VMIC INC, 10-12G/A, 1999-07-28

VMIC INC
10-12G/A, 1999-07-28
COMPUTER & OFFICE EQUIPMENT

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As filed with the Securities and Exchange Commission on July 28,1999
Registration No. 000-25309

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------

FORM 10
AMENDMENT No.2

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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VMIC, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 63-0917261
(State or other jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)

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

12090 S. MEMORIAL PARKWAY HUNTSVILLE ALABAMA 35803-3308
(Address of Principal Executive Offices, Including Zip Code)

(256) 880-0444
(Registrant's Telephone Number, Including Area Code)

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

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Title of Each Class to be so Registered

COMMON STOCK, $0.10 PAR VALUE PER SHARE

<PAGE>

TABLE OF CONTENTS

Registration Statement Summary..........................................3
Risk Factors............................................................6
Capitalization..........................................................11
Dividends...............................................................11
Selected Financial Data.................................................12
Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................12
Business................................................................18
Management..............................................................29
Certain Transactions....................................................33
Principal Stockholders..................................................34
Description of Capital Stock............................................34
Legal Matters...........................................................35
Independent Accountants.................................................35
Additional Information..................................................35
Index to Financial Statements...........................................36

<PAGE>
REGISTRATION STATEMENT SUMMARY

This summary highlights information contained elsewhere in this
Registration Statement. Please carefully consider and evaluate all of the
information provided in this Registration Statement, including the risk factors
listed and described under "RISK FACTORS," and the financial statements and the
notes to those statements. In addition to historical information, this
Registration Statement includes forward-looking statements and information that
are based on our beliefs, plans, expectations and assumptions and on information
currently available to us. The words "may," "should," "expect," "anticipate,"
"intend," "plan," "continue," "believe," "seek," "estimate," and similar
expressions used in this Registration Statement that do not relate to historical
facts are intended to identify forward-looking statements. The forward-looking
statements in this Registration Statement are not guarantees of future
performance and involve certain risks, uncertainties and assumptions, including
but not limited to the risk factors described under "RISK FACTORS." The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "RISK FACTORS." Many of such
factors are beyond the Company's ability to control or predict. As a result,
VMIC's future actions, financial condition, results of operations and stock
price could differ materially from those expressed in any forward-looking
statements made by the Company. You should not put undue reliance on
forward-looking statements. We do not intend to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. As used in this Registration Statement the "Company", "we,"
"us," "our" or "VMIC" means VMIC, Inc. VMIC, Inc. was formally known as VME
Microsystems International Corporation. Trade names and trademarks of other
companies appearing in this Registration Statement are the property of their
respective holders.

DATE OF INITIAL REGISTRATION STATEMENT FILING

The Company's initial Registration Statement on Form 10 was filed January 28,
1999. The Registration Statement included business and financial information as
of September 30, 1998. Amendment 1, and Amendment 2 to the Company's
Registration Statement do not present updated business or financial information.
The Company's business and financial results for the first and second quarters
of fiscal year 1999, ending December 31, 1998, and March 31,1999, respectively,
have been filed separately with the Securities and Exchange Commission on Form
10-Q.
QUESTIONS AND ANSWERS CONCERNING
THE REGISTRATION OF VMIC, INC. COMMON SHARES

Q: Why must VMIC become a reporting Company and register its Common Stock
under the Securities Exchange Act of 1934?

A: As of September 30, 1998 VMIC has over 500 Common Stock shareholders and is
valued at over $10 million, therefore it must register these shares with
the Securities Exchange Commission and become a reporting company.

Q: Will the value of the Company's Common Stock be affected?

A: The Company believes that the registration of VMIC's Common Stock will not
materially affect the value of VMIC's Common Stock.

Q: How does this registration process benefit owners of the Company's Common
Stock?

A: As a reporting company, VMIC will make regular public disclosures to the
SEC about its financial condition and business activities. Owners of the
Company's Common Stock will be able to use this information to evaluate
their investment.

Q: Will the Company's Common Stock be listed on a stock exchange?

A: Initially the Company's Common Stock will not be listed on a stock
exchange.

WHO CAN HELP ANSWER YOUR QUESTIONS

Faye Robinson, Director of Human Resources
12090 S. Memorial Parkway
Huntsville Alabama 35803-3308
256-880-0444

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THE COMPANY

VMIC, INC.

VMIC is a leading independent designer and manufacturer of embedded
computer solutions based upon a wide variety of open standard bus designs such
as VME, CPCI, PCI, PMC, Multibus, ISA, and special custom buses.An embedded
computer is a single or multiple circuit board designed for a specific
computational purpose such as the monitoring or control of an external process
or machine, and embedded within a larger device. The Company's products are used
by original equipment manufacturers ("OEMs"), systems integrators and end-users
in various industries; including manufacturing automation, Telecommunications,
Simulation and Training, environmental monitoring, and Test and Measurement.
Unlike general purpose computers, embedded computer solutions are i)
incorporated into systems and equipment to provide a single or a limited number
of critical system control functions; ii) generally integrated into larger
automated systems; and iii) often have extended product life cycles. The
Company's embedded computers are based upon the Intel x86 and Pentium
architecture and are typically capable of running personal computer ("PC")
compatible operating systems and application software.

Recently the Company introduced its IOWorks suite of PC-based control
software modules that run on standard PC platforms using the Windows NT
operating system. IOWorks modules 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. The Company's
IOWorks software is designed for compliance with open industry standards, and
the software modules can be mixed and matched to provide solutions for a variety
of industrial applications. The Data Acquisition and control market represents
the largest market for VMIC's products.

The Company is also involved in networking systems of dissimilar buses using
adapters, high-performance networks, and synergistic software. The Company's
family of networking products is based on a technology known in the computer
industry as "Reflective Memory." VMIC's connectivity products allow low
maintenance, high-speed communication between PC computers, workstations,
computer mainframes and embedded computers manufactured by a wide variety of
companies.

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

VMIC continues to invest heavily in new and enhanced technology, including
software, and has focused its attention on highly vertical markets to support
faster growth, more consistent profitability, and enhanced shareshareholder
value. The Company's business strategy consists of these key elements:

Maintain the Company's leadership position in its core board-level
products and systems markets.

Further develop markets for new PC based control software such as
IOWorks.

Maintain the Company's philosophy and reputation as a company dedicated
to customer support and relations.

Apply the Company's technology and industry knowledge to create new
solutions for existing and new customers.

Focus on PC single-board computers and related software for multiple
markets.

Focus on the communications industry with the Company's Reflective
Memory product line and PC single board computer product line.

