its long-term debt. However, if the revenues
and profits of the Company substantially decrease, it will be more difficult for
the Company to service its long-term  debt,  meet its current  obligations,  and
continue with its current business plan. As of December 31, 1999 the Company had
sufficient current assets to liquidate all of its current liabilities.


The  Company's  products  may become  obsolete  and the Company may be unable to
respond to future market needs.

         Most of the Company's  products are developed to meet certain  industry
standards.  These  standards  continue  to  develop  and are  subject to change.
Elimination or  obsolescence  of all or some of these standards could affect the
design,  manufacture,  and sale of the  Company's  products  and require  costly
redesign to meet new or emerging standards.

         In general,  technology in the computer industry,  and the computer bus
board  industry  specifically,  is subject to rapid  technological  change.  The
introduction of new technology and products by others could adversely affect the
Company's business. There is no assurance that future advances in technology may
not make the Company's  existing  product line obsolete,  resulting in increased
competition,  and requiring the Company to undertake  costly  redesign  efforts.
There can be no  assurance  that the  Company  will be able to  incorporate  new
technology   into  its  product  lines  or  redesign  its  products  to  compete
effectively.

         Moreover,  because new products and  technologies  require  commitments
well in advance of sales,  decisions  with  respect  to those  commitments  must
accurately  anticipate  both  future  demand  and the  technology  that  will be
available to meet that demand.  There can be no assurance  that the Company will
be able to successfully anticipate or adapt to future technological changes, and
failure  to do so  may  materially  adversely  affect  the  Company's  business,
financial condition, or results of operations.



The Company may  experience  reduced cash flows as a result of selling  products
with  smaller  margins,  fluctuations  in  operating  results and  increases  in
expenses.

         The Company is  dependent  upon the success of its  recently  developed
IOWorks software for the sale of I/O system products, embedded PC board products
and  communication  products  such as  Reflective  Memory  and Fibre  Channel to
substantially   increase   revenue  growth.   Embedded  PC  board  products  and
communication  products  typically  yield  smaller  margins  than the  Company's
traditional  product mix and the Company's  profits could therefore erode in the
future.

         In  addition,  the  Company  has  experienced  reduced  net cash flows,
attributable to substantial software development,  inventory expansion, building
expansion, purchased technologies associated with PC single-board computers, the
Company's  expanded  use of internal  products  for  software  development,  and
fluctuations  in the  Company's  operating  results.  Moreover,  because  of the
Company's high level of current fixed expenses and working capital requirements,
and because  the  Company  believes  it should  continue  its  current  business
strategy of expending  substantial  resources on research and development,  VMIC
may experience a negative cash flow position in the future.






                                       13
                                     <PAGE>


     The  Company  may not be  able to  successfully  protect  its  intellectual
property and confidential information.

         The Company's success is, to a significant degree,  attributable to the
unique features of its software,  proprietary  technology and other confidential
information.  Unfortunately, software and information technology industries have
experienced widespread unauthorized  reproduction of software products and other
proprietary  technology.  While the Company has some patent  protection  for its
hardware  products,  the  Company's  software  is  not  patented,  and  existing
copyright  law  offers  only  limited  practical  protection.  For  most  of its
intellectual  property protection,  VMIC relies on a combination of trade secret
laws, copyright  protection,  common law intellectual  property rights,  license
agreements,  nondisclosure,  and other contractual provisions.  The Company does
not, however,  sell its software source code, or provide its customers access to
the source code associated with its software products.


         There is no  assurance  that the  Company  will be able to protect  its
trade  secrets  or that  others  will not  independently  develop  substantially
equivalent  proprietary  information  and techniques or otherwise gain access to
the Company's  trade secrets.  There is no assurance  that foreign  intellectual
property  laws will  protect the  Company's  intellectual  property  rights.  In
addition,   the  computer  industry  is  characterized  by  frequent  litigation
regarding  patent and other  intellectual  property  rights,  and litigation has
been, and may in the future be necessary to enforce the Company's  trade secrets
or to defend against claims of patent infringement. While VMIC believes that its
proprietary rights do not infringe upon the proprietary rights of others,  third
parties  may assert  infringement  claims  against the Company in the future and
such  assertion  could  cause the Company to enter into a license  agreement  or
royalty  arrangement with the party asserting the claim. The Company may also be
required to indemnify its customers for claims made against them.  Responding to
and defending any such claims, developing  non-infringing  intellectual property
or acquiring  licenses  could have a material  adverse  affect on the  Company's
business, financial condition or results of operations.


The Company may not be able to adequately finance its continued growth.

