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, 1999.

   ( ) 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 $.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, 1999, there were 4,580,016  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  $20,007,438  based on the
price of such stock with  respect to a sale  transaction  at $8.25 per share for
654 shares on December 9, 1999,  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.


                       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 19,
2000 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 is a supplier  of  hardware  and  software  products  to the  embedded
computer  industry.  Embedded  computers  are  different  from desktop and other
computers in that embedded  computers are designed to perform  repetitive tasks,
whereas other computers are more general purpose. Embedded computers are used in
markets such as telecommunications,  medical,  industrial  automation,  test and
measurement,  and  defense.  VMIC  supplies  products  to all of these  markets.
However, the Company's focus for the future is primarily  telecommunications and
and Fibre Channel storage area networks  markets.  VMIC has recently entered the
storage area network,  or SAN market, and the computer  networking industry with
Fibre Channel  products that are also used  throughout  these  markets.  SAN and
computer networking have wide applications throughout the computer industry.

         The Company is focused on growth in five key product revenue areas:

          o     embedded Intel(R) central processing units, or CPUs,
          o     communications/networking products, such as Fibre
                Channel and Reflective Memory networks,
          o     data  acquisition  and  control  input and  output,  or I/O,
                products,
          o     personal computer-based control I/O systems, and
          o     software to the embedded computer market.

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

         The Company's products are used in:
             o         communications and networking of computer and computer
                       storage systems,
             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
             o         other applications.


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     VMIC recently  expanded its product lines and changed its market focus. The
new product  lines,  such as  singleboard  computers,  communications/networking
products,  and PC-based I/O control  systems,  are targeted at vertical,  larger
markets rather than the Company's  historical niche markets. The Company's niche
markets,  which  generated  high  margins,  were  primarily  in  simulation  and
training,  defense, and power plant monitoring. The new vertical market focus is
telecommunications,  and Fibre  Channel  storage  area  networks for the broader
computer market.  VMIC'S  communications/networking  products are focused on the
Fibre Channel host adapter market,  which is projected to grow from $1.6 billion
to $6.1 billion by 2002.  According to EMF  Associates,  the total Fibre Channel
market is projected to be $23 billion by 2003.  The Company plans,  however,  to
continue to market its products to the defense,  test and measurement,  medical,
industrial automation and other markets.

     While  the   total   telecommunications,   storage   area   networks,   and
communications  markets are very large,  the  segments in which VMIC are focused
are  estimated to have annual  sales  between $40 and $50 billion  dollars.  The
Company believes that each of these markets offers unique  opportunities in that
the demands of each market are changing.  The markets'  demand for  performance,
high-speed  communications/  networking,  and PC  solutions,  coupled  with open
architecture  software and hardware  solutions,  the Company  believes  presents
significant  opportunities for the Company. VMIC has focused on the development,
sales,  and  marketing  of products  focused on these  markets.  The Company has
invested  more than 20  percent  of each  year's  sales  hardware  and  software
products    with   a    recent    focus    on    Intel-based    computers    and
communications/networking products and complete PC Based Control I/O systems for
the high growth markets.

         For  the  telecommunications  market,  the  Company  offers  a line  of
embedded PC  computers  and  communications/networking  products,  such as Fibre
Channel and Reflective  Memory networks,  which satisfies the industry's  demand
for  high-performance,  fiber-optic  network products.  The Company's  strategic
vision is to offer a total solution to the industrial automation factory control
market, and board products to the  telecommunications,  storage area network and
embedded computer markets.  The Company  differentiates  itself in these markets
through a broad product line and software.  To effect the strategy,  the Company
has invested in developing  PC-based  software and factory control  hardware for
industrial   automation,   communications/network   and   computer   boards  for
telecommunications,  a complete  product line  focused on the embedded  computer
industry, and a line of Reflective Memory network and Fibre Channel products for
the  communications/network  industry. Each of these product lines is crucial to
the objective of offering total solutions;  however,  independently each product
line participates in a market with significant potential for growth.

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

     VMIC,  headquartered in Huntsville,  Alabama, is a 13-year-old company with
207 employees  and operates  from over 72,000 square feet in buildings  covering
ten acres.


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.


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     Data  acquisition  refers to the  process of  collecting  what is  commonly
referred  to as  real-world  information  phenomena  such  as  light,  pressure,
temperature,  humidity,  force,  and  flow.  A data  acquisition  system  (which
comprises  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 upon open  standards  and  standard  PC
platforms.  The  industry  is focused on  technology  leaders  such as Intel and
Microsoft,  and standard buses.  Designs based upon 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.

     Standard bus solutions include such buses as VME, CompactPCI,  PCoMIP, 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.  CompactPCI is an embedded computer version of
PCI.  CompactPCI  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.  CompactPCI has certain advantages in applications that require fast
transfers of large amounts of data.

     CompactPCI 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 industrial automation market is experiencing a major shift to standards
based upon PC  technology  and open bus  architectures.  According  to Frost and
Sullivan,  the total industrial  automation market generated  revenues of $13.78
billion  in 1999.  Revenues  for this  market are  anticipated  to  increase  to
approximately  $16.5  billion by the year 2001.  According  to this  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.   Ability  to  upgrade  the  hardware  while
preserving the customer's software investment is a key benefit of PC control.


                                        5

<PAGE>



     The   telecommunications   market  recently   adopted   CompactPCI  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  CompactPCI-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  storage  area  network   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 a wide range of companies
are  entering  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 upon a cost-effective scalable
architecture.

     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  is now the  choice  for  computer  clustering,  storage
interfacing, and networking.


Business Strategy

         Until  approximately three years ago, the Company's focus was primarily
defense,  test and measurement,  nuclear power plant monitoring,  and simulation
and training. At that time, the Company's revenues were primarily generated from
specialized products in smaller niche markets. These products served the Company
well by providing high margins;  however, these markets were not large enough to
sustain desired growth.

         Approximately  three  years  ago,  the  Company  implemented  a plan to
develop products  focused on larger vertical markets with potential  high-volume
growth. The product lines selected were:

    o     embedded PC computers for VMEbus and CompactPCI,

    o     expanded communications/networking products for the embedded computer
         industry and for the broader server computer market,

    o     PC-based control software and other software products, and

    o     I/O systems for industrial automation based upon PC control software.

         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 SAN  industry  and embedded  computer  industry  for  telecommunications,
industrial  automation,  test and  measurement,  medical  devices,  and  defense
applications.  The key  elements  of the  Company's  strategy  to  achieve  this
objective are:

     Leverage the  Company's  Pentium  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, and other leading PC vendors, and the Company's investment in leading
technology, customers are now selecting the Company for custom-designed products
for potential high-volume applications. The product line focus is for VMEbus and
CompactPCI applications.

     Offer   Fibre   Channel   Products.    The   Company   has   expanded   its
communications/networking product line to include a family of Fibre Channel host
bus adapters which support  computer  clustering and networking of computers and
storage  devices at high speed  gigabit  data  rates.  Fibre  Channel is an ANSI
standard adopted by most leading computer  companies.  Host bus adapters convert


                                       6
<PAGE>

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  entry into broader markets such as
telecommunications and storage area networks.

     Leverage  Input/Output  (I/O)  Expertise.  VMIC's I/O product line has been
primarily based upon VMEbus.  The product line was recently  expanded to include
CompactPCI and a low-cost  busless DIN rail mount I/O product line. The strategy
is to focus on lower cost I/O  products  designed  specifically  for  industrial
automation 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 is establishing a
worldwide  distribution  network  that is highly  focused on this  market  while
continuing  the  sale  of  legacy  products  through  existing  sales  reps  and
distributors.

     Expand  International  Markets. The Company has 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.  The
Company anticipates  significant growth in international orders in 2000. In 1998
the Company opened an office in Paris,  France in response to customer  requests
for a VMIC presence in Europe beyond its distributor network. The Company is now
pursuing  business in China and Russia through new distributors  managed by VMIC
personnel.

     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 reduce costs and
increase functionality. 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 repeat sales. 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 more
focused  on  communications/  networking,  PC  single-board  computers,  and I/O
systems based upon PC-based  control  software and  improvements in the PC-based
control software product.


Products

     The  Company  designs  and  manufactures  a  wide  variety  of  board-level
products,  I/O systems,  and software primarily for embedded computer solutions,
as well as communications products for most leading computer manufacturers. Some
of the Company's products are used for high-speed  communications among embedded
computer  systems and systems  offered by such  companies  as Silicon  Graphics,
Harris, IBM, Intergraph, Motorola, Gateway and DELL. The Company's product lines
can be partitioned into six primary groups:

     Single-Board PC VMEbus and Compact PCI CPUs and Peripherals. The Company is
a technological leader in VMEbus and CompactPCI (CPCI) Intel-based CPU products.
The product line spans the complete line of Intel-based  products including 486,
586, Pentium, Pentium II and Pentium III processor-based single-board computers.
The  Company's  Pentium  processor-based  single-board  computers  have recently
received national award recognition from Control  Engineering.  The product line
supports a wide variety of operating systems such as DOS, Windows, Windows

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NT/RTX,  Lynx OS,  Windows  CE/RTX,  Linux,  VxWorks and QNX. In  addition,  the
Company  manufactures  an array of  compatible  VMEbus boards such as floppy and
hard drive  modules.  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 with VMIC products.  The
Company has recently announced a variety of Pentium single board computers based
on CPCI. According to recent independent market studies and the Company's recent
marketing   efforts,   CPCI  products   have  the  greatest   potential  in  the
telecommunications  market area. The Company's  single-board  products are fully
supported by the Company's component software (IOWorks). See "Component Software
(IOWorks)" below.

     General  Purpose  I/O  Products.  The  Company  offers a wide  range of I/O
products including VMEbus,  Compact PCI, PCI and DIN rail I/O. The Company's 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,  and
Windows NT/RTX. The Company has recently private 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. The Company's profit margins for
these products are in line with similar products  developed by the Company.  The
Company's 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.

     Communications Products. The Company's communications product line includes
five discrete product categories. The categories are:


          (1) Fibre  Channel.  Fibre  Channel,  a highly  reliable,  high  speed
  interconnect technology,  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:

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

     VMIC's  Reflective  Memory  (RTnet)  product line  utilizes  Fibre  Channel
technology to achieve deterministic  operations beyond Fibre Channel. Because of
VMIC's  experience with this  technology,  VMIC believes that it is qualified to
enter the host  adapter,  hub, and bridge  market arena with a complete  line of
Fibre Channel  products.  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,
CompactPCI, 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,

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Gateway, and others.  Infiniband is the next generation computer architecture on
the drawing board for the future.  In addition,  VMIC has  significant  software
experience to differentiate its product line.

     VMIC's host bus  adapter  (HBA) Fibre  Channel  product  line is based upon
state-of-the-art  technology,  and the product line includes  open  architecture
solutions based on several  industry-standard  bus structures,  such as PCI bus,
CompactPCI, and PMC/VME.

     The Company has  recently  released  for  production  six new Host  Adapter
Boards,  or HBA's,  boards for PCI, CPCI, and PMC. The Company has also recently
released three new storage area network  compatible  single board  computers for
VME and CPCI.  These new 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.

