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 March 31, 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
                 4,623,581 shares outstanding on March 31, 2000


<PAGE>

                                   FORM 10-Q
                                   VMIC, Inc.

             QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2000



                                      INDEX


                                                                           Page

Part I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

          Balance Sheets as of March 31, 2000 (Unaudited)
          and September 30, 1999...............................................1

          Statements of Operations for the Three and Six Months Ended
          March 31, 2000 and March 31, 1999 (Unaudited)........................2

          Statements of Cash Flows for the Six Months Ended March 31, 2000
          and March 31, 1999  (Unaudited)......................................3

          Notes to Condensed Financial Statements (Unaudited)................4-7

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations ............................................8-15

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.......16-22

Part II.  OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders.................23

          Signatures..........................................................24



<PAGE>

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

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

                                                                                        March 31,       September 30,
                                                                                          2000                1999
                                     ASSETS                                            (Unaudited)
<S>                                                                                <C>                    <C>

Current assets:
    Cash and cash equivalents                                                             $    996,609       $   582,883
    Accounts receivable (includes allowance for doubtful accounts of
      $250,381 at March 31, 2000 and September 30, 1999)
                                                                                             5,083,187         5,080,529
    Inventories                                                                              6,014,112         4,658,243
    Prepaid expenses                                                                           116,762           110,483
    Deferred income taxes                                                                      992,758                 0
    Income tax receivable                                                                        5,238           106,553
                                                                                   -------------------- -----------------

           Total current assets                                                             13,208,666         10,538,691
Property, plant, and equipment, net                                                          8,002,442          8,165,822
Purchased product and software costs, net                                                      640,165            728,630
Software development costs, net                                                              1,045,740            836,363
Deferred income taxes                                                                        2,105,509                  0
                                                                                   -------------------- ------------------

                                                                                         $  25,002,522       $ 20,269,506
                                                                                    ==================== =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current
liabilities:
    Accounts payable                                                                     $   2,181,746      $  1,977,284
    Current portion of notes, mortgages, and capital leases                                  5,315,990         5,753,110
    Accrued liabilities                                                                      2,662,111         2,201,069
                                                                                   -------------------- -----------------

           Total current liabilities                                                        10,159,847         9,931,463
Notes, mortgages, and capital leases, less current portion above                             6,294,560         6,447,808
                                                                                   -------------------- ------------------

           Total liabilities                                                                16,454,407        16,379,271
                                                                                   -------------------- -----------------

Stockholders' equity:
    Common stock, par value $.10 (10,000,000 shares authorized;  4,623,581
      and 4,580,016 shares issued and outstanding at March 31, 2000
      and September 30, 1999, respectively)                                                    462,358           458,002
    Additional paid-in capital                                                               7,032,643         6,810,314
    Retained earnings (accumulated deficit)                                                  1,053,114       (3,378,081)
                                                                                   -------------------- -----------------

           Total stockholders' equity                                                        8,548,115         3,890,235
                                                                                   -------------------- -----------------

                                                                                         $  25,002,522      $ 20,269,506
                                                                                   ==================== =================

See notes to condensed financial statements.

</TABLE>


                                       1
<PAGE>

VMIC, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>

<CAPTION>

                                                                       Three months ended                Six months ended
                                                                     March 31,   March 31,         March 31,         March 31
                                                                  2000                1999        2000                 1999
<S>                                                      C>                  <C>              <C>                    <C>
Sales:
Hardware sales                                                $ 8,953,659       $ 6,500,062    $ 17,106,284        $ 14,004,649
Software sales                                                    297,909           171,635         498,463             372,146
                                                         -----------------  ----------------  -------------    ---------------
        Total sales                                             9,251,568         6,671,697      17,604,747          14,376,795
                                                         -----------------  ----------------  -------------    ---------------

Cost and expenses:
    Cost of products sold                                       3,366,713         2,461,357       6,384,288           5,312,637
    Research and development expense                            1,280,096         1,469,988       2,565,687           3,047,625
    Selling, general, and administrative expense                3,257,352         3,124,715       6,228,418           6,664,855
                                                         -----------------  ----------------  --------------  ------------------
                                                                7,904,161         7,056,060      15,178,393          15,025,117
                                                         -----------------  ----------------  --------------  ------------------

           Operating income (loss)                              1,347,407         (384,363)       2,426,354           (648,322)

