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 June 30, 2000

                                       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
                 4,635,030 shares outstanding on June 30, 2000


<PAGE>


                                   FORM 10-Q
                                   VMIC, Inc.

             QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2000




                                      INDEX


                                                                          Page

Part I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

          Balance Sheets as of June 30, 2000 (Unaudited)
          and September 30, 1999..............................................1

          Statements of Operation for the Nine Months Ended
          June 30, 2000 and June 30, 1999 (Unaudited).........................3

          Statements of Cash Flows for the Nine Months Ended June 30, 2000
          and June 30, 1999  (Unaudited)......................................4

          Notes to Condensed Financial Statements (Unaudited).................5

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations ..............................................9

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.........19

Part II.  OTHER INFORMATION

          Signatures.........................................................27



<PAGE>

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

                                   VMIC, Inc.
                            Condensed Balance Sheets


                                                                                           June 30,          September 30,
                                                                                             2000                 1999

                                     ASSETS                                              (Unaudited)
<S>                                                                                  <C>                      <C>

Current assets:

   Cash and cash equivalents                                                       $            329,564        $   582,883

   Accounts receivable (includes allowance for doubtful accounts of

      $286,381 and $250,381 at June 30, 2000 and September 30, 1999)
                                                                                              6,276,896          5,080,529

   Inventories                                                                                7,571,539          4,658,243
   Prepaid expenses                                                                              13,008            110,483
   Deferred income taxes                                                                        992,758                  0
   Income tax receivable                                                                          5,238            106,553
                                                                                   --------------------  -----------------


           Total current assets                                                              15,189,003         10,538,691
Property, plant, and equipment, net                                                           8,036,802          8,165,822
Purchased product and software costs, net                                                       595,934            728,630
Software development costs, net                                                               1,119,386            836,363
Deferred income taxes                                                                         2,105,509                  0
                                                                                   --------------------  -----------------


                                                                                     $       27,046,634     $    20,269,506
                                                                                    ===================  ==================


                      LIABILITIES AND STOCKHOLDERS' EQUITY



Current liabilities:
   Accounts payable                                                                $          2,571,222   $      1,977,284
   Current portion of notes and mortgages                                                     5,056,790          5,753,110
   Accrued liabilities                                                                        3,091,892          2,201,069
                                                                                   --------------------  -----------------

          Total current liabilities                                                          10,719,904          9,931,463

Notes and mortgages less current portion above                                                6,813,980          6,447,808
                                                                                   --------------------  -----------------



           Total liabilities                                                                 17,533,884         16,379,271
                                                                                    --------------------  -----------------



Stockholders'  equity:

   Common stock, par value $.10 (10,000,000 shares authorized;  4,635,030

      and 4,580,016 shares issued and outstanding at June 30, 2000
      and September 30, 1999, respectively)                                                     463,503            458,002
   Additional paid-in capital                                                                 7,090,775          6,810,314
   Retained earnings (accumulated deficit)                                                    1,958,472        (3,378,081)
                                                                                   --------------------  -----------------

           Total stockholders' equity                                                         9,512,750          3,890,235
                                                                                    --------------------  -----------------


                                                                                    $        27,046,634     $    20,269,506
                                                                                    ===================  ==================


See notes to condensed financial statements.
</TABLE>


                                        1
<PAGE>


<TABLE>
<CAPTION>


                                   VMIC, Inc.
                       Condensed Statements of Operations

(Unaudited)                                                                   Three months ended

                                                                           June 30,             June 30,
<S>                                                                         <C>                  <C>
                                                                            2000                 1999
Sales:
Hardware sales                                                      $     9,749,791     $     5,889,997
Software sales                                                              196,661             225,528
                                                                -------------------   ------------------
        Total sales                                                       9,946,452           6,115,525
                                                                -------------------   ------------------

Cost and expenses:
   Cost of products sold                                                  3,738,975            2,367,541
   Research and development expense                                       1,320,596            1,251,995
   Selling, general, and administrative expense                           3,324,509            2,706,774
                                                                -------------------   ------------------
                                                                          8,384,080            6,326,310
                                                                 ------------------   ------------------

           Operating income (loss)                                         1,562,372           (210,785)

Other expense                                                              (230,960)           (205,441)
                                                                 -------------------   -----------------

           Income (loss) before income taxes                               1,331,412           (416,226)


Provision (benefit) for income taxes                                        426,050            (112,381)
                                                                 -------------------   -----------------

           Net income (loss)                                        $       905,362   $        (303,845)
                                                                  ------------------   ------------------


Net income (loss) per common and common equivalent share:
   Basic                                                                       $0.20             $(0.07)
                                                                   ===================   =================
   Diluted                                                                     $0.20             $(0.07)
                                                                   ===================   =================


Weighted average common and common equivalent
    shares outstanding:

      Basic                                                                 4,627,025           4,549,591
                                                                  ===================   =================
      Diluted                                                              4,638,299            4,549,591
                                                                  ===================   =================



See notes to condensed financial statements.



