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, 1999


                                       OR

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

                  For The Transition Period From _____________
                                To _____________

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

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

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

           DELAWARE                                                63-09172
(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
                 4,551,566 SHARES OUTSTANDING ON JUNE 30, 1999
                          ----------------------------


<PAGE>
                                   FORM 10-Q
                                   VMIC, Inc.

               QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999


                                     INDEX

                                                                           Page

Part I.   FINANCIAL INFORMATION
Item 1    Financial Statements

          Balance Sheets as of June 30, 1999 (Unaudited)
          and September 30, 1998..............................................2

          Statements of Income for the Three and Nine Months Ended
          June 30, 1999 and June 30, 1998 (Unaudited).........................3

          Statements of Cash Flows for the Nine Months Ended June 30, 1999
          and June 30, 1998  (Unaudited)......................................5

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

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



Part II.  OTHER INFORMATION


          Signatures.........................................................14

                                       1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

VMIC, Inc.
Condensed Balance Sheets

<TABLE>
<CAPTION>




                                   VMIC, Inc.
                            Condensed Balance Sheets

                                                                                            June 30,         September 30,
                                                                                             1999                1998
                                                                                          (Unaudited)
<S>                                                                                       <C>               <C>

    Cash and cash equivalents                                                             $     25,878       $    527,972

    Accounts  receivable  (includes  allowance for doubtful accounts of $408,383
      and $384,383 at June 30, 1999 and September 30, 1998,
      respectively)                                                                          3,947,385          4,366,330
    Inventories                                                                              5,896,747          4,943,239
    Prepaid expenses                                                                           162,129            250,733
    Income tax receivable                                                                      106,553            573,771
    Deferred income taxes                                                                      954,929            954,929
                                                                                     ------------------ ------------------

           Total current assets                                                             11,093,621         11,616,974
Property, plant, and equipment, net                                                          8,615,481          9,033,922
Purchased product and software costs, net                                                    1,047,605            967,852
Software development costs                                                                   5,382,449          3,543,030
                                                                                     ------------------ -----------------

                                                                                         $  26,139,156      $  25,161,778
                                                                                     ================== ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current
liabilities:
    Accounts payable                                                                     $   1,846,173       $  2,367,397
    Current portion of notes, mortgages, and capital leases                                  4,961,996          2,104,777
    Accrued liabilities                                                                      1,821,174          2,421,180
                                                                                     ------------------ ------------------

           Total current liabilities                                                         8,629,343          6,893,354
Notes, mortgages, and capital leases, less current portion above                             5,683,137          5,713,086
Deferred income taxes                                                                          808,101            808,101
                                                                                     ------------------ ------------------

           Total liabilities                                                                15,120,581         13,414,541
                                                                                     ------------------ ------------------

Stockholders' equity:
    Common stock, par value $.10 (10,000,000  shares  authorized;  4,551,566 and
      4,462,917 shares issued and outstanding at June 30, 1999
      and September 30, 1998, respectively)                                                    455,157            446,292
    Additional paid-in capital                                                               6,700,306          6,432,799
    Retained earnings                                                                        3,863,112          4,868,146
                                                                                     ------------------ ------------------

           Total stockholders' equity                                                       11,018,575         11,747,237
                                                                                     ------------------ ------------------

                                                                                         $  26,139,156      $  25,161,778
                                                                                     ================== ==================
</TABLE>

See notes to condensed financial statements.