Expand the Company's new business of offering software and complimentary
hardware products for the Industrial Automation and Test and Measurement
markets.

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WE ARE PROVIDING THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY
TO HIGHLIGHT SELECTED FINANCIAL INFORMATION FOR YOUR BENEFIT. WE 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."

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION> VMIC, INC.
YEARS ENDED SEPTEMBER 30
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------

STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 18,745 $ 23,104 $ 23,791 $ 27,901 $ 31,049
Gross profit 12,275 15,546 15,495 18,108 20,290
Selling, general and administrative expenses 7,175 8,328 9,661 10,995 13,302
Research and development 3,684 5,105 5,335 5,307 6,231
Income from operations 1,416 2,113 499 1,806 757

Net income $ 791 $ 1,455 $ 41 $ 934 $ 205

PER SHARE DATA:

Diluted earnings per share $ 0.21 $ 0.37 $ 0.01 $ 0.22 $ 0.04

Weighted average common share outstanding 3,802,194 3,901,278 4,047,989 4,189,113 4,554,448

BALANCE SHEET DATA:
Working capital $ 2,906 3,463 2,544 4,693 4,724
Total assets 10,173 13,511 16,410 19,707 25,162
Long-term debt 2,784 3,507 5,078 5,395 5,713
Total stockholders' net investment 4,674 6,365 6,693 9,397 11,747
</TABLE>

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RISK FACTORS

THE COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN ITS CURRENT OR FUTURE
MARKETS.

The standard bus embedded computer industry is highly competitive and
fragmented, and the Company faces significant competition in each of its product
markets. The Company's competitors differ depending on product type, geographic
market, and application type. Several of VMIC's competitors are well established
and have greater assets and financial resources than the Company, and have
larger marketing and research and development budgets. Several of the Company's
competitors also have larger service organizations.

Competition in the Company's business areas is influenced by technical
capacity, customer support, product longevity, supplier stability, breadth of
product offerings, reliability, performance, and price. Accordingly, even small
competitors who develop technologically similar or advanced products could
successfully compete with the Company. Other competitors have established
relationships with customers or potential customers that afford them a
competitive advantage. There can be no assurance that the Company will be able
to compete effectively in its current or future markets or whether the Company's
technology and designs will be viable in the marketplace in the future.

THE COMPANY HAS 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 has required the Company to develop new hardware and stand-alone
software products. However, these new products, while offering potential new
revenue sources, may not achieve market acceptance, and the failiure 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 IOWorks, embedded PC board products, and Reflective Memory products to
the Industrial Automation and Telecommunications markets and other more
vertically integrated markets. In order 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 and
PC based products generated over 32% of the Company's revenues in 1998, 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 LIMITED SOFTWARE BUSINESS EXPERIENCE.

The Company has made significant investments in PC based control software,
software such as IOWorks, with the intention of marketing software-only
products, systems involving such software, and board-level products involving
such software. The Company's software-only products may not be received well in
the industry because of a number of factors, including the reputation of the
Company as a hardware supplier, competition from other manufacturers and and
quality of the software or software support. The future success of the Company
in the stand-alone software business is subject to all of the risks inherent in
the establishment of a new line of business. Unforeseen expenses, difficulties,
complications and delays in developing and marketing the software, dependence
upon current management, lack of market acceptance of IOWorks, or the effects of
competition could prevent the Company from becoming successful as a software
vendor. If IOWorks is not successful in the market, it could have a significant
impact on the Company's financial condition and operating results.

6
<PAGE>
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 $5.7 million as of September 30, 1998. 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, 1998 the Company
had sufficient current assets to liquidate all of its current liabilities.

THE COMPANY'S PRODUCTS MAY BECOME OBSOLETE AND THE COMPANY MAY BE UNABLE TO
RESPOND TO FUTURE MARKET NEEDS.

Most of the Company's products are developed to meet certain industry
standards. These standards continue to develop and are subject to change.
Elimination or obsolescence of all or some of these standards could affect the
design, manufacture, and sale of the Company's products and require costly
redesign to meet new or emerging standards.

In general, technology in the computer industry, and the computer bus board
industry specifically, is subject to rapid technological change. The
introduction of new technology and products by others could adversely affect the
Company's business. There is no assurance that future advances in technology may
not make the Company's existing product line obsolete, resulting in increased
competition, and requiring the Company to undertake costly redesign efforts.
There can be no assurance that the Company will be able to incorporate new
technology into its product lines or redesign its products to compete
effectively.

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

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, embedded PC board products and Reflective Memory products to
substantially increase revenue growth. Embedded PC board products and Reflective
Memory 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,
attribbutable 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.

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<PAGE>
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 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 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 software products.
Unamortized capitalized costs were approximately $3.4 million as of September
30, 1998 and VMIC anticipates that an additional $2.0 million of software
development costs will be capitalized for the fiscal year ending September 30,
1999. The Company will be required to amortize these 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 will be required to expense those capitalized costs, resulting in
substantial write-offs.

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 supplier,
such as Altus, Triquent, Intel, AMD, Tundra, Cypress; or a limited number of
suppliers, for which alternative sources would be difficult to locate. The
Company has experienced shortages of integrated circuits and other key
components from time to time, and this has resulted in delay s 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 incorpporate 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 unavail-

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ability of components could cause delayed shipments and lead to customer
dissatisfaction. Any sustained unavailability of components could materially
adversely affect the Company's operating results and financial condition.

THE COMPANY HAS LIMITED MANUFACTURING FACILITIES AND MUST RELY ON SUBCONTRACTORS
TO COMPLETE SOME OF THE COMPANY'S PRODUCTS.

The Company relies on subcontractors for manufacturing some of the Company's
products. One subcontractor, Nextek Inc., produces 20% 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 8.3% of VMIC's sales during 1997. 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 1998, approximately 25% of the Company's
sales were derived directly or indirectly from 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 38.8% of the Company's Common
Stock. Together, all of the current officers and directors of the Company
(including Carroll E. Williams and Mary W. Williams) own a substantial majority
of its Common Stock. Consequently, these individuals, and particularly Carroll
E. Williams and Mary W. Williams, will control virtually all aspects of the
Company's business by virtue of their ability to nominate and elect the Board of
Directors and officers of the Company. As directors and officers of the Company,
they will, subject to their fiduciary duties, be entitled to develop and
implement the Company's course of business. Neither the Company's Articles of
Incorporation nor its Bylaws permit cumulative voting. Consequently, the
remaining shareholders will not be entitled to elect a representative to the
Company's Board of Directors.

THE COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS.