                                                             2
</TABLE>
<PAGE>

<TABLE>
<CAPTION>


                                   VMIC, Inc.
                       Condensed Statements of Operations

(Unaudited)                                                                Nine months ended

                                                                        June 30,             June 30,
<S>                                                                       <C>                  <C>
                                                                          2000                 1999

Sales:
Hardware sales                                                     $     26,856,075    $     19,894,646
Software sales                                                              695,124             597,674
                                                                -------------------   -----------------

        Total sales                                                      27,551,199           20,492,320
                                                                -------------------   ------------------



Cost and expenses:
   Cost of products sold                                                 10,123,263            7,680,178
   Research and development expense                                       3,886,283            4,299,620
   Selling, general, and administrative expense                           9,552,927            9,371,628
                                                                -------------------   ------------------


                                                                         23,562,473           23,351,426
                                                                -------------------   ------------------

           Operating income (loss)                                        3,988,726            (859,106)



Other expense                                                             (697,130)           (517,658)
                                                                -------------------   -----------------



           Income (loss) before income taxes                              3,291,596          (1,376,764)



Benefit for income taxes                                                 (2,044,958)           (371,730)
                                                                  -------------------   ------------------

           Net income (loss)                                      $       5,336,554  $       (1,005,034)
                                                                  ===================   ==================



Net (loss) income per common and common equivalent share:

   Basic                                                                       $1.16              $(0.22)
                                                                   ===================   =================
   Diluted                                                                     $1.15              $(0.22)
                                                                   ===================   =================


Weighted average common and common equivalent
   shares outstanding:
      Basic                                                                4,613,290           4,529,263
                                                                   ===================   =================
      Diluted                                                              4,626,861           4,529,263
                                                                   ===================   =================



See notes to condensed financial statements.

</TABLE>



                                       3
<PAGE>


                                   VMIC, Inc.
                       Condensed Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                                   Nine months ended
<S>                                                                             <C>                <C>

                                                                                 June 30,         June 30,
                                                                                   2000             1999
Cash flows from operating activities:

   Net income (loss)                                                         $    5,336,554  $   (1,005,034)

     Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:

         Depreciation and amortization                                            2,223,866         2,247,451
         Provision for losses on accounts receivable                                 36,000            24,000
         Stock issued in lieu of cash compensation                                   29,813           115,280
         Gain on disposal of property and equipment                                       0          (39,957)
         Change in operating assets and liabilities:
           Accounts receivable                                                   (1,232,366)          394,945
           Inventories                                                           (2,913,297)        (953,508)
           Prepaid expenses                                                           97,475           88,604
           Income tax receivable                                                     101,315          467,218
           Income tax payable                                                      1,053,309                0
           Deferred income tax                                                   (3,098,267)                0
           Accounts payable                                                          543,655        (521,224)
           Accrued liabilities                                                     (872,857)        (600,006)
                                                                             ---------------  ----------------
                 Total adjustments                                               (4,031,354)        1,222,803
                                                                             ---------------  ----------------
                 Net cash provided by operating activities                         1,305,200          217,769
                                                                             ---------------  ----------------



Cash flows from investing activities:

   Capital expenditures                                                         (1,364,105)      (1,383,448)
   Software development costs and purchased product and software costs            (150,328)      (2,364,734)
   Proceeds from dispositions of property, plant,

     and equipment                                                                        0           39,957
                                                                             ---------------  ----------------
                 Net cash used in investing activities                           (1,514,433)     (3,708,225)
                                                                             ---------------  ----------------



Cash flows from financing activities:
   Proceeds from issuance of long-term debt                                       2,042,662        2,827,270
   Principal payments on long-term debt                                         (2,372,710)                0
   Proceeds from issuance of common stock                                           285,962          161,092
                                                                             ---------------  ----------------
                 Net cash (used in) provided by financing activities                (44,086)       2,988,362
                                                                             ---------------  ----------------

Net decrease in cash and cash equivalents                                        (253,319)         (502,094)
Cash and cash equivalents, beginning of period                                     582,883           527,972
                                                                           ---------------  ----------------

Cash and cash equivalents, end of period                                   $       329,564       $    25,878
                                                                           ===============  ================



See notes to condensed financial statements.

</TABLE>

                                       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 June 30, 2000 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 nine months ended June 30, 2000 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
       The Company  granted 19,900 options to purchase shares of common stock 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  6,850 shares of common stock were  exercised  during
       the quarter.