                                       2


<PAGE>
VMIC, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
                                                                           Three months ended
                                                                       June 30,             June 30,
                                                                        1999                  1998
<S>                                                                  <C>                    <C>
Sales:
Hardware sales                                                       $   5,889,997        $  7,521,487
Software sales                                                             225,528             240,497
                                                                  -----------------  ------------------

                                                                  -----------------  ------------------
        Total sales                                                      6,115,525           7,761,984
                                                                  -----------------  ------------------

Cost and expenses:
    Cost of products sold                                                2,367,541           2,646,462
    Research and development expense                                     1,251,995           1,559,705
    Selling, general, and administrative expense                         2,706,774           3,286,628
                                                                  -----------------  ------------------


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

           Operating (loss) income                                       (210,785)             269,189

Other income (expense)                                                   (205,441)           (108,893)
                                                                  -----------------  ------------------

           (Loss) income before income taxes                             (416,226)             160,296

Benefit (provision) for income taxes                                       112,381            (51,294)
                                                                  -----------------  ------------------

           Net (loss) income                                         $   (303,845)         $   109,002
                                                                  =================  ==================

Net (loss) income per common and common equivalent share:
    Basic                                                                 $(0.067)              $0.025
                                                                  =================  ==================
    Diluted                                                               $(0.067)              $0.024
                                                                  =================  ==================

Weighted average common and common equivalent shares outstanding:
      Basic                                                              4,549,591           4,433,752
                                                                  =================  ==================
      Diluted                                                            4,549,591           4,583,607
                                                                  =================  ==================
</TABLE>

See notes to condensed financial statements.


                                       3
<PAGE>


VMIC, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
                                                                           Nine months ended
                                                                       June 30,              June 30,
                                                                         1999                  1998
<S>                                                                  <C>                   <C>

Sales:
Hardware sales                                                       $  19,894,646       $  22,521,476
Software sales                                                             597,674             513,846
                                                                  -----------------  ------------------

                                                                  -----------------  ------------------
        Total sales                                                     20,492,320          23,035,322
                                                                  -----------------  ------------------

Cost and expenses:
    Cost of products sold                                                7,680,178           7,863,991
    Research and development expense                                     4,299,620           4,500,140
    Selling, general, and administrative expense                         9,371,628           9,524,170
                                                                  -----------------  ------------------


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

           Operating (loss) income                                       (859,106)           1,147,021

Other income (expense)                                                   (517,658)           (342,720)
                                                                  -----------------  ------------------

           (Loss) income before income taxes                           (1,376,764)             804,301

Benefit (provision) for income taxes                                       371,730           (257,364)
                                                                  -----------------  ------------------

           Net (loss) income                                        $  (1,005,034)       $     546,937
                                                                  =================  ==================

Net (loss) income per common and common equivalent share:
    Basic                                                           $      (0.222)       $       0.124
                                                                  =================  ==================
    Diluted                                                         $      (0.222)       $       0.120
                                                                  =================  ==================

Weighted average common and common equivalent shares outstanding:
      Basic                                                              4,529,263           4,394,437
                                                                  =================  ==================
      Diluted                                                            4,529,263           4,544,292
                                                                  =================  ==================
</TABLE>

See notes to condensed financial statements.

                                       4
<PAGE>
VMIC, Inc.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                               Nine months ended
                                                                               June 30,       June 30,
                                                                                1999           1998
<S>                                                                          <C>              <C>

Cash flows from operating activities:
    Net (loss) income                                                        $(1,005,034)    $   546,937
     Adjustments to reconcile net (loss) income to net cash
      provided by operating activities:
        Depreciation and amortization                                           2,247,451      1,954,113
        Provision for losses on accounts receivable                                24,000         67,500
        Stock issued in lieu of cash compensation                                 115,280        112,500
        Gain on disposal of property and equipment                               (39,957)        (3,322)
        Change in operating assets and liabilities:
           Accounts receivable                                                    394,945      (357,797)
           Inventories                                                          (953,508)      (681,120)
           Prepaid expenses                                                        88,604       (42,742)
           Income tax receivable                                                  467,218        132,376
           Accounts payable                                                     (521,224)        526,022
           Accrued liabilities                                                  (600,006)        351,841
                                                                           --------------- --------------
               Total adjustments                                                1,222,803      2,059,371
                                                                           --------------- --------------
               Net cash provided by operating activities                          217,769      2,606,308
                                                                           --------------- --------------