         (2) 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.

         (3)  Serial  I/O  communication  products.  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.

         (4) 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  which  support the  configuration  of large I/O
systems and the remoting of I/O boards from the CPU via fiber optics.

         (5)  Reflective   Memory.   VMIC's  Reflective  Memory  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 Company's  Reflective Memory 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  Reflective  Memory products have recently received national award
recognition from Control Engineering.

     Component Software  (IOWorks).  The Company's IOWorks software product line
is an  extensive  family  of  PC  software  components  intended  primarily  for
applications  in the  Industrial  Automation  industry,  the products  also have
applications   in  the   Test  and   Measurement,   Simulation   and   Training,
Telecommunications,  and other markets. These components provide a comprehensive
set of  tools  used to  create  data  acquisition  and  control  systems  and to
interconnect  the large  number of legacy  control  products  commonly  found in
industrial plants today.  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.  IOWorks'  strength lies in the seamless,
cohesive, easy-to-use environment it provides and the flexibility it gives users
to pick and choose the right components for the application.

     IOWorks components 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.  IOWorks 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 upon open standards such
as IEC-1131-3  and  Microsoft  technologies.  IEC-1131-3  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 I/O boards
and platforms, as well as VMIC's hardware products. The software is designed for
hardware independence and software O/S 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 OEM's,  systems
integrators,  or end-users who install the equipment,  develop software, and add
third-party products to customize such systems for specific applications.

     The Company  now offers a much wider  range of I/O  systems  based upon new
hardware and software  products which have wider  applications in the industrial
automation and test and  measurement  markets.  The Company's  IOWorks  software
product  enables  the Company to offer  systems-level  products  for  industrial
automation which:

        o  support the  interconnectivity of a wide range of existing
            dissimilar I/O systems, thereby opening a closed market,

        o  replace   antiquated   closed   proprietary  I/O  systems  with
           state-of-the-art  open architecture I/O systems which are based on
           open standards,

        o  enhance  the  performance  and  increase  the  functionality  of
          antiquated  installed I/O systems,  allowing customers to maintain
          their investment in such equipment, and

        o  support  the  interconnection  of the  Company's  advanced  I/O
           systems  with a broad  array  of  installed  I/O  systems  and new
           systems offered by third-party suppliers.

     IOWorks, when coupled with the Company's PC single-board computer line, I/O
boards,  Reflective Memory, and other products,  allows the Company to offer the
following   additional   systems-level   products  in  the  multibillion  dollar
industrial automation market.

     o The Company's IOWorks controller product line performs the same functions
as programmable  logic controllers  (PLCs) with the added benefit of being based
upon open  standards,  and  Intel-based CPU designed by the Company which offers
high performance and system  flexibility.  In addition,  the Company's  products
preserve the  customer's  investment  in software so that  customers  can update
their equipment without rewriting their software.

     o The Company's new system-level  Reflective  Memory based PLC ACCELERATION
product  increases the  functionality of existing PLCs which may be overtaxed or
PLCs which are too slow for expanded requirements. The Company's solution allows
the customer to maintain their investment in old technology by linking the older
PLC products to the Company's IOWorks system by way of the Company's  Reflective
Memory.


     o IOWorks Server,  which combines the Company's  IOWorks  PC-based  control
software,   with  certain  of  the  Company's   hardware  products  and/or  some
third-party products, to offer solutions that support the interconnectivity of a
wide  variety of PLC systems in a seamless  network.  The  Company's  Reflective
Memory is utilized  to support  the  networking  of the same or  dissimilar  I/O
systems, computers, etc.



                                        9

<PAGE>



     In addition to these new  systems-level  products,  the  Company's  IOWorks
component software is designed as a stand-alone product. This flexibility allows
the Company to market its software  without the Company's  hardware content in a
market that is  projected  to grow over 50 percent  compounded  annually to $500
million by 2003. This embryonic market is in the early stages of growth.



     The  Company's  potential  growth in the test and  measurement  I/O systems
market has been  significantly  enhanced  because  its  IOWorks  software,  when
coupled  with  the  Company's   equipment  and  leading   third-party  test  and
measurement  software,  enables  the  Company  to  offer  state-of-the-art  open
architecture I/O systems to the test and measurement  market.  While the Company
has sold  products  into the test and  measurement  market,  its  potential  for
significant  growth  has also been  increased  because of its  investment  in PC
single-board computers, new IOWorks PC-based control software, and new I/O board
products designed specifically for the test and measurement market.


     The company has recently  expanded its' I/O systems product line to include
CPCI , PCI, and DIN rail I/O. These systems are based upon the IOWorks  software
product line and  significantly  expand the  Companies  offering of system level
products to the Industrial Automation market .

Special Products. The Company develops,  manufactures,  and markets a variety of
special products which are modified versions of the companies standard products.
The Company has  recently  focused more of its'  resources on several  potential
contracts associated with such opportunities. 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 high volume  opportunities.  While special products are
normally developed at the customer's expense, occasionally the Company may share
development expenses for such products or completely underwrite the development.
The company  typically  negotiates the complete  ownership in all rights to such
products.

         The development and sale of these special  products gives the company a
significant  advantage  over the  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.



                                       10

<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  recently  changed its  marketing  focus to more  vertical
channels  associated  with OEMs who  incorporate the Company's new products into
their new  products  for  resale in these  vertical  markets.  The  Company  has
recently  won  design-ins  in  the  medical,   digital  broadcasting,   defense,
telecommunications, and industrial automation markets with leading companies.

     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, 1999, 70 customers  accounted for  approximately 68 percent of the
Company's  sales.  However,  no single  customer  represented  greater  than 8.1
percent of the Company's  sales.  The following  tables  include  representative
customers and end-users include of VMIC, by market:

<TABLE>
<CAPTION>

Industrial Process Control                Computer Manufacturers                Automotive
--------------------------                ----------------------                -----------------
<S>                                       <C>                                   <C>

3M Company                                Concurrent Computer Corp.             Applied Automation
AGFA                                      Cray Research                         Chrysler
AVX Corporation                           Digital Equipment Corp.               Ford Motor Company
Bethlehem Steel                           Electronics Associates                General Motors/EDS
Cegelec                                   Encore                                Mercedes Benz
Cimtek                                    Harris Corporation                    Sverdrup Technologies
Commonwealth Aluminum                     Hewlett-Packard                       Toyota
Corning                                   IBM
Dupont                                    Motorola                              Research
                                                                                --------
Eastman Kodak                             Perkins-Elmer                         Argonne National Labs
Fairmont Tamper                           Telecommunications                    AT&T Bell Labs
GE Fanuc                                  Lucent                                Bell Telephone Labs
Kimberly-Clark                            ATT                                   Brookhaven National Labs
Kvaerner                                  Divicom                               Duke University
Lamm Research                             EMS                                   Fermilab
Logan Aluminum                            Nortel                                Ganil
Mannesman Demag                           SED                                   Harry Diamond Lab
McNaughton and McKay                      Utilities Industry                    Harvard University
Poscon                                    Commonwealth Edison Co.               Johns Hopkins University
Quester                                   Department of Energy                  Los Alamos National Labs
Reynolds Aluminum                         Georgia Power                         Michigan State University
Thermco                                   Houston Lighting & Power              MIT
Tuscaloosa Steel                          KSG                                   Rensselaer Polytechnic
Xerox                                     Majuba                                RIST
                                          Mochovce                              Sierra Research
                                          Ontario Hydro                         SRRC
                                          PP&L
                                          TVA
                                          Union Electric
                                          Vepco

</TABLE>

                                                            11

<PAGE>




<TABLE>
<CAPTION>

Customers, continued
--------------------


Simulation and Training                   Aerospace                             Defense Military
------------------------------------------------------------------------------------------------
<S>                                       <C>                                   <C>
Altas Elektronik                          Aerospatiale                          AIDC
AAI Corporation                           Alenia                                AVCO
Burtek                                    Bendix Field Engineering              BDM
CAE Electronics                           Boeing Aerospace Co.                  BEI Defense Systems Co.
Flight Safety International               British Aerospace                     Department of Defense
General Physics                           CASA                                  Edwards AFB
Mitsubishi Heavy Industries               Dassault                              Eglin AFG
Quintron Corporation                      Debis Systems Haus                    Electronics Warfare
Rediffusion                               Delta Airlines                        E-Systems
Reflectone, Inc.                          Dornier                               Ferranti
S3 Technologies                           Ford Aerospace                        Martin Marietta
SAIC                                      General Dynamics                      Moore Research Center
Sanders Associates                        Goodyear Aerospace                    Naval Air Test Center
Siemens AG                                Grumman Aerospace                     Naval Air Test Development
Simulation Associates, Inc.               Hamilton Standard                     Naval Aviation Depot
Sogitec                                   Hercules Aerospace                    Naval Coastal Systems Center
SSI                                       Hughes Aircraft                       Naval Oceans Systems Center
TAI                                       Israeli Aircraft Industries           Naval Research Lab
                                          Jet Propulsion Laboratory             Naval Surface Weapons Center
                                          Lockheed                              Naval Underwater Systems
                                          LTV Aerospace                         Naval Weapons Center
                                          Matra MBB                             Raytheon
                                          McDonnell Douglas
                                          NASA
                                          Northrop Corporation
                                          Pratt & Whitney
                                          Rockwell International

                                          Rolls Royce Associates
                                          Smith Industries

</TABLE>



         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.

         The  Company's  customer  base is changing  from  end-users and systems
integrators   involved  in   projectrelated   systems  designs   involving  long
development and  implementation  cycles to OEM customers who use VMIC's products
in their  products  which they sell to end-users  and systems  integrators.  The
Company  believes  that it has been  successful  in focusing its  attention  and
resources on such  customers;  however,  there are no assurances that this trend
will continue. Recently, the Company has been informed of several key design-ins
where the Company's  products  have been selected by OEMs for leading  companies
focused on  telecommunications,  medical,  and  industrial  automation  markets.
Shipments have begun to these customers and the Company is

                                       12

<PAGE>



negotiating with some of the same customers for additional  business  associated
with other  products.  See  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations- Recent Developments.


Backlog

         The Company's backlog of firm orders as of September 30, 1999 was $14.7
million,  as  compared  to a  firm  order  backlog  at  September  30,  1998  of
approximately  $4.1 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 $2.0  million  of the total  backlog as of
September 30, 1999. 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.

         For the fiscal year ended  September 30, 1999, the Company  received 8%
of its revenues from Litton  Industries  and 23% of its revenues from  customers
who received contracts from various agencies of the Department of Defense.



Markets

         The Company has recently  concluded  that its  traditional  markets are
insufficient to satisfy its growth  objective,  and a strategic plan was devised
and implemented to refocus the Company. The objective of the new strategy called
for a transition  of the company from its  traditional  niche  markets to higher
growth  vertical  markets  involving  original  equipment  manufactures,  or OEM
applications.  The Company identified the Fibre Channel storage area network, or
SAN  and  telecommunications  markets  as the  two  most  promising  high-growth
markets.  These particular markets were selected because each was substantial in
size and the Company's  existing  infrastructure  allowed for the development of
technology  that  could  satisfy  market  demands.  While the  Company is highly
focused on the SAN and telecommunications markets, it expects significant growth
in the  industrial  automation,  defense,  test and  measurement,  digital video
broadcast and medical equipment industries .