                                       5
<PAGE>






                                   VMIC, Inc.

               Notes to Condensed Financial Statements (Continued)


 3.  Earnings Per Share


<TABLE>
<CAPTION>


Earnings Per Share:
A summary of the calculation of basic and diluted
earnings per share is as follows:
<S>                                                 <C>                    <C>                <C>

                                                       Income (Loss)           Shares         Per-Share
                                                        (Numerator)        (Denominator)        Amount
                                                    --------------------  ----------------  --------------
   Three months ended
   June 30, 2000
Basic EPS:

   Income available to common stockholders                  $    905,362         4,627,025      $     0.20
Effect of dilutive securities:
   Stock options                                                                    11,274

Diluted EPS                                                $    905,362          4,638,299      $     0.20
                                                    -------------------  ----------------- ---------------
         Three months ended
           June 30, 1999


Basic EPS:

   Loss available to common stockholders                  $    (303,845)         4,549,591     $    (0.07)
Effect of dilutive securities:
   Stock options                                                                         0

Diluted EPS                                              $    (303,845)          4,549,591     $    (0.07)


                                                       Income (Loss)           Shares         Per-Share
                                                        (Numerator)        (Denominator)        Amount
                                                    --------------------  ----------------  --------------

   Nine months ended
   June 30, 2000
Basic EPS:
   Income available to common stockholders                $    5,336,554         4,613,290      $     1.16
Effect of dilutive securities:
   Stock options                                                                    13,571

Diluted EPS                                              $    5,336,554          4,626,861      $     1.15
                                                    -------------------  ----------------- ---------------
         Nine months ended
           June 30, 1999

Basic EPS:
   Loss available to common stockholders                $    (1,005,034)         4,529,263     $    (0.22)
Effect of dilutive securities:
   Stock options                                                                         0

Diluted EPS                                            $    (1,005,034)          4,529,263     $    (0.22)

</TABLE>







                                       6

<PAGE>
4.  Inventories

     At June  30,  2000 and  September  30,  1999,  inventories  consist  of the
     following:





                                          June 30,           September 30,
                                            2000                  1999
                                    ---------------------  ------------------


Raw Materials                              $    4,231,119     $    2,511,460
Work in Process                                 2,520,262          1,232,573
Finished Goods                                  1,455,373          1,549,425
                                    --------------------- ------------------

                                                8,206,754          5,293,458

Less Reserve for Inventory
Obsolescence                                    (635,215)          (635,215)
                                    --------------------- ------------------


                                          $    7,571,539      $    4,658,243
                                    ===================== ==================


5.   Segment Reporting

     The  Company's  reportable  segments are based on the  Company's  method of
     internal reporting which is disaggregated operationally. The two reportable
     segments,  U.S. and  International,  are  evaluated  based on gross profit;
     therefore,  selling, general, and administrative costs, as well as research
     and development expense,  interest income,  interest expense, and provision
     for taxes is reported on an entity-wide basis only.

     The accounting  policies of the segments are the same as those described in
     the summary of significant  accounting policies to the extent such policies
     affect the reported segment information.  The operational  distributions of
     the Company's revenues and gross margin for the three and nine months ended
     June 30, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
<S>                                <C>                  <C>             <C>                     <C>
                                             Three Months Ended                    Nine Months Ended

                                          June 30,           June 30,                June 30,        June 30,
                                            2000               1999                   2000             1999
                                  -------------------   ---------------- ---------------------  --------------
Total Sales:

         U.S.                          $    7,639,959    $    4,953,108       $    21,159,250  $    15,819,265
         International                      2,306,511         1,162,418             6,391,949        4,673,055

                                       $    9,946,470    $    6,115,526       $    27,551,199  $    20,492,320
                                  ===================  ================  ==================== ================
Gross Profit:

         U.S.                          $    4,991,683    $    3,245,114       $    13,877,263  $    10,360,320
         International                      1,215,794           502,870             3,550,673        2,451,822

                                       $    6,207,477    $    3,747,984       $    17,427,936  $    12,812,142
                                  ===================  ================  ==================== ================


The Company's identifiable assets as of December 31, 1999 and 1998 relate to the
U.S. Segment only.


</TABLE>
                                       7

<PAGE>
6.       Recently Issued Accounting Pronouncements

     In June 1998, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards  No. 133  ("SFAS  133"),  "Accounting  for
     Derivative Instruments and Hedging Activities," which will be effective for
     fiscal  years  beginning  after June 15,  2000.  SFAS 133  establishes  new
     standards of  accounting  and  reporting  for  derivative  instruments  and
     hedging activities. SFAS 133 requires that all derivatives be recognized at
     fair  value  in  the  statement  of  financial   position,   and  that  the
     corresponding  gains or  losses be  reported  either  in the  statement  of
     operations or as a component of comprehensive income, depending on the type
     of hedging  relationship  that exists.  The Company currently does not hold
     derivative instruments or engage in hedging activities.