Cash flows from investing activities:
    Capital expenditures                                                      (1,383,448)    (2,304,480)
    Software development costs and purchased product and software costs       (2,364,734)    (1,446,544)
    Proceeds from dispositions of property, plant,
     and equipment                                                                 39,957          3,322
                                                                           --------------- --------------
               Net cash used in investing activities                          (3,708,225)    (3,747,702)
                                                                           --------------- --------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                                    2,827,270        320,624
    Proceeds from issuance of common stock                                        161,092      1,806,298
                                                                           --------------- --------------
               Net cash provided by financing activities                        2,988,362      2,126,922
                                                                           --------------- --------------
               Net (decrease) increase in cash and
                  cash equivalents                                              (502,094)        985,528
Cash and cash equivalents, beginning of year                                      527,972        339,101
                                                                           --------------- --------------

Cash and cash equivalents, end of period                                     $     25,878    $ 1,324,629
                                                                           =============== ==============

Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                 $    583,000    $   400,000
                                                                           =============== ==============

    Cash paid during the period for income taxes                             $         0     $   125,000
                                                                           =============== ==============
</TABLE>

See notes to condensed financial statements.

                                       5
<PAGE>


                                   VMIC, Inc.
                     Notes to Condensed Financial Statements

1.   Basis  of  Presentation
     The accompanying  unaudited  condensed  financial  statements of VMIC, Inc.
     ("VMIC") 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, 1999 should be read in conjunction with VMIC's financial  statements as
     of and for the year ended  September  30, 1998  included in VMIC's  Form-10
     filed March 29, 1999. Operating results for the three and nine months ended
     June 30, 1999 are not  necessarily  indicative  of the results  that may be
     expected for the year to end  September  30, 1999.  The  September 30, 1998
     balance  sheet data  presented  herein was derived from  audited  financial
     statements  but does not include  all  disclosures  required  by  generally
     accepted accounting principles.

 2.    Stock Options
       No options to purchase  shares of common  stock were  granted  during the
       quarter to  employees  under the Employee  Stock Option Plan.  Options to
       purchase 15,205 shares of common stock were exercised during the quarter.



  3.   Comprehensive Income

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





4.       Inventories

         Inventories are valued at standard cost,  which  approximates  weighted
         average cost, does not exceed market, and consists of the following

                                        Inventory
                             June 30, 1999         September 30, 1998
Raw Materials                   2,575,193                 2,388,844
Work In Process                 1,343,678                   829,125
Finished Goods                  1,977,876                 1,725,270
Totals                          5,896,747                 4,943,239



                                       6

<PAGE>


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





5. Technological Feasibility of Software.

VMIC deems its software technologically feasible only after the software  has:

  (i)   passed a series of  standardized quality  control tests;

  (ii)  operated for extended  periods  without failure in
        simulated user environments;

  (iii) has been approved for release to VMIC customers.

<TABLE>
<CAPTION>

6.       Earnings Per Share

       A summary of the  calculation of basic and diluted  earnings per share is
as follows:

                                                                        Income                Shares             Per-Share
                                                                      (Numerator)         (Denominator)            Amount
                                                                 --------------------    -----------------    ----------------
                            Three months ended

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

       Basic EPS:

          Loss available to common stockholders                       $   (303,845)        4,549,591          $   (0.067)

       Effect of dilutive securities:

          Stock Options                                                                            0



       Diluted EPS                                                    $   (303,845)        4,549,591          $   (0.067)



                                                                     ----------------    -----------------     ---------------
                              Three months ended

                                 June 30, 1998
       Basic EPS:

          Income available to common stockholders                     $     109,002        4,433,752          $   0.025

       Effect of dilutive securities:

          Stock Options                                                                      149,855



       Diluted EPS                                                    $     109,002        4,583,607          $   0.024



