<PAGE>





                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                   THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
                      FISCAL YEAR ENDED SEPTEMBER 30, 2000.

            ( ) 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)

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

           Securities registered pursuant to Section 12(b) of the Act:

                    Title of each class Name of each exchange

                                    None None


           Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share

                                (Title of Class)









                                     <PAGE>


     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 by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         As of September 30, 2000,  there were 4,668,403  shares  outstanding of
VMIC Common Stock,  $.10 par value. The aggregate value of the voting stock held
by non-affiliates  of the registrant was approximately  $43,182,728 based on the
price of such stock with  respect to a sale  transaction  at $9.25 per share for
400 shares on October 19, 2000  assuming  that all shares  beneficially  held by
officers and members of the registrant's  Board of Directors are shares owned by
"affiliates,"  a status which each of the officers  and  directors  individually
disclaims.

                                 1
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                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of VMIC's definitive Proxy Statement furnished to shareholders
in connection  with the Annual Meeting of Shareholders to be held on February 18
2001 are incorporated by reference with respect to Part III of Form 10-K.


                           FORWARD-LOOKING STATEMENTS

      Except for historical information contained herein, this document 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  Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of Operations  section of this Annual  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.































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                                     PART I

ITEM 1.  BUSINESS

General

         VMIC (the Company) is a supplier of standard bus boards,  software, and
systems  products  that  are  used in  applications  involving  markets  such as
telecommunications,  medical, industrial automation,  test and measurement,  and
defense. VMIC also offers products for the storage area network (SAN) market and
the  computer  clustering/networking  industry.  SAN  and  computer  clustering/
networking have wide applications throughout the computer industry.

         The Company offers primarily three product lines which consist of:

              o  Embedded  Intel(R)  central  processing  units or  CPUs/SBCs
              o Communications/networking products, such as Fibre Channel, SCSI,
                gigabit Ethernet, and Reflective Memory networks
              o Data Acquisition and Control or Input/Output Boards and Systems

         Of these three  product  lines,  we see the highest  growth in SBCs and
communications/networking  products.  The Company's  historical  niche  markets,
which  generate high margins,  are primarily in flight  simulation and training,
defense,  power plant monitoring,  and power plant simulation and training which
primarily utilize the Company's data acquisition and control products.

         VMIC  specializes  in  open  architecture,   nonproprietary,   standard
computer  buses,  such as VMEbus,  PCI bus,  CompactPCI(R)  (CPCI),  and PMC. In
addition,  the Company has expanded its product  lines to include DIN Rail mount
applications.  These open architecture solutions are supported by companies such
as Motorola,  Intel,  Hewlett-Packard,  Sun, Microsoft,  Dell, Compaq, and other
leaders in the industry.  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 products are used in:

          o   Communications and networking of computer and computer
              storage systems
          o   Wireless bus stations
          o   Telecom call servers
          o   Telecom firewalls
          o   Telecom test equipment
          o   High-availability fiber-optic switching
          o   Voice recognition systems
          o   Medical testing machines
          o   Telephone switching
          o   Digital television signal routing
          o   Rolling mills for steel and aluminum
          o   Textile machines
          o   Munitions  testing
          o   Engine  propulsion  systems
          o   Automotive manufacturing machines
          o   Aircraft wheel testing systems
          o   Robotic arm control systems, and other applications

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         The  Company's  SBC product line is based upon Intel  architecture  and
includes a broad line of VME and  CPCI-based  computer  boards and software.  We
recently  have  expanded  the product  line to include  small DIN rail  computer
boxes.  This is a  high-growth  product  line and has  recently  contributed  to
substantial contract awards and revenue growth.

         VMIC's  communications/networking  products include  Reflective  Memory
Networks, Fibre Channel, and gigabit Ethernet. The Company's historical focus in
this product area has been  Reflective  Memory  Networks,  which are proprietary
high-performance  fiber-optic  communication  products designed for applications
which require low latency and deterministic operations. The Company has expanded
its focus to include industry standard  communications/network  products such as
Fibre Channel, SCSI, and gigabit Ethernet. The Company's focus for Fibre Channel
is primarily the embedded  computer  industry while most larger  competitors are
focused on the server market.

         The Company also offers a broad range of I/O  products  based upon open
architecture buses such as PCI, CPCI, VME and DIN rail mount. This family of I/O
products includes data acquisition and control boards and system-level products.

         The Company plans to continue to market its products in markets such as
data  acquisition  and  control,  defense,  test  and  measurement,   industrial
automation, medical, and other markets; however, we expect substantial growth in
the telecom/datacom  market. The Company has recently won significant  contracts
in  telecommunications/datacom,  defense,  medical, and the SAN markets. Orders,
backlog,  sales,  and  profits  are  increasing,  establishing  new  records  of
performance.

         While the total telecommunications and communications (datacom) markets
are very large, the product areas in which VMIC is focused are estimated to have
annual sales between $8 and $10 billion dollars.  The Company believes that each
of these markets offers unique  opportunities in that the demands of each market
are changing. The market's demand for high-speed  communications/networking  and
high-performance   embedded  PC  computers  focused  on  open  architecture  bus
standards  and  leading  software  operating  systems  such  as  Linux,  Windows
NT(R)/2000,  Solaris,  VxWorks, and others present significant opportunities for
the Company.


         VMIC is focused on the  development,  sales,  and marketing of products
designed for original equipment manufacturers (OEMs) applications.  OEMs provide
the Company a source of revenue growth  generated from replicated  sales of high
volumes of single products,  which are key elements in customers' products.  The
Company  is  focusing  on  hardware  and  software   products   based  on  Intel
processor-based  embedded computers and  communications/networking  products and
PC-based controllers utilizing our SBCs and software for OEM applications.

                             4
<PAGE>



         The  Company's  strategic  vision  is to  offer  standard  bus  boards,
software,  and  systems  to  high-growth  markets  with a focus  on PC SBCs  and
communications/networks. Our strategy in the SBC market is to offer leading-edge
PC  computer  technology  for  standard  products  and attract  high-volume  OEM
business through mass  customization for key accounts.  The Company has recently
added  to its  customer  list  companies  such as  Litton  Data,  Nuspeed/Cisco,
Paravant,  Lucent,  Battelle/Cytyc,  and  others.  The  strategy  for  growth in
communications/networking  is to focus  on the  Fibre  Channel/SCSI,  high-speed
gigabit  Ethernet,  and Reflective  Memory  product  lines.  Our focus for these
product lines is in the embedded computer market and the broader server markets.
The Company has recently won  design-ins  and  contracts in the SAN and computer
clustering  markets with  companies  such as  Nuspeed/CISCO,  QUALCOMM,  Lucent,
Concurrent, and others, and our products are seriously being considered by other
leading companies.

         To effect the  strategy,  the Company has (1) invested in  developing a
line of  communications/networking  products  based  on Fibre  Channel,  gigabit
Ethernet,  SCSI,  and  enhancements  of Reflective  Memory  Networks  (RM),  (2)
invested in a comprehensive line of embedded PC Intel  processor-based  computer
boards and joined Intel's third-party board vendor (TPBV) program,  (3) invested
in PC-based control software and controller  products for industrial  automation
to expand the SBC revenue base into  industrial  automation,  (4) established an
extensive  worldwide  network of  distributors  and sales  representatives,  (5)
implemented a sales approach wherein VMIC acts as an extension of the customers'
R&D organization for mass  customization OEM  opportunities,  (6) penetrated the
SAN industry with an extensive line of Fibre Channel, gigabit Ethernet, and SCSI
products, (7) focused on increasing intellectual property, including patents and
close strategic  partnerships  for key markets and product lines,  (8) leveraged
and  expanded  our  state-of-the-art  manufacturing  capacity,  (9)  focused our
investments and marketing primarily on  communications/networks  and embedded PC
SBCs, (10) expanded software  investments to support the Company's  standard bus
board and systems product line, and (11) executed agreements with leaders in the
industry for Fibre Channel,  gigabit  Ethernet,  and SCSI  technology,  and (12)
executed an agreement  with a leading  industrial  automation  company to expand
VMIC's  products into industrial  automation with a focus on OEM  opportunities.
This agreement includes  co-marketing and new product  development  sharing,  as
well as cross product  marketing.  The Company has also  increased  partnerships
with market  leaders in  high-growth  large  markets and suppliers for hardware,
firmware,  and software  technology to develop new products and enhance existing
products for these markets.

         Management  believes that it is successfully  transitioning the Company
from a niche market and niche  product  company to a company  highly  focused on
large vertical markets with products designed for OEM applications.  The Company
has recently  experienced  four consecutive  quarters of substantially  improved
operating  margins and profitability  with substantial  increases in backlog and
operating  efficiencies.  In addition,  the Company's book-to-bill ratio for the
twelve-month  period  ending  September  30, 2000 has been  greater than 1.0 for
sixteen consecutive months.

         The Company's objective is to become a leading supplier of standard bus
board-level  products and software to the embedded computer and  telecom/datacom
markets with a focus on high-volume OEM applications. The 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,

                                    5
<PAGE>

such as telecommunications,  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 decreases the
need for customers to invest in product  development and support.  We also focus
on market segments that enable us to grow at reasonable  rates and at attractive
margins.

         The Company believes that its expertise in the embedded computer market
will  provide  the  catalyst  for  the  Company's  success  in  the  high-growth
communications/networking market with expanded and unique Fibre Channel, gigabit
Ethernet,  new Reflective Memory, and SCSI products,  in addition to SAN-enabled
PC SBCs.  Interest in the  Company's  SBC product  line has  recently  increased
because of the our experience and focus on the communications/networking market.
The Company has recently  signed  contracts with LSI and QLogic to enhance their
product lines with state-of-the-art Fibre Channel hardware and software.

         The   Company  is   experiencing   significant   growth  in  its  Intel
processor-based   SBC  product   lines  with   design-ins   and   contracts   in
telecommunications,  medical,  industrial  automation,  and defense. We are also
experiencing significant interest in the mass customization SBC market where


potential  customers  are showing  significant  interest in SBCs  designed  with
on-board Fibre Channel and/or gigabit Ethernet  networks.  We recently  expanded
our SBC  product  lines to include DIN rail  mount,  very small PC boxes  highly
focused on the industrial  automation market. We recently received approval from
GE Fanuc to offer a PLC  alternative  for its 90/70  product line based upon our
SBC and PC-based controller software.

         Throughout  the year ending  September  30, 2000,  VMIC has won over 26
design-ins  throughout  markets  such as  telecom/datacom,  defense,  industrial
automation,  medical,  and SAN.  The  Company  characterizes  a design  win as a
project  estimated  to  produce  $500,000  or more in  revenue  per year when in
production.  Although  these  projects  ramp into  production  volume  over time
intervals which range from 3 to 9 months after the award, 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.

         VMIC,  headquartered in Huntsville,  Alabama,  is a 15-year-old company
with  230  employees,  and  operates  from  more  than  76,000  square  feet  of
production, research and development, and administrative space.


                                 6
<PAGE>



                               Industry Background

         Unlike general-purpose  computers,  embedded computers are incorporated
into  systems  and  equipment  to perform a single or limited  number of complex
applications. Embedded computers are used in such markets as telecommunications,
industrial  automation,  medical,  test and measurement,  data acquisition,  and
defense. Some applications include production testing of electrical  components,
fiber-optic cable manufacturing,  film manufacturing,  automotive  manufacturing
and development,  jet and rocket engine development,  environmental  monitoring,
steel and aluminum  rolling mill  control,  telecommunications  and switch gear,
real-time communications and networking, robotics, and machine control.

         Standard bus solutions  include such buses as VME, CPCI,  PMC, PCI, and
others.  Standard buses are nonproprietary,  which means that the bus technology
is  available  to any  company  and  product  designer.  Currently,  the primary
standard  bus  used in PCs  and  computer  workstations  is  PCI.  Most  leading
industrial  computer  manufacturers  include  PCI  buses in their  machines  for
enhanced  computer  connectivity.  CPCI is an embedded  computer version of PCI.
CPCI  capitalizes  on the  combination  of the  Eurocard  form  factor,  already
popularized by VME, and the PCI bus characteristics.  The wide acceptance of the
PCI  bus  in  the  desktop  market  has  created  an  abundance  of  inexpensive
components.  CPCI has certain  advantages  in  applications  that  require  fast
transfers of large amounts of data.

         CPCI architecture is preferred for  high-performance  applications with
moderate I/O  requirements  that utilize less than eight slots.  VME, because of
its superior bus arbitration and distributed interrupt handling characteristics,
is preferred for larger  applications  where  processes and I/O are  partitioned
across as many as 20 boards in the backplane.

         The telecommunications market recently adopted CPCI as its architecture
of  choice  for   telephone   switching,   speech   recognition,   and  Internet
applications.  Other markets such as defense, medical, and industrial automation
are also beginning to utilize this technology.  The telecommunications market is
now configuring dual-redundant systems and is demanding PC CPCI-based computers,
high-speed communications, and higher reliability. The telecommunications market
is outsourcing  designs and sourcing embedded computers as technology within the
market changes more rapidly.

         The SAN market is a broad market involving the simultaneous  networking
and  interconnecting  of storage  devices such as discs,  tapes,  and  computers
utilizing fiber optics and very high gigabit  transfer  rates.  Fibre Channel is
the technology of choice and gigabit Ethernet has a significant growing interest
and a wide range of  companies  have  entered  the  market  with a vast array of
products that support the configuration of a wide variety of expandable  systems
designed  for  high  reliability  using  high-speed  data  transfers  based on a
cost-effective  scalable  architecture.  Gigabit Ethernet and Fibre Channel also
have    applications   in   computer    clustering   and    computer-to-computer
communications/networking.  Fibre Channel is a scalable  solution and has become
an industry standard  supported by such companies as  Hewlett-Packard,  Seagate,
Sun, IBM,  Compaq,  and others.  Fibre Channel and gigabit  Ethernet are now the
choice for computer clustering, storage interfacing, and networking.

         The server  industry  leaders  such as  Compaq,  Dell,  Sun,  Motorola,
Hewlett-Packard,  and others have selected the CPCI architecture as the platform
of choice for internet server farms where multiple processors and/or high

                                    7
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reliability  is  required.  The  market is moving  towards  SBCs  based on Intel
architecture    where    customers   are   requiring    the    integration    of
communication/network  functions such as Fibre Channel  and/or gigabit  Ethernet
with the processor board.

         Data  acquisition  refers to the process of collecting what is commonly
referred  to as  real-world  phenomena  information  such  as  light,  pressure,
temperature,  humidity,  force,  and flow. A data  acquisition  system (which is
comprised of a  collection  of measuring  instruments,  a computer,  and control
devices) is used to collect, document, and analyze that information.  Real-world
information,  commonly represented by analog signals, originates from sensors or
transducers.  The data  acquisition  system  accepts these  signals  produced by
sensors and  transducers  and converts  them into a format that the computer can
understand. Data acquisition and control also involves the collection of digital
input data that  originates  from  switches,  relays,  lights,  and other on/off
signals. In addition, computer-controlled digital outputs may be used to turn on
or off lights, relays, switches, valves, conveyor belts, or on/off functions.

         A data acquisition system can be used to gather,  monitor,  display, or
analyze  data.  If the system has output  capabilities,  it can also  accurately
control the processes it is monitoring.  The software works in association  with
the data acquisition  hardware.  Without the software,  the system's hardware is
considered to be generally ineffective.  The software can be used to control the
collection of data, as well as to display and analyze the data.

         The industrial  manufacturing  sector is currently the largest end-user
of data acquisition  products.  The Company believes that strong trends exist in
multiple  markets  for  equipment  based  on  open  standards  and  standard  PC
platforms.  The  industry  is focused on  technology  leaders  such as Intel and
Microsoft,  and standard  buses.  Designs  based on this  technology  ensure the
availability  of enhanced  equipment and software  migration paths that preserve
the customers'  investment in technology.  The  performance of PC technology has
now improved to the point where many  applications  that  historically  required
custom or special  equipment can now use PC technology and embedded standard bus
products.

         The industrial  automation  market is experiencing a shift to standards
based on PC technology and open bus  architectures.  According to an independent
market study,  the PC-based  control  hardware and software  segment will likely
demonstrate  the  strongest  growth.  The study  also  indicates  that users are
considering their control systems software to be the value-added element in such
systems.  The market  trend is  shifting  from  proprietary  programmable  logic
controllers (PLCs) to more general-purpose computers such as industrial PCs and


embedded  computers.  This  market  study  complements  the study by  Automation
Research  Corporation  (ARC) that  indicates  PC-based  logic  control  software
(SoftLogic)  within a standard  computer  environment can perform the exact same
functions  as  conventional  hardware-based  proprietary  PLCs.  The  ability to
upgrade the hardware while  preserving the customer's  software  investment is a
key benefit of PC control.

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                            Business Strategy

         Historically,  the  Company's  focus was  primarily  defense,  test and
measurement,  nuclear power plant monitoring,  and simulation and training.  The
Company's revenues,  investments,  and marketing were primarily  associated with
data  acquisition  and  control  board-level  and  systems-level   products  and
supporting  niche products.  These products served the Company well by providing
high margins.  However,  these markets were not large enough to sustain  desired
growth.

         The Company is  transitioning  to markets  with  potential  high-volume
growth by  investing in new  technology  and  products  associated  high growth,
larger  markets  such  as  telecommunications   and   communications/networking.
Simultaneously  with  focusing  on  different  markets,   the  Company  is  also
experiencing  significant success in its legacy markets,  such as defense,  with
new Intel processor-based single-board computers based on the CPCI architecture.
The  transitioning  has included a new focus on OEM  applications  within legacy
markets, as well as new markets such as medical and telecom/datacom.

         The trend in the embedded  computer industry is to outsource the design
and  manufacturing  of  standards-based  products to fewer and fewer  suppliers.
VMIC's  strategy  is to  continue  to  offer a wide  range of  products  to fill
customers' requirements in dealing with fewer suppliers. The Company's objective
is to be a leading supplier of board-level, systems-level, and software products
to the embedded computer industry for telecommunications, industrial automation,
test and measurement, medical devices, and defense applications.

         The focus product lines are:

              o  embedded Intel processor-based PC computers for VMEbus, CPCI,
                 rail applications
              o  expanded  communications/networking  products for the embedded
                 industry and for the broader server computer market
              o  OEM products for industrial automation based upon PC control

         The key elements of the  Company's  strategy to achieve this  objective
are:

                  Leverage the  Company's  Pentium(R)  Computer  Expertise.  The
Company has the  broadest  line of Intel  processor-based  Pentium  single-board
computers in the embedded  computer  industry.  Because of VMIC's close alliance
with Intel, Microsoft, Red Hat Inc., Serverworks,  and other leading PC vendors,
and the Company's investment in leading technology,  customers are now selecting
VMIC  for  custom-designed  and  standard  products  for  potential  high-volume
applications.  The  product  line  focus  is for  VMEbus  and  CPCI and DIN rail
applications.

                  Expand  Fibre  Channel/SCSI,  Reflective  Memory,  and Gigabit
Ethernet Product Lines.  The Company has expanded its  communications/networking
product line to include a family of Fibre Channel SCSI and gigabit Ethernet host
bus adapters,  which support computer clustering and networking of computers and
storage devices at high-speed gigabit data rates. Fibre Channel, SCSI, and

                                    9
<PAGE>


gigabit  Ethernet  are  industry  standards  adopted  by most  leading  computer
companies.   We  are  enhancing  our  Reflective   Memory  network  products  to
substantially  increase their  performance and reduce recurring costs.  Host bus
adapters  convert the electronic  signals of a computer to a high-speed  gigabit
data stream for efficient communications with other computers or storage devices
such as tapes and  disks.  The  Company's  extensive  background  with its Fibre
Channel-based Reflective Memory products, hub technology, and host adapters used
for computer  networking  should  facilitate  the Company's  growth into broader
markets such as telecommunications/datacom and SANs.