         VMIC  specializes  in  supplying  products  to  the  embedded  computer
industry and has expanded its focus to the broader  server  market which provide
products to the Fibre Channel SAN industry. Embedded computer products are a key
element of the broad  electronics  market and are the central to the control and
monitoring  system  for many  types of  electronic  systems  requiring  advanced
capabilities for human  interface,  data analysis,  communications  and control.
Embedded  computers are designed to operate in specific  applications where they
are   typically   programmed   to  perform   repetitive   tasks,   whereas  more
general-purpose  computers  are designed to perform many types of  operations in
broader,  more general markets.  Embedded  computers differ from general purpose
computers,  such as  PCs,  in  several  key  respects.  Embedded  computers  are
typically integrated into larger systems,  perform a single or limited number of
complex   functions  and  adhere  to  specific   requirements   regarding  size,
scalability, maintainability, reliability and expandability.

         Embedded  computers  can be used in a wide range of  applications  from
on-board  automotive engine control to more extensive open architecture  systems
that use plug-in boards in an industrial chassis.  Open architecture systems are
nonproprietary  designs based upon open standards supported by a wide variety of
vendors, all of which build products based upon the open systems specifications.
The leading open architecture  embedded  computers today are based upon industry
standard  buses such as VMEbus,  PCI bus,  CompactPCI,  PMC,  and others.  These
leading buses allow the  interconnection  of boards in a plug-in  backplane that
supports data communications  among a broad range of different boards offered by
embedded computer board suppliers.


                                                            13

<PAGE>



         VMIC specializes in open  architecture  standard bus boards and systems
solutions  based upon these  open  standards.  Open  architecture  standard  bus
products  have been  adopted by a wide  variety of  companies in markets such as
SAN,  telecommunications,  digital video  broadcasting,  industrial  automation,
medical, defense, and aerospace.

         VMIC has recently experienced  significant design-in success within the
industrial automation,  telecommunications,  defense, digital video broadcasting
and medical markets. The Company is highly focused on vertical markets involving
potential  high-volume sales of specific  single-board products and systems that
are used in customers'  products  (OEM  applications)  such as medical  imaging,
telephone  switching,  communications  systems,  computer  clustering,  SANs and
complete I/O systems for control and monitoring applications.

         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,   CompactPCI  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
CompactPCI 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 CompactPCI  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 CompactPCI.  VMIC is highly focused on the
VMEbus, PCI, PMC and CompactPCI 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 2000.

         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 is $700
million in 1999.  Utilizing the VMEbus market as a guide,  the Company  believes
that the CPU business for  CompactPCI  could  approach more than $500 million by
2003. The telecommunications  market has selected CompactPCI 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  CompactPCI
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 upon the number of design-ins  won by VMIC during 1999 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  CompactPCI  as their  next
generation architecture of choice for new embedded applications.





                                       14

<PAGE>



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 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 non-linear  digital editing systems in the  advertising,  broadcast
and  entertainment  industries  as  well  as  for  high  speed  data  processing
applications in a variety of industries including Internet service providers.

         IDC  forecasts  that the market  for  products  based on Fibre  Channel
technology will grow from  approximately  $2.0 billion in 1998 to  approximately
$23.0 billion by 2002.

         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  Host Bus  Adapters  (HBA) 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
(non-cellular)  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 $1.643 billion in 1999 to $6.112 billion
in 2002.  Hubs are  devices/boxes  that  simplify the  interconnection  of nodes
within  a Fibre  Channel  network.  A hub  allows  the  continued  operation  of
operating  nodes in the event of a node failure or power off  condition.  Strong
growth has been projected for Fibre Channel hubs. International Data Corporation
(IDC) forecasts  revenue for hubs of $827 million in 2002, which translates to a
compounded annual growth rate of 71 percent over a six-year time frame.

                                       15

<PAGE>




         VMIC has  significant  experience  with Fiber  Channel  HUB  technology
because of its' reflective memory network boards and bypass hubs which are based
upon Fiber Channel technology.

         Fibre Channel  supports  configurations/multiple  topologies that allow
significant node growth while protecting existing  investments as systems growth
explodes  using  switch  boxes  and/or  hubs.  Fibre  Channel  networks  can  be
configured  without hubs and switch boxes;  however,  hubs are predicted to be a
popular  investment  for the  foreseeable  future.  As a result,  the ability to
leverage the installed base of hubs in simple configurations of HBA introduces a
market opportunity.


The Industrial Automation Market

         Since  the  1960's,   industrial   automation   systems  have  included
mechanical devices,  meters, and gauges, as well as data loggers and strip chart
recorders.    In   the   1970's,    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  upon open  hardware  platforms  and  nonproprietary
standards such as VMEbus ,  CompactPCI,  and PCI;  Intel  processor  technology;
Microsoft  operating systems and other Microsoft key technologies;  and PC-based
control software such as VMIC'S IOWorks software package.

     The  total  market  for  distributed  and  remote  I/O  devices  used  with
distributed control systems (DCS), PC-based controllers,  and programmable logic
controllers  (PLC) is expected to grow from $1.9 billion in 1998 to $2.8 billion
in 2003, according to Venture Development Corporation. The report indicates that
the global markets and user needs for industrial distributed/remote I/O products
used only with PC-based systems is projected to grow by 19 percent per year from
$201 million in 1998 to $476 million in 2003. The report indicates the increased
adoption of PC-based control systems is aided by software  suppliers who provide
solutions based upon PC-based architectures and open networking.  The advantages
of PC-based control systems are:

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

                                       16

<PAGE>



     *     Reduced development costs
     *     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 upon Intel
PCs, key Microsoft  technologies,  and open  architecture  equipment  based upon
standards such as VME, CompactPCI,  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.  The  industrial  automation  market is
projected  to generate  $11 billion in revenues by 2001  according  to Frost and
Sullivan.

     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 a 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 worldwide PC control  software  market is
projected to grow from $94.1 million in 1999 to more than $500 million  annually
by 2003 according to a recent ARC study.

     The  Company's  strategy  is to  continue  to  focus  on  the  I/O  systems
(front-end  systems)  business.  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.

     The demand for process controller  technology,  both hardware and software,
is  projected  to grow from  $8.51  billion  in 1993 to $15.17  billion in 2000,
according to Frost and Sullivan.  The Company now offers  hardware and software,
as well as I/O systems  for this  market,  and the Company is highly  focused on
growth in this market  arena.  With a market value of $1.9  billion,  automation
software is the most dynamic sector of the global  automation  industry and will
be a crucial product for large control system  suppliers during the next decade,
according to a recent report by Datamonitor,  a market analysis firm. Its Global
Automation Software report states that the global market for automation software
has grown at an average  annual rate of 22 percent  over the last five years and
will reach $3.6 billion in 2003. It adds the  chemicals  industry is the largest
global  end-user  of  automation  software.  Growth  has been  strongest  in the
Americas,  where impact of new  products in major U.S. and Canadian  markets and
rapid market  development in South America  increased market value by 33 percent
annually. European growth has averaged 21 percent per year because those markets
have been well developed  since the mid- 1990s and the full impact of recent new
product  launches -  especially  in  PC-based  DCSs - haven't  been fully  felt.
Datamonitor's  report  projects future growth will be fastest in the Americas at
18.4 percent  annually,  pushing that segment $1.88 billion in 2003.  Meanwhile,
Europe will grow 9.8 percent per year to reach $1.19 billion, while

                                       17

<PAGE>



Asia will grow 7.3  percent  annually to $574  million.  The Company has entered
this market with an extensive product line for several  industrial  applications
such as petrochemical, hydro-desulphurization, film processing, aluminum rolling
mills,  steel rolling  mills,  fiber-optic  cable  manufacturing,  silicon wafer
manufacturing, and others.


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 CPU's have  become the most  common  standard
platform in next-generation  telecommunications  systems. The telecommunications
market has  selected  CompactPCI  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, or 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  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 from $35.2 billion. 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.





                                       18

<PAGE>



The Medical Market

         In virtually all areas of the medical ultrasound and magnetic resonance
imaging, 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 co-located within the
same box communicating on the same hardware medium.

         The medical  industry has selected open  architecture  solutions  based
upon  VMEbus  and  CompactPCI  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 storage area network problems
are solved with Fiber 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  Windriver.  Graphical  user
interfaces  that  demand  less  deterministic  or  real-  time  performance  are
generally  supported by Windows NT, Lynx or other less robust software operating
systems.  VMIC offers the Intel based  Pentium class high  performance  computer
boards,  Fiber  Channel  host bus  adapters  and  supporting  software  for such
applications.


The Digital Video Broadcasting Market

         An important transformation is taking place today in how information is
distributed.   Digital  video  is  at  the  forefront  of  the   convergence  of
broadcasting, entertainment, computers and telecommunications. Open architecture
CompactPCI   (CPCI)  platforms  are  being  selected  by  leading  providers  of
standards-based  encoding  products and systems for digital video  broadcasting.
CPCI offers  significant  benefits such as Hot swap  capability,  multiprocessor
work load sharing,  expandability,  reliability,  high  performance and Intel PC
architecture solutions.

End-to-end  solutions  designed for this market enable users to digitally encode
compress,  transmit and decode broadcast quality video signals for a broad range
of   applications,   including   satellite   delivery,   terrestrial  and  cable
broadcasting, and contribution. Products designed for this market enable digital
video  broadcasting over a variety of networks  including  satellite,  wireless,
fiber and cable.  Solutions  include audio,  video, data encoding and networking
systems.  Leaders in this industry  reach into all major segments of the digital
television  industry such as direct broadcast  satellite (DBS),  cable,  content
distribution, digital terrestrial, MMDS, and digital subscriber line.

Leaders in this  industry  offer  television  service  providers  digital  video
networking  solutions that merge video, audio and data with leading-edge digital
compression  and  communications  technologies.  These  solutions  enable  their
customers  to optimize  their  digital  transmission  networks  and expand their
services to increase  revenue while providing  consumers with unmatched  digital
pictures  and  CD  audio   quality.   Leading   solutions   enable   terrestrial
broadcasters,  satellite  providers and cable  operators to expand their service
offerings with high quality encoding and data broadcasting products.



                                       19

<PAGE>

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 CompactPCI 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,  Lynx 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.

         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.


                                       20

<PAGE>



         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  48  foreign   countries   through  more  than  32   distributors   and  14
representative  organizations worldwide. As of September 30, 1999, the Company's
marketing,  sales,  and  distribution  programs  were  conducted  by 43  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,  1999,   the  Company  has  contracts   with  14  independent
representative  organizations that employ more than 54 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   32
distributors.  As of September 30, 1999, the distributors  employed more than 78
salespeople.