</TABLE>
                                       7

<PAGE>

<TABLE>
<CAPTION>



                                                                        Income                Shares             Per-Share
                                                                      (Numerator)         (Denominator)            Amount
                                                                 --------------------    -----------------    ----------------
                             Nine months ended

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

       Basic EPS:

          Loss available to common stockholders                       $   (1,005,034)      4,529,263          $   (0.222)

       Effect of dilutive securities:

          Stock Options                                                                            0



       Diluted EPS                                                    $   (1,005,034)      4,529,263          $   (0.222)



                                                                     ----------------    -----------------     ---------------
                               Nine months ended

                                 June 30, 1998
       Basic EPS:

          Income available to common stockholders                     $     546,937        4,394,437          $   0.124

       Effect of dilutive securities:

          Stock Options                                                                      149,855



       Diluted EPS                                                    $     546,937        4,544,292          $   0.120



</TABLE>



                                       8
<PAGE>


                                   VMIC, Inc.

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

EXCEPT FOR  HISTORICAL  INFORMATION  CONTAINED  HEREIN,  THIS  QUARTERLY  REPORT
CONTAINS FORWARD-LOOKING  STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934.  SUCH  FORWARD-LOOKING  STATEMENTS  ARE SUBJECT TO VARIOUS
RISKS AND  UNCERTAINTIES  THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER  MATERIALLY
FROM  THOSE  PROJECTED  IN  THE  FORWARD-LOOKING  STATEMENTS.  THESE  RISKS  AND
UNCERTAINTIES  ARE DISCUSSED IN MORE DETAIL IN VMIC'S  REGISTRATION  ON FORM 10,
AND IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND   RESULTS  OF   OPERATIONS   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 VMIC OR MANAGEMENT
"BELIEVES,"  "ANTICIPATES,"  "EXPECTS,"  "PLANS,"  OR WORDS OF  SIMILAR  IMPORT.
SIMILARLY,  STATEMENTS THAT DESCRIBE VMIC'S FUTURE PLANS,  OBJECTIVES,  GOALS OR
STRATEGIES ARE FORWARD-LOOKING STATEMENTS.


Overview

VMIC is a leading  independent  designer and  manufacturer of embedded  computer
solutions  based upon a wide  variety of open  standard bus designs such as VME,
CPCI,  PCI, PMC,  Multibus,  ISA, and special custom buses.  VMIC's products are
used by original  equipment  manufacturers  ("OEMs"),  systems  integrators  and
end-users   in   various   industries;    including    industrial    automation,
telecommunications, defense and test and measurement.

VMIC markets and sells more than 200  different  products  worldwide,  including
application-specific embedded computer subsystems,  board-level modules, control
and driver  software,  and network  products.  In addition to offering  standard
commercial products,  VMIC is involved in the development of custom products for
high-volume applications.


Recent Events

VMIC's  strategy for IOWorks has changed.  Although the software only market for
PC-Based  Control Systems is not growing as rapidly as anticipated,VMIC believes
that it is achieving positive results by marketing hardware systems that rely on
IOWorks. While the soft logic software market is still promising, the industrial
automation  market is  projected  to  generate  more than $16  billion in annual
revenues by 2001  according to the market  research firm Frost and Sullivan.  In
response  to this  anticipated  market  growth,  VMIC has  expanded  its systems
products  to  include  CompactPCI  and PCI  solutions  and will  soon  enter the
distributed   input  and   output("I/O")   product   market   with  a   low-cost
private-labeled I/O product line. VMIC expects to begin volume shipments of many
of its new CompactPCI products in October 1999.

VMIC recently expanded its  communications/networking  products to include Fibre
Channel  and  FireWire,  which  are  industry  standards.  In  addition,  VMIC's
Reflective  Memory products are beginning to obtain  recognition  outside of the
defense industry in both the telecommunications and medical industries.