7.       Income Taxes

     The  benefit  for income  taxes for the nine  months  ended  June 30,  2000
     consists of the following:

     Income tax expense                                $       1,053,331
     Reversal of valuation allowance                         (3,098,289)
                                                       -----------------
                                                       $     (2,044,958)
                                                       =================


     The ultimate  realization of the net deferred  income tax assets depends on
     the Company's ability to generate  sufficient taxable income in the future.
     Management  believes  that it is more  likely  than not  that the  deferred
     income tax asset will be realized. Accordingly, the valuation allowance was
     reversed during the quarter ended March 31, 2000.

                                       8

<PAGE>
     Item 2:  Management's  Discussion  and Analysis of Financial  Condition and
     Results of Operations


     The following  discussion and analysis  should be read in conjunction  with
     the Company's financial statements and notes thereto.


     Except for historical  information  contained herein, this quarterly report
     contains  forward-looking  statements  as  defined  in  Section  21E of the
     Securities and 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.

     The  forward-looking  statements included in this quarterly report are also
     subject to a number of risks and uncertainties,  including, but not limited
     to,  economic,   competitive,   governmental,   and  technological  factors
     affecting the Company's operations,  markets,  products,  services, prices,
     and other risk factors listed in the Company's Form 10-K for the year ended
     September  30,  1999  and  this  quarterly  report.  These  forward-looking
     statements are not  guarantees of future  performance  and actual  results;
     developments  and  business  decisions  may differ from those  expressed or
     implied by these forward-looking statements.


                                       9
<PAGE>
     Overview

     VMIC is a supplier of standard bus boards,  software,  and systems products
     which   are   used   in    applications    involving    markets   such   as
     telecommunications,  Fibre Channel storage area networks  (SANs),  medical,
     industrial automation,  test and measurement,  and defense. VMIC supplies a
     variety of products to all of these markets;  however,  the Company's focus
     is high-volume OEM  applications  involving the PC  single-board  computers
     (SBCs) and  communications/networking  products.  VMIC has recently entered
     the 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.


     The Company has focused its attention on two key product revenue areas that
are experiencing high growth:


     *  Embedded Intel(R) central processing units or CPUs


     *   Communications/networking products, such as Fibre Channel, SCSI,
         gigabit Ethernet, and Reflective Memory networks


     VMIC specializes in open  architecture,  nonproprietary,  standard computer
     buses,  such as VMEbus,  PCI bus,  CompactPCI(R),  PMC, PCI-X,  and PCoMIP.
     Companies such as Motorola, Intel,  Hewlett-Packard,  Sun, Microsoft, Dell,
     Compaq,  and other leaders in the industry support these open  architecture
     buses.  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  medium-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,    international
     distributors,  and  remote  offices  in Texas,  the  Carolinas,  and Paris,
     France.


     The  Company's  objective  is to become a leading  supplier of standard bus
     board-level  products and software to the embedded computer with a focus on
     high  volume  OEM  applications.  Embedded  computers  are  different  from
     general-purpose  computers  in that  embedded  computers  are  designed  to
     perform  repetitive  tasks,  whereas  other  computers are more flexible in

                                       10

<PAGE>

     their use and applications.  Embedded computer products are used throughout
     markets  such as  telecommunications,  SAN,  defense,  medical,  industrial
     automation, and test and measurement.  The Company differentiates itself in
     these markets through a feature-rich  hardware  product line and supporting
     software   that   obviates  the  need  for  customers  to  invest  in  VMIC
     product-specific software development.


     VMIC,  headquartered in Huntsville,  Alabama, is a 14-year-old company with
     215  employees,  and  operates  from more than  76,000  square feet in four
     buildings on a campus of ten acres.


     Management's  Discussions and Analysis of Financial  Conditions and Results
     of Operation


     Revenues  were  $9,946,452  for the  quarter and  $27,551,199  for the nine
     months  Ended June 30,  2000  compared  to  $6,115,525  for the quarter and
     $20,492,320  for the nine months ended June 30, 1999, for increases of 62.6
     percent and 34.4 percent,  respectively.  Gross profits for the quarter and
     nine months ended June 30, 2000 were $6,207,477 and $17,427,936 compared to
     $3,747,984 and  $12,812,142  for the quarter and nine months ended June 30,
     1999, for increases of 65.6 percent and 36 percent, respectively.