Other expense                                                   (233,863)         (173,915)       (466,170)           (312,217)
                                                         -----------------  ----------------  --------------  ------------------

           Income (loss) before income taxes                    1,113,544         (558,278)       1,960,184           (960,539)

Benefit for income taxes                                      (2,471,008)         (148,235)     (2,471,008)           (259,345)
                                                         -----------------  ----------------  --------------  ------------------

           Net income (loss)                                 $  3,584,552      $  (410,043)    $  4,431,192        $  (701,194)
                                                         =================  ================  ==============  ==================

Net income (loss) per common and common equivalent share:
    Basic                                                           $0.78           $(0.09)           $0.96             $(0.16)
                                                         =================  ================  ==============  ==================
    Diluted                                                         $0.78           $(0.09)           $0.96             $(0.16)
                                                         =================  ================  ==============  ==================

Weighted average common and common equivalent
    shares outstanding:
      Basic                                                     4,600,058         4,538,118       4,606,422           4,519,100
                                                         =================  ================  ==============  ==================
      Diluted                                                   4,625,454         4,566,442       4,640,192           4,519,100
                                                         =================  ================  ==============  ==================

See notes to condensed financial statements.

</TABLE>
                                       2

                                     <PAGE>


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

                                                                                   Six months ended
                                                                               March 31,       March 31,
                                                                                2000             1999
<S>                                                                            <C>             <C>


Cash flows from operating activities:
    Net income (loss)                                                          $ 4,431,192     $ (701,193)
     Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
        Depreciation and amortization                                            1,518,922       1,486,745
        Provision for losses on accounts receivable                                      0          24,000
        Stock issued in lieu of cash compensation                                   29,813          21,794
        Gain on disposal of property and equipment                                       0        (39,957)
        Change in operating assets and liabilities:
           Accounts receivable                                                     (2,657)       (461,112)
           Inventories                                                         (1,355,870)       (422,476)
           Prepaid expenses                                                        (6,279)          39,623
           Income tax receivable                                                   101,315         354,317
           Income tax payable                                                      627,279               0
           Deferred income tax                                                 (3,098,287)               0
           Accounts payable                                                        154,179     (1,162,900)
           Accrued liabilities                                                   (641,076)       (435,662)
                                                                           ---------------- ---------------
               Total adjustments                                               (2,672,661)       (595,628)
                                                                           ---------------- ---------------
               Net cash provided by (used in) operating activities               1,758,531     (1,296,821)
                                                                           ---------------- ---------------

Cash flows from investing activities:
    Capital expenditures                                                         (822,197)       (725,221)
    Software development costs and purchased product and software costs          (120,813)     (1,712,505)
    Proceeds from dispositions of property, plant,
     and equipment                                                                       0          39,957
                                                                           ---------------- ---------------
               Net cash used in investing activities                             (943,010)     (2,397,769)
                                                                           ---------------- ---------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                       827,995       3,167,704
    Principal payments on long-term debt                                       (1,427,602)               0
    Proceeds from issuance of common stock                                         197,812         237,190
                                                                           ---------------- ---------------
               Net cash (used in) provided by financing activities               (401,795)       3,404,894
                                                                           ---------------- ---------------
               Net increase (decrease) in cash and
                  cash equivalents                                                 413,726       (289,696)
Cash and cash equivalents, beginning of period                                     582,883         527,972
                                                                           ---------------- ---------------

Cash and cash equivalents, end of period                                        $  996,609       $ 238,276
                                                                           ================ ===============


</TABLE>





See notes to condensed financial statements.

                                      3
<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 March 31, 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 six months ended March 31, 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

28,200 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 23,380 shares of
common stock were exercised during the quarter.


                                      4
<PAGE>

                                   VMIC, Inc.