         In   addition   to   international    distributors   and   U.S.   sales
representatives,  the Company has 29 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 are highly  focused on industrial  automation,  and a
separate network of VARs and  distributors  that are highly focused on the Fibre
Channel  storage area  network  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 catalog
enhancements, direct mail, and other marketing techniques to expand its customer
base  growth  revenues.  The  Company  is in  the  process  of  establishing  an
E-Commerce link which will allow customers to purchase products via the Web.

         The  Company  has  recently  reorganized  its  Sales and  Research  and
Development  departments  to  establish  a  business  center  staffed  with  key
employees highly focused on the industrial automation markets and products. This
staff  includes  an  experienced  industrial  automation  manager,  three  sales
managers, and a Research and Development staff of approximately 63 employees.

     In  addition,  the Company has  recently  dedicated  an  experienced  sales
manager to market Fibre Channel products to the storage area network  customers.



                                       21

<PAGE>

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  companies  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  which  includes  5DX  Xray,  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
high technology research community which allows the Company to take advantage of
the  quality  and  high-volume  manufacturing   capabilities  of  several  local
international.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 is $551,000.

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  which  involve the  potential for
medium- to high-volume production opportunities.

     As of September  30, 1999,  the Company has  approximately  80 employees in
research and  development  activities.  Of these  employees,  45 are involved in
hardware development and 35 are involved in software development.

     As of September 30, 1999,  75 employees  have  technical  degrees and eight
have advanced  degrees.  Approximately 52 percent of the Company's  research and
development  efforts in fiscal  year 1999 were  software  related.  The  Company
recently  reduced  its  software   development   efforts  and  plans  to  invest
approximately 36 percent of the Company's R&D efforts for the fiscal year ending
2000.  The Company's  research and  development  expense was $5.6 million,  $6.2
million,  and  $5.3  million  in  fiscal  1999,  1998,  and  1997  respectively,
corresponding  to 19.7  percent,  19.9  percent,  and  19.0  percent  of  sales,
respectively.  Software deferred expense was $2.33 million,  $2.20 million,  and
$1.47 million in fiscal 1999, 1998, and 1997, respectively.

The Company expensed $5.3 million of previously capitalized software development
costs for the fiscal year ended  September 30, 1999.  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 As of September 30, 1999, the
total deferred software  development  expense to be amortized over future sales,
including software used in production testing and manufacturing, is $836,000.

     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   on   PC-based   control    software,    single-board    computers,
communications/networking  products,  such as Reflective Memory,  CompactPCI I/O
products, and, in particular, Fibre Channel technology.


     VMIC has recently  developed a host adapter Fibre channel product line that
includes host adapters for the most popular open architectures, such as PMC, PCI
and  CompactPCI.  The Company is also  converting its  Reflective  Memory bypass
switches to Fibre channel  connectivity  compatibility  for a Fibre Channel hub.
The Fibre Channel hub allows a configuration  of computers and peripherals  such
that a  failure  on one node  does  not  create a total  failure  of the  entire
network.  The  Reflective  Memory  network  bypass product is already based upon
Fibre channel technology. The Company is also examining the possibility of using
other VMIC  technology  to enter the  concentrator,  router,  and bridge  switch
markets.  The  Company is  developing  VxWorks  host  adapter  software,  and is
examining the  enhancement of third-party  software that is compatible  with its
host adapters.

                                       22

<PAGE>



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 the Company.

     While the Company's focus remains  directed to the  telecommunications  and
Fibre Channel  storage area network  markets,  the Company is still committed to
the embedded markets of defense, test and measurement, industrial automation and
medical equipment. 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.


<TABLE>
<CAPTION>
                                            Competitor By Market

                                               Industrial                          Test and
        Product Line            Telecom        Automation         Defense        Measurement        Medical
<S>     <C>                  <C>           <C>                 <C>              <C>                <C>

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                                       X                                 X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Emulex                             X                                 X                                 X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Object Automation                                   X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Think and Do                                        X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Steeplechase                                        X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Interphase                         X                                 X                                 X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Ziatech                            X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Dynatem                            X                X                X                X                X
---------------------------- -------------- -----------------  ------------- -------------------- ------------
Nematron                                            X
---------------------------- -------------- -----------------  ------------- -------------------- ------------

</TABLE>
                                       23
<PAGE>
<TABLE>
<CAPTION>
                                                 Competitor By Product Line


                                 Computer          Communications/        Input/          I/O          PC-Based Control
        Product Line              Boards             Networking           Output        Systems            Software

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

Competitor
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Systran                                                   X                  X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Motorola                             X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Force                                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
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Emulex                                                    X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Object Automation                                                                                             X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Think and Do                                                                                                  X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Steeplechase                                                                                                  X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Interphase                                                X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Ziatech                              X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Dynatem                              X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Nematron                                                                     X             X                  X
---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
</TABLE>


Government Business

      The Company's reliance on direct and indirect government business has been
significantly  reduced  over  the past  eight  years  from 75% of the  Company's
business  to  31%;  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
tentatively selected to supply a potentially large quantity of CPCI single board
computers  to a large  government  contractor.  The  Contract  award  should  be
finalized  in the first  quarter  of 2000.  In the event  that the  contract  is
awarded to VMIC a significant  percentage of the Company's  future revenue could
be generated by government related business.


                                       24

<PAGE>




Proprietary Rights

     The Company's  success  depends to a  significant  degree upon its software
proprietary  technology  and  other  confidential   information.   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 has applied for two patents  associated with Reflective  Memory
and single board computers. Reflective Memory is a trademark of Sun Microsystems
and Sun owns five patents related to Reflective Memory.
VMIC is an approved licensee of the trademark and all patents.

     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  upon  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  non-infringing  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

Employees

     As of September 30, 1999, the Company had 207 full-time employees.  None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. 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 south  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.




                                       25

<PAGE>




                      EXECUTIVE OFFICERS OF THE REGISTRANT

         Information  relating  to the  executive  officers of the Company as of
September 30, 1999, 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          56     Director, Vice President Sales and Marketing

Charles McDonald             58     Executive Vice President of Operations

George Meares                49     Vice President Research and Development

Gordon Hubbert               54     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.

     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

                                       26

<PAGE>



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.



                                       27

<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, 1999, the Company's Common Stock outstanding was held by
approximately 525 shareholders.  At September 30, 1999, there were 409,617 stock
options  outstanding,  convertible  into the Company's  Common Stock. See "VMIC,
Inc. Notes to the Financial  Statements- 6. Stock  Options." 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



       1997                  117,978                  364,015

       1998                   77,420                  273,931

       1999                   74,069                  257,204





     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.







                                       28

<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 F-1 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
                                                  ------------------------------------------------

                                                     1995          1996       1997        1998           1999
                                                ------------  -----------  ----------- -----------  --------------
 <S>                                            <C>           <C>          <C>         <C>          <C>


  Statements of Operations Data:

   Revenues                                      $    23,104    $  23,791    $  27,901  $   31,049    $    28,381

   Gross profit                                       15,546       15,495       18,108      20,290         16,096

   Selling, general and administrative expenses        8,328        9,661       10,995      13,302         12,419

   Research and development expenses                   5,105        5,335        5,307       6,231          5,801

   Income (loss) from operations                       2,113          499        1,806         757         (7,336) (1)

   Net income (loss)                             $     1,455     $      41   $     934  $      205     $   (8,246) (1)
 Per Share Data:
   Diluted earnings (loss) per share             $      0.37     $    0.01   $    0.22  $     0.04     $    (1.82)

   Weighted average common share outstanding
   (diluted)                                        3,901,278    4,047,989   4,189,113    4,554,448      4,534,189



Excluding Certain One-Time Events (1)
   Net income(loss)                              $     1,455    $      41   $     934  $      205      $   (2,989)

   Diluted earnings per share                    $      0.37    $    0.01   $    0.22  $     0.04      $    (0.66)


Balance Sheet Data:

     Working capital                              $    3,463    $    2,544  $    4,693 $     4,724     $      607


     Total assets                                     13,511       16,410       19,707      25,162          20,270


     Long-term debt                                    3,507        5,078        5,395       5,713           6,448


     Total stockholders' net investment                6,365        6,693        9,397      11,747           3,890

</TABLE>


                                       29

<PAGE>










(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.

                                       30

<PAGE>



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

     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 below. These forwardlooking 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 new 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 is now focused on the  telecommunications  industry and storage
area networks for the broader computer market.  The Company plans to continue to
market its products to the defense,  test and measurement,  medical,  industrial
automation, and other markets.

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

     Approximately  three years ago, the Company  developed a plan to change its
primary  market  focus and product  lines from  defense,  test and  measurement,
nuclear  power plant  monitoring,  and  simulation  and  training to new,  large
vertical  markets  that were  experiencing  changes,  and where  customers  were
demanding new  solutions.  At that time,  the Company's  revenues were primarily
generated from specialized products in niche markets.  These products served the
Company well by providing  high margins;  however,  these markets were not large
enough to sustain the Company's planned growth rate.


                                       31

<PAGE>



     As a result  of this  change  in focus the  Company  implemented  a plan to
develop products  focused on larger vertical markets with potential  high-volume
growth.  The product lines selected were 1) embedded PC computers for VMEbus and
CompactPCI,  2) expanded  communications/networking  products  for the  embedded
computer  industry and for the storage area network market,  3) PC-based control
software  and  other  software  products,  and 4)  I/O  systems  for  industrial
automation based upon PC control software.


     Recent Developments

     Telecommunications.  The  Company  is  in  negotiations  with  two  leading
telecommunications  companies for contracts to deliver Reflective Memory network
products for telephone  switching,  voice  recognition,  and redundant  computer
communications. In addition, VMIC is also negotiating contracts for the delivery
of PC single-board computers to several telecommunication companies. The Company
believes  that  these  opportunities  may  lead  to  significant  sales  to  the
telecommunication industry.

     Industrial Automation. VMIC has recently received orders from several major
industrial  automation  companies for PC-based  control I/O systems that use the
Company's  IOWorks software  products.  In addition,  the Company is negotiating
with a leading global industrial  automation company to supply a PLC replacement
computer that uses the Company's PC-based control software. The Company has also
recently  negotiated a contract to provide a distributed  I/O product line under
private label for a leading industrial automation company.

     Medical.   The  Company  has  recently   been  selected  to  supply  VMIC's
Intel-based  single-board computers, or SBCs, for use in a six processor medical
testing device. In addition,  the Company is negotiating with a leading supplier
of  medical   imaging   systems  to  supply   CompactPCI   SBCs  for  ultrasound
applications.

     Digital  Video  Broadcasting.  The Company has recently  been selected by a
leading provider of encoding products and systems for digital video broadcasting
to supply SBCs to be used in digital video broadcasting. The customer's products
enable digital video broadcasting over a variety of networks including satellite
wireless, fiber, and cable.

     Defense. VMIC is negotiating with a large defense subcontractor to supply a
significant  number of SBCs for a military  project.  VMIC has shipped beta test
specimen SBCs and expects to be informed of a contract  award in December  1999.
This opportunity could result in the sale of more than 40,000 SBCs over 10 years
if all the contact options are exercised.