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

THE COMPANY MAY NOT BE ABLE TO MAKE ACQUISITIONS AND THE COMPANY'S ACQUISITIONS
MAY NOT BE SUCCESSFUL.

Part of the Company's strategy for growth includes acquisitions of
complementary technologies or businesses that would enhance the Company's
capabilities or increase the Company's customer base. The Company's ability to

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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 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 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"

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CAPITALIZATION

The following table sets forth the actual capitalization of the Company as of
September 30, 1998. The following table should be read in conjunction with the
Company's historical financial statements.

September 30, 1998
(in thousands)

Current Portion of Long-term Debt.............................. $ 2,105

Long-Term Debt - Net of Current Portion........................ 5,713

Shareholders' Equity
Common Stock, $0.10 par value (1)............................ 446
Additional Paid-in Capital................................... 6,433
Retained Earnings............................................ 4,868

Shareholders' Equity............................................ 11,747
-------
Total capitalization............................................ $19,565
=======
- ----------
(1) The par value of the Company's Common Stock is $0.10 per share. As of
of September 30, 1998, 10,000,000 shares were authorized and 4,462,917
were issued and outstanding. The table shows the shares outstanding as
of September 30, 1998, but does not reflect shares issued after September
30, 1998, or shares subject to options or subject to purchase under the
Employee Stock Purchase Plan. See "Management- Directors Compensation" and
"Employee Benefit Plans."

MARKET PRICE OF VMIC'S COMMON STOCK AND DIVIDEND POLICY

There is no established public trading market for the Company's Common
Stock. At September 30, 1998, the Company's Common Stock was valued at $11.25
per share and was held by approximately 525 shareholders. At September 30, 1998,
there were 520,919 stock options outstanding, convertible into the Company's
Common Stock. See "VMIC, Inc. Notes to the Financial Statements- 6. Stock
Options."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.

11
<PAGE>

SELECTED FINANCIAL INFORMATION

THE FOLLOWING TABLE SUMMARIZES CERTAIN SELECTED FINANCIAL DATA FOR VMIC,
WHICH SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE AND WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THE SELECTED FINANCIAL DATA
FOR ALL YEARS PRESENTED HAS BEEN DERIVED FROM THE COMPANY'S AUDITED FINANCIAL
STATEMENTS.

<TABLE>
<CAPTION> VMIC, INC.
YEARS ENDED SEPTEMBER 30
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------

Net income $ 791 $ 1,455 $ 41 $ 934 $ 205

PER SHARE DATA:

Diluted earnings per share $ 0.21 $ 0.37 $ 0.01 $ 0.22 $ 0.04

Weighted average common share outstanding 3,802,194 3,901,278 4,047,989 4,189,113 4,554,448

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The Company designs, develops, manufactures, markets, and services a broad
range of embedded computer products as well as products for desktop workstations
and industrial computers. Applications of the Company's products typically
involve dedicated use of computers to perform repetitive tasks associated with
such markets as Data Acquisition and control, plant monitoring, Simulation and
Training, industrial automation, Telecommunications, Defense, and Test and
Measurement. The Company's product line includes single-board PC computers, I/O
boards and systems, software, and networks.

While the Company's historical business has typically involved limited
volume, high-gross margin niche markets such as Simulation and Training, Power
Plant Monitoring and Data Acquisition, the Company's new focus involves
vertically integrated markets such as Telecommunications and Industrial
Automation that require high volume production, but yield lower profit margins.

The Company's sales have increased each year due primarily to the Company's
penetration of new markets with new products. The Company's sales, however, have
reached a magnitude that requires the Company to focus on larger markets to
sustain its growth rate. The Company is, therefore, more focused on markets that
can contribute significantly to its growth requirements such as
Telecommunications, Test and Measurement, Industrial Automation, and Defense.

<PAGE>

The Company believes that it will be able to increase unit sales of its PC
computer product line and networking product line while reducing product costs
through redesign and alliances with large subcontracting manu- facturers.

The Company's most recent focus has been on the introduction of new products
and the subsequent redesign of new products to reduce product manufacturing
costs. The Company believes that it will be able to increase its market share by
offering high quality products and services, at a low cost.

Recently, the Company leveraged its technological expertise, and brand
recognition in the embedded PC market, to initiate discussions with a number of
potential customers relating to the development of high-volume, custom products
associated with the Company's embedded bus solutions such as VME, CPCI, and
other proprietary buses. The challenge for the Company is to select those
opportunities that offer the lowest risk and greatest growth potential while
maintaining its standard commercial off-the-shelf products. The Company believes
that the development of custom products results in closer customer relationships
that are difficult for a competitor to disturb with price cuts alone. These
opportunities may result in increased research and development spending to
capture potentially large future revenues.

While the Company's gross margins have remained constant, VMIC anticipates
some erosion as lower margin product sales increase as a percentage of total
sales. The Company believes that significant sales of lower margin, high volume
products will benefit the Company, and it is anticipated that net profits after
taxes will rise as efficiencies of sales associated with this high-volume
business are realized. Because sales of the Company's Reflective Memory products
benefit from higher margins, and new software products potentially have high
margins, sales of these products could partially offset the effect of lower
margin hardware sales. Software margins have recently decreased, however,
because of increased amortization expenses associated with the Research and
Development of the software, and will remain low unless sales increase
significantly. The sales of IOWorks have not materially effected the Company's
gross profits or Margins. The sales of Reflective Memory products have helped
maintain gross profits and increase the Company's average gross margin. (See
Results of Operations- Margins and Sales)

The Company's sales have increased each year; however, operating results may
vary significantly in the future. The Company is presently experiencing
significant increases in its order growth rate and backlog. Operating expenses
are relatively fixed in the short term because the Company has enough employees
and equipment to support the projected growth. A shortfall of revenues could
impact the Company's financial results significantly in a given quarter or for
the fiscal year.

The Company has recently increased its component inventory levels. While such
increases allow for improved response times to customer purchase orders, the
Company faces a greater risk of inventory obsolescence which could have an
adverse effect on the Company's business and operating results. The Company also
maintains a significant, separate, customer service inventory to support
customer requirements for replacement equipment associated with warranty returns
and products returned for repair or replacement.

The Company's operating results may also fluctuate as a result of a number of
factors including customer order patterns, defense spending patterns, product
warranty returns, changes in product mix, increased competition, announcements
of new products by the Company or its competitors, the loss of certain key
employees to other companies including competitors, and the Company's overall
ability to design, test, and introduce new hardware and software products on a
timely basis.