          The Company has been growing since 1986, during which time the Company
has  experienced  increased  debt,  sales growth,  high research and development
expenditures,  and an increased asset base.  There are certain risks inherent in
any growing company  arising from such factors as increased  working capital and
capital  expenditure  requirements.  Moreover,  the Company's  business strategy
calls for  substantial  continued  investment in new products.  The Company also
anticipates expanding its inventory and increasing  investments in equipment and
other fixed assets. There is no assurance that the Company will be successful in
obtaining additional long-term debt or equity financing,  or if obtained,  there
can be no assurance that the debt or equity financing will be on terms favorable
to the  Company  or its  shareholders.  The  failure  of the  Company  to obtain
additional  funds or the  obtaining  of such funds on  unfavorable  terms  could
adversely affect the financial  performance and prospects of the Company and any
equity investment on unfavorable  terms could cause substantial  dilution to the
shareholders.



The Company will be required to expense certain  software  development  costs if
software  sales  are  not  sufficient  to  amortize  the  capitalized   software
development costs over a five-year period.

         The Company, in fiscal year 1996, began to capitalize development costs
associated with its IOWorks software and certain other products.  The Company is
required to amortize its capitalized  software costs against future sales of the
software products over a five-year period after the release of the products. The
Company  accounts  for  these  software  development  costs in  accordance  with
Statement of Financial  Accounting Standards No. 86, Accounting for the Costs of
Computer  Software  to be  Sold,  Leased  or  Otherwise  Marketed.  The  Company
capitalizes  certain costs incurred in the production of computer  software once
technological  feasibility  of the product to be marketed has been  established.
Capitalization  of these costs ceases when the product is  considered  available
for general release to customers.

                                       14
                                     <PAGE>



The  establishment  of technological  feasibility and the ongoing  assessment of
recoverability of capitalized  software  development costs require  considerable
judgment by VMIC.

         If software sales are not sufficient to amortize the capitalized  costs
over the five-year  period the Company is required to expense those  capitalized
costs.  In 1999,  the  Company  recorded a $5.3  million  write-down  of certain
software development costs and purchased product and software costs.


The Company relies on suppliers for many of its electronic  components,  some of
which can only be obtained from a single source.

     Most of the Company's products contain  state-of-the-art digital electronic
components and integrated circuits.  The Company is dependent upon third parties
for the continuing  supply of most of these components and all of its integrated
circuits.  Some of these components are obtained from a sole supplier, such as Q
Logic,  Altus,  Triquent,  Intel, AMD, Tundra,  Cypress;  or a limited number of
suppliers, for which alternative sources would be difficult to locate. Recently,
the Company has experienced  difficulties in purchasing components for its Fibre
Channel  products from Q Logic.  The Company has also  experienced  shortages of
integrated  circuits and other key  components  from time to time,  and this has
resulted in delays in product
deliveries.  The  Company has also had to  terminate  its  marketing  of certain
products,  even newly developed  products,  when a component supplier terminated
its production of a critical component.  Moreover,  suppliers may discontinue or
upgrade some of the components  incorporated into the Company's products,  which
could  require  the  Company  to  redesign  a product  to  incorporate  newer or
alternative  technology.   Although  the  Company  believes  it  maintains  good
relationships  with its  suppliers,  and has arranged for an adequate  supply of
components to meet its short-term requirements, any unavailability of components
could  cause  delayed  shipments  and  lead  to  customer  dissatisfaction.  Any
sustained  unavailability  of components could  materially  adversely affect the
Company's operating results and financial condition.



The Company has limited manufacturing facilities and must rely on subcontractors
to complete some of the Company's products.

         The Company  relies on  subcontractors  for  manufacturing  some of the
Company's  products.  The contractors  may experience  delays because of quality
problems,  backlog,  component  availability,  financial  difficulty,  or  other
situations which could have an adverse effect on the Company's operating results
and customer  relationships.  In this event, the Company may be required to find
alternative subcontractors, and there can be no assurance that the Company could
find suitable subcontractors.


The loss of one or more major  customers or a number of smaller  customers could
adversely affect the Company's revenues and profits.

     Sales to two major  customers  accounted for  approximately  6.4% of VMIC's
sales in 1998 and 12.7% of VMIC's sales during 1999.  If either or both of these
customers  discontinued  purchasing  products  from the Company,  the  Company's
operating  results  and  financial  condition  could  be  materially   adversely
affected. In addition,  in fiscal year 1999,  approximately 31% of the Company's
sales were derived  directly or  indirectly  from various  agencies of the U. S.
Department of Defense.  Although the  percentage of the Company's  sales derived
from  governmental  contracts  has  decreased  from a high of 75% in  1986,  the
Company expects that the government will continue to be a significant  source of
sales.  It is possible  that changes in national  policy or other  factors could
result in reduced defense spending which could  materially  adversely affect the
operating results and financial condition of the Company.





                                       15
                                     <PAGE>

Lack of a Public Market and Certain Transfer Restrictions.

         There presently exists no public market for the shares of the Company's
stock,  nor is there any  likelihood  of one  developing  in the near future.  A
holder of the  Company's  Common Stock may not be able to  liquidate  his or her
position when  liquidity is needed and may be required to retain the  securities
indefinitely.