                  Continue  the  Growth  of  Data  Acquisition  and  Control  or
Input/Output  (I/O) Business.  The Company's I/O product line has been primarily
based on VMEbus.  This  product  line has been  expanded  to include  CPCI and a
low-cost  busless DIN rail mount I/O product  line.  The strategy is to focus on
OEM  applications of I/O products such that the PC-based control software can be
used as a catalyst  to sell I/O  products  such as boards and I/O  systems.  The
Company's  plan is to transition  its revenue base in I/O to an OEM focus rather
than a project  focus.  The  Company is  continuing  to  establish  a  worldwide
distribution network that is highly focused on the industrial  automation market
while  continuing  the sale of other  products  through  existing sales reps and
distributors.  The Company  diverted most of its investments from I/O to SBC and
communications/networking over the previous two years as part of its strategy of
re-inventing  the Company to increase growth rates and profits while  decreasing
the number of niche products. The Company has no plans to exit this product line
as revenues from this market segment still generate  substantial profits for the
Company. The Company is examining I/O product acquisitions and licensed products
to enhance the product line in areas of significant  growth  potential.  The DIN
rail I/O  product  line  was  recently  licensed  from a  leader  of  industrial
automation.  This licensing arrangement allows the Company to enjoy high margins
similar to products developed within the Company.

                  Remove  Low-Volume  Products from  Production.  The Company is
aggressively  removing  lower volume niche  products  from its product  lines as
higher  volume  sales of SBCs and  communications/network  products  provide the
necessary growth for the Company.  The Company has implemented an EOL program to
minimize potential problems for customers who use such products.  Generally, the
Company  will  manufacture  EOL and  products or products  targeted  for EOL for
special  customer needs at a significant  production  cost premium to facilitate
customer  transitions to higher volume VMIC products,  or to competitor products
where the Company has decided to terminate the lower volume products.

                  Expand  International  Markets.  The Company has a substantial
presence in the  international  market  where it sells  products in more than 60
foreign countries through its line of international distributors.  The Company's
strategy is to continue to grow its  international  presence by  expanding  into
more  countries  while  it  continues  to grow  its  business  through  existing
distributors. In 1998, the Company opened an office in Paris, France in response
to customer  requests  for VMIC to  introduce  a presence  in Europe  beyond its
distributor  network  personnel.  The  Company  has  changed  its  international
distribution  strategy  to  support  multiple  distributors  in most  countries,
whereas  historically we have executed exclusive contracts with one distribution
organization  in each  country.  The  Company  has  also  aggressively  replaced
distributors  and, where  necessary,  added  additional  distributors to improve
geographic  coverage.  We recently  added several new  distributors  in Germany,
Scandinavia,  Korea, Russia,  China, and France. Our business in Japan, Germany,
Israel, and Italy has significantly improved. We have also recently executed OEM
agreements with SMS DEMAG in Germany and ALSTOM in France and England.

                  Continue  Investments in Engineering and Product  Development.
The  Company  expects to  continue  its  relatively  high  levels of  developing
innovative new products and enhancing and redesigning  its existing  products to

                                    10
<PAGE>


reduce costs and increase  functionality.  However, as a percentage of sales, we
expect R&D to be in the range of 10 percent,  whereas historically the ratio has
been much higher.  The Company is continuing  its focus on new products that may
provide more substantial growth  opportunities in more vertical markets. The R&D
strategy has recently changed to focus more on major targeted opportunities that
offer the potential for  high-volume  replicated  sales and  opportunities  that
match our mass  customization  model. The Company's  investments in new products
are primarily  modifications  and/or  enhancements  to existing  products  where
customers and VMIC are co-developing the  specifications of products designed to
meet  customer  requirements  for  potential  high-volume  repeat  business.  In
addition,  the Company's focus for new product  investments is primarily focused
on  communications/networking,  Intel processor-based PC single-board computers,
and OEM applications  involving the Company's  PC-based control software coupled
with our new DIN rail CPUs as well as our PC-based controller products.

         The  Company  has  recently  changed  its  strategy  in the  industrial
automation  market to focus on OEM markets  involving  higher volume  replicated
sales of single-board computers and CPU DIN rail, very small boxes utilizing the
Company's  PC-based  control  software  product.  These  new  products  are  now
receiving  serious interest from a leading company in the industrial  automation
market.

                                    Products

         The  Company's  product  lines can be  partitioned  into three  primary
product  lines as described in this section.  The primary  product lines are (1)
Intel     processor-based      embedded     single-board     computers,      (2)
communications/networks,   and  (3)  data  acquisition  and  control  (I/O)  and
supporting software.

         Single-Board PC Computers and Peripherals.  The Company has significant
recognition   in  the   embedded   market   with  its   VMEbus  and  CPCI  Intel
processor-based CPU products. This product line has contributed significantly to
our recent success in  transitioning  the Company to an OEM focus in larger more
vertical  markets.  The  product  line is highly  focused  on  Intel(R)  Pentium
processors  that have been used to build one of the largest lines of SBCs in the
industry.  The Company  has an  excellent  relationship  with  Intel's  embedded
computer  group  where  we  are  involved  with  receiving   advanced  data  and
information  for  the  development  of  new  products  based  upon  Intel's  new
technology.  We are an approved Intel  "third-party  board vendor"  (TPBV).  The
product  line  supports  a wide  variety  of  operating  systems  such  as  DOS,
Windows(R),  Windows NT(R), LynxOS, Windows CE, Linux, VxWorks, and QNX. We have
recently  partnered with Red Hat, Inc., a leading developer and provider of open
source  operating system  solutions,  to resell Red Hat Linux 6.2 Deluxe Edition
for  Intel  (x86)  platforms.  The Red Hat  Linux 6.2  Deluxe  Edition  includes
operating system software,  documentation, and support from Red Hat. The Company
also  manufactures  an array of compatible  boards such as floppy and hard drive
modules and complementary PMC products such as video, Fibre Channel,  Reflective
Memory, gigabit Ethernet, SCSI, and sound. PMC is an industry-standard mezzanine
board  that can be  plugged  into a site on the  SBC.  VMIC  manufactures  fully
functional  PC/AT  single-board  computers,  which support  off-the-shelf  PC/AT
software and enable the user to completely  configure an embedded PC/AT computer
system.  The Company's  single-board  computer products (CPCI, VME, and DIN) are
fully supported by the Company's component software (IOWorks(R)). See "Component
Software (IOWorks)" below.

         Communications/Network  Products. The Company's  communications product
line  consists  of  three  primary  product  categories.  Our  primary  focus is
associated  with new and enhanced  Reflective  Memory  networks,  Fibre Channel,
gigabit Ethernet,  and high-performance SCSI. Other communications product lines
are primarily legacy products. The primary product categories are:

                                     11
<PAGE>


              1.  Fibre Channel.  Fibre Channel,  a highly reliable,  high-speed
                  interconnect technology, that allows concurrent communications
                  among workstations, mainframes, servers, data storage systems,
                  and  other   peripherals  using  common  storage  and  network
                  protocols.   Installations  range  from  small  postproduction
                  systems on Fibre  Channel  loops to very large  computer-aided
                  design,  or CAD,  systems  linking  thousands  of users into a
                  switched Fibre Channel network.
                  Fibre Channel is ideal for the following applications:

                  o   Internet/Intranet
                  o   High-performance storage
                  o   Large databases and data warehouses
                  o   Storage backup systems and recovery
                  o   Server clusters
                  o   Network-based storage
                  o   High-performance workgroups
                  o   Campus backbones
                  o   Distance learning
                  o   Digital audio/video networks
                  o   Medical imaging/telemedicine
                  o   Embedded military sensor, processing, and displays
                  o   Industrial control systems

                  VMIC's  Reflective  Memory  (Rtnet(TM))  product line utilizes
                  Fibre Channel technology to achieve  deterministic  operations
                  beyond Fibre Channel. While many of the existing Fibre Channel
                  companies  are  highly  focused on PCI bus  solutions,  VMIC's
                  strategy  is to offer a more  complete  product  line for most
                  industry-standard open architectures,  such as PCI, CPCI, PMC,
                  VME, and future advanced architectures, such as Infiniband and
                  PCI-X,  an  enhanced  version  of PCI  which  is  the  leading
                  architecture  used by most leading  computer  companies  today
                  such as Sun, IBM, Compaq, Dell, Hewlett-Packard,  Gateway, and
                  others.  Infiniband is the Company's  next-generation computer
                  architecture on the drawing board for future  development.  In
                  addition,   VMIC  has  significant   software   experience  to
                  differentiate  this product line. The Company is also focusing
                  on  combination  communications  features on the same board to
                  take advantage of the slot limitations associated with the PCI
                  bus-based server market.

                  VMic's host bus adapter  (hba) fibre  channel  product line is
                  based  on  state-of-the-art   technology.  This  product  line
                  includes  open   architecture   solutions   based  on  several
                  industry-standard  bus structures,  such as pci bus, cpci, and
                  PMC/VME.

                  The Company has recently  released for production  several new
                  HBAs,  boards for PCI, and PMC. The Company has also  released
                  three new  SAN-compatible  single-board  computers for VME and
                  CPCI.  These  products  couple  the PMC HBA  boards  with  the
                  Company's  single-board  computers  to offer  customers  fully
                  integrated  and tested Fibre Channel  single-board  computers.
                  The  Company  has  recently   released  a  combination   board
                  featuring  Fibre  Channel  and  SCSI  on the  same  board.  In
                  addition,  we have  released  SCSI-based  boards for  embedded
                  applications.

                                    12
<PAGE>

              2.  Gigabit  Ethernet.  The  Company  has  recently  expanded  its
                  network products to include gigabit Ethernet boards based on
                  new Intel  communications  technology.  Our first  product  is
                  focused  on the  embedded  computer  industry  for  high-speed
                  communications between and among computers using either copper
                  or fiber  optics.  Gigabit  Ethernet  technology is now moving
                  into  the  SAN   market   as  well  as  the   broader   server
                  communications market.

              3.  Reflective  Memory  Networks.   VMIC's  Reflective  Memory
                  Network  products offer real-time  networking for applications
                  where  guaranteed  delivery  of data at precise  times or time
                  intervals are primary  requirements.  The Company's Reflective
                  Memory    allows    customers    to    configure     extremely
                  high-performance   networks.   The   product   line   supports
                  networking  of  most  computer   systems  offered  by  Silicon
                  Graphics, Harris, IBM, Intergraph, Hewlett-Packard,  Motorola,
                  Gateway,  DELL,  and many others that are  designed to support
                  standard  buses.   Reflective   Memory  has  applications  for
                  networking the same or dissimilar  computer systems in a high-
                  performance,  fiber-optic,  or cable network.  One of the most
                  significant  benefits of Reflective Memory is that software is
                  not required for its  operation.  However,  the Company offers
                  industry-compatible    networking    software   compliant   to
                  internationally  recognized standards such as TCP/IP, which is
                  typically used with other types of networks.

The Company's legacy products within the communications sector includes:

              1.  General-purpose    serial   I/O   products.    The   Company's
                  general-purpose  serial I/O products support a wide variety of
                  connectivity options associated with peripherals,  intelligent
                  sensors, dials, and indicators.

              2.  Serial I/O  communication  products for defense and aerospace.
                  The Company's serial I/O communication  products are used in a
                  wide  variety of  military  and space  applications  including
                  aircraft,  missiles,  ground support  equipment,  and avionics
                  buses, which are used in commercial applications.

              3.  Bus repeater  products.  The Company's  bus repeater  products
                  provide  customers  a means of  expanding  the  capacity  of a
                  system so that I/O  boards  may be used or added to the system
                  without the high cost of using a CPU for each  chassis,  which
                  may require I/O boards.  The Company's  bus repeater  products
                  include more than six products that support the  configuration
                  of large I/O systems  and the  remoting of I/O boards from the
                  CPU via fiber optics.

         General-Purpose  I/O Products.  The Company  offers a wide range of I/O
products  including  VMEbus,  CPCI,  PCI, and DIN rail I/O. The I/O product line
includes more than 90 I/O boards and  supporting  software  drivers based upon a
broad line of  operating  systems  such as VxWorks,  QNX,  Windows,  Linux,  and
Windows NT. The Company has recently  privately  labeled a complete low-cost DIN
rail mount I/O product line from a leading industrial  automation supplier.  The
product line consists of over 35 I/O modules and  communication/networks  blocks
such as Ethernet,  Profibus and  DeviceNet,  which are the leading host computer
networks for the industrial automation market. Profit margins for these products
are in line with similar products developed by the Company. The I/O products are
used to perform  such  tasks as  monitoring  temperature,  fluid  flow,  motion,
resistance,  strain,  revolutions,  and reporting  the states of many  different
conditions  such as the  closed/open  status  valves  or the  on/off  status  of
switches.
                                 13
<PAGE>


         Component  Software  (IOWorks).  The Company's IOWorks software product
line is an extensive  family of PC software  components.  Some of the components
are used to facilitate the sales of key  board-level  product lines such as SBCs
and  I/O  while   others  are   designed  to  support  the   configuration   and
implementation  of  complete  I/O  systems.  Some of the  components  provide  a
comprehensive  set of tools used to create data  acquisition  and control system
and to interconnect the large number of legacy control  products  commonly found
in  industrial  plants  today.  Several of the IOWorks can be used to  implement
complete plant-wide control, or can be used in conjunction with existing control
systems to augment or supplement those existing  systems.  The IOWorks component
architecture  provides  a  seamless,   cohesive,   easy-to-use  environment  and
flexibility for users to pick and choose  components for the application or VMIC
product of interest or users  interested  in  configuring  complete  systems may
select an entire suite of components to suit their needs.

         A  variety  of  IOWorks   components   can  be  configured  to  form  a
comprehensive  development and control  environment for PC-compatible  computers
running  Microsoft's  Windows NT  operating  system.  Control  systems run under
Windows  NT and  VxWorks.  Windows NT is used for less  demanding  applications,
whereas   VxWorks   is  used   for   critical   high-performance   deterministic
applications. A complete set of IOWorks component software executes on the PC to
read  temperatures,  pressures,  motor shaft positions,  and other data from the
plant and then controls such machines as  conveyors,  packaging  equipment,  and
extruders.  IOWorks  components  are based on open standards such as IEC 61131-3
and  Microsoft  technologies.  IEC  61131-3  is  an  internationally  recognized
software specification that defines and standardizes  programming of control and
monitoring systems. IOWorks adherence to these open standards allows integration
with other standard off-the-shelf Windows NT-compatible software products.

         IOWorks component  software  functions with various  third-party boards
and platforms, as well as VMIC's hardware products. The software is designed for
hardware  independence and software OS independence at the system control level.
IOWorks supports open architecture and open systems solutions, ensuring that the
customer's investments will be compatible with future programming environments.

         I/O Systems  Products.  The Company  offers a wide range of systems for
the embedded computer market. A system is a combination of board-level products,
coupled with  backplanes  (interconnecting  boards),  power modules,  mechanical
packaging,  and  software.  Systems  products are  configured  by the Company to
customer  specifications  and are  delivered  to the  customer as an  integrated
product.  The Company typically does not provide any custom software or hardware
products for such sales.  Systems  products are generally sold to OEMs,  systems
integrators,  or end-users who install the equipment,  develop software, and add
third-party products to customize such systems for specific applications.

         We  offer a wide  range  of I/O  systems  based  on a wide  variety  of
hardware and software  products that have wide  applications  in the  industrial
automation and test and measurement markets.

         The Company has expanded its I/O systems  product line to include CPCI,
PCI, and DIN rail I/O. These systems are based on the IOWorks  software  product
line and significantly expand the Company's offering of system-level products to
the industrial automation market and test and measurement market.

         Special  Products.  The Company develops,  manufactures,  and markets a
variety of special products that are modified versions of the Company's standard
products.  The Company has  recently  focused  more of its  resources on several
potential contracts associated with such opportunities. This market is typically
referred to as the "mass  customization  market" where  customers  work with the
Company to make modifications to existing products, or the Company uses an

                                     14
<PAGE>


existing  product as a  baseline  to develop a new  product  customized  to meet
specific customer requirements.  These opportunities  typically have long design
cycles  ranging from three months to nine months  before the Company  recognizes
any significant  revenue from these  relationships.  The Company is experiencing
significant  success in this area of its  business  in markets  such as defense,
telecommunications,  medical, and industrial  automation.  The Company typically
avoids  such  special  products  unless  the  business   relationship   involves
significant  revenue and volume  opportunities.  The  Company  may either  share
development   expenses  for  such   products,   or  completely   underwrite  the
development.  The Company  typically  negotiates  the complete  ownership in all
rights to such products. Some contracts in the future may involve a guarantee of
a fixed period of production  by VMIC after which the product  rights could pass
to the  customer.  For the twelve month period ending  September  30, 2000,  the
Company has maintained complete ownership of all such products.

         The development and sale of these special products provides the Company
a  significant  advantage  over its  competition  because the products have been
tailored to specific  customer  requirements,  which makes it difficult  for the
competition  to offer the same  product at a lower  price.  VMIC  believes  that
customers  that require such products will be unlikely to contract with multiple
suppliers  because of the high cost of the initial  efforts  associated with the
design,  qualification,  and testing of such  products.  The Company  lists such
customers  as  Lucent,  Litton  Data  Systems,  Paravant,  and  others  as "mass
customization" accounts.
                                 15
<PAGE>


Customers

         The  Company  offers a broad range of embedded  computer  solutions  to
customers in a wide variety of industries. The customer base includes end-users,
systems integrators, value-added resellers, and distributors.