     Fibre  Channel.  VMIC has  recently  released  its host bus  adapter  Fibre
Channel product line, which includes six host adapters for the most popular open
architectures,  such as PMC, PCI, and CompactPCI.  The Company has also recently
released  three SAN ready single board  computers  with Fiber  Channel  adapters
attached for VME and CPCI.

        The Company  recently  began  extensive  marketing of its Fibre  Channel
product line and has a dedicated Fibre Channel Web site at www.vmicnet.com.  The
Company  anticipates  increasing its investments in Fibre Channel  technology to
include  additional  adapters,  bridges and hubs to enhance its  position in the
marketplace.

     Manufacturing. The Company has recently expanded its manufacturing capacity
and  capability  and now  manufactures  the  majority of its products in its own
facilities.  The  Companies  reduced  reliance  on  contract  manufacturers  has
decreased  the cost of certain of the  Company's  products  and should allow the
Company to be more competitive.

                                       32

<PAGE>




     Sales Organization.  The Company has initiated a significant reorganization
of its sales  department,  which is now organized  around  specific  markets and
product  specialists  who work  closely with  customers  to develop  high-volume
products  designed to meet specific  customer  requirements.  A group within the
Sales  Department  is  dedicated  to the  industrial  automation  market and the
products designed especially for industrial automation. In addition, the Company
has  recently  dedicated  a  sales  manager  to the  Fibre  Channel  market  and
associated products.

     International  Sales. The Company has substantial presence in international
markets where it sells  products in more than 60 foreign  countries  through its
line of international  distributors.  International  revenues as a percentage of
sales were 18.3% of sales in 1998, or $5.7 million,  and 22% of sales in 1999 or
$6.16 million.  The Company's  anticipates  international  orders  significantly
increasing in 2000. In 1998 the Company  opened an office in Paris,  France,  in
response  to  customer  requests  for a  VMIC  presence  in  Europe  beyond  its
distributor  network.  The Company is now pursuing  business in China and Russia
through new distributors managed by VMIC personnel.

     Write-down of Certain  Assets.  In the fourth  quarter of 1999, the Company
recorded a charge of  approximately  $5.3 million for the  write-down of certain
software  development costs and product and software costs related to industrial
automation.  Due to the fact that the  market  for  processed  control  software
failed to grow at projected  rates, the Company  significantly  restructured the
software  sales staff and  realigned  its product mix.  The Company  reduced its
software  sales force and research and  development  staff devoted to industrial
automation and hired a new software  sales manager with  extensive  knowledge of
the industry.  The Company also changed its marketing  strategy  associated with
this  industrial  automation  to focus on  selling  I/O  systems  based upon the
Company's software and hardware. The Company has also expanded the VMIC hardware
platforms supported by the software to include systems based upon PCI, CPCI, VME
and a new line of  low-cost  I/O  products.  The Company is  continuing  to make
investments  in the industrial  automation at reduced levels  compared to fiscal
year 1999 levels.  The investments are primarily  associated with  modifications
and  enhancement  to the  software  product  to make it more  acceptable  to the
industrial automation market. There are no assurances that these changes will be
successful and the Company may have to take additional  write-offs in the future
should sales of systems not be  sufficient  to amortize the cost of the software
development.  The  write-down  is based on  management's  estimates of the gross
future sales from the existing software  products marketed by the Company.  This
takes into  consideration  no  additional  development  costs being  incurred to
increase the marketability of the products.  See Notes to Financial  Statements-
Significant Fourth Quarter Event.


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.

                                       33

<PAGE>



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

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



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

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



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

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


The Company has  increased its debt level and working  capital  requirements.The
Company Has Increased Its Debt
Level and Working Capital Requirements
     Traditionally,  the Company has utilized  long-term  liabilities as a major
financing source.  Long-term debt of the Company rose from $200 thousand in 1986
to  approximately   $6.4  million  as  of  September  30,  1999.  The  Company's
utilization  of long-term  debt is somewhat  higher than the average  company in
this industry.  A primary reason for the increase in long-term debt was the need
for the Company to manage its growth.  The Company  believes its current revenue
level will be sufficient to service its long-term debt. However, if the revenues
and profits of the Company substantially decrease, it will be more difficult for
the Company to service its long-term  debt,  meet its current  obligations,  and
continue  with its current  business  plan. As of September 30, 1999 the Company
had sufficient current assets to liquidate all of its current liabilities.


The  Company's  products  may become  obsolete  and the Company may be unable to
     respond  to  future  market  needs.  Most  of the  Company's  products  are
     developed to meet certain industry standards. These standards continue
to develop and are subject to change. Elimination or obsolescence of all or some
of  these  standards  could  affect  the  design,  manufacture,  and sale of the
Company's  products  and  require  costly  redesign  to  meet  new  or  emerging
standards.

     In general, technology in the computer industry, and the computer bus board
industry   specifically,   is  subject  to  rapid   technological   change.  The
introduction of new technology and products by others could adversely affect the

                                       34

<PAGE>



Company's business. There is no assurance that future advances in technology may
not make the Company's  existing  product line obsolete,  resulting in increased
competition,  and requiring the Company to undertake  costly  redesign  efforts.
There can be no  assurance  that the  Company  will be able to  incorporate  new
technology   into  its  product  lines  or  redesign  its  products  to  compete
effectively.

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



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

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

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



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

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


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

                                       35

<PAGE>



non-infringing intellectual property or acquiring licenses could have a material
adverse  affect on the  Company's  business,  financial  condition or results of
operations.


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

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



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

     The Company,  in fiscal year 1996,  began to capitalize  development  costs
associated with its IOWorks software and certain other products.  The Company is
required to amortize its capitalized  software costs against future sales of the
software products over a five-year period after the release of the products. The
Company  accounts  for  these  software  development  costs in  accordance  with
Statement of Financial  Accounting Standards No. 86, Accounting for the Costs of
Computer  Software  to be  Sold,  Leased  or  Otherwise  Marketed.  The  Company
capitalizes  certain costs incurred in the production of computer  software once
technological  feasibility  of the product to be marketed has been  established.
Capitalization  of these costs ceases when the product is  considered  available
for general release to customers. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software development
costs  require  considerable  judgment  by  VMIC.  If  software  sales  are  not
sufficient  to amortize  the  capitalized  costs over the  five-year  period the
Company is required to expense those  capitalized  costs.  In 1999,  the Company
recorded a $5.3 million  write-down of certain  software  development  costs and
purchased  product  and  software  costs.  See  Notes  to  Financial   Statement
Significant Fourth-Quarter Event.



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

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

                                       36

<PAGE>





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

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



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

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

Lack of a Public Market and Certain Transfer Restrictions.

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


Control by Existing Shareholders.

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



The Company Does Not Anticipate Paying Dividends.

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

                                       37

<PAGE>



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



The Company may be subject to product liability claims.

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



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

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

The Company may not be able to identify,  successfully remedy or assess all year
2000 related date-handling problems that could directly or indirectly impact its
business or financial condition.

     The  Company  is aware  that  many  computer  programs  were  designed  and
developed  without  considering the upcoming change in the century,  which could
lead to failure of computer  applications or create  erroneous  results by or at
the year 2000.  This issue is referred to as the "Year 2000"  problem.  The Year
2000  problem is a broad  business  issue,  whose  impact may extend  beyond the
Company's   computer   hardware  and   software  and  may  affect   utility  and
telecommunication  services as well as disrupt the systems of its  customers and
suppliers.  It is  possible  that the  Company's  currently  installed  computer
systems,  software products or other business systems, or those of its suppliers
or customers, will not always accept input of, store, manipulate or output dates
in the years 1999, 2000, or thereafter  without error or interruption.  VMIC has
conducted a review of its business systems,  including its computer systems,  in
an attempt to identify  ways in which its systems could be affected by Year 2000
problems.  Based on this review, the Company does not expect the Year 2000 issue
to have a material  adverse affect on its systems.  In addition,  the Company is
requesting  assurances from all software  vendors from which it has purchased or
from which it may purchase  software  that the software sold to the Company will
correctly  process date  information.  The Company is querying  its  significant
customers  and  suppliers as to their  progress in  identifying  and  addressing
problems  that their  computer  systems may face in  correctly  processing  date
information as the Year 2000 approaches.  However, there can be no assurance the
Company will  identify  all  date-handling  problems in its business  systems or
those of its

                                       38

<PAGE>



customers and suppliers in advance of their  occurrence or that the Company will
be able to successfully remedy problems that are discovered. The expenses of the
Company's  efforts to identify  and  address  such  problems,  or the expense or
liabilities  to which  the  Company  may  become  subject  as a  result  of such
problems,  could have a material  adverse  affect on the Company's  business and
financial  condition.  See  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations - Year 2000.

Year 2000.

     Many computer programs were designed and developed without  considering the
upcoming  change  in the  century,  which  could  lead to  failure  in  computer
applications  or create  erroneous  results due to those  computer  programs not
recognizing the year 2000. This issue is referred to as the "Year 2000" problem.
Although  the  Company  believes  that  its  Year  2000  compliance  program  is
comprehensive,  the Company may not be able to identify,  successfully remedy or
assess all date-handling problems in its business systems or operations or those
of its customers and suppliers.  As a result, the Year 2000 problem could have a
materially  adverse  affect on the Company's  business,  financial  condition or
results of operations.



Results of Operation

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

     SALES.  The Company's  sales  decreased  8.6% from $31.0 million in 1998 to
$28.4 million in 1999.  International  sales  decreased 14% from $7.4 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  cause  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.  Since that time,  the
Company believes that the downturn has stabilized after a series of cost-cutting
measures  and the  Company's  shift to new  markets  and  products.  The Company
recently  negotiated  several OEM product  sales  which,  the Company  believes,
should  have a  positive  impact  on 2000  sales of  singleboard  computers  and
Reflective  Memory networks.  Hardware sales accounted for  approximately  $27.6
million  in 1999  compared  to $30.3  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%  of  sales,  while  sales of  single-board  PC  products
accounted  for  approximately  $4.9  million  or  17.3% of  sales.  Sales of I/O
products  accounted  for  approximately  $12.1  million or 42.6% of sales  while
miscellaneous  other products  accounted for approximately $4.6 million or 16.2%
of sales.

     GROSS MARGINS. The Company's gross margin, which represents sales less cost
of goods sold as a  percentage  of sales,  decreased  from 65% in 1998 to 57% 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.


                                       39

<PAGE>



     SELLING,  GENERAL,  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general,  and
administrative expenses, including warranty and software amortization, decreased
7.5% from $13.3  million in 1998 to $12.3  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.

     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 %
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% in 1998 to 19.7% 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.

     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.


     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
carry-forwards  for  federal  income tax  purposes  available  to reduce  future
federal income taxes,  if any. These  carry-forwards  expire in varying  amounts
between 2002 and 2009. The Company also has approximately $67,000 in minimum tax
carry-forwards  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  carry-forwards,  respectively,  which expire in
2018.