The Fibre  Channel  board market is projected to be over $6 billion  annually by
2003.  VMIC's Fibre Channel products are primarily  adapter boards that are used
to network  computers  and  communicate  with high speed  peripherals.  For some
applications,  Fibre Channel products provide higher performance at a lower cost
than Reflective Memory products.

VMIC is currently planning its marketing strategy for its FireWire product line.
FireWire  is  a  high-performance  serial  bus  ideal  for  interconnecting  the
components  of  modular  real  time  systems.  FireWire  supports  low  cost and

                                       9
<PAGE>

deterministic  communications.  FireWire peripherals such as hard disks, Digital
Audio Tape (DAT),  Digital Video Disks (DVD),  digital video and audio equipment
are  available  now. The FireWire  specification  was designed to replace  older
peripheral communication  technology.  VMIC believes that there exists marketing
opportunities for this technology in traffic control systems.

VMIC  has  expanded  its  CompactPCI  product  line to  include  Fibre  Channel,
FireWire, Reflective Memory, Pentium Single-Board Computers, I/O boards, and I/O
systems  including  IOWorks  personal   computer-Based   Control  Software.  The
CompactPCI  market  is  projected  to grow from $100  million  annually  to $1.9
billion  annually  by 2003  according  to market  research by  Electronic  Trend
publications.

VMIC  has  focused  significant  resources  on  growing  its  telecommunications
business by developing  Compact PCI Pentium central  processing  units ("CPUs"),
Reflective  Memory,  and Fibre  Channel  specifically  for this market.  A major
leading  telecommunication  corporation  has  selected  VMIC's  Pentium CPUs for
speech recognition and switching applications.  VMIC is also negotiating the use
of  Reflective   Memory  and  VMIC's  Fibre  Channel  products  with  a  leading
telecommunications   company.  Another  leading   telecommunication  company  is
evaluating  VMIC's  Reflective  Memory  for  new  CompactPCI   telecommunication
switching  applications  and VMIC's has  received  CPCI Pentium CPUs for digital
television signal switching applications and Internet functions.

Comparison of Operating Results for the Three and Nine Month Periods Ending
June 30, 1998 and June 30, 1999

SALES.  Sales for the nine months  ending  June 30,  1999 were $20.5  million as
compared  to $23  million  for the same  period in 1998.  Sales  decreased  21.2
percent to $6.12  million for the three month  period  ending June 30, 1999 from
$7.76  million  for the period  ending June 30,  1998.  VMIC  believes  that the
decrease in sales for the nine month period and the three month period ending in
June 30, 1999 was attributable to technology  changes in defense  simulation and
training,  delayed  projects from several  customers,  reductions in spending by
nuclear power plants for simulation and training and power plant  monitoring I/O
systems. In particular,  I/O systems sales decreased 35 percent to $4.64 million
for the nine month period  ending June 30, 1999 as compared to $7.14 million for
the nine month  period  ending June 30,  1998.  I/O systems  sales for the three
month period  ending June 30, 1998  decreased  45.9 percent to $1.24  million as
compared to $2.29 million for the three month period ending June 30, 1998.  This
decrease in I/O systems sales was the primary  reason for our sales decrease for
the nine month period ending June 30, 1999.

Hardware  sales  accounted for  approximately  $5.9 million while software sales
accounted for approximately $225 thousand for the three month period ending June
30, 1999. Hardware sales accounted for approximately $7.5 million while software
sales  accounted  for  approximately  $241  thousand  for the three month period
ending June 1998.  Sales of VMIC's  Reflective  memory  products  accounted  for
approximately  $1.5 million or 25 percent of VMIC's hardware sales for the three
month period ended June 30, 1999,  compared to $1.65  million or 21.2 percent of
sales during the same period in 1998.

Hardware sales accounted for  approximately  $20 million of VMIC's sales for the
nine- month period ended June 30, 1999,  compared to 23 million  during the same
period in 1998.  Software  sales  increased  to $0.6  million for the nine month
period  ended June 30, 1999,  from $0.5 million for the same period in 1998.  Of
the hardware sales,  sales of VMIC's  reflective  Memory products  accounted for
$5.6  million,  or 27.4  percent of VMIC's sales for the nine month period ended
June 30, 1999, compared to $6.0 million , or 26.2 percent for the same period in
1998.