               Notes to Condensed Financial Statements (Continued)

<TABLE>
<CAPTION>


 3. Earnings Per Share


<S>                                                    <C>                 <C>                <C>

Earnings Per Share:
A summary of the  calculation  of basic and diluted
earnings per share is as follows:
                                                       Income (Loss)           Shares           Per-Share
                                                        (Numerator)         (Denominator)        Amount
                                                    --------------------- ------------------ ----------------
                                 Three months ended
                                     March 31, 2000
Basic EPS:
    Income available to common stockholders                  $ 3,584,552          4,600,058           $ 0.78
Effect of dilutive securities:
    Stock options                                                                    25,396


Diluted EPS                                                  $ 3,584,552          4,625,454           $ 0.78
                                                    --------------------- ------------------ ----------------
                                 Three months ended
                                     March 31, 1999

Basic EPS:
    Loss available to common stockholders                    $ (410,041)          4,538,118         $ (0.09)
Effect of dilutive securities:
    Stock options                                                                         0

Diluted EPS                                                  $ (410,041)          4,538,118         $ (0.09)


                                                       Income (Loss)           Shares           Per-Share
                                                        (Numerator)         (Denominator)        Amount
                                                    --------------------- ------------------ ----------------
                                   Six months ended
                                     March 31, 2000
Basic EPS:
    Income available to common stockholders                  $ 4,431,192          4,606,422           $ 0.96
Effect of dilutive securities:
    Stock options                                                                    33,770


Diluted EPS                                                  $ 4,431,192          4,640,192           $ 0.96
                                                    --------------------- ------------------ ----------------
                                   Six months ended
                                     March 31, 1999

Basic EPS:
    Loss available to common stockholders                    $ (701,193)          4,519,100         $ (0.16)
Effect of dilutive securities:
    Stock options                                                                         0

Diluted EPS                                                  $ (701,193)          4,519,100         $ (0.16)

</TABLE>

                                       5
<PAGE>


4.  Inventories

At March 31, 2000 and September 30, 1999, inventories consist of the following:



                                  March 31,          September 30,
                                     2000                1999
                               ------------------- ------------------

Raw Materials                         $ 2,972,506        $ 2,511,460
Work in Process                         2,214,428          1,232,573
Finished Goods                          1,462,393          1,549,425
                               ------------------- ------------------
                                        6,649,327          5,293,458

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

                                      $ 6,014,112        $ 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 six
months ended March 31, 2000 and 1999 are summarized as follows:


<TABLE>
<CAPTION>


                                          Three Months Ended                    Six Months Ended
                                      March 31,         March 31,           March 31,         March 31,
                                        2000               1999               2000               1999
                                  ------------------   -----------------   --------------- --------------
<S>                               <C>                  <C>                 <C>             <C>

Total Sales:
        U.S.                            $ 6,697,350       $ 5,224,114         $ 13,519,309    $ 10,866,158
        International                     2,554,218         1,447,583            4,085,438       3,510,637
                                  -----------------  ----------------- -------------------- ---------------
                                        $ 9,251,568       $ 6,671,697         $ 17,604,747    $ 14,376,795
                                  ================== ================= ==================== ===============

Gross Profit:
        U.S.                            $ 4,363,255       $ 3,362,605          $ 8,885,580     $ 7,115,206
        International                     1,521,600           847,735            2,334,879       1,948,952
                                  ------------------ ----------------- -------------------- ---------------
                                        $ 5,884,855       $ 4,210,340         $ 11,220,459     $ 9,064,158
                                  ================== ================= ==================== ===============

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

</TABLE>

                                       6
<PAGE>


6.   Recently Issued Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1").  SOP 98-1 provides guidance
over  accounting  for computer  software  developed or obtained for internal use
including the requirement to capitalize specified costs and amortization of such
costs over the estimated  useful life of the software SOP 98-1 was effective for
the Company's  current fiscal year. The adoption of this standard did not have a
material impact on the Company's  results of operations,  financial  position or
cash flows.



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 three months and six months ended March 31,
2000 consists of the following:

     Income tax expense                         $ (627,279)
     Reversal of valuation allowance              3,098,289
                                                ------------
                                                $ 2,471,008
                                               =============


The ultimate  realization  of the net deferred  income tax assets depends on the
Company's ability to generate sufficient taxable income in the future.  Based on
the  Company's  results of  operations  during the quarter ended March 31, 2000,
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.


                                       7

<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
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 Form 10K 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  10K  for the  year  ended  September  30,  1999.  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.