     Net income was  $905,362  and  $5,336,554  for the  quarter and nine months
     ended June 30, 2000 compared to a net loss of ($303,845)  and  ($1,005,034)
     for the quarter and nine months  ended June 30,  1999.  Earnings per common
     share  (diluted) were $0.20 and $1.15 for the quarter and nine months ended
     June 30,  2000  compared  net losses of ($0.07) and ($0.22) for the quarter
     and nine months ended June 30, 1999.


     International  sales  for the  third  quarter  increased  98.4  percent  to
     $2,306,511  million  compared to  $1,162,418  million for the quarter ended
     June 30, 1999.


     Domestic  sales for the third quarter  increased 54.2 percent to $7,639,959
     million compared to $4,953,108 million for the quarter ended June 30, 1999.
     Systems sales  decreased  15.8 percent to $1,040,995  million for the third
     quarter compared to $1,236,061 million for the quarter ended June 20, 1999.
     Systems  sales  include  the  sale  of  a  mixture  of  products  involving
     input/output  hardware and software  typically  preconfigured to customers'
     specifications.  Our  investment  in  PC-based  control  software  has been
     instrumental  in expanding  our I/O systems  business  into the  industrial
     automation market arena.


     The Company began shipments for the  Applique'+V4  program,  which involves
     the  production  of  single-board  computers  (SBCs)  designed  to meet the
     military's  digital  battlefield  requirements with applications  involving
     situational awareness,  command and control,  weapons targeting, as well as
     tactical  and  operational  applications.   Litton  Systems,  Data  Systems
     Division,  recently  awarded VMIC a $2.8 million  contract to use its Intel
     Pentium(R) II  processor-based  CompactPCI  SBCs in Litton's  Applique'+ V4
     computer system. A second source contract has also been awarded to VMIC for
     a similar  product which could also generate  equivalent  revenues over the
     same time frame.

                                       11
<PAGE>

     VMIC announced  eight new products  during the quarter.  Of these products,
     four were new SBC  products.  Of the four new SBCs two are based on the 850
     MHz Pentium  III for VMEbus and two are  CompactPCI  Pentium  IIIs based on
     Intel's embedded module. VMIC was recently selected by Intel to be a leader
     account  for a new  815e  PC  chipset  which  allows  VMIC to  begin  early
     development  of leading PC  technology  sooner than its  competition.  VMIC
     engineers   identified  this  chipset  as  a  good  solution  for  embedded
     computers.  VMIC's  embedded  SBCs  designed  with this  chipset  will have
     processor speed of 1 GHz and higher. We believe VMIC's position as a leader
     account has provided VMIC with  strategic  advantage in the  development of
     embedded  computers  based  on the 815e  chipset.  We also  released  Fibre
     Channel  software  drivers for Solaris and  Windows  NT(R),  and  announced
     support  for  Microsoft(R)   Windows(R)  2000.  We  recently  announced  an
     enhanced,  user friendlier version of our PC-based control software package
     (IOWorks(R))  for  industrial  automation.  This new version,  coupled with
     VMIC's CPU, VME I/O,  and  IOMax(TM)  distributed  I/O  products,  has been
     selected  by  Logan  Aluminum  for a  major  automation  upgrade  to  their
     Russellville, Kentucky plant.


     VMIC  achieved  four design wins in the quarter  ended June 30, 2000.  "The
     Company  characterizes  a design  win as a  project  estimated  to  produce
     $500,000 or more in revenue per year when in production. Of the four design
     wins,  two are  expected  to produce  over  $500,000  annually  and two are
     expected  to produce  over $1  million or more in revenue  per year once in
     full production,"  explained Mr. Williams. Of these four design wins, three
     involves  data  acquisition  and control and one  involves  SBCs in turbine
     control and training.


     Design wins ramp into  production  volume over time  intervals  which range
     from 3 to 9 months  after the win  occurs.  A variety  of risks can  affect
     these  programs  before the start of production,  such as schedule  delays,
     changes in customer markets, and customer product sales volumes.


     LSI Logic  Corporation  and VMIC have entered into an agreement that allows
     VMIC to become a beta  test site for LSI  Logic's  Fibre  Channel  and SCSI
     chips and software. The agreement provides VMIC with licensed technology to
     enable VMIC to develop  state-of-the-art Fibre Channel and SCSI board-level
     products,  firmware,  and software with advance information from LSI Logic.
     The  agreement  provides  LSI Logic  access to VMIC Fibre  Channel and SCSI
     technical data, firmware, and software.


     VMIC is in the  process of  immediate  release of several  new  board-level
     products  based upon LSI Logic Fibre Channel and SCSI chips  supported by a
     robust suite of software drivers.


     The Company's new relationship  with LSI Logic is critical to the continued
     implementation  of our  strategy of moving to large  vertical  markets with
     advanced products and technology.