                                       40

<PAGE>



Results of Operation

Year Ended  September 30, 1998 Compared to Year Ended  September 30, 1997 ? Year
Ended  September 30, 1998 Compared to Year Ended  September 30, 1997 [update for
last quarter]

     SALES.  The  Company's  sales  increased  11% from $27.9 million in 1997 to
$31.0  million in 1998.  Sales of IOWorks and the  Company's  Reflective  Memory
products  accounted for approximately $9.5 million or 30% of the Company's total
sales in fiscal year 1998 compared to $7.9 million or 28% of sales in 1997.  The
Company's  international  sales increased 7% in 1998 to $5.7 million,  from $5.3
million in 1997. Sales for 1998 did not meet  expectations  because of delays in
orders from several major customers.  Equipment manufacturers whose products are
marketed in Asian countries have been experiencing  repercussions from the Asian
financial  market  problems and have been slow to place orders.  Delayed  orders
negatively  impacted the sales of VMIC's quad  redundant  Reflective  Memory for
Naval surface applications, and several Industrial Automation products. The week
fiber-optic cable market has also caused a delay in orders for VMIC equipment.

While the IOWorks  software  product has been well received in the  marketplace,
software  sales of IOWorks  have not met  expectations  because  of the  delayed
time-to-market  of  certain  software  components  that  make the  product  more
attractive to users of non-VMIC hardware.  The Company has recently enhanced the
IOWorks product to appeal to a broader market, and has redesigned its multimedia
presentations and  demonstration  compact disks to support its marketing to this
larger, more general market.

     GROSS MARGINS.  The Company's average gross margin,  which represents sales
less cost of goods sold as a percentage of sales,  increased  from 64.9% in 1997
to 65.4% in 1998.  During this period the gross  margin for  hardware  increased
from 64.5% to 66.3%,  while  software  margins  decreased  from 83% to 27.2. The
Company  expects  its  average  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.  For  fiscal  year 1998 the shift in  product  mix did not  impact the
Company's average gross margin. The decease in software margins was attributable
to increased  amortization  associated with the Company's  capitalized  software
product  investment.  VMIC believes  that software  margins will increase as the
Company gains market acceptance for its software products.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  General  and
Administrative expenses (including warranty and software amortization) increased
21% from $11.0  million  in 1997 to $13.3  million in 1998.  This  increase  was
partially  attributable  to  staffing  increases  in  the  Sales  and  Marketing
department  which accounted for $0.3 million of the increase,  and the Company's
recent  publication and worldwide  distribution of more than 5,000 copies of its
new  450-page  product  catalog  at a cost of $0.4  million.  The  company  also
released a new software only catalog.  Additional  promotional  expenditures  of
$0.2 million,  including an enhanced Internet site, have  approximately  doubled
the number of  qualified  sales leads  generated  each week.  The  Company  also
incurred expenses  associated with the termination of certain  independent sales
representatives,  and their  replacement  with Company sales people in locations
throughout the United States.

     WARRANTY EXPENSE.  The Company's warranty expenses decreased to $501,000 in
1998,  from $645,000 in 1997.  This reduction was partially  attributable to the
Company's  use of new suppliers for certain  components  used in its  Reflective
Memory  products  and the  improvements  made  to its  Pentium  processor  based
products.

     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, 1998 was $471,598 compared to $234,124 as of September 30, 1997. Unamortized
software costs  increased to $3,543,030 as of September 30, 1998 from $1,819,560
as of September 30 1997.

     RESEARCH AND DEVELOPMENT.  Research and Development  expenses increased 17%
from $5.3  million in 1997 to $6.2 million in 1998.  As a  percentage  of sales,
research and development expenses increased from 19%

                                       41

<PAGE>



in 1997 to 20% in 1998. The Company has committed  substantial  resources to the
continued development of its IOWorks software,  Reflective Memory products,  and
embedded PC boards.

     NET INCOME. Net Income after taxes decreased to $204,723 in 1998,  compared
to $934,229 in 1997. Profits decreased despite higher sales because of increased
promotional,  advertising,  and  staffing  expenses and the sale of lower margin
products.  The  Company  has  recently  reduced  its  operating  expenses  as  a
percentage of sales, and plans to implement significant cost controls in 1999.


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, 1999,  the  Company's
variable  line of credit for  working  capital was $8.0  million,  of which $4.1
million was used. The Company's $2 million equipment line of credit availability
was $1.0 million.

Working  Capital was $4.7  million at  September  30,  1998 and $1.6  million at
September 30, 1999  respectively.  Included in working capital are cash and cash
equivalents  of $0.53 million at September 30, 1998 compared to $0.58 million at
September  30,  1999.  This  decrease  occurred  as a result of the  changes  in
operating  assets  and  liabilities.  Operating  activities  for the year  ended
September  30,  1999  provided  $78  thousand in cash.  Cash used for  investing
activities was $4.6 million for the year ended September 30, 1999, of which $4.1
million was used for capital expenditures. Cash provided by financing activities
was $3.2  million and $4.5  million for the years ended  September  30, 1998 and
1999, respectively.

Inventory  turnover for the year ended September 30, 1999 was  approximately 179
days compared to approximately  192 days in 1998. This decrease was attributable
to improved inventory level management. At September 30, 1999, the Company had a
reserve of $635,215 for  possible  inventory  obsolescence,  the Company did not
have such a reserve at September 30, 1998.  Accounts  receivable  from customers
were outstanding on average  approximately 56 days for the year ended September,
30 1998, compared to approximately 49 days in 1999.

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.  However,
management is examining several options to raise working capital to pay down its
revolving line of credit.


YEAR 2000 READINESS DISCLOSURE

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

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

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


                                       42

<PAGE>



     INTERNAL  INFORMATION  SYSTEMS.  The Company's internal information systems
utilize hardware and software from several commercial suppliers. The Company has
investigated  its internal  information  systems for Year 2000  compliance,  and
potential  Year 2000 problems have a been  identified  and corrected on critical
systems to ensure that the Company's operations will be Year 2000 compliant. The
Company's most critical  system,  MRPII, has been upgraded and is certified Year
2000 compliant.

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

COST FOR YEAR 2000 COMPLIANCE.  The Company believes that the total cost of Year
2000  compliance  activity  will not be  material to the  Company's  operations,
liquidity and capital resources. VMIC estimates that the total cost for its Year
2000 compliance will be approximately  $75,000,  which represents 1,136 hours of
internal  analysis,  modification  and  testing and  $15,000  for  hardware  and
software  upgrades.  As of September  30, 1999,  the Company had  completed  its
software and hardware  upgrades  and  approximately  1,050 of hours of Year 2000
analysis, modification and testing at a cost of approximately $69,300.

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

                                       43

<PAGE>



ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


                                       44

<PAGE>





ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                        Report of Independent Accountants


To the Board of Directors
VMIC, Inc.

In our  opinion,  the  accompanying  balance  sheets and related  statements  of
income,  changes in stockholders'  equity, and cash flows present fairly, in all
material  respects,  the  financial  position of VMIC,  Inc. (the Company) as of
September  30,  1999 and 1998,  and the results of its  operations  and its cash
flows for each of the three years in the period ended  September  30,  1999,  in
conformity with generally accepted  accounting  principles in the United States.
These financial  statements are the responsibility of the Company's  management;
our  responsibility  is to express an opinion based on our audits.  We conducted
our audits of these  statements in accordance with generally  accepted  auditing
standards in the United  States which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. 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 the opinion expressed above.


PricewaterhouseCoopers LLP


January 6, 2000

                                       45

<PAGE>
<TABLE>
<CAPTION>


VMIC, Inc.
Balance Sheets
September 30, 1999 and 1998
---------------------------



                                                                                         1999               1998

                               ASSETS
<S>                                                                             <C>                       <C>

Current assets:
    Cash and cash equivalents                                                        $  582,883          $  527,972
    Accounts receivable, net of allowance for doubtful accounts of
      $250,382 and $384,383 in 1999 and 1998, respectively                            5,080,529           4,366,330
    Inventories                                                                       4,658,243           4,943,239
    Prepaid expenses                                                                    110,483             250,733
    Income tax receivable                                                               106,553             573,771
    Deferred income taxes                                                                                   954,929
                                                                               -----------------  ------------------

        Total current assets                                                         10,538,691          11,616,974

Property, plant, and equipment, net                                                   8,165,822           9,033,922
Purchased product and software costs, net                                               728,630             967,852
Software development costs                                                              836,363           3,543,030
                                                                               -----------------  ------------------

                                                                                    $20,269,506         $25,161,778
                                                                               =================  ==================

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                                $ 1,977,284         $ 2,367,397
    Current portion of notes, mortgages, and capital leases                           5,753,110           2,104,777
    Accrued liabilities                                                               2,201,069           2,421,180
                                                                               -----------------  ------------------

        Total current liabilities                                                     9,931,463           6,893,354
Notes, mortgages, and capital leases, less current portion above                      6,447,808           5,713,086
Deferred income taxes                                                                                       808,101
                                                                               -----------------  ------------------

        Total liabilities                                                            16,379,271          13,414,541

Commitments and contingencies (Note 10)

Stockholders' equity:
    Common stock, par value $0.10 (10,000,000 shares authorized;
      4,580,016 and 4,462,917 shares issued and
      outstanding in 1999 and 1998, respectively)                                       458,002             446,292
    Additional paid-in capital                                                        6,810,314           6,432,799
    Retained earnings (accumulated deficit)                                         (3,378,081)           4,868,146
                                                                               -----------------  ------------------

        Total stockholders' equity                                                    3,890,235          11,747,237
                                                                               -----------------  ------------------

                                                                                    $20,269,506         $25,161,778
                                                                               ==================  =================


</TABLE>

The  accompanying  notes  are  an  integral  part  of  these
financial statements.
                                       46



<PAGE>

<TABLE>
<CAPTION>

VMIC, Inc.
Statements of Operations
For the Years Ended September 30, 1999, 1998, and 1997
--------------------------------------------------------

                                                                         1999             1998              1997
<S>                                                                 <C>              <C>               <C>

Sales:
    Hardware sales                                                     $ 27,577,162     $ 30,329,726     $ 27,337,479
    Software sales                                                          803,899          719,547          563,649
                                                                    ---------------- ----------------  ---------------

        Total sales                                                      28,381,061       31,049,273       27,901,128
                                                                    ---------------- ----------------  ---------------

Cost and expenses:
    Cost of products sold                                                12,285,219       10,759,343        9,793,061
    Research and development expense                                      5,601,454        6,231,572        5,307,207
    Selling, general, and administrative expense                         12,418,854       13,301,730       10,994,853
    Writedown of property and equipment (Note 2)                            154,662
    Writedown of capitalized software costs (Note 15)                     5,257,335
                                                                    ---------------- ----------------  ---------------

                                                                         35,717,524       30,292,645       26,095,121
                                                                    ---------------- ----------------  ---------------

        Operating income (loss)                                         (7,336,463)          756,628        1,806,007