RESULTS OF OPERATION

Year Ended September 30, 1998 Compared to Year Ended September 30, 1997

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
applica- tions, 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
market-place, 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.

13
<PAGE>

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 $.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% 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.

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996

SALES. The Company's sales increased 17.3% from $23.8 million in 1996 to to
$27.9 million in 1997. Sales of IOWorks and the Company's reflective Memory
products accounted for approximately $7.9 million or 28% of the Company's total
sales in fiscal year 1997 compared to $6.6 million or 28% of sales in 1996. The
increase in sales resulted from increased sales volume to existing customers and
from increased new market penetra- penetration. Sales of the Company's software
products increased by 50%. Domestic sales increased 24.4% from $18.2 million in
1996 to $22.6 million in 1997, while international sales dropped 5.4% from $5.6
million in 1996 to $5.3 million in 1997. International sales dropped from 23.5%
of total sales in 1996 to 18.85% of total sales in 1997. Domestic sales
increased from 76.5% of total sales in 1996 to 81.2% of total sales in 1997.

GROSS MARGINS. The Company's average gross margin decreased slightly from
65.0% in 1996 to 64.9% in 1997. During this period the gross margin for hardware
increased from 64.1% to 64.5%, while software margins decreased from 97.9% to
83%. Although the Company focused on high volume, low margin hardware products
in 1997, the Company's sales of high margin software and Reflective Memory
products minimized the impact of this change in product mix.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, General, and
Administrative expenses (including warranty and software amortization) increased
13.3% from $9.7 million in 1996 to $11.0 million in 1997. This increase was
attributable mainly to additional sales and marketing support of its Industrial
Automation products and IOWorks software which accounted for $0.5 million of the
increase. As a percentage of sales, selling, general, and administrative
expenses dropped from 40.6% of sales in 1996 to 39.4% of sales in 1997.

WARRANTY EXPENSE. The Company's warranty expenses increased to $644,754
in 1997 from $355,293 in 1996. This increase was mainly attributable to the
failure of certain third-party supplied components used in VMIC's Reflective

14
<PAGE>
Memory products and the addition of several new hardware products in 1996. The
Company responded by replacing the supplier of faulty components and refining
its new hardware products.

SOFTWARE AMORTIZATION. Accumulated amortization in 1997 was $234,124
compared to $0 in 1996. Unamortized software costs increased to $1,819,560 at
September 30, 1997 from $584,958 at September 30, 1996.

RESEARCH AND DEVELOPMENT. Research and Development expenses decreased from
$5,335,288 in 1996 to $5,307,207 in 1997. As a percentage of sales, research and
development expenses decreased from 22.4% in 1996 to 19.0% in 1997.

NET INCOME. Net income increased to $934,229 in 1997, compared to $41,286 in
1996. The increase in profits resulted primarily from increased orders and
shipments during the third and fourth quarters of 1997, including a 50% increase
in software sales, and the Company's cost cutting efforts.

LIQUIDITY AND CAPITAL RESOURCES.

VMIC finances its operations primarily through a combination of cash from
operations and short and long term debt. Working capital was $4.7 million at
September 30, 1998, unchanged from $4.7 million at September 30, 1997. Included
in working capital are cash and cash equivalents of $0.5 million at September
30, 1998 compared to $0.3 million at September 30, 1997. During fiscal year
1998, operating activities provided $2.7 million of cash. Investing activities
used $5.8 million for the year ended September 30, 1998, of which $2.3 million
was used to acquire plants and equipment, which approximately $1.0 million was
used for construction in process.

Inventory turnover for fiscal year 1998 was approximately 156 days compared
to approximately 140 days in 1997. This increase was attributable to increased
component inventory levels which allow for faster filling of customer purchase
orders and better response times for warranty returns and replacements. Accounts
receivable from customers were outstanding on average approximately 50.2 days in
fiscal year 1998, compared to approximately 49.3 days in fiscal year 1997. The
company has recently offered extended payment terms contractually as an
incentive to purchase VMIC products. Exept for these contractual extensions, the
company's invoices are due within 30 days and the Company does not generally
extend payment terms.

1997 PRIVATE PLACEMENT

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 Secuurities Act.

1998 CORPORATE NAME CHANGE

On December 12, 1998 the stockholders of the Company followed the
recommendation of the Company's Board of Directors and voted in favor of
changing the Company's name from VME Microsystems International Corporation to
VMIC, Inc. This change reflects the Company's substantial investment in the
registered trademark VMIC, and the expansion of the Company's product line
beyond VME bus-based hardware. The name change became effective on December 22,
1998.

15
<PAGE>
YEAR 2000

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 systems 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
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.

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 certain modifications have
already been identified and corrected on critical systems to ensure that the
Company's operations will be Year 2000 compliant. This effort will continue
throughout 1998 and 1999.

THIRD PARTIES

The Company has had initial communications with certain of its significant
suppliers and customers to evaluate their Year 2000 compliance plans, state of
readiness and to determine the extent to which the Company's systems may be
affected by the failure of others to remedy their own Year 2000 issues. VMIC is
conducting a Year 2000 certification program with all of its critical suppliers,
which will be completed by the end of 1998. In addition, Year 2000 compliance is
a prerequisite to new supplier relationships. VMIC is also in the process of
distributing a Year 2000 assessment form to other parties in order to provide
VMIC with further information as to their Year 2000 conversion progress.
However, the Company has received only preliminary responses from such parties
and has not independently confirmed all of the information received from other
parties with respect to the Year 2000 issues. As such, there can be no assurance
that such other parties will complete their Year 2000 conversion in a timely
fashion or will not suffer a Year 2000 business disruption that may adversely
affect the Company's business, financial condition or results of operations.

16
<PAGE>
CONTINGENCY PLANS

Because the Company's Year 2000 conversions are expected to be completed
prior to any potential disruption to the Company's business, VMIC has not yet
completed the development of a comprehensive Year 2000 specific contingency
plan. If VMIC determines that its business is at material risk of disruption due
to the Year 2000 problem, or anticipates that its Year 2000 conversion will not
be completed in a timely fashion, the Company will work to enhance its
contingency plan.

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 $55,600 which represents 833 hours of internal analysis,
modification, upgrades and testing. As of December 31, 1998, the Company has
completed 450 hours of Year 2000 compliance work at a cost of $21,600.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, which requires the reporting and display of comprehensive
income and its components in an entity's financial statements, and SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
specifies revised guidelines for determining an entity's operating segments and
the type and level of financial information to be required. The Company is
required to adopt these standards in fiscal year 1999. The Company does not
expect the impact of these pronouncements to be material.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE
RECOGNITION, to supersede SOP 91-1, the previously released SOP on this topic.
SOP 97-2 provides additional guidance on when revenue should be recognized and
in what amounts, for licensing, selling, leasing or otherwise marketing computer
software. The provisions of SOP 97-2 are effective for transactions entered into
in fiscal years beginning after December 15, 1997. Adoption of SOP 97-2 is not
expected to have a material adverse affect on the Company's financial
statements.