                                       12
<PAGE>


     The Company's gross margin for the third quarter  increased to 62.4 percent
     from 61.3  percent in the quarter  ended June 30, 1999.  This  increase was
     primarily the result of decreased software  amortization costs and selected
     price  increases  on  lower  volume  products  and  reduced  costs  of some
     products.


     R&D expenses for the third quarter  decreased to 13.3 percent of sales from
     20.5 percent of sales for the quarter ended June 30,1999. SG&A decreased as
     a  percentage  of revenue to 33.4 percent from 44.3 percent for the quarter
     ended June 30, 1999.  Operating  income as a percentage  of revenue for the
     third quarter was 13.4 percent compared to an operating loss of 6.8 percent
     for the quarter ended June 30, 1999.


     The Company's cash flow was sufficiently  positive during the third quarter
     to reduce our borrowings on our working line of credit from $3.5 million to
     $3.0 million.


     Inventory  for the third  quarter  increased  61.7  percent to $7.6 million
     compared to $4.7 million for the year ended  September 30, 1999.  Inventory
     increased  primarily  because of  increased  requests  from  customers  for
     quicker  deliveries,  new hardware  products  focused on SBCs and increased
     backlog creating demands for increasing shipments.


     Stockholder  equity  increased  143.6  percent  from  $3.9  million  as  of
     September 30, 1999 to $9.5 million as of June 30, 2000.


     We  are  pleased  with  this   quarter's   performance,   the   performance
     year-to-date  and expect the benefits  from recent new business  awards and
     our  continued  cost  containment  program to provide  strong  support  for
     achieving our financial goals for fiscal year 2000.


                              Results of Operations


     (Nine  Months  Ended June 30, 2000  Compared to Nine Months  Ended June 30,
     1999.)


     Sales

     For the nine-month period ended June 30, 2000, sales increased 34.6 percent
     to $27.6 million compared to $20.5 million for the nine-month  period ended
     June 30, 1999.  Sales were  generated  primarily  from four  product  areas
     involving  input/output,  communications/networking,  SBCs,  and  software.
     Sales for input/output products increased 17.5 percent to $12.1 million for
     the nine-month period ended June 30, 2000 compared to $10.3 million for the
     same period in 1999. Sales for  communications/network  products  increased
     27.0 percent to $8.0 million for the nine-month  period ended June 30, 2000
     compared to $6.3 million for the same period ended in 1999. The increase in
     sales for  communications/network  products  was  primarily  from growth in
     Reflective Memory and Fibre Channel product lines. Sales for SBCs increased
     109.1 percent to $6.9 million for the nine-month period ended June 30, 2000
     compared to $3.3 million for the same period in 1999. The increase in sales
     was generated as a result of shipments  associated  with new design wins in
     telecommunications, medical, defense, and industrial automation.

                                       13
<PAGE>

     Sales  for  software  increased  16.2  percent  to  $695  thousand  for the
     nine-month  period  ended June 30, 2000  compared to $598  thousand for the
     same  period in 1999.  This  increase  in sales was  generated  because  of
     increased  shipments  of  PC-based  control  software  coupled  with higher
     shipments of other software modules associated with other product lines.


     Gross Profits

     For the nine-month  period ended June 30, 2000, gross profit increased 35.9
     percent  or $4.6  million  to $17.4  million  from  $12.8  million  for the
     nine-month  period ended June 30, 1999.  Gross  profits as a percentage  of
     sales increased to 63.3 percent from 62.5 percent for the nine-month period
     ended June 30, 2000.


     The increase  resulted from lower  amortized  software costs selected price
     increases on lower volume niche products and improvements in parts costs.


     Gross  margins as a  percentage  of sales are  expected  to decrease as the
     Company's  lower margin products  business  becomes a larger portion of the
     total sales mix.


     Selling, General, and Administrative Expenses

     For the  nine-month  period  ended June 30,  2000,  selling,  general,  and
     administrative  (SG&A) expenses  increased 2.1 percent to $9.6 million from
     $9.4 million for the nine-month period ended June 30, 1999.


     Research and Development

     For the  nine-month  period ended June 30, 2000,  Research and  Development
     (R&D) expenses  decreased 9.3 percent to $3.9 million from $4.3 million for
     the nine-month  period ended June 30, 1999. This decrease resulted from the
     reduction in staff and reductions in amortized  expenses to align resources
     to  the  companies  new  market  focus.  Capitalized  software  development
     expenses for the nine-month period ended June 30, 2000 decreased 65 percent
     to $0.7 million compared to $2.0 million for the same period in 1999.