         The Company has active  customers  worldwide.  These customers  include
major OEMs, systems integrators, value-added resellers, and educational/research
organizations,  many of whom are  Fortune  500  companies.  For the  year  ended
September 30, 2000, 55 customers  accounted for  approximately 70 percent of the
Company's  sales.  However,  no single  customer  represented  greater  than 7.9
percent of the  Company's  sales.  The  following  table  includes the Company's
representative customers and end-users by market:

<TABLE>
<CAPTION>
                                    Representative Customers and End-Users by Market
<S>                             <C>                     <C>                        <C>
TELECOMMUNICATIONS              COMPUTER MANUFACTURERS  AEROSPACE                  RESEARCH
ALACATEL                        CONCURRENT COMPUTER CORPAEROSPATIALE               ARGONNE NATIONAL LABS
ATT                             CRAY RESEARCH           ALENIA                     AT&T BELL LABS
DIVICOM                         DIGITAL EQUIPMENT CORP. ANSALDO                    AT&T TECHNOLOGIES
EMS                             ELECTRONIC ASSOCIATES   BENDIX FIELD ENGINEERING   BECHTEL-NEVADA
LUCENT                          HARRIS CORPORATION      BF GOODRICH                BELL TELEPHONE LABS
MOTOROLA                        HEWLETT-PACKARD         BOEING AEROSPACE CO.       BROOKHAVEN NATIONAL LABS
NORTEL                          IBM                     BRITISH AEROSPACE          DUKE UNIVERSITY
SED                             MOTOROLA                CASA                       FERMILAB
                                                        DASSAULT                   GANIL
                                                        DEBIS SYSTEM HAUS          HARRY DIAMOND LAB
INDUSTRIAL AUTOMATION           AUTOMOTIVE              DELTA AIRLINES             HARVARD UNIVERSITY
3M COMPANY                      APPLIED AUTOMATION      DORNIER                    JOHN HOPKINS UNIVERSITY
AGFA                            CHRYSLER                FORD AEROSPACE             LOS ALAMOS NATIONAL LABS
AVX CORPORATION                 COM                     GENERAL DYNAMICS           MICHIGAN STATE UNIVERSITY
BETHLEHEM STEEL                 FORD MOTOR COMPANY      GOODYEAR AEROSPACE         MIT
CANON                           GENERAL MOTORS/EDS      GRUMMAN AEROSPACE CORP.    RENSSELAER POLYTECHNIC
CEGELEC                         MERCEDES BENZ           HAMILTON STANDARD          RIST
CIMTEK                          SVERDRUP TECHNOLOGIES   HERCULES AEROSPACE         SIERRA RESEARCH
COMMONWEALTH ALUMINUM           TOYOTA                  HUGHES AIRCRAFT            SRRC
CORNING                         WERTH ENGINEERING       ISRAELI AIRCRAFT INDUSTRIES
DUPONT                                                  JET PROPULSION LABORATORY
EASTMAN KODAK                                           LOCKHEED                   SIMULATION AND TRAINING
FAIRMONT TAMPER                 SEMI-CONDUCTOR MANUFACTULTVGAEROSPACET             ATLAS ELEKTRONIK
GE FANUC                        APPLIED MATERIALS       MARTA MBB                  AAI CORPORATION
GE DRIVES                       CANON                   MCDONNELL DOUGLAS          BURTEK
INTEGRATED MILL SYSTEMS         CANON QUESTER           NASA                       CAE ELECTRONICS
KIMBERLY-CLARK                  CHAD                    NORTHROP CORPORATION       FLIGHT SAFETY INTERNATIONAL
KVAERNER                        EXCELLON                PRATT & WHITNEY            GENERAL PHYSICS
LAMM RESEARCH                   ORTHODYNE               ROCKWELL INTERNATIONAL     METEOR
LOGAN ALUMINUM                  SILICON VALLEY GROUP    ROLLS ROYCE ASSOCIATES     MITSUBISHI HEAVY INDUSTRIES
MANNESMAN DEMAG                 SVG THERMO              SMITH INDUSTRIES           QUINTRON CORPORATION
MCNAUGHTON AND MCKAY                                                               REDIFFUSION
MINARIK CORPORATION                                                                REFLECTONE, INC.
NUCOR STEEL                     UTILITIES INDUSTRY      DEFENSE/MILITARY           S3 TECHNOLOGIES
POSCON                          COMMONWEALTH EDISON CO. AIDC                       SAIC
PROSOFT AUTOMATION              DEPARTMENT OF ENERGY    ARNOLD AFB                 SANDERS ASSOCIATES
QUEST ENGINEERING               GEORGIA POWER           AVCO                       SBS ENGINEERING
QUESTER                         HOUSTON LIGHTING & POWERBDM                        SIEMENS AG
RENFRO CORPORATION              KSG                     BEI DEFENSE SYSTEMS CO.    SIMULATION ASSOCIATES, INC.
REYNOLDS ALUMINUM               MAJUBA                  DEPARTMENT OF DEFENSE      SOGITEC
SMS-DEMAG                       MOCHOVCE                EDWARDS AFB                SSI
THERMCO                         ONTARIO HYDRO           EGLIN AFB                  TAI
TUSCALOOSA STEEL                PP&L                    ELECTRONICS WARFARE ASSOCIATES
US STEEL                        TVA                     E-SYSTEMS
WISE ALLOYS                     UNION ELECTRIC          FERRANTI
XEROX                           UTILCOM                 LITTON DATA
                                VEPCO                   LITTON GUIDANCE & CONTROL
                                WESTINGHOUSE            MARTIN MARIETTA
                              MOORE RESEARCH CENTER
                                                        NAVAL  AIR  TEST  CENTER
                                                        NAVAL      AIR      TEST
                                                        DEVELOPMENT        NAVAL
                                                        AVIATION   DEPOT   NAVAL
                                                        COASTAL  SYSTEMS  CENTER
                                                        NOVAL   OCEANS   SYSTEMS
                                                        CENTER  NAVAL   RESEARCH
                                                        LAB    NAVAL     SURFACE
                                                        WEAPONS   CENTER   NAVAL
                                                        UNDERWATER SYSTEMS NAVAL
                                                        WEAPONS CENTER  PARAVANT
                                                        RAYTHEON
</TABLE>

                                 16
<PAGE>







         The Company's  products are used in  communications  and  networking of
computer  and computer  storage  systems,  voice  recognition  systems,  medical
testing machines,  telephone switching, digital TV signal routing, rolling mills
for steel and aluminum,  textile machines,  munitions testing, engine propulsion
systems,  automotive  manufacturing  machines,  aircraft wheel testing  systems,
robotic arm control systems, and other applications.


Backlog

         The Company's backlog of firm orders as of September 30, 2000 increased
80 percent to $23.5  million,  as compared to a firm order  backlog at September
30,  1999 of  approximately  $14.7  million.  Although  orders  are  subject  to
cancellation  in the normal  course of  business,  historically  the Company has
filled most of its firm orders.  One  customer  accounts for $9.1 million of the
total  backlog as of September  30, 2000.  Management  believes that the primary
reason for the  increase in the  Company's  backlog of orders is the  increasing
demand for a variety of new products.  The  book-to-bill  ratio has been greater
than 1.0 for sixteen consecutive months through September 30, 2000.

         For the fiscal year ended September 30, 2000, the Company  received 7.9
percent of its revenues  from Litton and 24 percent of its revenues from several
customers  who received  contracts  from various  agencies of the  Department of
Defense.

Intellectual Property (IP)

(1) Intel Processor-Based  Single-Board Computers. The Company offers one of the
widest PC single-board  (SBC) embedded  computer  product lines in the industry.
Our SBCs  involve  advanced  technology  12-layer  PC boards and ball grid array
(BGA) technology. We build embedded computers on half the real estate of leading
PC suppliers,  such as Dell,  Compaq,  and others. We have extensive  supporting
software product lines,  partnerships with PC leaders,  one SBC patent,  and the
most extensive SBC computer product line on the market.  We have more than seven
new SBCs in development by a dedicated and experienced  computer design team. We
have an extensive line of software  products that enables most leading  software
operating  suppliers'  products to run on our line of SBC  products.  We have an
extensive  line of  accessories  and  supporting  mezzanine  boards  to  support
expanded  CPU  functionality.   Our  investment  in  software  and  our  leading
technology are keys to our success.  We are an approved Intel "third-party board
vendor" (TPBV),  which involved  significant  discussions and negotiations  with
Intel. Our  intellectual  SBC property  involves unique features in hardware and
software.

         The  Company  has more than 22 SBC  standard  board  products  based on
Pentium(R),  Pentium II, and Pentium III processors in production. These designs
differentiate  VMIC from its  competition  and have  allowed  us to win  several
custom SBC  design-ins  for large OEMs. Our software  support  packages  include
products for Windows NT,  Windows(R)  2000,  VxWorks,  Linux,  LynxOS,  QNX, and
Solaris operating systems.  These software packages differentiate VMIC and offer
us significant  advantages over the  competition.  Our SBC product line includes
various support products such as disk drive assemblies, transition panels, and a
complementary  line of PMC products,  such as video,  Fibre Channel,  Reflective
Memory, gigabit Ethernet, SCSI, and sound.

                                 17
<PAGE>


         Our  relationship  with Intel allows us to obtain advanced  information
for new  products  and  advanced  information  concerning  Intel's  new  product
roadmaps.  In addition,  Intel assists the Company in marketing its products. We
participate with Intel in various forums, seminars, and symposiums.

         The Company's  recent  success,  and a  substantial  part of our recent
growth, can be attributed to our significant investment in Intel processor-based
SBCs, accessories, and software. Our SBC focus allows us to participate in other
product business with the same customers  because the SBC is typically the first
product selected in configuring and designing embedded systems.

         The  Company  has a  dedicated  SBC  design  staff  highly  focused  on
expanding our product line with leading-edge  technology for VMEbus and CPCI. We
are also  expanding our product base to include other form factors,  such as DIN
rail mount and other technologies.

         The Company has  announced a new,  low-cost wall mount  computer  which
will include our PC-based control software  package  (IOWorks(R)),  targeted for
high-volume industrial automation OEM accounts. Our SBCs form a critical element
in our I/O systems  business where we couple I/O products,  software  (IOWorks),
and accessory products for turnkey systems.

(2) Fibre Channel  Hardware and Software.  The Company  offers a wide variety of
Fibre Channel host bus adapters for standard buses,  such as PCI, PMC, and CPCI.
To support these hardware products, we offer a complete line of software drivers
for most popular operating systems,  such as Microsoft Windows NT, Windows 2000,
Wind River  Systems,  Inc.  VxWorks,  Red Hat Linux,  and Sun  Solaris.  We have
contracts with LSI and QLogic that enables us to obtain advanced information for
new designs.  The  Company's  technology  includes 1 G and 2 G products,  and we
offer combination  functions on the same host bus adapter, such as Fibre Channel
and SCSI.  The  Company's  hardware and software  Fibre  Channel  products  have
features  and benefits not  available  from LSI or QLogic.  The Company has also
recently released a high-performance SCSI product based on LSI technology.

(3)   Communications/Network   Products.   We  are  a  worldwide  leader  in  RM
communications/networking  products and  technology.  We have one patent pending
and have licensed five patents and the RM trademark from Sun. We have the widest
variety of RM hardware  and software  products in the market.  This product line
offers unique  high-performance  communications/networking  where determinism is
required.  A subset of the  product  line uses a  modified  version of the Fibre
Channel to achieve low latency and high  determinism.  We have an extensive line
of supporting products, such as hubs. The Company offers more than 16 RM network
board  products.  These  designs  are unique in the  industry,  and  include the
highest performance RM products available. We offer more than six bypass and hub
designs for use in RM networks. In addition,  these products are supported by an
extensive  line of  software  drivers  for Windows  NT,  VxWorks,  Linux,  IRIX,
Solaris,  VMS, UNIX,  and others.  We have a patent pending for a design concept
that improves the reliability of RM networks.

         The Company has expanded its communications/networking  product line to
include higher  performance,  lower cost Reflective  Memory,  gigabit  Ethernet,
Fibre Channel, and SCSI products.


(4) We are a market leader in data  acquisition  and control  boards and systems
for the embedded  market  arena.  The Company has a large family of I/O products
for the data  acquisition  and  control  market.  The IP  associated  with these
products includes hardware and software.  However,  the barrier to entry lies in
the sheer  number of products  and the  systems'  advantages  we have because we
offer  complete  turnkey  solutions  based  on  our  PC-based  control  software
(IOWorks) package. Our expertise, knowledge, and experience with PC-based
                                 18
<PAGE>


control systems has allowed us to beat large  industrial  automation  leaders in
applications,  such as  rolling  mill  control or other  applications  where I/O
system  performance/speed  is  critical.  We have the  widest  variety  and most
extensive  data  acquisition  product line on the market.  We have more than 100
different  input/output  board-level  products and a large number of  supporting
products,  such as transition panels,  signal conditioning,  and other accessory
products.

(5) We  have  extensive  investments  in a wide  variety  of  software  products
(support of most leading  operating  systems such as Windows NT,  Windows  2000,
VxWorks,  Linux, QNX, and others),  including an extensive and  high-performance
PC-based control software package (IOWorks). Our investments in software include
board drivers,  firmware, host software drivers, computer BIOS software, and I/O
system software such as IOWorks. Our PC-based control software is enabling us to
penetrate  industrial   automation  markets  with  leading   relationships  with
corporate giants, such as GE Fanuc, Alcan, Reynolds,  Goodrich, Renfro, and many
others. We are also experiencing  growth in the test and measurement and defense
systems because of our PC-based control software.  Our PC-based control software
is modular such that sales involve  components and total  packages.  The modules
seamlessly  interact  and  support  a  wide  variety  of PC  platforms,  leading
input/output products, including VMIC I/O product line, communications/networks,
and other products used in applications  involving the broader data  acquisition
and control markets.

(6) We have numerous trade secrets,  trademarks,  two patents, and five licensed
patents from Sun (our proprietary design/technology).

(7) Our investments are enabling us to win many systems and opportunities  where
VMIC is the preferred supplier for several products sold to the same customer in
high volumes because of our extensive  product lines and intellectual  property.
This form of internal reference selling is a significant factor in our success.

(8) We are highly focused on obtaining additional patents and trademarks, and we
are constantly adding trade secrets as our technology base expands.

(9) The barrier to entry is an extensive  product  line of  hardware,  software,
long-term  relationships  with suppliers,  customers,  partners,  trade secrets,
patents,  licensed  patents,  and a team of employees highly motivated by shared
ownership.  The Company has  historically  invested  more than 20 percent of its
revenues on building an extensive product line with unique features and benefits
that differentiates our Company,  our products,  and our service.  Recent market
studies  indicate  that  VMIC is one of the top  most  recognized  names  in the
embedded computer industry.

(10)  The  Company  has  built  an  excellent   reputation   through   long-term
associations and close partnerships with leading suppliers,  such as LSI, Intel,
QLogic,  Microsoft,  Wind River Systems,  Inc., and many others. The Company has
recently negotiated agreements with QLogic, Red Hat, Inc., LSI, Serverworks,  GE
Fanuc,  and others to support the  Company's  marketing  strategies  and product
development roadmaps.

         The Company has invested 15 years in building an  excellent  reputation
for delivering  superior,  high-quality  products globally at reasonable prices,
and we have a history of winning  significant  contracts  with many  Fortune 500
companies.   We  have  a  formidable  worldwide  network  of  independent  sales
representatives and distributors serving more than 60 countries. The Company has
the infrastructure and management talent to support high growth.

                                 19
<PAGE>



         Our Company is focused on retaining  long-term,  repeat  customers that
allow us to profit from such  relationships.  We are highly  focused on service,
quality,  technological leadership, and product differentiation,  which allow us
to enjoy high margins.

Markets

         The Company  markets its products  primarily  to the embedded  computer
industry, which serves markets such as telecommunications,  defense,  industrial
automation, test and measurement, and medical equipment industries.

         The embedded  computer market is projected to grow from $3.6 billion in
1998 to $9 billion in 2003, according to Market and Technology  Quarterly.  This
market  includes  VMEbus,  CPCI bus, PCI bus,  PMC, and other open  architecture
standards.  Within this market,  VMEbus products are projected to grow from $700
million in 1999 to $1.9 billion by 2003. The embedded PCI market is projected to
grow from $600  million  in 1999 to $1.65  billion in 2001.  One of the  hottest
markets within the embedded  computer  market is the relatively new CPCI market,
which is  projected  to grow from $100  million in 1999 to $1.9 billion in 2003.
Within the embedded computer market,  VMIC has invested in the new CPCI computer
architecture,  creating a complete product line of PC single-board computers and
network  products  such as  Reflective  Memory  networks and Fibre  Channel.  In
addition,  VMIC has invested in the  development  of a complete  line of new I/O
products for CPCI. VMIC is highly focused on the VMEbus, PCI, PMC and CPCI board
business. The bus board market is a market that changes as new standards and new
open  architecture  technology  is  brought  to market  generally  by very large
companies  such as Intel,  Motorola,  Compaq,  Hewlett-Packard,  Sun,  and other
leading computer  suppliers.  The Company is studying new PC standards,  such as
Infiniband,  supported by Intel, and PCI-X for new bus board products.  PCI-X is
an  enhanced  version of the PCI bus,  which is the most  widely  used  computer
architecture  today.  PCI-X,  according to recent market studies, is destined be
the next universal computer architecture for high-performance servers. Compaq is
presently a leader in developing this new open standard.  PCI-X computer systems
are scheduled for availability during fiscal year 2001.

         The  single-board  computer  market  within  the  VMEbus  market  arena
accounts  for more than 25 percent of the market which is projected at more than
$1.9  billion by 2003,  whereas the market  according  to COTS  Journal was $700
million in 1999.  Utilizing the VMEbus market as a guide,  the Company  believes
that the CPU  business for CPCI could  approach  more than $500 million by 2003.
The  telecommunications  market has selected CPCI as its standard,  and contract
awards for CPUs are  presently  estimated at 50 percent of the market.  However,
VMIC  expects   substantial   growth  in  other   applications  in  addition  to
single-board computers.  The Company believes that the market projections for PC
computer  board sales for VME and total  computer  board sales for CPCI indicate
that the total market for 1999 will exceed $388 million, for 2000 it will exceed
$600 million, and for 2001 it will exceed $964 million.

         Based on the number of design-ins won by VMIC during 1999 and 2000, and
recent marketing information, the Company believes that multiple industries such
as defense,  medical,  digital  video  broadcasting,  communications,  and other
markets  in  addition  to   telecommunications   have  selected  CPCI  as  their
next-generation architecture of choice for new embedded applications.

                                 20
<PAGE>



The Telecommunications Market

         According to the Company's  market  research  data,  high  availability
technologies,  specifically  CPCI with hot swap  capabilities,  are enabling the
migration of  telecommunications  infrastructure  from proprietary  hardware and
software  architectures  to  mass-marketed  PC hardware  and  industry  standard
software  like  Windows  NT.  With the  popularity  of Windows NT  applications,
Intel's  Pentium  processor-based  CPUs have  become  the most  common  standard
platform in next-generation  telecommunications  systems. The telecommunications
market has selected CPCI bus as its architecture of choice.  However, VMEbus and
PCI bus applications are also prevalent in this market.

         The   transformation   and   upgrading  of  the   existing   networking
infrastructure to ensure that it will be able to connect voice,  data, and video
gear is well on its way.  With  Internet  growth  fueling  more and more network
usage for multimedia, the telecommunications market is developing boxes to offer
flexible  service  and  avoid  obsolescence.  Reliability  and  availability  is
dictating redundant systems  interconnected by high-speed gigabit communications
products.  These  communication  requirements  typically  involve  deterministic
operations with little or no software overhead.

         According to the PCI Industrial Computer  Manufacturers' Group (PICMG),
the CPCI bus is particularly well suited for many high-speed data  communication
applications such as servers, routers, converters, and switches.

         The  telecommunications  market  arena is  projected  to grow  from $15
billion  in 1999 to more than  $18.5  billion  in 2001.  The  embedded  computer
industry sells boards into this market.  The board-level  market is projected to
grow from $800 million in 1999 to $1.55 billion by 2002 according to RTC.

         The first six months of 1999  brought an 18  percent  increase  in U.S.
telecommunications  equipment  factory  sales  over the same  period  last year,
according to the annual 1999  Multimedia  Telecommunications  Market  Review and
Forecast,  published  by the  multimedia  Telecommunications  Association  (MMTA
Arlington,  Virginia).  Sales  rose to nearly  $41.6  billion  for the first six
months of 1999 from $35.2  billion  for the first six months of 1998.  The trade
organization  credits the substantial  growth to an economic rebound in Asia and
Latin  America,  which  relies  on  U.S.-manufactured  products  to  meet  their
communications needs.

         In addition,  the Company  believes that  increases in Internet  users,
which are expected to exceed 300 million by the end of 2002,  and the  resulting
bandwidth  requirements,  estimated to be 500TB per month volume in 1999, offers
market opportunities for the Company's products.

Communications/Networking

         Gigabit  Ethernet  enables the unhindered flow of data across intranets
as communication within enterprises will move on from text-based e-mail messages
to  bandwidth-intensive  real-time audio, video, and voice. Ethernet is the most
popular cabling technology for local area networks. Initially, the most commonly
installed  Ethernet  systems were called 10Base-T,  which provided  transmission
speeds of up to 10 Mbps. As data transmitted  across LANs increased,  100Base-T,
also known as Fast Ethernet,  which could (theoretically)  transmit at 100 Mbps,
became the standard that replaced 10Base-T.  Fast Ethernet uses the same cabling
as  10Base-T,  while  everything  else -- the packet  format and  length,  error
control,  and  management  information  -- remained  the same.  Its  scalability
ensured its quick adoption.

                                 21
<PAGE>



         Fast Ethernet was typically used for backbones, but the ever-prevailing
bandwidth crunch has pushed 100Base-T onto workstations. It is now giving up its
place at the backbone to gigabit  Ethernet which can  (theoretically)  provide a
bandwidth  of a billion  bits per  second  over cable  and/or  fiber  optics.  A
backbone is a  transmission  line that carries data  gathered from smaller lines
that  connect to it.  Since a backbone  will have to bear the load of the entire
network, it must be built on very-high bandwidth lines.