Other income (expense):
    Interest income                                                          34,957           78,222           25,497
    Interest expense                                                      (821,212)        (557,849)        (586,030)
    Gain on disposal of property, plant, and equipment                       39,957            3,322
                                                                    ---------------- ----------------  ---------------

                                                                          (746,298)        (476,305)        (560,533)
                                                                    ---------------- ----------------  ---------------

        Income (loss) before income taxes                               (8,082,761)          280,323        1,245,474

Provision for income taxes                                                (163,466)         (75,600)        (311,245)
                                                                    ---------------- ----------------  ---------------

        Net income (loss)                                             $ (8,246,227)       $  204,723       $  934,229
                                                                    ================ ================  ===============

Net income (loss) per common and common equivalent share:
    Basic                                                                   $(1.82)             $.05             $.23
    Diluted                                                                 $(1.82)             $.04             $.22

Weighted average common and common equivalent
    shares outstanding:
      Basic                                                               4,534,189        4,405,808        4,054,764
                                                                    ================ ================  ===============

      Diluted                                                             4,534,189        4,554,448        4,189,113
                                                                    ================ ================  ===============
</TABLE>

The  accompanying  notes  are  an  integral  part  of  these
financial statements.
                                       47




<PAGE>

<TABLE>
<CAPTION>

VMIC, Inc.
Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1999, 1998, and 1997
-------------------------------------------------------

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


Balance, September 30, 1996              3,989,684      $398,968     $2,565,101       $ 3,729,194     $  6,693,263

Issuance of common stock                   177,378        17,739      1,669,532                          1,687,271

Exercise of stock options                   58,040         5,804        121,726                            127,530

Purchase of common shares for
    constructive retirement               (10,567)       (1,057)      (104,367)                          (105,424)

Income tax benefit from exercise
    of nonqualified stock options                                        60,217                             60,217

Net income                                                                                934,229          934,229
                                    ---------------  ------------  -------------  ----------------  ---------------

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 shares 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
                                    ===============  ============  =============  ================  ===============



</TABLE>
The  accompanying  notes  are  an  integral  part  of  these
financial statements.
                                       48

<PAGE>


<TABLE>
<CAPTION>

VMIC, Inc.
Statements of Cash Flows
For the Years Ended September 30, 1999, 1998, and 1997
-------------------------------------------------------

                                                                       1999             1998             1997
<S>                                                                    <C>              <C>              <C>


Cash flows from operating activities:
    Net income (loss)                                               $(8,246,227)       $  204,723       $  934,229
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
        Depreciation and amortization                                  3,016,394        2,579,073        2,014,322
        Provision for losses on accounts receivable                    (134,001)           83,921           50,955
        Reserve for inventory obsolescence                               635,215
        Stock issued in lieu of cash compensation                        220,991           71,680          116,110
        Gain on disposal of property and equipment                      (39,957)          (3,322)
        Writedown of capitalized software costs                        5,257,335           67,479
        Writedown of property and equipment                              154,662
        Change in operating assets and liabilities:
           Accounts receivable                                         (580,198)        (509,119)      (1,013,504)
           Inventories                                                 (350,219)        (811,003)        (844,236)
           Prepaid expenses                                              140,250        (159,517)           40,422
           Income tax receivable                                         467,218        (295,188)        (197,066)
           Deferred income taxes, net                                    146,828           54,441           53,928
           Accounts payable                                            (390,113)        1,206,001        (540,483)
           Accrued liabilities                                         (220,111)          244,321          385,233
                                                                   --------------  ---------------  ---------------
               Total adjustments                                       8,324,294        2,528,767           65,681
                                                                   --------------  ---------------  ---------------
               Net cash provided by operating activities                  78,067        2,733,490          999,910
                                                                   --------------  ---------------  ---------------

Cash flows from investing activities:
    Purchases of plant and equipment                                 (1,441,990)      (3,304,007)      (1,268,476)
    Purchased product and software costs                               (456,283)        (288,150)        (332,471)
    Capitalized software development costs                           (2,755,940)      (2,195,068)      (1,468,726)
    Proceeds from dispositions of plant and equipment                     79,768           10,570
                                                                   --------------  ---------------  ---------------
               Net cash used in investing activities                 (4,574,445)      (5,776,655)      (3,069,673)
                                                                   --------------  ---------------  ---------------

Cash flows from financing activities:
    Proceeds from issuance of long-term debt                           1,671,358        5,120,581        2,080,202
    Proceeds from line of credit                                       4,100,000                         1,750,000
    Principal payments on long-term debt                             (1,388,303)      (3,562,293)      (1,914,167)
    Repayment of line of credit                                                         (400,000)      (1,350,000)
    Proceeds from issuance of common stock                               395,524        1,882,398        1,698,691
    Purchase of common stock for constructive retirement               (243,929)                         (105,424)
    Income tax benefit from exercise of nonqualified stock options        16,639          191,350           60,217
                                                                   --------------  ---------------  ---------------
               Net cash provided by financing activities               4,551,289        3,232,036        2,219,519
                                                                   --------------  ---------------  ---------------
               Net increase in cash and
                  cash equivalents                                        54,911          188,871          149,756
Cash and cash equivalents, beginning of year                             527,972          339,101          189,345
                                                                   --------------  ---------------  ---------------

Cash and cash equivalents, end of year                                $  582,883       $  527,972       $  339,101
                                                                   ==============  ===============  ===============

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest                            $  793,612       $  558,150       $  584,671
                                                                   ==============  ===============  ===============

    Cash paid during the year for income taxes                          $      -       $  125,000       $  381,600
                                                                   ==============  ===============  ===============

</TABLE>

The  accompanying  notes  are  an  integral  part  of  these
financial statements.
                                       49

<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
       (IO  Works)  to  complete  systems  for  industrial  control,   test  and
       measurement,  telecommunications,  simulation  and training,  and Storage
       Area Networks (SANs). The Company provides a synergistic  approach to the
       future by offering 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 debt
       instruments purchased with original maturities of three months or less to
       be cash equivalents.

       Inventories - Inventories are valued at the lower of standard cost, which
       approximates first-in, first-out cost, or market.

       Financial Instruments - The carrying amount reported in the balance sheet
       for cash and cash equivalents,  accounts receivable, and accounts payable
       approximates  fair value because of the immediate or short-term  maturity
       of these financial instruments.  The carrying amounts reported for notes,
       mortgages,   and  capital  leases  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.

                                       50

<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  $10,808,  $30,790,  and $0 was
       capitalized during 1999, 1998, and 1997, 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,  1999,  1998,  and 1997 was
       $267,702, $250,542, and $172,447, 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, 1999 and 1998 was $1,313,022
       and  $705,722,  respectively.  Amortization  expense  for the years ended
       September 30, 1999, 1998, and 1997 was $607,300,  $471,598, and $234,124,
       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 1998 or
       1997.

       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 and  $630,000 at  September  30, 1999 and
       1998,  respectively,  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 balance sheets.

                                       51

<PAGE>

       Revenue  Recognition  - The Company  records  sales upon  shipment of the
       related  products,  net of  any  discounts  and  provision  for  warranty
       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 $848,000, $907,000 and $849,000
       for the years ended September 30, 1999, 1998, and 1997, respectively.

       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.

       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.

       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 June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
       No. 130, Reporting Comprehensive Income, which requires the reporting and
       display  of  comprehensive  income  and  its  components  in an  entity's
       financial  statements.  The Company  adopted SFAS No. 130 during 1999 and
       for the three years ending September 30, 1999, 1998, and 1997, there were
       no differences between net income and comprehensive income.

                                       52
<PAGE>
        Reclassifications - Certain reclassifications have been made to the 1998
       and 1997 amounts in order to conform to the 1999 presentation.

3.       Inventories

       At September 30, 1999 and 1998, inventories consist of the following:
<TABLE>
<CAPTION>


                                                             1999                 1998

   <S>                                              <C>                      <C>

   Raw materials                                           $2,511,460        $2,388,844
   Work in process                                          1,232,573           829,125
   Finished goods                                           1,549,425         1,725,270
                                                   ----------------------  ----------------

                                                            5,293,458         4,943,239
  Less reserve for inventory obsolescence                   (635,215)
                                                   ----------------------  ----------------

                                                            $4,658,243        $4,943,239
                                                   ======================  ================
</TABLE>


4.       Property, Plant, and Equipment

       Property, plant, and equipment consists of the following at September 30,
1999 and 1998:

                                              1999              1998

       Land                                   $ 676,313         $ 676,313
       Buildings                              5,747,420         4,664,693
       Machinery and equipment                8,048,088         9,719,590
       Furniture and fixtures                    55,142           115,035
       Automobiles                               67,592           273,579
       Construction in progress                                 1,058,742
                                         ---------------   ---------------

                                             14,594,555        16,507,952
       Less accumulated depreciation          6,428,733         7,474,030
                                         ---------------   ---------------

                                             $8,165,822        $9,033,922
                                         ===============   ===============

                                       53

<PAGE>






  5.  Notes, Mortgages, and Capital Leases

       Notes, mortgages, and capital leases payable at September 30, 1999 and
       1998 consist of the following:
<TABLE>
<CAPTION>

                                                               1999                   1998
          <S>                                         <C>                  <C>

          Short-term obligations:
          Current portion of mortgage payable (1)           $  164,826          $  992,424
          Current portion of note payable (2)                1,488,284           1,112,353
          Line of credit (3)                                 4,100,000
                                                      -----------------   -----------------

                                                           $ 5,753,110         $ 2,104,777
                                                      =================   =================
       Long-term obligations:
          Mortgage payable (1)                             $ 3,425,694         $ 2,510,291
          Note payable (2)                                   3,022,114           3,202,795
                                                      -----------------   -----------------

                                                           $ 6,447,808         $ 5,713,086
                                                      =================   =================
</TABLE>



       (1)  Mortgages  on  buildings  and land with  unpaid  principal  balances
            becoming due through 2004.  Interest  rates ranged from 7.0% to 8.5%
            at September 30, 1999. The mortgages are  collateralized by building
            and  land  with a net  book  value of  approximately  $6,420,000  at
            September 30, 1999.

       (2)  Automobile and equipment  financing payable in monthly  installments
            ranging  from $806 to $70,200  with the final  payment  due in April
            2004;  payments  include interest at rates ranging from 7.5% to 8.3%
            at September 30, 1999.  Automobiles  and  equipment  with a net book
            value of  approximately  $4,243,000  at September  30, 1999 serve as
            collateral.

       (3)  The Company can also borrow  under a  $8,000,000  revolving  line of
            credit with an interest  rate of 7.75% at September  30, 1999.  This
            line of credit is  collateralized  primarily by accounts  receivable
            and inventory of the Company.  The line of credit agreement  expires
            on March 1, 2000.  The Company  had  $4,100,000  and $0  outstanding
            borrowings under this line of credit agreement at September 30, 1999
            and 1998, 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.