                                       14

<PAGE>


     Capitalized Software Development Costs


     During the nine-month  period ended June 30, 2000,  VMIC had two categories
     of capitalized software products under development as follows:


     Software Product Category | Capitalized  |  Expensed

     ====================================================

     IOWorks (PC-Based Control)    $16,078     $130,078

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

     Board Drivers*                $24,875     $95,247

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

     *Includes     software    drivers    for    products    such    as    CPUs,
     communications/networks, and I/O products.


     The Company is continuing  the  capitalization  of some  software  modules;
     however, the majority of our investments in software products are expensed.
     Special custom  software  developed for  production  testing of products is
     capitalized and amortized over its useful life.


     Earnings Per Share

     Net income per common  shares was $1.16 for the nine months  ended June 30,
     2000  compared to a net loss of ($0.22) for the nine months  ended June 30,
     1999.  Earnings  per common share  (diluted)  was $1.15 for the nine months
     ended June 30,  2000  compared to a net loss of ($0.22) for the quarter and
     nine months ended June 30, 1999.


     Three  Months  Ended June 30, 2000  Compared to Three Months Ended June 30,
     1999


     Sales

     Revenues for the third  quarter  ended June 30, 2000 were $9.9  million,  a
     62.3 percent  increase  from revenues of $6.1 million for the quarter ended
     June 30, 1999.


     International  sales for the third quarter  increased  91.7 percent to $2.3
     million  compared  to $1.2  million for the  quarter  ended June 30,  1999.
     Domestic sales for the third quarter increased 52.0 percent to $7.6 million
     compared to $5.0 million for the quarter ended June 30, 1999. Systems sales
     decreased  16.7 percent to $1.0 million for the third  quarter  compared to
     $1.2 million for the quarter ended June 30, 1999. Systems sales include the
     sale of a mixture of products involving  input/output hardware and software
     typically  preconfigured  to customers'  specifications.  Our investment in
     PC-based  control  software  has been  instrumental  in  expanding  our I/O
     systems business into the industrial automation market arena.


     Sales  were  generated   primarily   from  four  product  areas   involving
     input/output,  communications/networking,  SBCs,  and  software.  Sales for
     input/output  products increased 32.3 percent to $4.1 million for the third
     quarter  compared to $3.1  million  for the same period in 1999.  Sales for

                                       15
<PAGE>

     communications/network  products increased 47.1 percent to $2.5 million for
     the third quarter compared to $1.7 million for the same period in 1999. The
     sales  increase for  communications/network  products was  primarily due to
     increased sales of Reflective Memory and Fibre Channel products.  Sales for
     SBCs increased 181.8 percent to $3.1 million for the third quarter compared
     to $1.1 million for the same period in 1999.


     Sales for software  decreased  12.8 percent to $197  thousand for the third
     quarter  compared to $226  thousand  for the same period in 1999.  Software
     sales decreased because of lower shipments of PC-based control software and
     other software modules.


     Sales  increases were generated  because of new products,  our focus on new
     markets, OEM accounts, and generally better business conditions.


     Gross Profits

     For the  three-month  period ended June 30, 2000,  gross profits  increased
     67.6  percent or $2.5  million to $6.2  million  from $3.7  million for the
     three-month  period ended June 30, 1999. The increase was generated because
     of increases in revenues.


     The Company's gross margin  increased to 62.4 percent for the third quarter
     from 61.3  percent in the quarter  ended June 30,  1999.  The  increase was
     primarily the result of decreased  software  amortization  costs,  selected
     price increases on lower volume products, and improved parts costs.


     Gross  margins as a  percentage  of sales are  expected  to decrease as the
     Company's  lower margin products  business  becomes a larger portion of the
     total sales mix.


     Selling, General, and Administrative Expenses

     For the  three-month  period ended June 30,  2000,  selling,  general,  and
     administrative  (SG&A) expenses increased 22.2 percent to $3.3 million from
     $2.7 million for the three-month period ended June 30, 1999.


     SG&A for the third  quarter  decreased as a percentage  of revenues to 33.4
     percent from 44.3 percent for the quarter ended June 31, 1999.


     Research and Development Expenses

     For the  three-month  period ended June 30, 2000,  Research and Development
     expenses (R&D)  increased 8.3 percent to $1.3 million from $1.2 million for
     the three-month period ended June 30, 1999.


     R&D expenses  decreased to 13.3 percent of sales for the third quarter from
     20.5 percent of sales for the quarter ended June 30, 1999.

                                       16

<PAGE>

     Capitalized Software Development Costs

     During the three-month  period ended June 30, 2000, VMIC had two categories
     of capitalized software products under development as follows:

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

     Software Product Category  |  Capitalized  |  Expensed

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

     IOWorks (PC-Based Control)   $119,722          $70,085

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

     Board Drivers*               $39,888           $24,499

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

     *Includes     software    drivers    for    products    such    as    CPUs,
     communications/networks, and I/O products.