         In a LAN,  the nodes may  interface  to the  backbone  using  100Base-T
network cards while the backbone  interfaces  across  networks  through  gigabit
Ethernet.  Applications in the modern  enterprise make exacting demands from the
network  and put  pressure  on the  desktop,  server,  hub,  and the  switch for
increased  bandwidth.  Megabytes  of data  will have to flow  unhindered  across
intranets  as  communication  within  enterprises  will move on from  text-based
e-mail messages to bandwidth-intensive real-time audio, video, and voice.

         An increasing  number of enterprises are employing data warehousing for
strategic planning.  This implies increased volumes of data and low transmission
latency.  These  warehouses may comprise of terabytes of data  distributed  over
hundreds of platforms  and  accessed by thousands of users,  and must be updated
regularly to provide users near-real-time data for critical business reports and
analyses.

         Archiving an enterprise's mission-critical information scattered across
a network usually occurs during off hours.  Even then, it requires large amounts
of  bandwidth  for a fixed  period of time (4 to 8 hours).  The backup  involves
gigabytes or terabytes of data  distributed over hundreds of servers and storage
systems   throughout  an  enterprise.   Enterprise-critical   applications  will
proliferate and demand ever greater shares of bandwidth at the desktop level. As
the number of users grows  rapidly,  enterprises  will need to migrate  critical
portions of their networks (if not the whole network itself) to higher-bandwidth
technologies. Crossing over from megabit to gigabit Ethernet will be inevitable,
starting at the backbone.

         A very  straightforward  scenario for upgrading,  is increasing the 100
Mbps links  between  Fast  Ethernet  switches or  repeaters  to 1,000 Mbps links
between 100/1,000 switches.  Such high-bandwidth,  switch-to-switch  links would
enable the 100/1,000  switches to support a greater  number of both switched and
shared Fast Ethernet segments.

         Demand  for  more  bandwidth  to  support  Internet,  streaming  media,
enterprise resource planning and customer relationship management  applications,
and a huge  installed  base of  compatible  equipment  and  cabling,  will drive
growth. The overwhelming  prevalence of Ethernet topologies and installed copper
cable  creates  a  virtually   automatic  decision  to  upgrade  to  the  latest
technology.

The Storage Area Network Market

         Fibre  Channel  products  are used to connect  servers and data storage
devices to form storage area networks (SANs).  Fibre Channel  technology,  a new
generation of  server-to-storage  communications  technology  that improves data
communication speeds,  connectivity,  distance between connections,  reliability
and accessibility, has made SANs possible.

         The  volume  of  electronic  data  generated,  processed,  stored,  and
manipulated has expanded significantly in recent years as a result of the growth
of data-intensive applications such as transaction processing, data warehousing,
data mining, multimedia, and Internet applications. Application requirements for
video-on-demand, HDTV, 3-D Video, video mail, and visual computing are pushing

                                       22
<PAGE>


the  envelope  on  server  capacity  and  transfer  rates.   International  Data
Corporation (IDC) estimates that the amount of stored network data grew from 750
terabytes  in 1994 to 10,500  terabytes  in 1998,  and that it will  increase to
420,000 terabytes in 2002. With the dramatic increase in information storage and
data  retrieval   requirements,   system  performance  has  become  increasingly
constrained  by  traditional  input/output  technologies,  such as  SCSI  (small
computer communications interface),  the currently prevailing  server-to-storage
communications protocol. The support for a limited number of connections and the
short  transport  distance  that  characterize  SCSI,  as  well  as the  lack of
reliability  of data  delivery,  have limited the  capabilities  of  traditional
network storage architectures and placed constraints on the size of the network.
Fibre Channel  overcomes the  limitations  of  traditional  data  communications
technologies, because it offers the connectivity,  distance, and access benefits
of networking architectures combined with the high performance, scalability, and
quick response needed for data storage applications.

         Many Fibre Channel  products find their  primary  application  in SANs.
However,  they have also been  deployed  for use with  digital  graphics,  video
networks,   and  nonlinear   digital   editing   systems  in  the   advertising,
broadcasting,  and  entertainment  industries,  as well as for  high-speed  data
processing  applications in a variety of industries  including  Internet service
providers.

         Fibre  Channel  is  a  technology  standard  that  allows  data  to  be
transferred  from one network  node to another at rates of 100 Mbyte per second,
which  translates  to about 45,000 pages of text in this  document  each second.
Fibre  Channel  was  developed  jointly  by  Seagate,  Hewlett-Packard,  and Sun
Microsystems,  and is now backed by consortiums consisting of leading vendors in
both networking and storage markets.  Fibre Channel is now an industry  standard
accredited by the American National Standards  Institute (ANSI).  Leading server
companies such as Dell,  Compaq,  Sun Microsystems,  Silicon Graphics,  IBM, and
others have  selected  Fibre  Channel as their  technology  for SAN and computer
clustering applications.

         Fibre  Channel  HBAs are used to  convert  computer  buses such as PCI,
CPCI,  SBus,  PMC,  VMEbus,  etc. to transmit and receive data pursuant to Fibre
Channel  standards.  Just  as a  wire  is  needed  for  telephone  (noncellular)
operations,  a wire fiber is needed to allow storage boxes and computers/servers
to be  interconnected  into a system.  EMF Associates  project the Fibre Channel
board market to grow from $1.6 billion in 1999 to $6.1 billion in 2002.

The Industrial Automation Market

         Since the 1960s, industrial automation systems have included mechanical
devices,  meters, and gauges, as well as data loggers and strip chart recorders.
In  the  1970s,   programmable   logic  controllers   (PLCs),   special-purpose,
proprietary,   stand-alone,  industrial  computers,  were  introduced  and  were
primarily  used  for  discrete  manufacturing  applications  such as  automobile
assembly.  PLCs have  traditionally  had  primitive  operator  interface  panels
incorporating  buttons,  lights,  and  indicators.  In  parallel,  sophisticated
industrial  automation  systems called  distributed  control systems (DCSs) were
also adopted to provide  computer  control of large-scale  continuous  processes
such as those found in oil refineries.  DCSs integrated a variety of sensors and
control  elements using I/O  connections  all  controlled by a central  computer
running proprietary software.  Systems were also configured based on proprietary
hardware.

         The market is  undergoing  significant  changes,  and customers are now
demanding   solutions  based  on  open  hardware  platforms  and  nonproprietary
standards such as VMEbus, CPCI, and PCI; Intel processor  technology,  Microsoft
operating systems, and other Microsoft key technologies; and PC-based control

                                    23
<PAGE>


software such as VMIC's IOWorks software package.

         The increased adoption of PC-based control systems is aided by software
suppliers  who  provide  solutions  based  on  PC-based  architectures  and open
networking. The advantages of PC-based control systems are:

         o Reduced cost of installation
         o Ability to upgrade systems easily
         o Higher  performance  than other  technologies
         o Customers  can select "best-in-class" products from multiple
           vendors
         o Reduced  dependence  upon just one vendor
         o Ability to integrate special-purpose  products
         o Controls and human-machine  interface, as well as other functions
           can be executed on one computer
         o Ability to integrate data with entire enterprise
         o Leverage commercial technology in reduced cost and  training
         o Reduced  development  costs
         o Design-in  migration path for future enhancements and
           system upgrades

         The  primary  cost  element  involved  in  systems  today is  software.
Customers  want to design their  software  application  one time and have it run
unmodified  for  decades  while  they  take  advantage  of  continuous  hardware
upgrades.  Suppliers of software and hardware products fill this continuous need
and requirement  through its open architecture  hardware  standards and PC-based
control software based upon international standards.

         The  industrial  automation  market is a key growth market  because the
Company's  customers are demanding open  architecture  solutions  based on Intel
PCs, key Microsoft  technologies,  and open  architecture  equipment  based upon
standards  such as VME,  CPCI,  and PCI.  Most of the  Company's  customers  and
industry  leaders  consider these  technologies  nonproprietary  open standards.
Customers are  demanding  more  flexibility,  more  computer  power,  and higher
performance  systems with open  connectivity to other platforms,  software,  and
most industry leaders' I/O equipment.

         VMIC selected  industrial  automation to take advantage of the industry
trends with open  architecture  hardware and PC-based  control  software.  These
products,  when packaged as an I/O system, allow VMIC to offer  high-performance
I/O systems  solutions with the flexibility,  scalability,  and life-cycle costs
that customers are requesting.

         The  Company's  strategy is to  continue  to market I/O  systems  while
changing  its  focus to OEM  replicated  sales of SBCs  and DIN rail  CPUs  with
PC-based  control  software.  I/O  systems  are  offered  by  the  Company  as a
configuration of boards, distributed I/O, chassis, power supplies, software, and
other  products  to  effectively  provide  customers  or systems  integrators  a
building    block   approach   that   enables   the   customer   to   focus   on
application-specific problems, not problems associated with I/O programming. The
Company  is the  market  leader  in  front-end  systems  according  to Frost and
Sullivan, an independent market research organization.


         The primary focus for I/O growth is industrial automation.  The Company
has coupled its communications/networking  products,  single-board PC computers,
IOWorks  software,  and  I/O  boards  to  offer  and  complete  I/O  systems  as
alternatives to PLCs.
                                 24
<PAGE>


The Medical Market

         In virtually all areas of the medical ultrasound and magnetic resonance
imaging  markets,  embedded  computers are used in the  real-time  animation and
manipulation  of  3D-objects in stereo by  interactive  computer  graphics.  The
processing,  analysis,  and  manipulation  of such data often  requires  several
tightly-coupled,   super-high-performance,   simultaneously-operating  computers
located within the same box and communicating on the same hardware medium.

         The medical industry has selected open architecture  solutions based on
VMEbus  and CPCI  bus,  both of  which  support  the  requirements  of  parallel
processing of large  volumes of image data. In addition to processing  the data,
the  medical  industry is faced with  massive  storage  requirements,  including
storage  archiving,  data  sharing,  and analysis  often from  multiple  servers
simultaneously.  Computer  clustering  and SAN  problems  are solved  with Fibre
Channel products designed for high-performance servers and embedded computers.

         Real-time  computer  software  requirements  are typically  solved with
leading  operating  systems  such as  VxWorks  from  Wind  River  Systems,  Inc.
Graphical  user   interfaces  that  demand  less   deterministic   or  real-time
performance  are generally  supported by Windows NT, LynxOS or other less robust
software  operating  systems.  VMIC  offers  the Intel  processor-based  Pentium
high-performance  computer boards,  Fibre Channel HBAs, and supporting  software
for such applications.

The Defense Market

         The  Defense  Department  has  executed a new  initiative  to move from
custom  militarized  products  to  commercial-off-the-shelf  (COTS)  products to
reduce its cost of building  electronic systems where possible.  Therefore,  the
tri-services  have selected  VMEbus as its  architecture  of choice for building
computer  systems,  and CPCI is now  moving  into  many COTS  applications.  The
projection of standard bus open architecture  board-level  products for military
COTS  applications  is projected to grow from $716 million in 1999 to $1 billion
by 2001  according  to  NSWC-Crane.  Most  prime  contractors  for  applications
involving  ship  control  systems,  radar,  simulation  and  training,  military
vehicular,  and embedded  computer  systems have  selected  standard  commercial
products.  The defense industry is moving from  proprietary  designs to hardware
and software  based on PC  technology  and industry  standard  software  such as
VxWorks,  Windows  NT,  LynxOS and others.  The  Company's  defense  business is
commercial-off-the-shelf  products that also sell into all other markets  within
the embedded computer industry. The Company does not offer militarized or rugged
products specifically designed for military or other applications.

The Simulation and Training Market

         The  simulation  and training  industry can be  partitioned  into three
primary  markets.  These  markets  include  Defense,  Power and  Utilities,  and
Transportation.  The Defense market involves the use of the Company's simulation
and  training I/O products in aircraft,  helicopter,  and ship  simulators,  and
trainers.  The Company's  customers are systems  integrators such as Reflectone,
McDonnell Douglas, Quintron, Flight Safety International,  AAI Corporation,  and
others who typically  purchase products designed  specifically for the industry.
The power utility industry uses the Company's  simulation and training  products
for applications in nuclear power plant  simulators and trainers.  The Company's
customers  are  systems  integrators  and  end-users  such  as S3  Technologies,
Siemens,  Atlas,  Thomson-CSF,   Mitsubishi  Heavy  Industries,  Georgia  Power,
Virginia Electric Power, and TVA. The primary difference in the markets involves
the size of the I/O system. Usual I/O systems for nuclear power plants typically
sell for  $500,000  to  $1,000,000  per unit,  whereas  I/O  systems for Defense
applications sell for $50,000 to $100,000 per unit.

                                 25
<PAGE>


         The Company believes that its success in this market centers around its
focus on  providing a wide variety of standard bus products and systems that are
designed  specifically  for the  simulation  and training  markets.  This market
requires  high-density I/O boards with self-test capability supporting extensive
fault  detection  and  isolation  capabilities.  The  defense  and  power  plant
industries  have  focused  on open  architecture  solutions,  and  VMEbus is the
leading embedded computer bus standard.  The Company believes that its customers
in this market  particularly  value its Intelligent  I/O  Controllers  that were
designed  specifically for the simulation and training  industry.  The Company's
simulation  and  training  product  line  enables a  customer  to order  systems
solutions  that obviate the need for  detail-level  programming of the Company's
equipment.

                    The Test and Measurement Market

         The  Company's  data  acquisition  and  control  products  are  used in
semiconductor ovens,  annunciation  systems, gas turbine monitoring and control,
electron particle  acceleration,  power train testing,  wind tunnel testing, and
emissions  monitoring.  VMIC's  customers  for such  applications  include OEMs,
systems  integrators,  and end-users such as  Interautomation,  Arnold Air Force
Base, Sverdrup,  Chrysler,  American Power, Ohio Edison,  Synchrontron Radiation
Research Center,  and others.  The Company attributes its success in this market
to its  broad  array  of I/O  boards,  open  system  technology,  and  the  wide
acceptance of VMEbus in the embedded systems market.

         The Company's line of Universal  Intelligent I/O  Controllers  form the
core of its data  acquisition and control  systems.  The I/O Controller  product
line was designed  specifically for the data acquisition and control market.  It
features many benefits required by OEMs, systems integrators, and end-users. One
of the  primary  benefits  is  the  I/O  Controllers'  support  of the  broadest
assortment  of VMEbus I/O boards in the  industry.  This wide  selection of I/O,
coupled  with  effective  turnkey I/O  solutions  for the  industry,  is a major
benefit, and the prime reason for the Company's success in this market.

                       Sales and Distribution

         The Company is a global  corporation that distributes  products in more
than  51  foreign   countries   through  more  than  31   distributors   and  13
representative  organizations worldwide. As of September 30, 2000, the Company's
marketing,  sales,  and  distribution  programs  were  conducted  by 41  of  the
Company's employees. The Company sells its products in the United States through
commissioned-based independent sales organizations and direct VMIC employees. As
of  September  30,  2000,   the  Company  has  contracts   with  13  independent
representative  organizations that employ more than 56 salespeople.  These sales
organizations are supported by their own support staff, as well as the Company's
employees.  The Company's home office is located in Huntsville,  Alabama. Remote
offices  are  located  in  Paris,  France  to  support  European  customers  and
distributors, and in Raleigh, North Carolina and Dallas, Texas.

         The   Company's   products   are  sold   internationally   through   31
distributors. As of September 30, 2000, the Company's distributors employed more
than 79 salespeople.

         In   addition   to   international    distributors   and   U.S.   sales
representatives,  the Company has 31 value-added  resellers (VARs) who represent
the Company.  VARs purchase and resell the  Company's  products and add value to
the Company's products by including custom software,  hardware,  or installation
and  maintenance  of the  Company's  equipment.  The  Company is  expanding  its
distributors and VARs. The plan is to establish a network of distributors, VARs,
and  Representatives  that is highly  focused on  industrial  automation,  and a
separate network of VARs and distributors that is highly focused on the Fibre

                               26
<PAGE>


Channel  SAN  markets.  Because  of the need to  establish  more  market-focused
distributors,  VMIC has elected to appoint multiple nonexclusive distributors in
various European countries.

         The Company attends more than 40 tabletop trade shows per year and more
than ten major trade shows per year.  Tabletop  shows  require  minimum  Company
involvement.  The  major  shows  are  market  related  and  require  significant
planning,  staffing,  and  promotional  efforts.  The Company  also  markets its
products  through  publicity  received from numerous  publications and magazines
that publish articles and press releases.

         The Company continually  invests in Web site updates,  product brochure
enhancements, direct mail, and other marketing techniques to expand its customer
base and  revenue  growth.  The  Company is in the  process of  establishing  an
E-commerce link which will allow customers to purchase products via the Web.

                                 Manufacturing

         The  Company   manufactures   most  of  its  products   in-house  while
subcontracting  a small portion of the board-level  product  manufacturing.  The
Company  has an  in-house  manufacturing  capability  that  includes  automated,
semi-automatic,  and manual  assembly and testing.  The Company's  surface mount
technology (SMT) consists of an automated line that has fine pitch and ball grid
array placement  capabilities.  VMIC's automated  inspection lines consisting of
state-of-the-art   equipment   that  includes  5DX  X-ray,   Automatic   Optical
Inspection, and a Dual PCB Inspection Robot. Product manufacturing operations at
the Company involve:  electronic  circuit board,  module  assembly,  I/O systems
assembly,  configuration  and testing,  cable  assembly,  and the  production of
product  support  information.   In  addition,   manufacturing   agreements  are
established with several local manufacturing companies to provide prompt service
for additional  requirements.  Although the Company may subcontract  some of its
manufacturing,  final testing and  packaging are always  conducted at VMIC under
the direction of VMIC's Quality Assurance Department.  The Company is located in
a high-technology  research  community that allows the Company to take advantage
of the quality  and  high-volume  manufacturing  capabilities  of several  local
companies.  The Company  capitalizes the development  costs of certain  software
used in production  testing and the  manufacturing  of its  products.  The total
deferred  software  development  expense for product  manufacturing  and testing
software to be amortized over three years as of September 30, 2000 is $609,053.

                            Research and Development

         The Company invests in research and development programs to develop new
hardware  and  software  products,  enhance  existing  products  by  integrating
state-of-the-art  technology,  and  customization  of certain  products  to meet
customers' specifications for applications that involve the potential for medium
to high-volume production opportunities.

         As of September 30, 2000, the Company has approximately 56 employees in
research and  development  activities.  Of these  employees,  22 are involved in
hardware development and 34 are involved in software development.

         As of September 30, 2000, 55 employees have technical degrees and eight
have advanced degrees.  Approximately 12.0 percent of the Company's research and
development  efforts in fiscal year 2000 were  software  related.  The Company's
research  and  development  expense  was $5.2  million,  $5.6  million  and $6.2
million,  in fiscal years 2000, 1999 and 1998,  respectively,  corresponding  to
13.6  percent,  19.7 percent and 20.0 percent of sales,  respectively.  Software
deferred expense was $0.74 million,  $2.33 million,  and $2.20 million in fiscal
years 2000, 1999 and 1998, respectively.

                                    27
<PAGE>



         The  Company  expensed  $0.8  million  and $5.3  million of  previously
capitalized  software  development costs for the fiscal year ended September 30,
2000  and  1999,  respectively.  The  write-downs  were  based  on  management's
estimates  of the gross  future  sales that can be  generated  from the existing
software products  marketed by the Company.  As of September 30, 2000, the total
deferred software  development expense to be amortized over future sales is $0.2
million.

         The Company has focused its R&D  investments  on new products  designed
for more  vertical  markets;  therefore,  its research and  development  efforts
associated with legacy markets have been decreased.  The Company has focused its
investments in single-board computers,  communications/networking products, such
as Reflective Memory, Fibre Channel/SCSI, and gigabit Ethernet technology.