COST OF  SALES.  Cost of Sales as a  percentage  of sales  increased  from  34.1
percent for the three month period  ending June 30, 1998 to 38.7 percent for the
same  period  ending  June 30,  1999.  Total cost of sales  decreased  from $2.7
million  for the three  month  period  ending  June 30, 1999 as compared to $2.4
million for the same  period  ending June 30,  1999.  For the nine month  period
ended June 30, 1999 Cost of sales  decreased  to $7.7  million from $7.9 million
for the nine month  period  ended June 30,  1998.  Cost of Sales  increased as a
percentage of sales increased from 34.1 percent for the nine month period

                                       10
<PAGE>

ending June 30, 1998 to 37.4  percent for the same period  ending June 30, 1999.
Cost of sales decreased because of the decrease in revenues.  Cost of sales as a
percentage of total sales  increased  because of increased sales of lower margin
products such as single board computers and higher production overhead.


GROSS MARGINS.  VMIC's  average gross margin  decreased from 65.9 percent in the
three month period ended June 30, 1998 to 61.3 percent in the three month period
ended June 30, 1999. During this period the gross margin for hardware  decreased
from 66.5  percent  to 62.8  percent.  The gross  margin for  software  was 21.8
percent  for the three  month  period  ending  June 30, 1999 as compared to 48.1
percent for the same period in 1998.  VMIC's average gross margin decreased from
62.5 percent in the nine month period ended June 30, 1998 to 62.5 percent in the
nine month period  ended June 30, 1999.  During this period the gross margin for
hardware  decreased  from 66.3 percent to 63.8  percent and the software  margin
decreased to 19.1 percent from 46.7 percent.  The reduced  software  margins are
due to increasing  depreciation  expenses  resulting  from VMIC's  continued R&D
investment  in software.  The decrease in hardware  margins are primarily due to
increased  sales of  products  with lower  gross  margins  such as  single-board
computers  and the  increase in  production  overhead  because of lower  overall
sales.


SELLING,   GENERAL,   AND   ADMINISTRATIVE   EXPENSES.   Selling,   General  and
Administrative  expenses decreased  approximately 17.6 percent from $3.3 million
for the period  ending June 30, 1998 to $2.7 million for the period  ending June
30, 1999. Selling,  General, and Administrative expenses decreased approximately
1.6 percent  from $9.5  million for the nine month period ended June 30, 1998 to
$9.4  million for the nine month  period  ended June 30,  1999.  The decrease in
Selling, General and Administrative expenses resulted primarily from a reduction
of staff from 251  employees as of June 30, 1998 to 214 employees as of June 30,
1999. Sales commissions  decreased  substantially because of lower sales for the
three month  period  ending June 30, 1999 as compared to the period  ending June
30, 1998.


RESEARCH AND DEVELOPMENT  EXPENSE.  Research and Development  expenses decreased
19.9 percent  from $1.6 million for the three month period  ending June 30, 1998
to $1.3  million for the three month period  ending June 30, 1999.  Research and
Development  expenses decreased 4.5 percent from $4.5 million for the nine month
period  ending June 30, 1998 to $4.3  million for the nine month  period  ending
June 30,  1999.  The  reduction in Research  and  Development  expense is mainly
attributable  to a reduction in staffing levels from 90 employees as of June 30,
1998 to 86 employees as of June 30, 1999.


INCOME TAXES. Income taxes as a percentage of income before taxes was 27 percent
in the three month  period  ended June 30,  1999,  compared to 32 percent in the
three month period ended June 30, 1998.  Income taxes as a percentage  of income
before  taxes was 27  percent  in the nine month  period  ended  June 30,  1999,
compared to 32 percent in the nine month period ended June 30, 1998.