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  for the  future  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:

o        Embedded Intel(R) central processing units or CPUs
o        Communications/networking products, such as Fibre Channel,
         gigabit Ethernet, and Reflective Memory networks


                                      8
<PAGE>
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 and SAN markets 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 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  $9,251,568  for the quarter and  $17,604,747  for the six months
ended March 31, 2000 compared to $6,671,697 for the quarter and  $14,376,795 for
the six months  ended  March 31 1999,  for  increases  of 38.7  percent and 22.5
percent, respectively.  Gross profits for the quarter and six months ended March
31, 2000 were $5,884,855 and  $11,220,459  compared to $4,210,340 and $9,064,158
for the  quarter and six months  ended March 31,  1999,  for  increases  of 39.8
percent and 23.8 percent, respectively.

Net income (excluding  $3,098,287 income tax benefit arising from a reduction of
the deferred tax asset valuation  allowance) was $757,198 and $1,332,905 for the
quarter and six months ended March 31, 2000 compared to a net loss of ($410,043)
and  ($701,194)  for the quarter and six months ended March 31,  1999.  Earnings
(excluding  $3,098,287  income  tax  benefit  arising  from a  reduction  of the
deferred tax asset  valuation  allowance) per common share  (diluted) were $0.16
and $0.29 for the quarter and six months ended March 31, 2000  compared to a net
loss of ($0.09) and ($0.16) for the quarter and six months ended March 31, 1999.

Net income (including  $3,098,287 income tax benefit arising from a reduction of
the deferred tax asset  valuation  allowance)  was $3,584,552 and $4,431,192 for
the  quarter  and six months  ended  March 31,  2000  compared  to a net loss of
($410,043)  and  ($701,194) for the quarter and six months ended March 31, 1999.
Earnings  (including  $3,098,287  income tax benefit arising from a reduction of
the deferred tax asset  valuation  allowance) per common share  (diluted),  were
$0.78 and $0.96 for the quarter and six months ended March 31, 2000  compared to
a net loss of ($0.09) and ($0.16) for the quarter and six months ended March 31,
1999.
                                       9
                                     <PAGE>

International  sales for the  second  quarter  increased  85.7  percent  to $2.6
million compared to $1.4 million for the quarter ended March 31, 1999.  Domestic
sales for the second quarter  increased 28.8 percent to $6.7 million compared to
$5.2 million for the quarter ended March 31, 1999.  Systems sales increased some
66.7 percent to $2.5 million for the second quarter compared to $1.5 million for
the quarter ended March 31, 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  announced  11 new  products  during the second  quarter.  Of these
products, five were new SBC products, two Fibre Channel products, three software
products,  and one new I/O  controller  product  based on our  PC-based  control
software.  One of the new software  products  involved  VMIC SBC support for the
popular Linux operating system.

The Company was awarded a patent involving  performance  enhancements for VMEbus
computer  technology during the second quarter and we announced a new CompactPCI
850 MHz SBC. The CompactPCI  architecture  has been chosen by the telecom market
as its primary platform for embedded computers.

VMIC achieved eight design wins in the second quarter. 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 eight design wins, four are estimated to produce
$1  million  or more in revenue  per year once in full  production.  Of the four
design wins, one is for a Fibre Channel product,  two are computer  boards,  and
the fourth  involves  SBCs,  I/O  products,  and our  IOWorks  PC-based  control
software.

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.

The Company's gross margin for the second quarter increased to 63.6 percent from
63.1 percent in the quarter  ended March 31, 1999.  This  increase was primarily
the result of decreased software amortization costs and an inventory adjustment.

R&D expenses for the second quarter decreased to 13.8 percent of sales from 22.0
percent of sales for the  quarter  ended March 31,  1999.  SG&A  decreased  as a
percentage  of revenue to 35.2 percent  from 46.8 percent for the quarter  ended
March 31,  1999.  Operating  income as a  percentage  of revenue  for the second
quarter was 14.6 percent  compared to an  operating  loss of 5.8 percent for the
quarter ended March 31, 1999.

The Company's cash flow was  sufficiently  positive during the second quarter to
reduce our  borrowings  on our working  line of credit from $4.1 million to $3.5
million.  During the second  quarter,  we renewed our $8 million working line of
credit and  negotiated  a $2 million  open,  unused  line of credit for  capital
equipment procurements.

                                       10
                                     <PAGE>

Inventory for the second quarter increased 27.7 percent to $6.0 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
and new hardware products focused on SBCs and Fibre Channel host bus adapters.

Stockholder equity increased 117.9 percent from $3.9 million as of September 30,
1999 to $8.5 million as of March 31, 2000.