                                  Competition

         The markets for the Company's  products are intensely  competitive  and
are characterized by rapid technological  change and emerging industry standards
requiring  ongoing  expenditures  for  research and  development  and the timely
introduction  of new technology and  enhancements  of existing  technology.  The
Company's  future  success will depend,  in part,  on its ability to enhance its
current technology and services,  respond effectively to technological  changes,
sell additional services to its existing client base, introduce new technologies
and meet the increasingly  sophisticated  needs of its clients.  Other companies
may develop  products or  technologies  that may adversely  affect the Company's
competitive  position,  or render its  technologies  or services  obsolete.  The
Company  competes for  customers on the basis of price,  performance,  features,
quality, service, reliability, adherence to standards, availability, development
capabilities,  and support.  The Company's  competitors vary in the size, scope,
and breadth of the  products  and  services  they offer.  Some of the  Company's
competitors and potential  competitors  have greater  financial,  technological,
manufacturing, marketing, sales, and personnel resources than the Company does.

         The markets for the Company's  products are highly  competitive and are
characterized  by rapid changing  technology,  evolving  industry  standards and
frequent  product  performance  enhancements.  The  following  tables  list  the
Company's  competitors  by market and product lines.  As with VMIC,  many of the
Company's  competitors  supply  products to several  markets,  and many of their
products are fairly easily adapted to alternative market uses.




















                                       28
<PAGE>

<TABLE>
<CAPTION>

                           Competitor Matrix by Market
<S>             <C>                          <C>         <C>               <C>           <C>            <C>          <C>

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

              Product Line                 Telecom        Industrial       Defense       Test and      Medical       SAN
-----------------------------------------------------------------------------------------------------------------------------

Competitor
=============================================================================================================================

Systran                                                                       X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Motorola                                      X               X               X                           X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Force                                         X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
General Microsystems                                                          X                           X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentek                                                                        X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentland                                                                      X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Acromag                                                       X               X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
RTP Inc.                                                      X                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Performance Tech.                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
National Instruments                                          X                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Intellution                                                   X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Allen-Bradley                                                 X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
GE Fanuc*                                                     X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
SBS                                           X               X               X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Qlogic                                                                                                    X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Emulex                                                                                                    X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
LSI*                                                                                                                  X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Object Automation                                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Think and Do                                                  X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Steeplechase                                                  X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Interphase                                    X                               X                           X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Ziatech                                       X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Dynatem                                       X               X               X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Nematron                                                      X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Adaptec                                                                                                               X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Agilent                                                                                                               X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Radisys                                       X               X               X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
*Competitor and strategic alliance.
</TABLE>


                                                29
<PAGE>

<TABLE>
<CAPTION>



                                          Competitor Matrix by Product Line
<S>          <C>                           <C>         <C>                 <C>           <C>           <C>
=============================================================================================================================

              Product Line                 Computer    Communications/      Input/         I/O         PC-Based
                                            Boards                          Output       Systems
-----------------------------------------------------------------------------------------------------------------------------
Competitor
=============================================================================================================================

Systran                                                       X               X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Motorola                                      X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Force (Selectron)                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
General Microsystems                          X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentek                                                                        X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentland                                                                      X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Acromag                                                                       X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
RTP Inc.                                                                                    X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Performance Tech.                                             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
National Instruments                                                                        X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Intellution                                                                                               X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Allen-Bradley                                                                 X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
GE Fanuc*                                                                     X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
SBS                                           X               X               X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Qlogic                                                        X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
LSI*                                                                                                      X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Emulex                                                        X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Object Automation                                                                                         X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Think and Do                                                                                              X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Steeplechase                                                                                              X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Interphase                                                    X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Ziatech                                       X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Dynatem                                       X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Nematron                                                                      X             X             X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Radisys                                       X
=============================================================================================================================
*Competitor and strategic alliance.
</TABLE>

                                 30


<PAGE>




                              Government Business

         The Company's reliance on direct and indirect  government  business has
been  significantly  reduced  over the past  eight  years from 75 percent of the
Company's business to 24 percent.  However, the Company is currently involved in
several  opportunities  and contracts  that could have a material  impact on the
Company's  growth and  significantly  increase the  percentage  of the Company's
future  revenue  generated  by  government-related  business.  The  Company  has
received  orders for CPUs and I/O products for shipboard  propulsion  monitoring
and control, and is well positioned to receive sizable follow-on orders.  Should
the program prove successful,  27 cruiser-class ships,  including follow-ons for
destroyers  and carrier  class  ships,  would use the  Company's  products.  The
Company has also been contracted to supply a potentially  large quantity of CPCI
single-board  computers to two large government  contractors.  In the event that
the  contracts are expanded,  a significant  percentage of the Company's  future
revenue could be generated by government-related business.

                               Proprietary Rights

         The Company's  success depends to a significant  degree on its software
proprietary  technology  and other  confidential  information.  The software and
information  technology  industries  have  experienced  widespread  unauthorized
reproduction of software products and other proprietary technology. The majority
of the  Company's  software is not patented,  and existing  copyright law offers
only limited practical protection. VMIC relies on a combination of trade secret,
copyright,   common  law  intellectual  property  rights,   license  agreements,
nondisclosure,  and other  contractual  provisions  and  technical  measures  to
establish and protect its proprietary  rights in its  intellectual  property and
confidential  information.  The Company  does not,  however,  sell its  software
source code, or provide its customers  access to the source code associated with
its software products.

         The Company owns two patents  associated with its Reflective Memory and
SBC product line, and is a licensee of over five products from Sun  Microsystems
associated with Reflective Memory.

         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,  to
determine  the validity  and scope of the  proprietary  rights of others,  or to
defend  against  claims of patent  infringement.  Litigation,  with  respect  to
patents or other  intellectual  property  matters,  could result in  substantial
costs and diversion of management and other resources, and could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.

         VMIC  believes  that its  proprietary  rights  do not  infringe  on the
proprietary  rights  of  third  parties.   However,  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 may
distract the  attention of the Company's  management,  and could have a material
adverse affect on the Company's  business,  financial  condition,  or results of
operations.
                                 31
<PAGE>


                                   Employees

         As of September 30, 2000, the Company had 227 full-time employees. None
of the Company's employees are represented by a collective bargaining agreement,
nor has the Company ever  experienced any work stoppages.  The Company  believes
that it has an excellent relationship with its employees.


ITEM 2.  PROPERTIES

         The Company's headquarters and principal  administrative,  engineering,
sales, marketing,  and manufacturing  facilities are located in office buildings
containing approximately 77,000 square feet located on approximately 10 acres of
land  in  Huntsville,  Alabama.  The  Company  from  time to  time  also  leases
additional  space in the vicinity as  necessary.  The Company  believes that its
existing  facilities  are suitable for the Company's  projected  growth over the
next 24 to 36 months.


ITEM 3.  LEGAL PROCEEDINGS

         None.


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

         None.




                                 32
<PAGE>






                      EXECUTIVE OFFICERS OF THE REGISTRANT

         Information  relating  to the  executive  officers of the Company as of
September 30, 2000, is set forth below.  Officers serve at the discretion of the
Board of Directors.


Name                                         Age      Position

Carroll E. Williams                           53      President, CEO and
                                                      Chairman of the Board

Alfred F. Casteleyn                           61      Director, Vice President
                                                      Sales and Marketing

Charles McDonald                              62      Executive Vice President
                                                      of Operations

George Meares                                 53      Vice President
                                                      Research and Development

Gordon Hubbert                                58      Vice President and Chief
                                                      Financial Officer



         Carroll E. Williams. Mr. Williams is the founder of the Company and has
served as its President,  Chief Executive Officer,  and Chairman of the Board of
Directors  since its  incorporation.  Prior to founding  the  Company,  he was a
Design  Engineer for SAIC,  Huntsville  Division from 1972 to 1983. Mr. Williams
was the founder and Division  Manager of the VME  Microsystems  Division of SAIC
from 1984 to 1986.  Prior to joining SAIC,  Mr.  Williams was employed by Sperry
Rand where he was  involved  in  numerous  assignments  associated  with  highly
reliable,  fault-tolerant  computer  systems  including  the space  shuttle main
engine  controller dual  processors.  Mr.  Williams gained  experience with data
acquisition  and control  systems  while  employed  at Pratt & Whitney  Aircraft
during 1970 and 1971.  Mr.  Williams  graduated  from  Georgia Tech in 1969 with
honors and continued  graduate  studies in electrical  engineering  and computer
science at the University of Florida and the University of Alabama.

         Alfred F. Casteleyn.  Mr.  Casteleyn is the Vice President of Sales and
Marketing of the Company,  and has been an officer of the Company  since June of
1991.  He is also a member of the Board of Directors  of the  Company.  Prior to
joining the Company,  he was the Sales and Marketing  Manager and  International
Manager for EAI  Electronic  Associates  of West Long  Branch,  New Jersey.  Mr.
Casteleyn has substantial  experience in the  International  Sales and Marketing
area of the industry  and has built a career in the field for over 30 years.  He
has been  successful  in such  efforts as design and  maintenance  of  marketing
programs,   planning   company  sales   activities,   representative/distributor
supervision,  trade  show  preparation  and  participation,  advertising,  staff
recruitment and preparation of financial packages.

      Charles  McDonald.  Mr.  McDonald is an  Executive  Vice  President of the
Company and acts as the Company's  Executive Vice  President of Operations.  Mr.
McDonald has 30 years of  electronics  experience  and has held positions in the
areas of  manufacturing  systems,  computers,  computer  hardware  systems,  and
products.  Before joining the Company Mr.  McDonald spent seven years with SAIC,
where he was the Project Manager/Engineer for several computer systems contracts
and was manager of utilities system  integration.Mr.  McDonald has been with the
Company  since August 10, 1987 and has served as an officer of the Company since
1990.

                                    33
<PAGE>




      George  T.  Meares.  Dr.  Meares is the Vice  President  of  Research  and
Development.  Dr.  Meares has been with the Company  since 1990.  He has over 14
years of experience in engineering  leadership positions and has vast experience
in the design and  development of  communication  and display  products for many
commercial and  governmental  applications.  Dr. Meares was formerly  associated
with Pentastar  Electronics,  Inc. as the Electrical  Design Branch  Manager,  a
Project Leader, and a Design Engineer. Dr. Meares earned his Ph.D. in Electrical
Engineering from Tennessee Technical University,  as well as his M.S. in Systems
Engineering,  and a B.S. in  Electrical  Engineering.  Dr.  Meares  takes a very
active role in the design and development of the Company's product lines.

      Gordon  Hubbert.  Mr.  Hubbert is the Vice  President and Chief  Financial
Officer of the Company. He has been with the Company since 1991, and has been an
officer of the Company  since  September of 1996.  Mr.  Hubbert was formerly the
Controller at Tenneco and Duracell,  as well as Division  Controller at SCI. Mr.
Hubbert received his MBA from Indiana Northern University in 1976.


                                    34
<PAGE>


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

Dividend Policy, Market, and Stockholder Information

         There is no established  public trading market for the Company's Common
Stock. At September 30, 2000, the Company's Common Stock outstanding was held by
approximately 608 shareholders.  At September 30, 2000, there were 293,423 stock
options  outstanding,  convertible into the Company's Common Stock. See footnote
No.6 Stock Option Plan in the Notes to Financial Statements. The Company has not
declared any dividends.  The Company currently intends to retain its earnings to
finance future growth, and, therefore, does not anticipate paying cash dividends
in the  foreseeable  future.  The Board of  Directors  may review the  Company's
dividend policy from time to time to determine the  desirability and feasibility
of  paying  dividends  after  giving  consideration  to  the  Company's  capital
requirements,  operating results and financial  condition and such other factors
as the Board of Directors deems relevant.

Recent Sales of Unregistered Securities

         On November 30, 1997, the Company  completed a private  placement stock
offering of common  stock,  receiving net proceeds of $3.0 million from the sale
of 300,000 shares of stock.  After payment of offering  expenses and legal fees,
the Company used  approximately  $2.0 million of the offering  proceeds to repay
the balance of its working line of credit. The balance of the offering proceeds,
approximately $1.0 million,  was used for general working capital purposes.  The
Company  relied on Section 4(2) of the Securities Act of 1933 and the provisions
of Rule 506 of  Regulation D for  exemption of this private  placement  from the
registration requirements of the Securities Act.

         The Company maintains several employee stock option and purchase plans.
Pursuant  to these  plans,  the  Company  has sold  the  following  unregistered
securities:

Year Ended                Shares Sold          Aggregate
                                               Consideration

 1998                      77,420                273,931

 1999                      74,069                257,204

 2000                      73,985                280,534






         The securities  were sold in reliance on exemptions  under Section 4(2)
of the Securities Act of 1933 and Rule 701 promulgated under Regulation D of the
Securities Act of 1933. The proceeds of the sales were used for working  capital
and general corporate purposes.


                                 35
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

         VMIC is providing the following  summary  financial  information of the
Company to highlight  selected  financial  information  for your  benefit.  VMIC
derived this  information from the audited  financial  statements of the Company
for each of the fiscal years shown. The following  information is only a summary
and you should read it in conjunction with VMIC's financial statements and notes
thereto  (beginning on page 49 in the latter  portion of this  document).  For a
more detailed narrative explanation of the following results and conditions, see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.

<TABLE>
<CAPTION>
                             Summary Financial Data
                      (in thousands, except per share data)

                                   VMIC, Inc.
                            Years ended September 30

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

                                                              2000        1999         1998        1997        1996
                                                             ---------  ---------    ----------  ---------   --------

  Statements of Operations Data:

   Revenues                                                   $38,644     $28,446      $31,090     $27,901     $23,791

   Gross profit                                                24,393      16,078       20,274      18,108      15,495

   Selling, general and administrative expense                 12,742      12,401       13,286      10,995       9,661

   Research and development expense                             5,230       5,601        6,232       5,307       5,335

   Income (loss) from operations                                6,054     (7,336)(1)       757       1,806         499

   Net income (loss)                                           $7,139(2) $(8,246)(1)      $205        $934         $41

  Per Share Data:

   Diluted earnings (loss) per share                            $1.53      ($1.82)       $0.04       $0.22       $0.01

   Weighted average common stock
   outstanding (diluted)                                    4,663,834   4,534,189    4,554,448   4,189,113   4,047,989


Excluding Certain One-Time Events (1)(2)
   Net income(loss)                                            $4,041     ($2,989)        $205        $934         $41

   Diluted earnings (loss) per share                            $0.87      ($0.66)       $0.04       $0.22       $0.01


Balance Sheet Data:

     Working capital                                           $5,838        $607       $4,724      $4,693      $2,544


     Total assets                                              27,145      20,270       25,162      19,707      16,410


     Long-term debt                                             6,299       6,448        5,713       5,395       5,078


     Total stockholders' net investment                        11,423       3,890       11,747       9,397       6,693

</TABLE>

(1) Net loss for 1999  includes a  non-recurring  charge of  approximately  $5.3
million for the write-down of certain software  development  costs and purchased
product  and  software  costs.  See  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations - write-down of certain assets and
Notes to Financial Statements - significant Fourth-Quarter Event.

(2) Net Income for 2000 includes a non-recurring  income tax valuation allowance
reversal of  approximately  $3.1 million in the fiscal  quarter  ended March 31,
2000.
                                    36
<PAGE>


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

         Except  for  historical  information  herein,  this  document  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  below.  These  forward-looking  statements  can  be
generally  identified as such because the content of the statements will usually
contain  such words as the  Company  or  management  "believes,"  "anticipates,"
"expects,"  "plans,"  or words of similar  import.  Similarly,  statements  that
describe the  Company's  future plans,  objectives,  goals,  or  strategies  are
forward-looking statements.

Overview and Business Environment

         VMIC is a  leading  supplier  of  standard  bus  board-level  products,
software,  and I/O systems for the  embedded  computer  industry.  The  products
perform a broad range of functions such as storage area and computer networking,
data  acquisition  and  control,  PC  single-board  computers,  and complete I/O
systems based upon a PC-based  control  software  product.  The Company offers a
broad range of software products based upon the most popular operating systems.

         The Company's  products are used in  communications  and  networking of
computers and computer  storage  systems,  voice  recognition  systems,  medical
testing  machines,  telephone  switching,  digital  television  signal  routing,
rolling  mills for steel and  aluminum,  textile  machines,  munitions  testing,
engine propulsion systems,  automotive  manufacturing  machines,  aircraft wheel
testing systems, robotic arm control systems, and other applications.

      The Company expects  significant growth in the  telecommunications/datacom
industry and storage area networks.  The Company plans to continue to market its
products to the defense, test and measurement,  medical,  industrial automation,
and other markets.

      The Company's strategic vision is to offer standard bus boards,  software,
and   systems   to   high-growth   markets   with  a  focus   on  PC  SBCs   and
communications/networks. Our strategy in the SBC market is to offer leading-edge
PC  computer  technology  for  standard  products  and attract  high-volume  OEM
business through mass  customization for key accounts.  The Company has recently
added  to its  customer  list  companies  such as  Litton  Data,  Nuspeed/Cisco,
Paravant,  Lucent,  Battelle/Cytyc,  and  others.  The  strategy  for  growth in
communications/networking  is to focus on the Fibre  Channel,  SCSI,  high-speed
gigabit  Ethernet,  and Reflective  Memory  product  lines.  Our focus for these
product lines is in the embedded computer market and the broader server markets.
The Company has recently won significant design-ins and contracts in the SAN and
computer  clustering  markets with  customers such as  Nuspeed/Cisco,  QUALCOMM,
Lucent,  Concurrent, and others, and our products are seriously being considered
by other leading companies.

                                 37
<PAGE>


Risk Factors

         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 SANs 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 SAN, industrial automation,  and  telecommunications  markets, and
other more  vertically  integrated  markets.  To implement  this  strategy,  the
Company  reduced its research and  development  investments in its core business
while  significantly  increasing its investment in the new products  designed to
address these more vertical markets. If the Company is unsuccessful in these new
markets,  it will be  dependent  on its core  business  to  maintain  historical
operating  results.  VMIC may not be able to maintain its  historical  operating
results,  however,  because  it  has  substantially  reduced  its  research  and
development investments in its core business.

         Sales of the Company's new products may not meet the growth  objectives
of the Company.

         Some of the  Company's  new  hardware  products  will be sold at  lower
profit margins,  and the Company requires significant market acceptance of these
products to meet the growth objectives of the Company. While there has been

                                    38
<PAGE>


significant  customer  interest in these new products,  and  Reflective  Memory,
Fibre Channel,  and PC-based products generated a significant  percentage of the
Company's  revenues in 2000,  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 thousand in
1986 to  approximately  $6.3 million as of September  30,  2000.  The  Company's
utilization  of long-term  debt is somewhat  higher than the average  company in
this industry.  A primary reason for the increase in long-term debt was the need
for the Company to manage its growth.  The Company  believes its current revenue
level will be sufficient to service its long-term debt. However, if the revenues
and profits of the Company substantially decrease, it will be more difficult for
the Company to service its long-term  debt,  meet its current  obligations,  and
continue with its current  business  plan. As of September 30, 2000, the Company
had sufficient current assets to liquidate all of its current liabilities.

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

         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, and results of operations.

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

         The  Company is  dependent  on the  success of its  recently  developed
IOWorks  software  for the  sale  of I/O  system  products,  embedded  PC  board
products, and communication products such as Reflective Memory and Fibre Channel
to  substantially  increase  revenue  growth.  Embedded  PC board  products  and
communication  products  typically  yield  smaller  margins  than the  Company's
traditional product mix and the Company's profits could, therefore, erode in the
future.
                                 39
<PAGE>


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

         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,  the 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 fully  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, and results of operations.

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

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

                                 40
<PAGE>


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.