EARNINGS PER SHARE.  For the three month period ended June 30, 1999 net loss per
weighted  average common and common  equivalent share was $0.067 per basic share
compared  to net income of $0.025  per basic  share for the three  month  period
ended June 30, 1998.  For the three month  period ended June 30, 1999,  net loss
per weighted average common and common equivalent share, assuming dilution,  was
$0.067 per diluted share  compared to net income of $0.024 per diluted share for
the three month period ended June 30, 1998. For the nine month period ended June
30, 1999, net loss per weighted  average common and common  equivalent share was
$0.222 per basic share  compared to net income of $0.124 per basic share for the
nine month period ended June 30, 1998.  For the nine month period ended June 30,
1999, net loss per weighted average common and common equivalent share, assuming
dilution,  was $0.222 per  diluted  share  compared  to net income of $0.120 per
diluted share for the nine month period ended June 30, 1998.

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<PAGE>



CAPITALIZED  SOFTWARE  DEVELOPMENT COSTS. At June  30,  1999  VMIC  had  three
categories of software products under development.  These were:

   Software Product                               Capitalized  Amount
   ----------------                               -------------------
     IOWorks..........................................$ 4,830,000
     Reflective Memory................................$   369,000
     CPU related......................................$   251,000


EFFECTS OF INFLATION.

Substantially  all contracts  awarded to VMIC have been based on proposals which
reflect estimated cost increases due to inflation.  Historically,  inflation has
not been a significant impact on VMIC.


LIQUIDITY AND CAPITAL RESOURCES.

Historically,  VMIC's cash flow from operations and available credit  facilities
have  provided  adequate  liquidity  and  working  capital to fully fund  VMIC's
operational  needs.  As of June 30,  1999,  VMIC's  variable  line of credit for
working  capital was $6.1  million,  of which $2.6  million was used.  VMIC's $2
million equipment line of credit availability was $1.4 million.

Working  Capital was $4.7 million at September 30, 1998 and $2.5 million at June
30, 1999 respectively. Included in working capital are cash and cash equivalents
of $26 thousand at June 30, 1998 compared to $0.5 million at September 30, 1998.
This decrease  occurred as a result of the net loss  experienced for the quarter
ended June 30, 1999 and changes in  operating  assets and  liabilities.  Current
Liabilities  was  $8,629,343 at June 30, 1999 compared to $6,893,354  million at
September 30, 1998.  This increase was primarily the result of VMIC's  increased
use  of  its  credit  line  to  fund  Working  Capital  requirements.  Operating
activities  for the nine month period ending June 30, 1999 provided $0.2 million
of cash. Cash used for investing activities was $3.7 million for the nine months
ended June 30, 1999,  of which $1.4  million was used for capital  expenditures.
Cash provided by financing  activities was $2.1 million and $3.0 million for the
nine months ended June 30, 1998 and 1999, respectively.

Inventory turnover for the nine months ended June 30, 1999 was approximately 212
days  compared  to  approximately  164 days for the same  period  in 1998.  This
increase was  attributable to increased  component  inventory levels which allow
for faster  filling of customer  purchase  orders and better  response times for
warranty  returns and  replacements.  Accounts  receivable  from  customers were
outstanding on average  approximately 52 days for the nine months ended June, 30
1998,  compared to  approximately  49 days in for the same period in 1998.  This
increase is mainly  attributable to one negotiated account which is scheduled to
be collected in July, 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  working  capital to pay down its revolving
line of credit.


YEAR 2000 READINESS DISCLOSURE

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


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<PAGE>


VMIC  recognizes  that the impact of the Year 2000  problem  extends  beyond its
computer  hardware  and software  and may affect  utility and  telecommunication
services,  as well as the  system  of  customers  and  suppliers.  The Year 2000
problem is being  addressed  by a team  within  VMIC and  progress  is  reported
periodically to management.  VMIC has committed  resources to conduct  extensive
risk assessments and to take corrective action,  where appropriate,  within each
of the following areas:

VMIC  PRODUCTS.  VMIC has  initiated  extensive  internal  Year 2000 testing and
analysis of its products. VMIC believes that a majority of its products are Year
2000 compliant and VMIC anticipates  maintaining  compliance in future revisions
of any product that is currently compliant.