In February 1998 and in June 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," respectively.
Adoption of these standards is not expected to impact the financial results of
the Company.

17
<PAGE>
BUSINESS

THE COMPANY

VMIC is a leading independent designer and manufacturer of embedded computer
solutions based upon a wide variety of open standard bus designs such as VME,
CPCI, PCI, PMC, Multibus, ISA, and special custom buses such as the GE 90/30.
The Company's products are used by original equipment manufacturers ("OEMs"),
systems integrators and end-users in various industries, including manufacturing
automation, Telecommunications, Simulation and Training, environmental
monitoring, and Test and Measurement. Unlike general purpose computers, embedded
computer solutions are i) incorporated into systems and equipment to provide a
single or a limited number of critical system control functions; ii) generally
integrated into larger automated systems; and iii) often have extended product
life cycles. The Company's embedded computers are based upon the Intel x86 and
Pentium architecture and are typically capable of running PC-compatible
operating systems and application software.

According to a recent industry publication, BOARD LEVEL EMBEDDED COMPUTER
MARKETS AND TRENDS, the standard bus embedded computer market is projected to
grow from approximately $2.4 billion in 1995 to approximately $3.9 billion in
1999. The Company offers a wide variety of board-level products based on
standard buses such as VMEbus, PCI bus, Compact PCI bus, PMC, Multibus, and
others. The most popular embedded computer standard today is VMEbus, which is
widely used in many markets. According to BOARD LEVEL EMBEDDED COMPUTER MARKETS
AND TRENDS, the VMEbus embedded computer market is projected to grow from
approximately $1.3 billion in 1995 to approximately $2.4 billion in 1999.

The Company is also involved in networking systems of dissimilar buses using
adapters, high-performance networks, and synergistic software. The Company's
family of networking products is based on a technology known in the computer
industry as "Reflective Memory." VMIC's connectivity products allow low
maintenance, high speed communication between PC computers, workstations,
computer mainframes and embedded computers manufactured by a wide variety of
companies.

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 Data Acquisition,
Control, Monitoring, Processes Control, Factory Automation 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.

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. Realworld
information, which is 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

18
<PAGE>
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 market for Data Acquisition boards, systems, and software, according to
to a recent study from Frost and Sullivan, is expected to generate just under
under $700 billion between 1994 and 2001. The primary end-user markets for data
acquisition boards, software, and systems include Industrial Manufacturing, Test
and Measurement, Aerospace and Defense, Medical, Pharmaceutical, and Utility.

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 insure 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, Compact PCI ("CPCI"),
Multibus, 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 use computer manufacturers include PCI buses in
their machines for enhanced computer connectivity. CPCI is an embedded computer
version of PCI. CPCI capitalizes on the combination of the Eurocard form factor,
already popularized by VME, and the PCI bus characteristics. The wide acceptance
of the PCI bus in the desktop market has created an abundance of inexpensive
components. CPCI has certain advantages in applications that require fast
transfers of large amounts of data.

CPCI buses are preferred for single processor applications with moderate I/O
requirements which utilize less than 8 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 process controller market is experiencing a major shift to standards
based upon PC technology and open bus architectures. According to Frost and
Sullivan, the total process control market generated revenues of $8.51 billion
in 1993. Revenues for this market are anticipated to increase to approximately
$15.2 billion by the year 2000. 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") which indicates
that 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.

According to ARC in a recent study, the worldwide revenues for PC-based
SoftLogic packages approached nearly $21 million in 1996. With a 70% average
annual growth rate projected over the next few years, this market is slated to
reach nearly $300 million by the year 2001. The Company believes that the market
is significantly larger than the study indicates, and anticipates substantial
revenue opportunities in the next five years.

COMPANY STRATEGY

THE COMPANY'S GROWTH STRATEGY INCLUDES THE FOLLOWING ELEMENTS:

FOCUS ON SINGLE-BOARD COMPUTERS BASED UPON PC TECHNOLOGY. The Company
has recently made major investments in the VMEbus single-board computer

19
<PAGE>
market specializing in PC technology based upon Intel and AMD micro-computers
and Microsoft software. A recent decision by Microsoft not to support Motorola's
PowerPC processor with its Windows NT operating system may reduce the
attractiveness of Motorola's Power PC based products and help the Company
penetrate the market with Intel and AMD technologies. VMIC believes it currently
has the widest line of PC-based single-board computers in the VMEbus market. The
Company has also entered the CPCI market arena with its PC technology.

INCREASE MARKET SHARE OF REFLECTIVE MEMORY NETWORKS. Reflective Memory is a
high-performance deterministic networking product that is used in many
applications, from over-the-horizon radar systems and rolling mills, to ship
communications. Reflective Memory is one of the Company's fastest growing
product lines. The product line now supports many computer buses such as PCI
bus, Compact PCI bus, VMEbus, PMC, and Multibus. The Reflective Memory advantage
over more traditional networks such as Ethernet, Fast Ethernet, FDDI, and ATM
include its deterministic properties and very high performance, coupled with
little or no software requirements for its use. The Company continues to make
significant investments in this technology.

INCREASE MARKET SHARE FOR INDUSTRIAL AUTOMATION AND TEST AND MEASUREMENT MARKETS
WITH COMPONENT SOFTWARE (IOWORKS). The Company has recently developed and is
continuing to enhance its line of software products to increase the sales of its
single-board computers, board-level products, I/O systems, and stand-alone
software sales. The Company continues to focus its IOWorks marketing efforts in
the Industrial Automation market. This market is undergoing a substantial shift
from the use of Programmable Logic Controllers to the more open architecture of
PCs. The Company's IOWorks software components allow a PC to perform the same
functions as a Programmable Logic Controller.

CONTINUE TO GROW I/O BOARD-LEVEL PRODUCTS BUSINESS. According to Venture
Development Corporation, an independent market research organization, the
Company is the leader in VMEbus based I/O technology. The Company's strategy for
maintaining its leadership position is to continually enhance and expand its
product line. The Company will continue to support its currently existing
board-level product line with upgraded software, while developing improved I/O
technology for VMEbus and other buses such as Compact PCI.