         In fiscal year 1996, the Company began  capitalizing  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 2000 and 1999, the
Company recorded $0.4 and $5.3 million,  respectively, of write-downs of certain
software  development  costs and  purchased  product  and  software  costs.  See
footnote  No.15  Significant  Fourth-Quarter  Event in the  Notes  to  Financial
Statements.

         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 on 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.
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 product 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 subcontractors may experience delays because of quality
problems, backlog, component availability, financial difficulty, or other

                                     41
<PAGE>


situations which could have an adverse effect on the Company's operating results
and customer  relationships.  In this event, the Company may be required to find
alternative subcontractors, and there can be no assurance that the Company could
find suitable subcontractors.

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

         Sales to two major customers accounted for approximately 6.4 percent of
VMIC's sales in 1998 and 12.7 percent of VMIC's sales during 1999.  If either or
both of these customers  discontinued  purchasing products from the Company, the
Company's   operating  results  and  financial  condition  could  be  materially
adversely affected. In addition,  in fiscal year 1999,  approximately 31 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 future revenues.  It is possible that changes in national
policy or other factors  could result in reduced  defense  spending  which could
materially adversely affect the operating results and financial condition of the
Company.

         Lack of a Public Market and Certain Transfer Restrictions.

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

         Control by Existing Shareholders.

         Carroll  E.  Williams  and  Mary  W.  Williams  own 31  percent  of the
Company's  outstanding 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, 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 not 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

                                    42
<PAGE>


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 on the Company.

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

         The  Company's  success  will  depend in a 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 primary markets,  resulting in a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

                                 43
<PAGE>



Results of Operations

    Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

    Sales. The Company's sales increased 35.9 percent from $28.4 million in 1999
to $38.6 million in 2000.  International  sales increased 15.4 percent from $6.5
million  in 1999 to $7.5  million  in  2000.  Our  single-board  computer  (SBC)
business  increased  140.0  percent  contributing  to over 30.0  percent  of our
revenues.  The  communications/networking  business increased 12.5 percent while
the data  acquisition and control  business  increased over 9.0 percent.  We are
continuing our primary investments in Intel processor-based  computer boards and
communications/networking  products while  maintaining our data  acquisition and
control business.

    Gross Margins.  The Company's gross margin, which represents sales less cost
of products sold as a percentage of sales,  increased  from 57.0 percent in 1999
to 63.0 percent in 2000. The Company  expects its gross margin to decline in the
future as the  contribution  of lower margin  product to total sales  increases.
Gross profits for the twelve months ended  September 30, 2000 were $24.4 million
compared to $16.1  million for the twelve  months ended  September  30, 1999, an
increase of 52.0 percent.


    Selling,  General,  and  Administrative  Expenses.   Selling,  general,  and
administrative  expenses,  increased  2.0 percent from $12.4  million in 1999 to
$12.7  million  in  2000.  As a  percentage  of  sales,  Selling,  general,  and
administrative  expenses  decreased from 44.0 percent in 1999 to 33.0 percent in
2000. This decrease resulted from continued cost reduction  measures  throughout
sales and marketing.

    Warranty Expense.  The Company's  warranty expenses decreased to $526,500 in
2000 from  $578,535 in 1999.  This decrease was  partially  attributable  to the
Company's increased focus on product reliability.

    Software  Amortization.  Certain  internal  software  development  costs are
capitalized when incurred.  Capitalization of software  development costs begins
upon the establishment of technological feasibility. Amortization of capitalized
software  costs is  provided  over the  estimated  economic  useful  life of the
software product on a straight-line  basis,  generally five years.  Amortization
begins when a product master is made.  Accumulated  amortization as of September
30, 2000 was  $1,956,438  as compared to $1,313,022 as of September 30, 1999 and
$705,722 as of September 30, 1998. Amortization expense for year ended September
30, 2000 was  $643,416  compared to $607,300  for the year ended  September  30,
1999.

    Research and Development.  Research and Development  expenses  decreased 7.1
percent from $5.6 million in 1999 to $5.2  million in 2000.  As a percentage  of
sales,  research and development expenses decreased from 19.7 percent in 1999 to
13.5 percent in 2000.

   Taxes. The Company's  benefit from income taxes for year ended September 30,
2000 was $2.0  million as compared to a provision  of $0.2  million for the year
ended  September 30, 1999.  The Company  benefited  from an income tax valuation
allowance  reversal of $3.1 million during the quarter ended March 31, 2000. The
Company  realized  the  income tax  valuation  allowance  reversal  based on its
current profitable operations and projected sales and net income for fiscal year
2001.   The  Company  has  remaining   research  and   development   tax  credit
carryforwards for federal income tax purposes available to reduce future federal
income taxes, if any. These carryforwards expire in varying amounts between 2002
and  2015.  The  Company  also  has   approximately   $160,773  in  minimum  tax
carryforwards  available  for years  beginning  after  September  30, 2000.  The
Company has  approximately  $580,651 and  $1,061,976 of regular and  alternative
minimum tax net  operating  loss  carryforwards,  respectively,  which expire in
2014.


                                 44
<PAGE>
    Net Income or Loss. Net income after taxes and  adjustments was $7.1 million
in 2000 (including an income tax allowance  reversal of $3.1 million),  compared
to a net loss of $8.2 million in 1999.  The net loss for 1999 was  significantly
affected by a $5.3 million one-time  write-down of certain software  development
costs and product and software costs related to industrial  automation.  The net
income for 2000 was significantly  affected by the Company's $2.0 milion benefit
from income taxes.

    Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

    Sales.  The Company's sales decreased 8.4 percent from $31.0 million in 1998
to $28.4 million in 1999.  International  sales increased 14.0 percent from $5.7
million in 1998 to $6.5  million in 1999.  The Company  believes  that sales for
1999 did not meet  expectations  because of a general slow down in orders caused
by a combination of the Asian financial market crisis,  budget deferrals for new
equipment purchases, anticipated year 2000-related computer problems, changes in
legacy business market  technologies such as simulation and training,  delays in
VMIC's  penetration  of new markets with the  Company's  new  products,  product
development  delays,  and delays in market acceptance of VMIC's PC-based control
software.

    The  downward  trend  in  sales  began  in the  fourth  quarter  of 1998 and
continued until the middle of the third quarter of 1999.Hardware sales accounted
for approximately $27.6 million in 1999 compared to $30.4 million in 1998, while
software sales  accounted for  approximately  $0.8 million in 1999,  compared to
$0.7 million in 1998.

    Sales of the Reflective Memory product line accounted for approximately $6.8
million or 23.9  percent  of sales,  while  sales of  single-board  PC  products
accounted for approximately  $4.9 million or 17.3 percent of sales. Sales of I/O
products  accounted  for  approximately  $12.1  million or 42.6 percent of sales
while  miscellaneous  other products accounted for approximately $4.6 million or
16.2 percent of sales.

    Gross Margins.  The Company's gross margin, which represents sales less cost
of products sold as a percentage of sales,  decreased  from 65.0 percent in 1998
to 57.0 percent in 1999. The Company  expects its gross margin to decline in the
future as the  contribution  of lower margin  product to total sales  increases.
Such lower margins may,  however,  be partially offset by sales of the Company's
new software with I/O systems.

    Selling,  General,  and  Administrative  Expenses.   Selling,  general,  and
administrative  expenses,  decreased  7.0 percent from $13.3  million in 1998 to
$12.4  million in 1999.  This decrease was  partially  attributable  to staffing
decreases in the Sales and Marketing Department, and the cost reduction measures
executed  throughout the organization.  To better control expenses,  the Company
recently reduced sales commissions to independent sales contractors, established
house accounts,  and replaced some independent sales representatives with direct
factory sales employees.

                                 45
<PAGE>



    Warranty Expense.  The Company's  warranty expenses increased to $578,535 in
1999,  from $501,000 in 1998.  This increase was partially  attributable  to the
Company's  increased  manufacturing  of  more  complicated  products  such as PC
computer boards.  The Company has invested in more  sophisticated  manufacturing
equipment;  therefore,  the Company believes warranty expense should decrease in
2000, although there are no assurances that such reversal will occur.

    Software  Amortization.  Certain  internal  software  development  costs are
capitalized when incurred.  Capitalization of software  development costs begins
upon the establishment of technological feasibility. Amortization of capitalized
software  costs is  provided  over the  estimated  economic  useful  life of the
software product on a straight-line  basis,  generally five years.  Amortization
begins when a product master is made.  Accumulated  amortization as of September
30,  1999  was  $1,313,022  compared  to  $705,722  as of  September  30,  1998.
Amortization  expense for year ended September 30, 1999 was $607,300 compared to
$471,598 for the year ended September 30, 1998.

    Research and Development.  Research and Development  expenses  decreased 9.7
percent from $6.2 million in 1998 to $5.6  million in 1999.  As a percentage  of
sales,  research and development expenses decreased from 20.1 percent in 1998 to
19.7 percent in 1999. Although the Company has committed  substantial  resources
to  the  continued  development  of  its  IOWorks  software,  Reflective  Memory
products,  Fibre  Channel  products,  and  embedded  PC  boards,  the  Company's
reorganization of its software department  combined with significant  reductions
in software  spending should allow more efficient use of the Company's  research
and  development  budget and minimize the  possibility of future  write-downs of
software development costs.

    Taxes. The Company's provision for income taxes for year ended September 30,
1999 was $163  thousand  compared  to $75,600 for the year ended  September  30,
1998.   The  Company  has  remaining   research  and   development   tax  credit
carryforwards for federal income tax purposes available to reduce future federal
income taxes, if any. These carryforwards expire in varying amounts between 2002
and  2009.   The  Company  also  has   approximately   $67,000  in  minimum  tax
carryforwards  available  for years  beginning  after  September  30, 1998.  The
Company has  approximately  $5,423,000 and $5,431,000 of regular and alternative
minimum tax net  operating  loss  carryforwards,  respectively,  which expire in
2018.

    Net Income or Loss. Net loss after taxes and adjustments was $8.2 million in
1999,  compared  to net income of  $204,723  in 1998.  The net loss for 1999 was
significantly affected by a $5.3 million one-time write-down of certain software
development   costs  and  product  and  software  costs  related  to  industrial
automation.

    Liquidity and Capital Resources

    Historically,  the Company's cash flow from operations and available  credit
facilities  have provided  adequate  liquidity and working capital to fully fund
the  Company's  operational  needs.  As of  September  30, 2000,  the  Company's
variable  line of credit for  working  capital was $8.0  million,  of which $3.0
million was used.

    Working  capital was $0.6 million at September  30, 1999 and $5.8 million at
September 30, 2000, respectively.  Included in working capital are cash and cash
equivalents  of $0.58 million at September 30, 1999 compared to $0.59 million at
September 30, 2000.  Operating  activities for the year ended September 30, 2000
provided $4.5 million in cash. Cash used for investing activities was $3.8
                                 46
<PAGE>


million for the year ended  September  30, 2000,  of which $2.8 million was used
for capital expenditures. Cash provided by financing activities was $4.5 million
and  $(0.7)   million  for  the  years  ended   September  30,  1999  and  2000,
respectively.

    Inventory  turnover for the year ended September 30, 2000 was  approximately
163  days  compared  to  approximately  178  days in  1999.  This  decrease  was
attributable to improved inventory level management.  At September 30, 2000, the
Company  had a reserve  of  $267,196  for  possible  inventory  obsolescence  as
compared to $635,215 at September 30, 1999.  Accounts  receivable from customers
were  outstanding on average  approximately 45 days for the year ended September
30, 1999, compared to approximately 52 days in 2000.

    The Company believes that its financial resources,  including its internally
generated  funds and debt capacity,  will be sufficient to finance the Company's
current operations and capital expenditures for the next 12 months.

                                       47
<PAGE>

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Market Risks

      The  Company  is  exposed to  certain  levels of market  risks,  including
changes in foreign  currency  exchange rates and interest rates.  Market risk is
the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Exposure

     The Company believes that given its overall interest  exposure at September
30, 2000, including all interest rate sensitive instruments,  a near-term change
in interest  rates,  based on  historical  interest  rate  movements,  would not
materially  affect the  results  of  operations  or  financial  position  of the
Company.

Currency Rate Exposure

    The Company's  revenues are generally  denominated in United States dollars.
Accordingly,  foreign currency fluctuations have not had a significant impact on
the Company's  financial  position,  results of operations or cash flows for the
periods presented.


                                 48
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Financial Statements Included in Item 8:


Page
Report of Independent Accountants.......................50

Balance Sheets as of September 30, 2000 and 1999........51

Statements of Operations for the years ended
September 30, 2000, 1999 and 1998.......................52

Statements of Changes in Stockholders' Equity for the
years ended September 30, 2000, 1999 and 1998...........53

Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998.......................54
Notes to the Financial Statements for the years
ended September 30, 2000, 1999 and 1998.................55-70

Schedule for each of the three years in the period
ended September 30, 2000 included in Item 14(a)
II- Valuation and Qualifying Accounts and
Reserves................................................73


                                       49
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of VMIC, Inc.

In our  opinion,  the  financial  statements  listed in the  accompanying  index
present fairly, in all material respects the financial position of VMIC, Inc. at
September 30, 2000 and September 30, 1999, and the results of its operations and
its cash flows for each of the three  years in the period  ended  September  30,
2000, in conformity with accounting  principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
financial  statements.   These  financial  statements  and  financial  statement
schedule are the responsibility of the Company's management;  our responsibility
is to express an opinion on these financial  statements and financial  statement
schedule  based on our audits.  We conducted  our audits of these  statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatements. An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP

Birmingham, Alabama
November 6, 2000



                                       50
<PAGE>



VMIC, Inc.
Balance Sheets
September 30, 2000 and 1999


<TABLE>
<CAPTION>
                                                                                    2000                 1999
                              ASSETS
<S>                                                                             <C>                      <C>

Current assets:
    Cash and cash equivalents                                                      $  593,400            $  582,883
    Accounts receivable, net of allowance for doubtful accounts of
      $250,603 and $250,382 in 2000 and 1999, respectively                          6,369,480             5,080,529
    Inventories                                                                     7,641,513             4,658,243
    Prepaid expenses                                                                  132,826               110,483
    Income tax receivable                                                               5,238               106,553
    Deferred income taxes                                                             517,339                    --
                                                                            -----------------    ------------------
        Total current assets                                                       15,259,796            10,538,691

Property, plant and equipment, net                                                  8,885,123             8,165,822
Purchased product and software costs, net                                             551,701               728,630
Software development costs, net                                                       823,682               836,363
Deferred income taxes                                                               1,624,399                    --
                                                                            -----------------    ------------------

                                                                                  $27,144,701           $20,269,506
                                                                                   ==========            ==========
               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                              $ 2,140,555           $ 1,977,284
    Income tax payable                                                                 93,635                    --
    Accrued liabilities                                                             2,117,842             2,201,069
    Current portion of notes and mortgages                                          5,070,255             5,753,110
                                                                            -----------------    ------------------
        Total current liabilities                                                   9,422,287             9,931,463

Notes and mortgages, less current portion above                                     6,298,980             6,447,808
                                                                            -----------------    ------------------

        Total liabilities                                                          15,721,267            16,379,271
                                                                            -----------------    ------------------
Commitments and contingencies (Note 10)

Stockholders' equity:
    Common stock, par value $0.10 (10,000,000 shares authorized;
      4,668,403 and 4,580,016 shares issued and
      outstanding in 2000 and 1999, respectively)                                     466,840               458,002
    Additional paid-in capital                                                      7,195,930             6,810,314
    Retained earnings (accumulated deficit)                                         3,760,664           (3,378,081)
                                                                            -----------------    ------------------
        Total stockholders' equity                                                 11,423,434             3,890,235
                                                                            -----------------    ------------------

                                                                                  $27,144,701           $20,269,506
                                                                                  ===========           ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       51
<PAGE>


VMIC, Inc.

Statements of Operations For the Years Ended  September 30, 2000, 1999 and
1998

<TABLE>
<CAPTION>

                                                                        2000            1999               1998
<S>                                                            <C>                   <C>             <C>

Sales:
    Hardware sales                                                  $ 37,722,036     $ 27,641,622      $ 30,370,261
    Software sales                                                       922,373          803,899           719,547
                                                                ---------------- ----------------   ---------------

        Total sales                                                   38,644,409       28,445,521        31,089,808
                                                                ---------------- ----------------   ---------------

Cost and expenses:
    Cost of products sold                                             14,251,141       12,367,744        10,816,007
    Research and development expense                                   5,229,578        5,601,454         6,231,572
    Selling, general, and administrative expense                      12,741,733       12,400,789        13,285,601
    Writedown of property and equipment (Note 2)                              --          154,662                --
    Writedown of capitalized software costs (Note 15)                    368,019        5,257,335                --
                                                                ---------------- ----------------   ---------------

                                                                      32,590,471       35,781,984        30,333,180
                                                                ---------------- ----------------   ---------------

        Operating income (loss)                                        6,053,938      (7,336,463)           756,628

Other income (expense):
    Interest income                                                       63,436           34,957            78,222
    Interest expense                                                 (1,005,097)        (821,212)         (557,849)
    Gain on disposal of property and equipment                                --           39,957             3,322
                                                                ---------------- ----------------   ---------------

                                                                       (941,661)        (746,298)         (476,305)
                                                                ---------------- ----------------   ---------------

        Income (loss) before income taxes                              5,112,277      (8,082,761)           280,323

Provision for (benefit from) income taxes                            (2,026,468)          163,466            75,600
                                                                ---------------- ----------------   ---------------

        Net income (loss)                                    $        7,138,745   $   (8,246,227)       $   204,723
                                                                      ==========        =========          ========

Net income (loss) per common and common equivalent share:
    Basic                                                                  $1.55          $(1.82)             $0.05
    Diluted                                                                $1.53          $(1.82)             $0.04

Weighted average common and common equivalent shares outstanding:
      Basic                                                            4,620,501        4,534,189         4,405,808
                                                                      ==========         ========          ========

      Diluted                                                          4,663,834        4,534,189         4,554,448
                                                                      ==========         ========          ========
</TABLE>

The accompanying notes are an integral part of these financial statements.