                                       54
<PAGE>


       The aggregate maturities of notes and mortgages at September 30, 1999 are
       as follows:

       2000                                    $ 5,753,110
       2001                                      1,718,555
       2002                                      1,065,881
       2003                                      2,669,660
       2004                                        993,712
                                          -----------------

                                               $12,200,918
                                          =================


6.       Stock Options

       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 at September 30, 1999. 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 1999, 1998, and 1997, are as follows:


<TABLE>

<CAPTION>


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


       Options outstanding, October 1, 1996                            463,430     $2.125-$8.00           $4.23
       Options granted                                                 159,176     $8.00-$10.00           $9.76
       Options exercised                                              (58,040)     $2.125-$8.00           $2.20
       Options canceled                                               (20,800)     $4.25-$8.00            $7.50
                                                                  -------------  -----------------   ----------------

       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, October 1, 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
                                                                  =============  =================   ================

</TABLE>


                                       55
<PAGE>
<TABLE>
<CAPTION>


       The  following   table   summarizes   information   about  stock  options
outstanding at September 30, 1999:
                                   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>


             $4.90                    3,000        0.32            $4.90                3,000        $4.90
         $8.00 - $10.00             327,521        4.77            $8.71              124,767        $8.35
             $11.50                  79,096        8.52           $11.50                7,909        $11.50
                            ----------------                                   ---------------

                                    409,617                                           135,676
                            ================                                   ===============
</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
       would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>


                                                                  1999                  1998             1997
       <S>                                                       <C>                   <C>               <C>

       Net (loss) income - as reported                           $(8,246,227)        $ 204,723        $ 934,229
       Net (loss) income - pro forma                             $(8,443,623)         $  9,605        $ 754,430
       Diluted earnings per share - as reported                       $(1.82)            $0.04            $0.22
       Diluted earnings per share - pro forma                         $(1.86)            $0.00            $0.18
</TABLE>

       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>
                                                                  1999                 1998               1997
       <S>                                                 <C>                  <C>               <C>

       Dividend yield                                              0%                   0%                 0%
       Expected life (years)                                        7                    7                  6
       Risk-free interest rate                             4.34% - 7.74%         4.76% - 6.63%     5.87% - 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, 1999 and 1998
       were 26,609 and 362,885,  respectively.  During 1999 and 1998, 24,745 and
       7,033, respectively, shares of the Company's common stock were issued and
       $165,400 and $71,680, respectively, was charged to expense.

                                       56
<PAGE>

7.     Income Taxes

       The  components  of the  provision  for income  taxes for the years ended
       September 30, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>

                                                                          1999           1998             1997
       <S>                                                           <C>             <C>             <C>

       Current:
          Federal                                                            $    -       $ 13,599        $ 223,816
          State                                                                   -          7,560           33,501
                                                                     --------------- --------------  ---------------

             Total current                                                        -         21,159          257,317
          Deferred                                                          163,466         54,441           53,928
                                                                     --------------- --------------  ---------------

             Total provision for income taxes                             $ 163,466       $ 75,600        $ 311,245
                                                                     =============== ==============  ===============
</TABLE>


       Temporary differences which generated deferred tax assets and liabilities
       at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>

                                                                                   1999            1998
<S>                                                                             <C>            <C>

Current deferred tax asset:
    Accounts receivable                                                             $ 90,550       $ 139,224
    Inventory                                                                        278,077         418,702
    Accruals and other                                                               624,132         397,003
                                                                               --------------  --------------

                                                                                     992,759         954,929
    Valuation allowance                                                            (992,759)
                                                                               --------------  --------------

      Net current deferred tax asset                                                  $    -       $ 954,929
                                                                               ==============  ==============

Noncurrent deferred tax asset (liability):
    Property, plant, and equipment                                                 $ 161,179        $ 75,886
    Software development costs                                                     (103,227)     (1,251,307)
    Loss carryforwards                                                             1,980,439         300,183
    Tax credits                                                                       67,137          67,137
                                                                               --------------  --------------

                                                                                   2,105,528       (808,101)
    Valuation allowance                                                          (2,105,528)
                                                                               --------------  --------------

      Net noncurrent deferred tax asset (liability)                                   $    -      $(808,101)
                                                                               ==============  ==============
</TABLE>
                                       57

<PAGE>

       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  not  be  realized.
       Accordingly,  a valuation  allowance has been  established for the entire
       net deferred tax asset.

       During 1999 and 1998, 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   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.

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

<CAPTION>


                                                                          1999           1998             1997
       <S>                                                            <C>            <C>            <C>
       Income tax expense at statutory federal income
          tax rate                                                     $(2,748,009)       $ 95,310        $ 423,461
       Effect of tax credits                                                              (40,488)        (174,366)
       State income taxes - net of federal income tax benefit             (178,671)          7,102           25,830
       Miscellaneous                                                        (8,141)         13,676           36,320
                                                                     --------------- --------------  ---------------

                                                                        (2,934,821)         75,600          311,245
       Valuation allowance                                                3,098,287
                                                                     --------------- --------------  ---------------

             Total provision for income taxes                             $ 163,466       $ 75,600        $ 311,245
                                                                     =============== ==============  ===============
</TABLE>


8.       Employee Benefit Plan

       In April 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

                                       58
<PAGE>

       vesting  after one year and  becomes  100%  vested  after five  years.
       Amounts  expensed  for the  Savings  Plan  amounted  to  approximately
       $109,700,   $110,300,   and   $106,200  in  1999,   1998,   and  1997,
       respectively.

9.     Employee Stock Purchase Plan

       In July 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,
       1999  and  1998 in the  accompanying  balance  sheets,  is  approximately
       $71,200 and $117,500,  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 their 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 at September
       30, 1999 and 1998 is approximately $80,000 and $0, respectively.

                                       59
<PAGE>


 11.   Earnings Per Share

       A summary of the calculation of basic and diluted  earnings per share for
       the years ended September 30, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>

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

                                                                   ----------------  ------------------  ------------
       <S>                                                         <C>               <C>                 <C>
        1999
       Basic EPS:
          Income (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          $.05
       Effect of dilutive securities:
          Stock options                                                          -             148,640             -

       Diluted EPS                                                         204,723           4,554,448          $.04

        1997
       Basic EPS:
          Income available to common stockholders                          934,229           4,054,764          $.23
       Effect of dilutive securities:
          Stock options                                                          -             134,349             -

       Diluted EPS                                                         934,229           4,189,113          $.22

</TABLE>


       Options to purchase 409,617 shares of common stock at prices ranging from
       $0.50 to $11.50 per share were outstanding at September 30, 1999 but were
       not included in the  computation  of diluted net income  (loss) per share
       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  price was greater  than the
       average market price of common shares. The options,  which expire through
       September 2008, were still outstanding at September 30, 1998.  Options to
       purchase 137,961 shares of common stock at $10 per share were outstanding
       during 1997 but are not included in the  computation  of 1997 diluted EPS
       because the options'  exercise  price was greater than the average market
       price of common shares.

12.      Related Parties

       During 1999,  the Company  entered into an agreement with a member of the
       board of  directors  to  provide  certain  consulting  services  totaling
       $150,000.  The Company paid consulting fees of $15,000 in 1999.  Included
       in accrued  liabilities  at September  30, 1999 is $135,000 of consulting
       fees to be paid during 2000.

                                       60
<PAGE>

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, 1999, 1998, and 1997 are summarized as follows:
<TABLE>
<CAPTION>


                                                                  1999                 1998               1997
                                                                                  (In Thousands)
                                                           ---------------------------------------------------------
      <S>                                                  <C>                   <C>                 <C>

       Total sales:
          U.S.                                                      $  21,889            $  25,355        $  22,641
          International                                                 6,492                5,694            5,260
                                                           -------------------   ------------------  ---------------

                                                                    $  28,381            $  31,049        $  27,901
                                                           ===================   ==================  ===============

       Gross profit:
          U.S.                                                      $  12,779            $  16,938        $  14,972
          International                                                 3,317                3,352            3,136
                                                           -------------------   ------------------  ---------------

                                                                    $  16,096            $  20,290        $  18,108
                                                           ===================   ==================  ===============
</TABLE>

       The Company's identifiable assets as of September 30, 1999, 1998, and
       1997 relate to the U.S. segment only.

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.

                                       61
<PAGE>

<TABLE>
<CAPTION>




                                                                                 Three
                                                               Months Ended
                                                ----------------------------------------------------------------
                                                  December 31,    March 31,       June 30,       September 30,
                                                     1997            1998           1998             1998
                                                ---------------  -------------  -------------   ----------------
<S>                                             <C>              <C>           <C>              <C>

(In Thousands, Except for Per Share Amounts)

Net sales                                           $    7,584      $   7,689     $   7,762      $    8,014
Gross profit                                        $    5,054      $   5,002     $   5,116      $    5,118
Operating income (loss)                             $      478      $     400     $     269      $     (390)
Net income (loss)                                   $      242      $     196     $     109      $     (342)
Net income (loss) per share (1):
    Basic                                                $0.06          $0.04         $0.03          $(0.08)
    Diluted                                              $0.06          $0.04         $0.02           (0.08)



                                                            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     $    7,888
Gross profit                                        $    4,854      $   4,211      $   3,748     $    3,283
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)

</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 .

15.      Significant Fourth-Quarter Event

       In the  fourth  quarter  of  1999,  the  Company  recorded  a  charge  of
       approximately  $5.3  million  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.




                                       62

<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 19, 2000.





                                       63

<PAGE>





                                    PART IV

         a.       ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



     (a) (1) 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 45 through 62 of this Form 10-K Annual
     Report:


Consolidated Balance Sheets at September 30, 1999, 1997, 1996

Consolidated Statements of Income for the three years ended September 30, 1999

Consolidated Statements of Stockholders' Equity for the three years ended
September 30, 1999

Consolidated Statements of Cash Flows for the three years ended
September 30, 1999

Notes to Consolidated Financial Statements

Report of PricewaterhouseCoopers LLP, Independent Auditors

Selected Quarterly Financial Data

          (2) All financial statement schedules are omitted because they are not
          applicable  or the  required  information  is shown  in the  financial
          statements or notes thereto.

          (3) 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*



                                       64
<PAGE>

(a) Reports on Form 8-K. No reports on Form 8-K were filed  during the
    fourth quarter of the fiscal year ended September 30, 1999.

(b) Exhibits.  The response to this portion of Item 14 is submitted as
    a separate section of this report.

(c)  Financial  Statement  Schedules.  The response to this portion of
     Item 14 is submitted as a separate section of this report.

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

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




                                       65
<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, 1999.

                  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, 1999
Carroll E. Williams

Mary W. Williams
___________________    Director                          December 28, 1999
Mary W. Williams

Arthur Faulkner
___________________    Director                          December 28, 1999
Arthur Faulkner

Alfred F. Catelyn
___________________     Director, Vice President         December 28, 1999
Alfred F. Catelyn       Sales and Marketing

Ernest Potter
___________________     Director                          December 28, 1999
Ernest Potter

R. Gary Saliba
___________________     Director                          December 28, 1999
R. Gary Saliba

Jim Caudle, Sr.
___________________     Director                          December 28, 1999
Jim Caudle, Sr.

Gordon Hubbert
___________________     Vice President and Principal      December 28, 1999
Gordon Hubbert          Financial and Accounting Officer




                                      66