We are pleased with this  quarter's  performance  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
 (Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999.)

Sales

For the six-month  period ended March 31, 2000,  sales increased 22.2 percent to
$17.6 million compared to $14.4 million for the six-month period ended March 31,
1999.  Sales  were  generated   primarily  from  four  product  areas  involving
input/output,   communications/networking,   SBCs,   and  software.   Sales  for
input/output  products  increased  8.2 percent to $7.9 million for the six-month
period  ended  March 31, 2000  compared  to $7.3  million for the same period in
1999. Sales for  communications/network  products increased 17.4 percent to $5.4
million for the  six-month  period ended March 31, 2000 compared to $4.6 million
for  the  same   period   ended   in   1999.   The   increase   in   sales   for
communications/network products was primarily from the new Fibre Channel product
line.  Sales for SBCs  increased  17.4 percent to $5.4 million for the six-month
period  ended  March 31, 2000  compared  to $4.6  million for the same period in
1999.  The  increase  in sales was  generated  as a result of new design wins in
telecommunications, medical, defense, and industrial automation.

Sales for software  increased  33.9 percent to $498  thousand for the  six-month
period  ended March 31, 2000  compared to $372  thousand  for the same period in
1999. This increase in sales was generated because of improved acceptance of our
PC-based  control  software  coupled with higher  shipments of software  modules
associated with our SBC product line.

Gross Profits

For the  six-month  period ended March 31, 2000,  gross  profit  increased  23.1
percent or $2.1 million to $11.2  million  from $9.1  million for the  six-month
period ended March 31, 1999. Gross profits as a percentage of sales increased to
63.7 percent from 63.1  percent for the  six-month  period ended March 31, 2000.
The  increase  resulted  from lower  amortized  software  costs and an inventory
adjustment.

                                       11
                                     <PAGE>

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  six-month  period  ended  March  31,  2000,  selling,   general,   and
administrative  (SG&A) expenses  decreased 7.5 percent to $6.2 million from $6.7
million  for the  six-month  period  ended March 31,  1999.  This  decrease  was
primarily due to the reductions in sales and marketing expenses.

Research and Development

For the six-month  period ended March 31, 2000,  Research and Development  (R&D)
expenses  decreased  13.3  percent  to  $2.6  million  from $3  million  for the
six-month period ended March 31, 1999. This decrease resulted from the reduction
in staff and reductions in amortized expenses.  Capitalized software development
expenses for the six-month period ended March 31, 2000 decreased 64.3 percent to
$0.5 million compared to $1.4 million for the same period in 1999.

Capitalized Software Development Costs

During the  six-month  period ended March 31, 2000,  VMIC had two  categories of
capitalized software products under development as follows:


Software Product Category | Capitalized  |  Write-Down | Balance of Capitalized
================================================================================
IOWorks (PC-Based Control)    $287,485     $217,400            $70,085
--------------------------------------- -------------------------------------
Board Drivers*                $169,268      $86,519            $82,749
--------------------------------------- -------------------------------------
*Includes  software drivers for products such as CPUs,  communications/networks,
and I/O products.

The Company elected, after a study of historical and forecasted sales of certain
software  modules,  to write-off some modules and expense future  development of
some products.

Earnings Per Share
Net income (excluding  $3,098,287 income tax benefit arising from a reduction of
the deferred tax asset  valuation  allowance)  was $1,332,905 for the six months
ended March 31, 2000 compared to a net loss of $701,194 for the six months ended
March 31, 1999. Earnings (excluding $3,098,287 income tax benefit arising from a
reduction  of the  deferred  tax asset  valuation  allowance)  per common  share
(diluted)  were $0.29 for the six months ended March 31, 2000  compared to a net
loss of $0.16 for the quarter and six months ended March 31, 1999.

Net income  (including  $3,098,287  income tax benefit arising from a reduction
of the deferred tax asset valuation allowance) was $4,431,192 for the six months
ended March 31, 2000 compared to a net loss of $701,194 for the six months ended
March 31, 1999. Earnings (including $3,098,287 income tax benefit arising from
a reduction  of the  deferred tax asset  valuation  allowance)  per common share
(diluted),  were $0.96 for the six months ended March 31, 2000 compared to a net
loss of $0.16 for the quarter and six months ended March 31, 1999.