                                       52
<PAGE>




VMIC, Inc.
Statements of Changes in Stockholders' Equity For the Years Ended September
30, 2000, 1999 and 1998
<TABLE>
<CAPTION>

                                                                                      Retained
                                               Common Stock            Additional      Earnings             Total
                                      -----------------------------     Paid-In     (Accumulated       Stockholders'
                                             Shares      Amount         Capital       Deficit)            Equity
                                         ------------ ------------     ----------   -------------    ---------------
<S>                                    <C>                             <C>          <C>              <C>

Balance, September 30, 1997                4,214,535    $421,454       $4,312,209      $4,663,423        $9,397,086

Issuance of common stock                     187,528      18,753        1,827,230              --         1,845,983

Exercise of stock options                     60,854       6,085          102,010              --           108,095

Income tax benefit from exercise
    of nonqualified stock options                 --          --          191,350              --           191,350

Net income                                        --          --               --         204,723           204,723
                                          ----------  ----------    -------------       ---------       -----------

Balance, September 30, 1998                4,462,917     446,292        6,432,799       4,868,146        11,747,237

Issuance of common stock                      38,598       3,860          353,782              --           357,642

Exercise of stock options                    108,056      10,806          248,067              --           258,873

Purchase of common stock for
    constructive retirement                 (29,555)     (2,956)        (240,973)              --         (243,929)

Income tax benefit from exercise
    of nonqualified stock options                 --          --           16,639              --            16,639

Net loss                                          --          --               --     (8,246,227)       (8,246,227)
                                          ----------  ----------    -------------       ---------       -----------
Balance, September 30, 1999                4,580,016     458,002        6,810,314     (3,378,081)         3,890,235

Issuance of common stock                      39,899       3,989          309,099              --           313,088

Exercise of stock options                     77,810       7,781          319,574              --           327,355

Purchase of common stock for                (29,322)     (2,932)        (264,692)              --         (267,624)
    constructive retirement

Income tax benefit from exercise
    of nonqualified stock options                 --          --           21,635              --            21,635

Net income                                        --          --               --       7,138,745         7,138,745
                                           ---------    --------       ----------      ----------       -----------
Balance, September 30, 2000                4,668,403    $466,840       $7,195,930      $3,760,664       $11,423,434
                                           =========    ========       ==========      ==========        ==========

</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       53
<PAGE>


VMIC,Inc.
Statements of Cash Flows For the Years Ended  September 30, 2000, 1999 and
1998
<TABLE>
<CAPTION>

                                                                          2000               1999             1998
<S>                                                                       <C>          <C>               <C>

Cash flows from operating activities:
    Net income (loss)                                                   $7,138,745     $(8,246,227)      $  204,723
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
        Depreciation and amortization                                    2,856,538        3,016,394       2,579,073
        Provision for losses on accounts receivable                            221        (134,001)          83,921
        Reserve for inventory obsolescence                               (368,019)          635,215              --
        Stock issued in lieu of cash compensation                          244,475          255,940          71,680
        Gain on disposal of property and equipment                              --         (39,957)         (3,322)
        Writedown of capitalized software costs                            368,019        5,257,335          67,479
        Writedown of property and equipment                                     --          154,662              --
        Income tax benefit from exercise of nonqualified stock options      21,635           16,639         191,350
        Change in operating assets and liabilities:
           Accounts receivable                                         (1,289,172)        (580,198)       (509,119)
           Inventories                                                 (2,615,251)        (350,219)       (811,003)
           Prepaid expenses                                               (22,343)          140,250       (159,517)
           Income tax receivable                                           101,315          467,218       (295,188)
           Deferred income taxes                                       (2,141,738)          146,828          54,441
           Accounts payable                                                163,271        (390,113)       1,206,001
           Income tax payable                                               93,635               --              --
           Accrued liabilities                                            (83,227)        (220,111)         244,321
                                                                    --------------  --------------- ---------------
               Total adjustments                                       (2,670,641)        8,375,882       2,720,117
                                                                    --------------  --------------- ---------------
               Net cash provided by operating activities                 4,468,104          129,655       2,924,840
                                                                    --------------  --------------- ---------------
Cash flows from investing activities:
    Purchases of property, plant and equipment                         (2,755,494)      (1,441,990)     (3,304,007)
    Purchased product and software costs                                        --        (456,283)       (288,150)
    Capitalized software development costs                               (998,754)      (2,755,940)     (2,195,068)
    Proceeds from dispositions of property and equipment                        --           79,768          10,570
                                                                    --------------  --------------- ---------------
               Net cash used in investing activities                   (3,754,248)      (4,574,445)     (5,776,655)
                                                                    --------------  --------------- ---------------
Cash flows from financing activities:
    Proceeds from issuance of notes and mortgages                        2,042,662        1,671,358       5,120,581
    Proceeds from line of credit                                                --        4,100,000              --
    Principal payments on notes and mortgages                          (1,774,345)      (1,388,303)     (3,562,293)
    Repayment of line of credit                                        (1,100,000)               --       (400,000)
    Proceeds from issuance of common stock                                 395,968          360,575       1,882,398
    Purchase of common stock for constructive retirement                 (267,624)        (243,929)              --
                                                                    --------------  --------------- ---------------
               Net cash (used in) provided by financing activities       (703,339)        4,499,701       3,040,686
                                                                    --------------  ------------------------------
               Net increase in cash and cash equivalents                    10,517           54,911         188,871

Cash and cash equivalents, beginning of year                               582,883          527,972         339,101
                                                                    --------------  --------------- ---------------
Cash and cash equivalents, end of year                                 $   593,400   $      582,883   $     527,972
                                                                          ========        =========       =========
Supplemental disclosure of cash flow information:
    Cash paid during the year for interest                             $ 1,004,566   $      793,612    $    558,150
                                                                          ========        =========       =========
    Cash paid during the year for income taxes
                                                                       $        --   $           --    $    125,000
                                                                          ========        =========       =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       54
<PAGE>

1.       Nature of Business

         Effective November 12, 1998, VME Microsystems International Corporation
         changed its name to VMIC,  Inc. (the Company).  The Company is a global
         company  that  develops,  markets,  and sells  more than 200  different
         products worldwide.  The Company manufactures  products for all popular
         buses including  CompactPCI (CPCI),  VMEbus,  PCI, PMC, Multibus I, ISA
         and  PC-MIP.  Products  range from  analog and  digital  I/O boards and
         drivers,  distributed  I/O,  embedded  single board  computers  (CPUs),
         Reflective  Memory,  Fibre  Channel,  and component Soft Logic PC-based
         control software (IOWorks) to complete systems for industrial  control,
         test and measurement, telecommunications,  simulation and training, and
         Storage  Area  Networks  (SANs).  The Company  provides  products  that
         emphasize open architecture,  modularity and flexibility.  The Company,
         which is located in  Huntsville,  Alabama,  primarily  sells within the
         United States, but has international  sales. These  international sales
         are denominated in United States currency.

2.       Summary of Significant Accounting Policies

         The  financial   statements  of  the  Company   include  the  following
         significant accounting policies:

         Cash and Cash  Equivalents  - The Company  considers  all highly liquid
         instruments  purchased with original maturities of three months or less
          to be cash equivalents.

         Inventories - Inventory is carried at the lower of cost or market, with
         cost being determined using the first-in, first-out method.

         Financial  Instruments  - The carrying  amounts reported in the balance
         sheet for cash and cash equivalents,  accounts receivable  and accounts
         payable  approximate  fair value due to  the  immediate  or  short-term
         maturity of these financial instruments.  The carrying amounts reported
         for notes and mortgages approximate fair value  because the  underlying
         instruments  are  either  at  variable  interest  rates  which  reprice
         frequently or at stated rates of interest that approximate market.

         Property,  Plant and  Equipment  -  Property,  plant and  equipment  is
         recorded  at cost.  Upon  sale or  retirement  of  property,  plant and
         equipment,  the cost and related  accumulated  depreciation are removed
         from the respective  accounts,  and the resulting gain or loss, if any,
         is included in the income  statement.  Routine  maintenance and repairs
         are charged to expense  when  incurred.  Expenditures  that  materially
         increase  values,  change  capacities   or extend  useful  lives of the
         respective assets are capitalized.


                                       55
<PAGE>

         Depreciation  is  computed  using  the  straight-line  method  over the
         estimated useful lives of the respective assets, as follows:

                  Buildings                                   15 years
                  Machinery and equipment                  3 - 5 years
                  Furniture and fixtures                       5 years
                  Automobiles                                  4 years

         During  periods  of  construction,  the  Company  capitalizes  interest
         expenditures for certain assets requiring an extended period of time to
         place in service.  The capitalized  interest is recorded as part of the
         asset to which it relates and is depreciated over the asset's estimated
         useful  life.  Interest  in the amount of $0,  $10,808  and $30,790 was
         capitalized during 2000, 1999 and 1998, respectively.

         Purchased  Product and Software Costs - Certain  purchased  product and
         software   costs  are  being   amortized  over  three  to  five  years.
         Amortization  expense for the years ended  September 30, 2000, 1999 and
         1998 was $176,929, $267,702 and $250,542, respectively.

         Software  Development  Costs - Certain  internal  software  development
         costs  are  capitalized  when  incurred.   Capitalization  of  software
         development  costs  begins  upon  the  establishment  of  technological
         feasibility.  The  establishment of  technological  feasibility and the
         ongoing   assessment  of   recoverability   of   capitalized   software
         development  costs require  considerable  judgment by  management  with
         respect to certain  external  factors  including,  but not  limited to,
         technological feasibility, anticipated future gross revenues, estimated
         economic life and changes in software and hardware technologies.

         Amortization  of  capitalized  software  costs  is  provided  over  the
         estimated   economic   useful  life  of  the  software   product  on  a
         straight-line basis,  generally five years.  Amortization begins when a
         product master is made.  Accumulated  amortization  as of September 30,
         2000 and 1999 was $1,956,438 and $1,313,022, respectively. Amortization
         expense  for the years  ended  September  30,  2000,  1999 and 1998 was
         $643,416, $607,300 and $471,598, respectively.

        Impairment  of  Long-Lived  Assets - The Company  recognizes  impairment
        losses on  long-lived  assets  used in  operations  when  indicators  of
        impairment are present and the  undiscounted  cash flows estimated to be
        generated  by those  assets are less than the assets'  carrying  values.
        Losses in the  amount of  $154,662  were  recognized  for the year ended
        September 30, 1999. There were no such losses  recognized during 2000 or
        1998.

        Liability for Warranty Returns - The Company's sales generally include a
        three-year  warranty for product  defects.  The  liability  for warranty
        returns  approximated  $500,000  at  September  30, 2000 and 1999 and is
        management's  estimate  of the  Company's  liability  for such  warranty
        returns  (at cost to repair or  replace  products)  on sales made by the
        Company.  This  liability  is  included  in accrued  liabilities  on the
        accompanying balance sheets.


                                       56
<PAGE>

         Revenue  Recognition - The Company's  revenue is primarily derived from
         two sources:  (1) hardware sales to distributors  and end users and (2)
         software sales. The Company generally  recognizes  revenue from product
         sales upon shipment if a signed purchase order exists, the fee is fixed
         and  determinable,  collection of resulting  receivable is probable and
         product returns are reasonably  estimable.  Revenue from hardware sales
         is recorded net of any discounts and provisions  for warranty  returns.
         Revenue  from the sale of  software  products  for  which no  technical
         support is  provided  is  generally  recognized  upon  shipment  of the
         products, net of estimated returns.

         Research  and  Development  Costs  -  Research  and  development  costs
         incurred prior to the  establishment of  technological  feasibility are
         expensed as incurred.

         Advertising  Expense -  Advertising  costs are  expensed  as  incurred.
         Advertising  expense  totaled  approximately  $626,000,   $848,000  and
         $907,000  for the  years  ended  September  30,  2000,  1999 and  1998,
         respectively.

         Shipping  and  Handling  Fees and Costs-  The  Company's  shipping  and
         handling  fees are  included in total  sales and the related  costs are
         included in cost of products  sold in the  accompanying  statements  of
         operations.

         Accounting  for Income  Taxes - The Company  accounts  for income taxes
         under  the  asset  and  liability  method.  Deferred  income  taxes are
         recognized  for the tax  consequences  in  future  years  of  temporary
         differences  between the tax bases of assets and  liabilities and their
         financial  reporting  amounts at each year end. The amounts  recognized
         are based on enacted tax laws and statutory tax rates applicable to the
         periods in which the differences are expected to affect taxable income.
         The Company records a valuation  allowance when, based on the weight of
         available evidence, it is more likely than not that some portion or all
         of the deferred tax assets will not be realized.  Income tax expense is
         the tax  payable  for the period  and the  change  during the period in
         deferred tax assets and liabilities.

         Stock-Based  Compensation - The Company accounts for stock-based awards
         to  employees  using the  intrinsic  value  method in  accordance  with
         Accounting  Principles  Board Opinion (APB) No. 25 Accounting for Stock
         Issued to Employees, as permitted under the provisions of Statements of
         Financial  Accounting  Standards  (SFAS) 123 Accounting for Stock-Based
         Compensation.  Under APB 25,  if the  exercise  price of the  Company's
         employee stock options equals the market price of the underlying  stock
         on the date of grant, no compensation expense is recognized.

         Use  of  Estimates  -  The  preparation  of  financial   statements  in
         conformity  with  generally  accepted  accounting  principles  requires
         management to make estimates and  assumptions  that affect the reported
         amounts of assets and liabilities  and disclosure of contingent  assets
         and  liabilities  at the  date  of the  financial  statements  and  the
         reported amounts of revenue and expenses during the reporting period.
         Actual results could differ from those estimates.

                                       57
<PAGE>

         Recently  Issued  Accounting  Standards - In 1999, the Company  adopted
         Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
         about Segments of an Enterprise and Related Information,  that requires
         the use of the management approach in identifying operating segments of
         the Company.  Under the management  approach,  operating segments of an
         enterprise are identified in a manner  consistent  with how the Company
         makes operating decisions and assesses  performance.  SFAS No. 131 also
         requires disclosures about products and services, geographic areas, and
         major customers. The adoption of SFAS No. 131 did not affect results of
         operations  or  financial  position  but did affect the  disclosure  of
         segment information (see Note 13).

         In 1999, the Financial  Accounting  Standards Board issued Statement of
         Financial  Accounting  Standards  No. 137,  Accounting  for  Derivative
         Instruments  and Hedging  Activities  Deferral of the Effective Date of
         FASB No. 133, which deferred the effective date  provisions of SFAS No.
         133 for the  Company  until  fiscal  2000.  SFAS  133  establishes  new
         standards of accounting  and reporting for derivative  instruments  and
         hedging  activities.  SFAS No. 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.

         In  1999,  the  Securities  and  Exchange   Commission  released  Staff
         Accounting  Bulletin  ("SAB")  101,  Revenue  Recognition  in Financial
         Statements.  This  pronouncement  summarizes certain of the SEC staff's
         views on applying generally accepted  accounting  principles to revenue
         recognition.  The Company has reviewed the  requirements of SAB 101 and
         believes that its existing  accounting  policies are in accordance with
         the guidance provided in the SAB.

         Reclassifications  - Certain  reclassifications  have been made to the
         1999 and 1998 amounts in order to conform to the 2000 presentation.


                                       58
<PAGE>


3.       Inventories

         Inventories consist of the following at September 30, 2000 and 1999:
<TABLE>

<CAPTION>

                                                         2000                1999

<S>                                             <C>                   <C>

   Raw materials                                    $  4,146,871          $  2,511,460
   Work in process                                     2,361,306             1,232,573
   Finished goods                                      1,400,532             1,549,425
                                                 ---------------      ----------------

                                                       7,908,709             5,293,458
  Less reserve for inventory obsolescence              (267,196)             (635,215)
                                                ----------------      ----------------

                                                   $   7,641,513         $   4,658,243
                                                      ==========            ==========


4.       Property, Plant and Equipment

         Property,  plant and  equipment  consists of the following at September
30, 2000 and 1999:

                                                          2000                  1999

       Land                                          $    676,313          $    676,313
       Buildings                                        5,744,695             5,747,420
       Machinery and equipment                         10,786,306             8,048,088
       Furniture and fixtures                              55,142                55,142
       Automobiles                                         67,592                67,592
       Construction in progress                            20,000
                                                  ---------------       ---------------

                                                       17,350,048            14,594,555
       Less accumulated depreciation                  (8,464,925)           (6,428,733)
                                                 ---------------        ---------------

                                                    $  8,885,123           $  8,165,822
                                                    ============           ============


</TABLE>

                                       59
<PAGE>


5.       Notes and Mortgages

         Notes and  mortgages  payable at September 30, 2000 and 1999 consist of
         the following:

<TABLE>
<CAPTION>

                                                                              2000                 1999

          <S>                                                         <C>                      <C>

          Short-term obligations:
          Current portion of mortgages payable (1)                    $      177,583        $      164,826
          Current portion of notes payable (2)                             1,892,672             1,488,284
          Line of credit (3)                                               3,000,000             4,100,000
                                                                   -----------------     -----------------

                                                                      $    5,070,255        $    5,753,110
                                                                      ==============        ==============
       Long-term obligations:
          Mortgages payable (1)                                       $    3,248,111        $    3,425,694
          Notes payable (2)                                                3,050,869             3,022,114
                                                                   -----------------     -----------------

                                                                      $    6,298,980         $   6,447,808
                                                                      ==============        ==============
</TABLE>


         (1)  Mortgages on  buildings  and land with unpaid  principal  balances
              becoming due through 2004. Interest rates ranged from 7.0% to 7.5%
              at  September  30,  2000.  The  mortgages  are  collateralized  by
              buildings  and  land  with a net  book  value  of  $4,161,114  and
              $4,548,064 at September 30, 2000 and 1999, respectively.

         (2)  Automobile and equipment financing payable in monthly installments
              ranging  from $806 to $70,200  with the final  payment due in June
              2005; payments include interest at rates ranging from 7.5% to 8.3%
              at September 30, 2000.  Automobiles  and equipment with a net book
              value of approximately  $4,759,000 and $4,243,000 at September 30,
              2000 and 1999, respectively, serve as collateral.

          (3)  The Company can also borrow under an $8,000,000 revolving line of
               credit with an interest rate of 7.75% at September 30, 2000.  The
               line of credit is collateralized primarily by accounts receivable
               and  inventory  of the  Company.  The  line of  credit  agreement
               expires  on  March  1,  2001.  The  Company  had  $3,000,000  and
               $4,100,000 of  outstanding  borrowings  under this line of credit
               agreement at  September  30, 2000 and 1999,  respectively.  Under
               this  agreement,  the  Company is subject to certain  restrictive
               covenants  which include a minimum  tangible net worth, a maximum
               net worth ratio, a minimum amount of working  capital,  a minimum
               current ratio and a minimum fixed charge ratio. The Company is in
               compliance  with or has  received  appropriate  waivers  of these
               covenants as of September 30, 2000.


                                       60
<PAGE>

The  aggregate  maturities  of notes and  mortgages at September 30, 2000 are as
follows:

                           2001                       $    5,070,255
                           2002                            1,452,561
                           2003                            3,094,146
                           2004                            1,459,755
                           2005                              292,518
                                                       -------------

                                                       $  11,369,235
                                                       =============


6.       Stock Option Plan

         The Company has a stock  option  plan under which  1,062,000  shares of
         common  stock  have  been  reserved  for  issue to  certain  employees,
         officers,   and   directors   through   incentive   stock  options  and
         nonqualified  stock options at September 30, 2000. The options vest and
         are  exercisable  primarily  over a four year  period  from the date of
         grant and normally  expire either five years or ten years from the date
         of grant depending on when the options were granted.