Control by Existing Shareholders.

         Carroll  E.  Williams  and Mary W.  Williams  own 37% of the  Company's
Common Stock. Together, all of the current officers and directors of the Company
(including Carroll E. Williams and Mary W. Williams) own a substantial  majority
of its Common Stock. Consequently,  these individuals,  and particularly Carroll
E.  Williams and Mary W.  Williams,  will control  virtually  all aspects of the
Company's business by virtue of their ability to nominate and elect the Board of
Directors and officers of the Company. As directors and officers of the Company,
they  will,  subject to their  fiduciary  duties,  be  entitled  to develop  and
implement the Company's  course of business.  Neither the Company's  Articles of
Incorporation  nor  its  Bylaws  permit  cumulative  voting.  Consequently,  the
remaining  shareholders  will not be entitled to elect a  representative  to the
Company's Board of Directors.


The Company Does Not Anticipate Paying Dividends.

         Since its incorporation,  the Company has never paid dividends and does
not anticipate  paying cash  dividends in the  foreseeable  future.  The Company
projects that it will retain future earnings, if any, to provide working capital
and  implement  the  Company's  business  strategy.  Also,  pursuant to its loan
agreement,  the  Company's  ability to pay  dividends is  substantially  limited
because the loan agreement  requires the Company to maintain  certain  financial
ratios that the Company believes would not be maintained if dividends were paid.

The Company may not be able to make acquisitions and the Company's  acquisitions
may not be successful.

     Part  of  the  Company's  strategy  for  growth  includes  acquisitions  of
complementary  technologies  or  businesses  that would  enhance  the  Company's
capabilities or increase the Company's  customer base. The Company's  ability to
expand  successfully  through  acquisitions  depends on many factors,  including
business and management's ability to effectively  integrate and operate acquired
companies.  The Company may compete  for  acquisition  opportunities  with other
companies that have  significantly  greater financial and management  resources.
There can be no assurance  that the Company will be  successful  in acquiring or
integrating any such technologies or businesses.



The Company may be subject to product liability claims.

         The Company's products and services may be subject to product liability
or electronics  manufacturing  errors or omissions liability claims. The Company
maintains  product  recall  insurance  with an aggregate  limit of $1.0 million,
primary  product  liability  and  electronics  errors  or  omissions   liability
insurance with a general  aggregate limit of $2.0 million,  and $1.0 million per
occurrence,  with a $2.0 million excess policy. While the Company has never been
the subject of any such claims, given the wide use of the Company's products and
the propensity of claimants to initially  pursue all possible  contributors in a
legal action,  there can be no assurance  that such coverage will be adequate to
protect the Company from liability. Further, the Company may be unable to obtain
insurance in the future at rates  acceptable  to the Company.  In the event of a
successful  lawsuit  against the Company,  insufficiency  of insurance  coverage
could have a material adverse effect upon the Company.


                                       16




<PAGE>




The  Company may not be able to retain and  recruit  key  employees  and skilled
personnel necessary to maintain or grow the business.

     The Company's  success will depend in large part on the continued  services
of its key management,  and technical personnel. The loss of the services of one
or more of the Company's key employees or the inability to hire  additional  key
personnel  as needed  could  have a  material  adverse  effect on the  Company's
business,  financial  condition  and  results  of  operations.  There  can be no
assurance that the Company will be successful in attracting and retaining needed
personnel.  While the Company is currently experiencing  relatively low rates of
turnover for skilled  employees,  there can be no assurance  that these rates of
turnover will not increase in the future.  The inability of the Company to hire,
train,  and retain a sufficient  number of qualified  employees could impair the
Company's  ability to compete in its  markets  resulting  in a material  adverse
effect on the Company's business, financial condition and results of operations.








































                                       17
                                     <PAGE>






                                   FORM 10-Q
                                   VMIC, Inc.

PART II - OTHER INFORMATION

SIGNATURES

MANAGEMENT REPRESENTATION


           The  accompanying  Balance Sheets at December 31, 1999, and September
30,  1999 as  well  as the  Statements  of  Income,  Statements  of  Changes  in
Stockholders'  Equity and Statements of Cash Flows for the three months December
31, 1999, and 1999, have been prepared in accordance  with  instructions to Form
10-Q  and do not  include  all of the  information  and  footnotes  required  by
generally accepted accounting principles for complete financial  statements.  In
the opinion of management, all adjustments,  consisting only of normal recurring
accruals, considered necessary for a fair presentation have been included.





January 11, 2000
---------------                       By: Gordon Hubbert
Date
                                          Gordon Hubbert
                                          Vice President and Chief
                                          Financial Officer (Principal Financial
                                          and Accounting Officer)


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.





January 11, 2000                           By: Carroll E. Williams
----------------

Date                                            Carroll E. Williams
                                                President and Chief
                                                Executive Officer










                                       18
                                     <PAGE>