                                       12
<PAGE>


Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999

Sales

Revenues for the second  quarter ended March 31, 2000 were $9.3 million,  a 38.8
percent  increase  from revenues of $6.7 million for the quarter ended March 31,
1999.

International  sales for the  second  quarter  increased  85.7  percent  to $2.6
million compared to $1.4 million for the quarter ended March 31, 1999.  Domestic
sales for the second quarter  increased 28.8 percent to $6.7 million compared to
$5.2 million for the quarter ended March 31, 1999.  Systems sales increased 66.7
percent to $2.5 million for the second quarter  compared to $1.5 million for the
quarter  ended March 31, 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 28.1 percent to $4.1 million for the second  quarter  compared to $3.2
million for the same period in 1999. Sales for  communications/network  products
increased 38.1 percent to $2.9 million for the second  quarter  compared to $2.1
million   for   the   same   period   in   1999.    The   sales   increase   for
communications/network  products  was  primarily  due to the  success of our new
Fibre  Channel  product  line.  Sales for SBCs  increased  58.3  percent to $1.9
million for the second  quarter  compared to $1.2 million for the same period in
1999.

Sales for  software  increased  73.3  percent  to $298  thousand  for the second
quarter compared to $172 thousand for the same period in 1999.

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 March 31, 2000,  gross profits  increased 40.5
percent or $1.7 million to $5.9  million  from $4.2 million for the  three-month
period ended March 31, 1999. The increase was generated  because of increases in
revenues.

The Company's gross margin increased to 63.6 percent for the second quarter from
63.1 percent in the quarter ended March 31, 1999. The increase was primarily the
result of decreased software amortization costs and an inventory adjustment.

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.

                                       13
<PAGE>

Selling, General, and Administrative Expenses

For  the  three-month  period  ended  March  31,  2000,  selling,  general,  and
administrative  (SG&A) expenses increased 6.4 percent to $ 3.3 million from $3.1
million for the three-month period ended March 31, 1999.

SG&A for the second  quarter  decreased  as a  percentage  of  revenues  to 35.2
percent from 46.8 percent for the quarter ended March 31, 1999.

Research and Development Expenses

For the  three-month  period  ended March 31,  2000,  Research  and  Development
expenses (R&D)  decreased 13.3 percent to $1.3 million from $1.5 million for the
three-month period ended March 31, 1999.

R&D expenses decreased to 13.8 percent of sales for the second quarter from 22.0
percent of sales for the quarter ended March 31, 1999.

Capitalized Software Development Costs

During the  three-month  period ended March 31, 2000, VMIC had two categories of
capitalized software products under development as follows:


--------------------------------------------------------------------------------
Software  Product  Category   Capitalized   Write-Down  Balance  of  Capitalized
--------------------------------------------------------------------------------
IOWorks      (PC-Based       Control)      $135,534      $203,150      ($67,616)
--------------------------------------------------------------------------------
Board            Drivers*            $69,850            $62,383           $7,467
--------------------------------------------------------------------------------
*Includes  software drivers for products such as CPUs,  communications/networks,
and I/O products.

The write-downs  for  capitalized  software were taken because of recent studies
that  indicated  historical  sales and  forecasted  sales were  insufficient  to
continue  capitalization of certain software modules.  Accordingly,  the Company
elected to  write-down  the  capitalized  value of some  software  modules,  and
discontinue the R&D capitalization of several software modules.

Income Taxes

Income taxes for the three and six month periods ended March 31, 2000 were a net
benefit of $2.5 million.  Provision for taxes was $0.6 million  offset by a $3.1
million valuation benefit resulting from the previous year's loss carry forward.
Income tax  benefits  for the three and six month  periods  ended March 31, 1999
were $0.2 million and $0.3 million respectively.

Earnings Per Share

Net income (excluding a valuation  allowance of $3,098,287) was $757,198 for the
quarter  ended March 31, 2000 compared to a net loss of $410,043 for the quarter
ended March 31, 1999. Earnings (excluding  $3,098,287  valuation  allowance) per
common share  (diluted) were $0.16 for the quarter ended March 31, 2000 compared
to a net loss of $0.09 for the quarter ended March 31, 1999.