INTERNAL  INFORMATION  SYSTEMS.  VMIC's  internal  information  systems  utilize
hardware and software from several commercial  suppliers.  VMIC has investigated
its  internal  information  systems  for  Year  2000  compliance,   and  certain
modifications  have already been identified and corrected on critical systems to
ensure that VMIC's operations will be Year 2000 compliant.  VMIC's most critical
system, MRPII, has been upgraded and is certified Year 2000 compliant. The phone
system is scheduled for immediate  upgrade.  Several of the network servers will
require  upgrading,  however,  because  the vendor  continues  to upgrade  their
products for Year 2000  compliance,  VMIC has elected to delay  upgrading  these
servers until the period ending September 30, 1999.

THIRD  PARTIES.  VMIC has surveyed all of its internal  systems and software for
Year 2000  compliance and has received Year 2000 compliance  certification  from
the  suppliers of the systems and  software  that are  compliant.  Non-compliant
systems  and  software  have been or will be  upgraded  or  replaced  to achieve
compliance.  It is VMIC's  intention  to become  Year 2000  compliant;  however,
uncertainties  exist about the  thoroughness  of how other  companies,  vendors,
customers  and other  service  providers  that VMIC does  business  with will be
successful  at  also  becoming  Year  2000  compliant.  These  other  companies,
regardless of the dollar volume transacted with VMIC, may  significantly  affect
either directly or indirectly the operations of VMIC.  Where  practicable,  VMIC
will  attempt to mitigate  its risks with respect to the failure of suppliers to
be Year 2000 compliant. In the event that suppliers are not Year 2000 compliant,
VMIC will seek alternative sources of supplies.  However, such failures remain a
possibility  and could have an adverse impact on VMIC's results of operations or
financial condition.

COST FOR YEAR 2000  COMPLIANCE.  VMIC  believes that the total cost of Year 2000
compliance  activity  will not be material to VMIC's  operations,  liquidity and
capital  resources.  VMIC  estimates  that the  total  cost  for its  Year  2000
compliance will be approximately $55,000, which represents 833 hours of internal
analysis,  modification  and  testing  and $15,000  for  hardware  and  software
upgrades.  As of June 30,  1999,  VMIC had  completed  its software and hardware
upgrades and approximately 772 of hours of Year 2000 analysis,  modification and
testing at a cost of approximately $52,000.

YEAR  2000  RISKS  FACED BY VMIC.  Although  VMIC  believes  that its Year  2000
compliance  program  is  comprehensive,  VMIC  may  not  be  able  to  identify,
successfully remedy or assess all date-handling problems in its business systems
or operations or those of its customers  and  suppliers.  As a result,  the Year
2000 problem could have a materially adverse affect on VMIC's business financial
condition or results of operation.

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<PAGE>



PART II - OTHER INFORMATION
Signatures




           MANAGEMENT  REPRESENTATION.  The accompanying unaudited Balance Sheet
at June 30,  1999,  and  Balance  Sheet  at  September  30,  1998 as well as the
unaudited  Statements  of Income  for the three and nine  months  ended June 30,
1999,  and 1998, and the Statements of Cash Flows for the nine months ended June
30, 1999, and 1998 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.




                                                Gordon Hubbert
                                                --------------
August 13, 1999                            By:  Gordon Hubbert

Date
                                      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.


                                           VMIC, Inc.

                                           Carroll E. Williams
                                           -------------------
August 13, 1999
                                          By:  Carroll E. Williams
Date
                                                President and Chief
                                                Executive Officer



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