     The Company is continuing to capitalize  the  development  of some software
     products on a very limited basis. Most software product  development is now
     expensed.  Custom software  developed for production testing of products is
     capitalized and amortized over its useful life.


     Income Taxes

     The  Company  is  accruing  income  taxes  at the rate of 32  percent.  The
     statuatory   tax  rate  is  34  percent   less  credits  for  research  and
     development.


     Earnings Per Share

     Net income per common  share was $0.20 for the three  months ended June 30,
     2000  compared to a net loss of ($0.07) for the three months ended June 30,
     1999. Net income per common share (diluted) was $0.20 for the quarter ended
     June 30, 2000  compared to a net loss of ($0.07) for the quarter ended June
     30, 1999.

                                       17
<PAGE>


     Liquidity and Capital Resources

     Historically,  VMIC's  cash  flow  from  operations  and  available  credit
     facilities  has provided  adequate  liquidity and working  capital to fully
     fund VMIC's operational needs. As of June 30, 2000, VMIC's variable line of
     credit for working capital was $8.0 million,  of which $3 million was used.
     The Company's cash flow was sufficiently positive during the second quarter
     to reduce our borrowings on our working line of credit from $3.5 million to
     $3.0 million.


     The lines of credit require the Company to maintain  certain loan covenants
     and,  as of  June  30,  2000,  the  Company  was in  compliance  with  such
     covenants.


     Working  capital  was $4.5  million  at June 30,  2000 and $0.6  million at
     September  30,  1999.  Included  in  working  capital  are  cash  and  cash
     equivalents  of $0.3  million at June 30, 2000  compared to $0.6 million at
     September  30, 1999.  Total  working  capital  increased as a result of the
     profit  experienced  for the nine months ended June 30, 2000 and changes in
     operating assets and liabilities. Current liabilities were $10.7 million at
     June 30, 2000  compared to $9.9  million at September  30, 1999.  Operating
     activities  for the  nine-month  period ended June 30, 2000  provided  $1.3
     million of cash.  Cash used for investing  activities  was $1.5 million for
     the nine months  ended June 30,  2000,  of which $1.4  million was used for
     capital expenditures.  Cash used for financing activities was $0.04 million
     for the nine months ended June 30, 2000.


     Inventory   turnover   for  the  nine  months   ended  June  30,  2000  was
     approximately  202 days  compared  to  approximately  212 days for the same
     period in 1999.  This decrease is attributable to higher sales and improved
     inventory  management.  Accounts receivable from customers were outstanding
     on average  approximately  52 days for the nine months  ended June 30, 2000
     compared to approximately 52 days for the same period in 1999.


     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.

                                       18
<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.

                                       19
<PAGE>

     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,  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.


     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 $200,000 in 1986
     to  approximately   $6.8  million  as  of  June  30,  2000.  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 June 30, 2000 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.

                                       20
<PAGE>

     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 to increase the sales of I/O system products. The Company has also
     made   significant   investments   in  embedded  PC  board   products   and
     communications  products  such as  Reflective  Memory and Fibre  Channel to
     substantially  increase  revenue  growth.  Embedded PC boards  products and
     communications  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 SBCs, 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.


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

                                       21
<PAGE>

     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  noninfringing  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.
                                     22
<PAGE>

     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.


     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 QLogic, 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 QLogic.  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.

                                      23
<PAGE>

     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  12.7 percent of
     VMIC's sales in 1999 and 9.6 percent of VMIC's sales during 2000. 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 percent 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 percent 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.


     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 36 percent 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.

                                    24
<PAGE>

     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.


     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.

                                      25
<PAGE>

     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.


     IOWorks  and the VMIC logo are  registered  trademarks  of VMIC.  Intel and
     Pentium are registered trademarks of Intel Corporation. Microsoft, Windows,
     and  Windows  NT  are  registered  trademarks  of  Microsoft   Corporation.
     CompactPCI   is  a  registered   trademark  of  PCI   Industrial   Computer
     Manufacturer's Group. Other registered trademarks are the property of their
     respective owners.



















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<PAGE>






     Signatures


     Management Representation


     The accompanying Balance Sheets at June 30, 2000, and September 30, 1999 as
     well as the  Statements of Income,  Statements of Changes in  Stockholders'
     Equity,  and Statements of Cash Flows for the nine months June 30, 2000 and
     June 30, 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.




     August 12, 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.




     August 12, 2000        By: Carroll E. Williams

    Date                        Carroll E. Williams
                                President and Chief
                                Executive Officer



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