                                       14
                                     <PAGE>

Net income (including a $3,098,287  valuation  allowance) was $3,584,552 for the
quarter  ended March 31, 2000 compared to a net loss of $410,043 for the quarter
ended March 31, 1999. Earnings (including a $3,098,287  valuation allowance) per
common share (diluted), were $0.78 for the quarter ended March 31, 2000 compared
to a net loss of $0.09 for the quarter ended March 31, 1999.

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 March 31, 2000,  VMIC's  variable  line of credit for
working capital was $8.0 million,  of which $3.5 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 $4.1  million to $3.5  million.
During the second quarter,  we renewed our $8 million working line of credit and
negotiated a $2 million  open,  unused line of credit (as of March 31, 2000) for
capital  equipment  procurements.  The variable line of credit expires March 31,
2001.

The lines of credit require the Company to maintain  certain loan covenants and,
as of March 31, 2000,  the Company was either in compliance  with such covenants
or had obtained waivers.

Working capital was $3.0 million at March 31, 2000 and $0.6 million at September
30,  1999.  Included in working  capital are cash and cash  equivalents  of $1.0
million at March 31, 2000 compared to $0.6 million at September 30, 1999.  Total
working  capital  increased  as a result of the profit  experienced  for the six
months  ended March 31, 2000 and changes in  operating  assets and  liabilities.
Current  liabilities  were $10.2  million  at March 31,  2000  compared  to $9.9
million at September 30, 1999.  Operating  activities  for the six-month  period
ended March 31, 2000  provided  $1.8  million of cash.  Cash used for  investing
activities  was $0.9 million for the six months  ended March 31, 2000,  of which
$0.8  million  was used  for  capital  expenditures.  Cash  used  for  financing
activities was $0.4 million for the six months ended March 31, 2000.

Inventory turnover for the six months ended March 31, 2000 was approximately 170
days  compared  to  approximately  182 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 50
days for the six months ended March 31, 2000 compared to  approximately  56 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.  However,  management  is
examining several options to raise additional working capital.

                                       15
                                     <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.

                                       16
                                     <PAGE>

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  $6.3 million as of March 31, 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 March 31,  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.

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.

                                       17
                                     <PAGE>

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.

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.

                                       18
                                     <PAGE>
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.

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.

                                       19
                                     <PAGE>

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.

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.

                                       20
                                     <PAGE>

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.

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.

                                       21
<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.


The VMIC logo is a registered trademark of VMIC. Intel is a registered trademark
of Intel  Corporation.  CompactPCI is a registered  trademark of PCI  Industrial
Computer  Manufacturer's  Group. Other registered trademarks are the property of
their respective owners.

                                       22
                                     <PAGE>



Part II - Other Information

Item 4 - Submission of Matters to a Vote of Security Holders

On Saturday, February 19, 2000, the annual meeting of the Company's stockholders
was held at the Radisson Hotel, 6000 Memorial Parkway, S.W., Huntsville, Alabama
35802.  Proxies were solicited on behalf of the Board of Directors of VMIC, Inc.
and cast by Carroll E. Williams,  and Mary W. Williams.  Matters put to vote and
acted upon were the proposal to elect the Board of Directors and the proposal to
ratify  the  appointment  of  PricewaterhouseCoopers,  L.L.P.  as the  Company's
independent auditors for the current fiscal year.

All directors  were elected for a term of one year and will serve until the next
annual meeting. Directors elected were as follows:

                                               For              Withheld
Carroll E. Williams                            2,788,189        1,809,702
Mary W. Williams                               2,788,189        1,809,702
Arthur Faulkner                                2,788,189        1,809,702
Alfred F. Casteleyn                            2,788,189        1,809,702
Ernest Potter                                  2,788,189        1,809,702
R. Gary Saliba                                 2,788,189        1,809,702
Jim Caudle, Sr.                                2,788,189        1,809,702


PricewaterhouseCoopers,   L.L.P.   was  ratified  to  serve  as  the   Company's
independent auditors for the fiscal year ending September,  30, 2000. Voting for
ratification were 2,837,300 shares 1,760,591 shares abstained.


                                       23
<PAGE>



Signatures

Management Representation

The  accompanying  Balance  Sheets at March 31, 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 three months March 31, 2000 and September
30, 1999 have been prepared in accordance  with  instructions to Form 10Q 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.

May 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.

May 12, 2000                        By: Carroll E. Williams

Date                                     Carroll E. Williams
                                         President and Chief
                                         Executive Officer



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