CONTINUE TO GROW I/O SYSTEMS BUSINESS. VMIC will continue to focus on I/O
systems business for such markets as Industrial Automation, Test and
Measurement, Plant Monitoring and Simulation and Training markets. The I/O
systems offered by the Company are comprised of I/O boards, chassis, backplanes,
power supplies, software, and other products that provide customers or Systems
Integrators a building block approach to solve application-specific problems,
and avoid problems associated with I/O programming. The Company is expanding its
I/O systems business to include CPCI products.

EXPAND INTERNATIONAL MARKETS. VMIC sells products in more than 48 foreign
countries through its line of international distributors. VMIC plans to grow its
international presence by expanding into more countries while increasing sales
through existing distributors. The Company anticipates increasing its
investments in advertising, international trade shows, and international
offices.

MAINTAINING HIGH LEVEL OF INVESTMENTS IN ENGINEERING AND PRODUCT DEVELOPMENT.
The Company plans to continue its relatively high levels of research and
development expenses in order to provide innovative new products and to enhance
and redesign its existing products. The Company is focusing on new products that
may provide substantial growth opportunities in vertical markets. The Company
anticipates adding features, functions, and additional modules and components to
its IOWorks software, and expects its significant investments in this product
line to continue. The Company continuously monitors developing technologies and
introduces products as standards and markets emerge. The Company plans to
maintain its annual investment in Research and Development, as a result, the
Company expects that research and development investments, as a percentage of
revenues, will decrease if future revenues increase as anticipated.

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 DEC, Silicon Graphics,
Harris, IBM, Intergraph, Motorola, Gateway and DELL. The Company's product lines
can be partitioned into six primary groups:

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Single-Board PC VMEbus CPUs and Peripherals. The Company is a technological
leader in VMEbus Intel-based CPU products. The product line spans the complete
line of Intel-based products including 486, 586, Pentium, Pentium Pro and
Pentium II 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 NT/RTX, LynxOS, Windows
CE/RTX, 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 telecom 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 BOARDS. The Company offers a wide range of I/O products
including VMEbus, Compact PCI, I/O boards, and boards designed for other
standard computer buses. The Company's I/O product and 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's I/O products are used to perform such tasks as monitoring temperature,
fluid flow, motion, resistance, strain, revolutions, and the states of many
different conditions such as closed/open status of values or on/off status of
switches.

COMMUNICATIONS PRODUCTS. The Company's communications product line includes
four discrete product categories. The categories are:

1. General purpose serial I/O products that support a wide variety of
connectivity options associated with peripherals, intelligent sensors
sensors, dials, and indicators.

2. Serial I/O communication products used in a wide variety of military and
space applications, including aircraft, missiles, ground support
equipment, and avionics buses which are used in commercial applications.

3. Bus repeater products which provide 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.

4. Reflective Memory products which 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 DEC, Silicon Graphics, Harris, IBM, Intergraph,
Hewlett-Packard, Motorola, Gateway, DELL, and many others that are designed to
support standard buses. Reflective Memory has application 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.

The Company has developed a quad-redundant, fault-tolerant version of its
Reflective Memory and network hubs for Naval applications involving ship control
and weapon systems for Hughes and Raytheon. This product also has market
potential in many other markets where real-time deterministic communications,
reliability, and fault-tolerant are paramount.

COMPONENT SOFTWARE (IOWORKS). The Company's new 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,

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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, Windows NT/RTX 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 operating system 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's I/O systems, until recently, were primarily used in
applications involving simulation and training for nuclear plants, defense
simulation and training, Test and Measurement, Data Acquisition and Control, and
Environmental Monitoring. The Company currently offers an expanded 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 new IOWorks software enables the Company to offer systems-level
products for Industrial Automation which:

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

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

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

4. 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.

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 third-party leading Test and Measurement software,
enable 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
component software, and new I/O board products designed specifically for the
Test and Measurement market.

SPECIAL PRODUCTS. The Company develops, manufactures, and markets a variety
of special products related to: safety applications in nuclear power plants,
supplements to VMIC standard products, private label products, and proprietary
bus applications.

The Company typically avoids such special products unless the business

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relationship involves significant revenue opportunities. While special products
are normally developed at the customer's expense, occasionally the Company may
Company may share development expenses for such products or completely
underwrite the project.

CUSTOMERS, APPLICATIONS, AND MARKETS

The Company conducts business with more than 2,000 customers in more than
eight markets involving a wide variety of applications. The following is a brief
description of some applications, customers, and markets, some of which the
Company is currently addressing and others of which the Company intends to
pursue. There are no assurances that the Company will be successful in expanding
its presence in any of these industries.

A majority of the Company's customers are systems integrators, value-added
resellers, and end-users. However, in order to implement its strategy of
penetrating the Communications, Industrial Automation and other markets with its
Reflective Memory, I/O, IOWorks, and PC products, the Company has focused
significant marketing efforts on OEMs who will incorporate these new products
into their products for resale in these vertical markets.

Simulation and Training. 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 Company has also recently
received an order for I/O equipment for a simulator through STN Atlas Elektronik
for the Gosgen Nuclear Power Plant near Zurick, Switzerland. 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 typically sell for $50,000 to
$100,000 per unit.

Recently, the Company's I/O Systems have been specified by Samsung Electric
for use in a nuclear power plant simulator in Korea. Funding for this job has
been approved and the Company is negotiating pricing with the customer. In
addition, Samsung has been appointed as the systems integrator for three three
more simulator projects for which funding has not yet been been approved, but
for which the Company's equipment is specified. Several systems integrators
currently bidding on jobs in Russia, Greece and Germany have also specified the
Company's equipment.

The Company believes that its success in these markets 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 Defense Simulation and Training market is undergoing significant
technology changes which will require the Company to focus on IOWorks component
software solutions for this industry in the future. The Company expects that its
revenues from the Simulation and Training market to be stagnant at approximately
$2 to $3 million annually for the next five years without any consideration of
IOWorks software sales. The Company is the leading supplier of I/O equipment for
this market.

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

The Company's line of Universal Intelligent I/O Controllers form the core of

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its Data Acquisition and control systems. The I/O controller product line was
designed specifically for the Data Acquisition and Control market and 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.

INDUSTRIAL AUTOMATION. 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 ("PLC's"),
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 ("DCS") 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 a significant changes, and customers are now
demanding solutions based upon open hardware platforms, and nonproprietary
standards such as VMEbus and CPCI; and PC solutions based upon Intel processor
technology and software (such as IOWorks) based upon Microsoft operating systems
and other Microsoft key technologies.