         Transactions for 2000, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                                                                   Weighted-
                                                                  Number of      Range of           Average
                                                                   Options    Exercise Prices   Exercise Price
                                                              --------------  ----------------  --------------
        <S>                                                   <C>               <C>            <C>

       Options outstanding, September 30, 1997                      543,766      $4.25-$10.00           $6.13
       Options granted                                               92,887     $10.00-$11.50          $11.46
       Options exercised                                           (60,854)      $4.25-$10.00           $6.19
       Options canceled                                            (54,880)      $4.90-$11.50           $8.34
                                                              --------------  ----------------  --------------

       Options outstanding, September 30, 1998                      520,919      $2.125-$4.00           $2.29
       Options granted                                               52,900       $4.00-$8.00           $7.89
       Options exercised                                          (108,056)      $2.125-$4.90           $2.54
       Options canceled                                            (56,146)      $2.125-$2.45           $2.30
                                                              --------------  ----------------  --------------

       Options outstanding, September 30, 1999                      409,617      $4.90-$11.50           $8.51
       Options granted                                               56,100      $6.84-$11.04           $7.44
       Options exercised                                           (77,810)      $2.45-$11.50           $4.21
       Options canceled                                            (94,484)      $6.84-$11.04           $9.13
                                                              --------------  ----------------  --------------

       Options outstanding, September 30, 2000                      293,423      $6.84-$11.50           $9.17
                                                              ==============    ==============   ==============
</TABLE>

                                       61
<PAGE>



         The  following  table  summarizes   information   about  stock  options
outstanding at September 30, 2000:

<TABLE>
<CAPTION>

                                            Options Outstanding                     Options Exercisable
                               ---------------------------------------------    ------------------------------
                                                 Weighted
                                                  Average         Weighted                       Weighted-
               Range of                          Remaining         Average                        Average
               Exercise          Number         Contractual       Exercise        Number         Exercise
                Prices         Outstanding         Life            Price        Exercisable        Price
             -------------   --------------   ---------------   ------------- --------------- --------------
<S>             <C>          <C>              <C>               <C>            <C>             <C>

                $6.84                45,300             $8.95          $6.84               --             --
           $8.00 - $10.00           182,870             $5.18          $8.93           79,513          $8.61
               $11.04                 8,000             $9.89         $11.04               --             --
               $11.50                57,253             $7.41         $11.50           11,451         $11.50
                               ------------                                    --------------

                                    293,423                                            90,964
                                ===========                                    ==============
</TABLE>


         The  Company  applies APB  Opinion 25 and  related  Interpretations  in
         accounting for its stock plans.  Accordingly,  no compensation cost has
         been recognized related to the stock options. Had compensation cost for
         the Company's stock based  compensation  plans been determined based on
         the fair  value  at the  grant  dates  for  awards  under  those  plans
         consistent  with the method  prescribed  in SFAS No. 123, the Company's
         net  income  (loss)  would have been  reduced to the pro forma  amounts
         indicated below:

<TABLE>
<CAPTION>

                                                               2000               1999              1998
               <S>                                          <C>            <C>                   <C>

              Net income (loss) - as reported                $7,138,745     $(8,246,227)         $ 204,723
              Net income (loss) - pro forma                  $6,971,504     $(8,443,623)           $ 9,605
              Diluted income (loss) per share - as reported       $1.53          $(1.82)             $0.04
              Diluted income (loss) per share - pro forma         $1.50          $(1.86)             $0.00
</TABLE>


                                       62
<PAGE>
         The pro forma amounts  reflected  above are not  representative  of the
         effects on reported net income in future years because, in general, the
         options granted  typically do not vest for several years and additional
         awards are made each  year.  The fair  value of each  option  grant was
         estimated on the grant date using the following assumptions:

<TABLE>

<CAPTION>

                                                2000             1999             1998
         <S>                               <C>              <C>              <C>

         Dividend yield                         0%              0%                0%
         Expected life (years)                 1-4              1-4              1-4
         Risk-free interest rate           4.34% - 6.79%    4.34% - 7.74%     4.76% - 6.63%

</TABLE>

         In addition to the stock  options  granted under the stock option plan,
         the  Company  has  granted  bonuses to  employees  in the form of stock
         awards,  which vest in variable  terms,  not to exceed five years.  The
         nonvested shares of the stock awards  outstanding at September 30, 2000
         and 1999 were  36,050 and 26,609,  respectively.  During 2000 and 1999,
         15,709 and 24,745,  respectively,  shares of the Company's common stock
         were  issued and  $88,733 and  $165,400,  respectively,  was charged to
         expense.


7.       Income Taxes

         The components of the provision for (benefit from) income taxes for the
         years ended September 30, 2000, 1999 and 1998 are as follows:

<TABLE>

<CAPTION>

                                                               2000              1999              1998
    <S>                                                     <C>           <C>              <C>

      Current:
        Federal                                             $    93,635   $            --   $       13,599
        State                                                        --                --            7,560
                                                             -----------   --------------   --------------

          Total current                                          93,635                --           21,159
       Deferred                                             (2,120,103)           163,466           54,441
                                                            -----------    --------------   --------------

          Total provision for (benefit from) income taxes  $(2,026,468)   $       163,466     $      75,600
                                                           ============   ===============     =============


</TABLE>

                                       63
<PAGE>


         Temporary   differences   which  generated   deferred  tax  assets  and
         liabilities at September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>

                                                                                  2000              1999
<S>                                                                        <C>               <C>

Current deferred tax asset:
    Accounts receivable                                                     $     90,768     $      90,550
    Inventory                                                                     96,778           278,077
    Accruals and other                                                           329,793           624,132
                                                                          --------------    --------------

                                                                                 517,339           992,759
    Valuation allowance                                                               --         (992,759)
                                                                          --------------    --------------

      Net current deferred tax asset                                         $   517,339        $       --
                                                                          ===============   ==============

Noncurrent deferred tax asset (liability):
    Property, plant, and equipment                                           $   154,855       $   161,179
    Software development costs                                                  (77,739)         (103,227)
    Loss carryforwards                                                           226,437         1,980,439
    Tax credits                                                                1,320,846            67,137
                                                                          --------------    --------------
                                                                               1,624,399         2,105,528
    Valuation allowance                                                               --       (2,105,528)
                                                                          --------------    --------------
      Net noncurrent deferred tax asset                                      $ 1,624,399 $              --
                                                                          ===============   ==============
</TABLE>


         The ultimate  realization of the net deferred  income tax asset depends
         on the Company's ability to generate  sufficient  taxable income in the
         future. Based on the Company's results of operations, it is more likely
         than not that the net deferred tax asset will be realized. Accordingly,
         the  valuation  allowance  has been removed for the entire net deferred
         tax asset.

                                       64
<PAGE>

        During 2000 and 1999,  temporary  differences  resulted  primarily  from
        using different  methods of depreciation for book and tax purposes,  the
        capitalization  of  certain  inventory  costs  for  tax  purposes,   the
        capitalization of certain software  development costs for book purposes,
        accrued warranty expense,  and differences in the deduction of bad debts
        and compensated absences for book and tax purposes.

        The  Company  has  remaining  research  and  experimentation  tax credit
        carryforwards for federal income tax purposes available to reduce future
        federal  income taxes,  if any.  These  carryforwards  expire in varying
        amounts  between  2002 and  2015.  The  Company  also has  approximately
        $160,773  in minimum tax  carryforwards  available  for years  beginning
        after  September 30, 2000.  The Company has  approximately  $580,651 and
        $1,061,976 of regular and  alternative  minimum tax net  operating  loss
        carryforwards, respectively, which expire in 2014.

        The provision  for (benefit  from) income taxes differs from the amounts
        computed by applying the statutory federal income tax rate of 34 percent
        to income before income taxes. The reasons for these  differences are as
        follows:
<TABLE>
<CAPTION>

                                                                       2000               1999              1998
       <S>                                                         <C>            <C>                <C>

       Income tax expense at statutory federal income
          tax rate                                                  $  1,738,174     $(2,748,009)    $       95,310
       Effect of tax credits                                           (755,091)               --          (40,488)
       State income taxes - net of federal income tax benefit             88,736        (178,671)             7,102
       Miscellaneous                                                          --          (8,141)            13,676
                                                                 ---------------  ---------------    --------------

                                                                       1,071,819      (2,934,821)            75,600
       Valuation allowance                                           (3,098,287)        3,098,287                --
                                                                 ---------------   --------------    --------------

             Total provision for (benefit from) income taxes        $(2,026,468)     $    163,466    $       75,600
                                                                 ===============     ============    ==============
</TABLE>

8.       Employee Benefit Plan

         In 1991,  the Company  adopted an  incentive  savings plan (the Savings
         Plan) for all of its  employees.  The  Savings  Plan  provides  certain
         employment  benefits  to all  eligible  employees  and  qualifies  as a
         deferred arrangement under Section 401(k) of the Internal Revenue Code.
         Upon  approval  by the  Board of  Directors,  the  Company  will  match
         one-fourth  of  the  participants'  contributions,  limited  to 6% of a
         participant's   income.   An  employee's   interest  in  the  Company's
         contributions  begins  vesting  after one year and becomes  100% vested
         after five years.  Amounts  expensed for the Savings  Plan  amounted to
         approximately  $117,000,  $110,000 and $110,000 in 2000, 1999 and 1998,
         respectively.

                                       65
<PAGE>

9.       Employee Stock Purchase Plan

         In 1992, the Company adopted an employee stock purchase plan (the Stock
         Plan) for  employees  who have been  employed  by the  Company  for the
         twelve months  immediately  preceding the date of  participation in the
         Stock Plan.  The Stock Plan  provides  for the Company to withhold  any
         amount, not to exceed $25,000,  for the purpose of purchasing shares of
         the  Company's  stock at 85% of its fair  market  value on a  quarterly
         basis.  The Company has reserved 100,000 shares of its common stock for
         issuance  under the Stock  Plan.  Included  in accrued  liabilities  at
         September  30, 2000 and 1999 in the  accompanying  balance  sheets,  is
         approximately   $36,751  and  $71,194,   respectively,   withheld  from
         employees to purchase the Company's common stock under the Stock Plan.


10.      Commitments and Contingent Liabilities

         During the normal  course of  business,  the  Company is  subjected  to
         various  lawsuits  and  claims.  Management  does  not  anticipate  any
         judgments  against the  Company in excess of its insurance  coverage or
         liabilities  already  established  which would have a material  impact,
         individually  or in the aggregate,  on the financial  statements of the
         Company.   In   addition,   the  Company  has  entered   into   certain
         noncancelable,    nonrefundable   purchase   commitments.   Outstanding
         commitments  under these agreements were  approximately $0 and $80,000,
         respectively at September 30, 2000 and 1999.

                                       66
<PAGE>

11.      Earnings Per Share

         A summary of the  calculation  of basic and diluted  earnings per share
         (EPS) for the  years  ended  September  30,  2000,  1999 and 1998 is as
         follows:

<TABLE>
<CAPTION>
                                                              Income
                                                              (Loss)            Shares             Per-Share
                                                            (Numerator)      (Denominator)          Amount
                                                         ---------------- ------------------     ------------
<S>                                                      <C>              <C>                    <C>

                                       2000
       Basic EPS:
          Income available to common stockholders         $   7,138,745        4,620,501             $1.55
       Effect of dilutive securities:
          Stock options                                              --           43,333                --

       Diluted EPS                                        $   7,138,745        4,663,834             $1.53

                                      1999
       Basic EPS:
          Loss available to common stockholders           $ (8,246,227)        4,534,189           $(1.82)
       Effect of dilutive securities:
          Stock options                                              --               --                --

       Diluted EPS                                        $ (8,246,227)        4,534,189           $(1.82)

                                     1998
       Basic EPS:
          Income available to common stockholders        $      204,723        4,405,808             $0.05
       Effect of dilutive securities:
          Stock options                                              --          148,640                --

       Diluted EPS                                       $      204,723        4,554,448             $0.04

</TABLE>


         Options to purchase  145,254  shares of common stock at $10.00,  $11.04
         and $11.50 per share were outstanding  during 2000 but are not included
         in the  computation  of 2000 diluted EPS because the options'  exercise
         prices were greater than the average market price of common shares. The
         options, which expire through 2010, were still outstanding at September
         30, 2000.  Options to purchase 409,617 shares of common stock at prices
         ranging  from $4.90 to $11.50 per share were  outstanding  at September
         30,  1999 but were not  included  in the  computation  of  diluted  EPS
         because inclusion of such options would have been antidilutive. Options
         to  purchase  90,137  shares of common  stock at $11.50  per share were
         outstanding during 1998 but are not included in the computation of 1998
         diluted EPS because the options'  exercise prices were greater than the
         average  market  price of common  shares.  The  options,  which  expire
         through September 2008, were still outstanding at September 30, 1998.

                                       67
<PAGE>

12.      Related Parties

         The  Company  compensates  the  members of its board of  directors  for
         consulting services.  Total expenses for these consulting services were
         $23,750,  $187,350 and $35,000 for the years ended  September 30, 2000,
         1999  and  1998,  respectively.  Included  in  accrued  liabilities  at
         September  30,  2000  and  1999 is $0 and  $135,000,  respectively,  of
         consulting fees that were owed to one member of the board of directors.

13.      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 years
         ended September 30, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>


                                                                2000              1999             1998
                                                                             (In Thousands)
       <S>                                               <C>              <C>               <C>
                                                       --------------------------------------------------------

       Total sales:
          U.S.                                            $      31,180    $      21,939     $      25,389
          International                                           7,464            6,507             5,701
                                                         --------------  ---------------   ---------------

                                                              $  38,644    $      28,446     $      31,090
                                                         ==============  ===============   ===============

       Gross profit:
          U.S.                                            $      20,002    $      12,765     $      16,925
          International                                           4,391            3,313             3,349
                                                         --------------   --------------   ---------------

                                                           $     24,393    $      16,078     $      20,274
                                                         ==============  ===============   ===============

         The  Company's  identifiable  assets as of September  30, 2000,  1999 and 1998 relate to the U.S.  segment
         only.
</TABLE>

                                       68
<PAGE>

14.      Summarized Quarterly Financial Data (Unaudited)

         The following table presents unaudited  quarterly  operating results of
         each of the Company's last eight fiscal quarters.  This information has
         been prepared by the Company on a basis  consistent  with the Company's
         audited financial  statements and includes all adjustments,  consisting
         of normal  recurring  adjustments and the adjustment  described in Note
         15, that the Company considers necessary for a fair presentation of the
         data.
<TABLE>
<S>                                               <C>            <C>           <C>             <C>


                                                                       Three Months Ended
                                                ----------------------------------------------------------------
                                                    December 31,    March 31,     June 30,     September 30,
                                                        1998          1999          1999           1999
                                                   ---------------------------- -----------------------------
(In Thousands, Except for Per Share Amounts)

Net sales                                           $    7,705    $   6,672    $   6,116      $      7,953
Gross profit                                        $    4,854    $   4,211    $   3,748      $      3,265
Operating loss                                      $    (264)    $   (384)    $   (211)      $    (6,477)
Net loss                                            $    (291)    $   (410)    $   (304)      $    (7,241)
Net loss per share (1):
    Basic                                              $(0.07)      $(0.09)    $  (0.07)       $    (1.60)
    Diluted                                            $(0.07)      $(0.09)    $  (0.07)       $    (1.60)




                                                                       Three Months Ended
                                                ----------------------------------------------------------------
                                                    December 31,    March 31,     June 30,     September 30,
                                                        1999          2000          2000           2000
                                                   ---------------------------- -----------------------------
(In Thousands, Except for Per Share Amounts)

Net sales                                           $    8,353    $   9,252    $   9,946        $   11,093
Gross profit                                        $    5,335    $   5,885    $   6,207        $    6,966
Operating income                                    $    1,079    $   1,347    $   1,562        $    2,066
Net income                                          $      847    $   3,585    $     905        $    1,802
Net income per share (1):
    Basic                                                $0.18        $0.78      $  0.20         $    0.39
    Diluted                                              $0.18        $0.78      $  0.20         $    0.37

</TABLE>


(1)      The net income  (loss) per share for each quarter  within a fiscal year
         does not  necessarily  equal the total  net  income  per share for that
         particular  fiscal year due to variations in the estimated value of the
         Company's  common stock during the year and the effect these variations
         had on the shares outstanding calculation.

                                       69
<PAGE>


15.      Significant Fourth-Quarter Event

         In the fourth quarter of 2000 and 1999, the Company recorded charges of
         $368,019 and  $5,257,335,  respectively,  for the write-down of certain
         software  development  costs and purchased  product and software costs.
         Due to the fact that the market for processed  control  software failed
         to grow at the rate experts  projected,  the Company has  significantly
         restructured  the software sales staff and realigned the product mix to
         be more in line with the end-users'  needs.  Effective  September 1999,
         this change  resulted in a significant  reduction in the software sales
         force and the hiring of a new software  sales  manager  with  extensive
         knowledge of the industry and the end-users'  needs.  The write-down is
         based on  management's  estimates of the gross future sales that can be
         generated from the existing  software products marketed by the Company.
         The estimate takes into  consideration no additional  development costs
         being incurred to increase the marketability of the products.










                                       70
<PAGE>





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

         None.


                                    PART III


ITEMS 10, 11, 12, and 13.

DIRECTORS  AND  EXECUTIVE  OFFICERS  OF THE  REGISTRANT; EXECUTIVE COMPENSATION;
SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT;  AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  called for by Items 10,  11,  12,  and 13 is  incorporated
herein  by  reference  to  VMIC's   definitive  Proxy  Statement   furnished  to
stockholders in connection with the Annual Meeting of Stockholders to be held on
February 18, 2001.


                                     PART IV


  ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The  following  documents are filed as part of this report

(I) The financial  statements and other financial  information of VMIC, Inc. set
    forth below and the Report of Independent  Auditors thereon are incorporated
    by reference from pages 49 through 70 of this Form 10-K Annual Report:

      Balance Sheets at September 30, 2000, 1999 and 1998

      Statements of Operations For the Years Ended  September 30, 2000, 1999 and
      1998

      Statements  of  Changes  in  Stockholders'  Equity  For  the  Years  Ended
      September 30, 2000, 1999 and 1998

      Statements of Cash Flows For the Years Ended September 30, 2000, 1999 1998

      Notes to Financial Statements

      Report of PricewaterhouseCoopers LLP, Independent Auditors

      Selected Quarterly Financial Data

    (II)Financial Statement Schedule:
                                                                          Page
                                                                          -----
       Schedule II Valuation and Qualifying  Accounts and Reserves         73
       for each of the three years in the period ended September 30, 2000.

       All other  Schedules  called  for under  Regulation  S-X are not
       submitted  because  they are not  applicable  or not required or
       because the required  information is not material or is included
       in the financial statements or notes thereto.

(b)   Reports on Form 8-K.  No reports on Form 8-K were filed  during the fourth
      quarter of the fiscal year ended September 30, 2000.

                                      71
<PAGE>

(c) Exhibits:

3.1+      Certificate of Incorporation of VME Microsystems International
          Corporation and Amendments

3.2+     By-Laws of VME Microsystems International Corporation and Amendments

10.1+    Consolidated Nonqualified and Incentive Stock Option Plan*

10.2+    Form of Nonqualified Stock Option Agreement*

10.3+    Form of Incentive Stock Option Agreement*

10.4+    1992 Employee Stock Purchase Plan and Amendment*





----------

*   Management contract or compensatory plan or arrangement
+   Previously filed.

                                 72
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES



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

                                                     Balance at           Additions           Deductions           Balance at
                                                     Beginning           Charged to              from                  End
                                                      of Year              Income              Reserves              of Year
                                                   ---------------     ----------------     ----------------     ----------------

Inventory Reserve
   Year ended September 30, 2000                        $ 635,215                  $ -            $ 368,019            $ 267,196
   Year ended September 30, 1999                              $ -            $ 635,215                  $ -            $ 635,215
   Year ended September 30, 1998                              $ -                  $ -                  $ -                  $ -


Allowance for Doubtful Accounts
   Year ended September 30, 2000                        $ 250,382             $ 75,000             $ 74,779            $ 250,603
   Year ended September 30, 1999                        $ 384,383             $ 24,381            $ 158,382            $ 250,382
   Year ended September 30, 1998                        $ 300,462             $ 90,000              $ 6,079            $ 384,383


Deferred Tax Asset Valuation Allowance
   Year ended September 30, 2000                      $ 3,098,287                  $ -          $ 3,098,287                  $ -
   Year ended September 30, 1999                              $ -          $ 3,098,287                  $ -          $ 3,098,287
   Year ended September 30, 1998                              $ -                  $ -                  $ -                  $ -

</TABLE>


                                       73
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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 on this the 28th day of
December 2000.

                  VMIC, INC.

                  By:  Carroll E. Williams,

                  --------------------
                  Carroll E. Williams,
                  President, CEO and Chairman of the Board


Signature                        Title                  Date

Carroll E. Williams
___________________              Director                 December 28, 2000
Carroll E. Williams

Mary W. Williams
___________________              Director                 December 28, 2000
Mary W. Williams

Arthur Faulkner
___________________              Director                 December 28, 2000
Arthur Faulkner

Alfred F. Casteleyn
___________________              Director, Vice President December 28, 2000
Alfred F. Casteleyn              Sales and Marketing

Ernest Potter
__________________               Director                 December 28, 2000
Ernest Potter

R. Gary Saliba
___________________              Director                 December 28, 2000
R. Gary Saliba

Jim Caudle, Sr.
___________________              Director                 December 28, 2000
Jim Caudle, Sr.

Gordon Hubbert
___________________              Vice President and       December 28, 2000
Gordon Hubbert                   Principal Financial
                                 and Accounting Officer


                                       74