The Company has entered this market with applications 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 customers utilizing the Company's
products in this market include OEMs and end-users such as the 3M Company, AVX
Corporation, Corning, Eastman Kodak, Bethlehem Steel, Dupont, Kimberly Clark,
Quester, Reynolds Aluminum, Tuscaloosa Steel, and Xerox.

TELECOMMUNICATIONS. Typical telecommunications systems have multiple
embedded computers working in concert. Potential applications include voice
message systems, routers, fiber optic cable testers, cell phone switching
systems, and environmental monitors. The Company believes that the
Telecommunications market offers significant sales opportunities for its VMEbus
and CPCI PC single-board computers and Reflective Memory fiber-optic networks
products. The Company has demonstration equipment at several potential customer
sites. The CPCI bus has been selected as the primary architecture for the
Telecommunications industry; therefore, the Company has made significant
investments in a CPCI product line involving PC single board computers and
Reflective Memory products. There are no assurances, however, the Company will
be successful in penetrating this market or that its market share would be
significant.

TEST AND MEASUREMENT. Test and measurement generally refers to the
collection and analysis of experimental data. Such applications typically
involve the testing and verification of the proper operation of products being
manufactured. Instrument systems may also be used to simulate manufacturing
processes or techniques.

The Company's Test and Measurement products are used in applications
involving structural testing of aircraft, transmission testing, airbag sensor
testing, flight computer testing, weapon systems testing, automobile radiator
testing, pitch and roll tables for shaking engines, automobile engine test
stands, rocket engine test stands, and military and commercial jet engine test
stands. Companies that utilize the Company's Test and Measurement products
include OEMs, systems integrators, and end users such as Chrysler, Ford, BMW,
Rolls Royce, Bristol, Deutsche Aerospace Daimler Benz, GM, Pratt & Whitney,
Argonne National Labs, FERMILAB, Harvard University, Duke University, and
Brookhaven National Labs.

The Company has established a relationship with Deutsche Aerospace Daimler
Benz Conglomerate ("DASA"), a diversified company with significant assets and
worldwide marketing resources. DASA is involved in most of the markets served by
the Company, and is negotiating a worldwide distribution agreement with VMIC for
the Company's products.

The Company has recently developed unique, new, high-accuracy,
state-of-the-art, board-level products for the Test and Measurement market. The
Company believes that the Company's Test and Measurement market potential has
been significantly enhanced because of its IOWorks software products,
single-board

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computer and I/O boards. The Company has also coupled IOWorks to National
Instruments' LabVIEW software product. National Instruments is a Test and
Measurement market leader with respect to its human machine interface ("HMI")
software and the Company's IOWorks product complements National Instruments' HMI
software product.

ROBOTICS. The Company's products are used in a wide range of robotic
applications including hazardous environments in the nuclear and chemical
industries. Applications also involve large robotic steel hauling trucks,
nuclear waste removal, and rail track repair. Customers in these industries
include end-users such as Fairmont Tamper, Westinghouse, RedZone Robotics, and
Mitsubishi Heavy Industries.

POWER PLANT MONITORING. The Company selected this market as a potential
growth market for its products because of its relationship with key systems
integrators dedicated to the Nuclear Power Plant Monitoring industry. The market
is highly project-oriented with very sophisticated systems integrators within a
very narrow market focus. I/O systems in this industry are typically very large,
with such systems selling in the range of $500,000 to more than $1,000,000.
There are more than 200 nuclear power plants worldwide, most of which were built
10 to 15 years ago. Each plant must upgrade its equipment every 10 to 15 years
because of parts obsolescence, system performance enhancements, and regulatory
requirements. In addition, the U. S. Nuclear Regulatory Commission and similiar
organizations in other countries are constantly revising safety standards which
require utilities to modernize their facilities. The Company supplies products
to end-users such as Ontario Hydro, River Bend, Virginia Electric Power, Union
Electric, Kein Kroftwerk Gosgen, and others.

The Company recently delivered its first nuclear-qualified I/O System to
SAIC. SAIC, is the systems integrator leader for this market in the United
States. Nuclear-qualified equipment involves the qualification of some of the
Company's standard products to meet certain vibration, radiation, and electrical
isolation requirements. Most of the Company's business in this market does not
involve nuclear qualification testing.

VMIC recently received an order from Siemens AG for a Nuclear Power Plant
Monitoring application at Kein Kroftwerk Gosgen. This is an upgrade to a Siemens
nuclear power plant, replacing a Siemens monitoring system.

MARKETING, SALES, AND DISTRIBUTION

The Company is a global corporation that distributes products in more than 48
foreign countries through over 23 distributors and 14 representative
organizations worldwide. As of September 30, 1998, the Company's marketing,
sales, and distribution programs were conducted by 42 of the Company's
employees. The Company sells its products in the United States through
commissioned-based independent sales organizations. As of September 30, 1998,
the Company has contracts with 14 representative organizations that employ over
52 sales people. These sales organizations are supported by their own support
staff, as well as the Company's employees. The Company has recently opened an
office in Paris, France to support its European customers and distributors.

The Company's products are sold internationally through 23 distributors. As
of September 30, 1998, the distributors employed over 40 sales people. The
Company plans to add eight additional distributors in eight foreign countries by
the end of fiscal year 1999. The Company's representative and distributor
contracts do not allow such organizations to sell competitive products.

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 plans to add approximately six VARs by
the end of 1999.

The Company attends more than 40 table-top trade shows per year and more than
ten major trade shows per year. Table-top shows require minimum Company
involvement, whereas 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 has recently expanded its sales and marketing organization to
support its Industrial Automation products. The marketing organization has
recently been expanded to include 14 full-time employees and several part-time
telemarketing consultants. The sales origination has been recently expanded to

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include field located direct sales staff in several states. In addition, the
Company has recently dedicated a group of new employees to focus on IOWorks
software sales.

CUSTOMER SERVICE AND SUPPORT

The Company is dedicated to providing the products, service, quality, and
responsiveness that its customers require. The Company's core business is
characterized by repeat business from customers and long-term mutually
beneficial customer relationships. The Company understands that satisfaction of
the customer in all areas of the business relationship is crucial and the
Company solicits their feedback.

Users of the Company's products have access to a wide array of support
services. The Company has technical expertise and resources to support
installation, maintenance, and service of the Company's products. The Company
offers its customers standard classroom instruction, as well as "hands on"
training for all of the Company's hardware and software products. These courses
may be scheduled at the Company's facility, or they may be held at the
customer's site upon request.

The Company maintains a 24-hour per day phone service to support its
customers. The Company's organizational structure includes a staff of customer
service employees who offer sales support, warranty servicing, and product
repair. The customer service organization is supported by dedicated inventory
for quick product replacement. In addition, the customer service organization
has equipment committed exclusively to assist in emulation of customer problems
so that the Company can quickly respond to customer complaints. Critical
customer service inquiries are brought to the attention of upper management to
ensure that the Company continues to provide top quality service and prompt
response.

MANUFACTURING

The Company manufactures approximately 80% of its products in-house while
subcontracting the balance of the product manufacturing. The Company has an
in-house manufacturing capability that includes automated assembly and testing,
and surface mount technology. Product manufacturing operations at the Company
involve: electronic circuit card and module assembly; I/O systems assembly,
configuration, and testing, cable assembly, the production of technical manuals,
product support documentation, and software duplication on both CD-ROM and
diskette.

In addition, manufacturing agreements are established with several local
manufacturing companies to provide prompt service for customer's high volume
requirements. Although the Company subcontracts some of its manufacturing, final
testing, packaging, and quality assurance tasks are always conducted by the
Company.

The Company is strategically located in one of the country's largest
high-tech research communities which allows the Company to take advantage of the
quality and high volume manufacturing capabilities of several expert firms in
the area.

The principal steps in the manufacturing process are the purchase and
management of materials, assembly, testing, final inspection, packing, and
shipping. The Company purchases parts and components for assembly of all its
products from a large number of suppliers through a worldwide sourcing program.
However, certain key components used in the Company's products are currently
available from only one source, and other key components are available from only
a limited number of sources. In the past, the Company has experienced delays in
the receipt of certain key components, which have resulted in delays in related
product deliveries. The Company attempts to manage such risks through developing
alternative sources, engineering efforts designed to obviate the necessity of
certain components, and through maintaining quality relationships and close
personal contact with each of its suppliers. However, there can be no assurance
that delays in key component and product deliveries will not occur in the
future. The inability to obtain sufficient key components as required, or to
develop alternative sources if and as required in the future, could result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on the Company's customer relationships and operating results.

Engineering refinements to the Company's new hardware and software products
are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates.

The Company's Quality Assurance program is compliant to the ISO 9002

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specification. The Company's software is compliant to ISO 9000-3. ISO-9002 is an
internationally recognized "blueprint" for quality systems involving all aspects
of business, not just manufacturing and development. The Company maintains an
extensive Quality Assurance program that is consistently audited by most
customers for compliance to these commercial Quality Assurance standards.

The Company has also teamed with EGS Corporation, a division of SAIC, to
provide safety-related equipment to the nuclear power industry. EGS offers
specialized support in the areas associated with procurement and evaluation of
safety-related equipment including addressing issues associated with the
dedication of commercial-grade products for safety-related use.

A substantial portion of the Company's shipments in any fiscal period
relates to orders received in that period. The Company's backlog as of September
30, 1998 was $4.1 million compared to $ million as of September 30, 1997. Many
of the Company's customers require immediate delivery which requires the Company
to maintain substantial raw and finished goods inventory as well as separate
customer service inventory to support quick warranty and repair service.

RESEARCH AND DEVELOPMENT

The Company has recently undertaken substantial research and development
efforts outside of its traditional business area, resulting in the introduction
of new software control products, an improved line of computer network solutions
and new embedded PC single board computers. The Company has funded this research
by diverting research and development resources from its core products.

VMIC's research and development expenses were approximately $5.3 million in
1996, $5.3 million in 1997 and $6.2 million in 1998, exclusive of capitalized
software investments.

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, upon its ability to enhance its
current technology and services, respond effectively to technological changes,
sell additional services to its existing client base, introduce new technologies
and meet the increasingly sophisticated needs of its clients. Other companies
may develop products or technologies that may adversely affect the Company's
competitive position or render its technologies or services obsolete. The
Company competes for customers on the basis of price, performance, features,
quality, service, reliability, adherence to standards, availability, development
capabilities, and support. The Company's competitors vary in the size, scope and
breadth of the products and services they offer; some of the Company's
competitors and potential competitors have greater financial, technological,
manufacturing, marketing, sales, and personnel resources than the Company.

While the Company faces entrenched competitors in the single-board computer
market, VMIC believes that it offers the most complete line of Intel and AMD
PC-based single-board computers in the VMEbus market, and maintains
technological advantages in the CPCI market. The Company was first to market
with Intel's Pentium and Pentium Pro processor-based single-board computers. The
Company believes that it can become a major supplier of PC processor-based
single-board computers and associated products, although there is no assurance
that it will do so.

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 25%; however, the Company is involved in several government related
opportunities and contracts that could have a significant impact on the
Company's growth. The Company has received orders for CPUs and I/O products from
the Navy 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; therefore a significant percentage of
the Company's future revenue could be generated by government-related business.
The Company has received orders from the Navy for a quad-redundant Reflective
Memory for fault-tolerant ship communications and is well positioned to receive
sizable follow-on orders. Should the program prove successful, and all of the
Navy's ships use the Company's product, a significant percentage of the
Company's future revenue could be generated by government-related business.
However, there are no assurances that the Company will be the sole supplier or
that the initial test project will be successful. Furthermore, even if the
initial test is satisfactory, there

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are no assurances that additional ships would be upgraded or retrofitted with
this new technology.

PROPRIETARY RIGHTS

The Company's success depends to a significant degree upon 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.
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.

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, 1998, the Company had 266 full-time employees. 95 were
in Research and Development, 15 were in Marketing, 16 were in General
Administration, 41 were in Sales, 89 were in Production, and 10 were in Quality
Assurance. 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.

PROPERTIES

The Company's headquarters and principal administrative, engineering, sales,
marketing, and manufacturing facilities are located in office buildings
containing approximately 77,000 square feet located on approximately 10 acres of
land in Huntsville, Alabama. The Company from time to time also leases
additional space necessary. The Company believes that its existing production
facilities are suitable for the Company's projected growth over the next 24 to
36 months, whereas its Administration, Sales, Marketing, and Research and
Development facilities may need to be expanded. The Company owns sufficient land
to expand its current facilities.

LEGAL PROCEEDING

The Company has been involved from time to time in litigation in the normal
course of its business. The litigation has been associated with alleged patent
and trademark infringement and termination of a sales representative. The
Company is not aware of any pending or threatened litigation matters which will
have a material adverse affect on the Company.

<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning each of the
Company's directors and executive officers:

Name Age Position
- ---- --- --------
Carroll E. Williams 51 President, CEO and Chairman of the Board

Mary W. Williams 54 Director, Secretary, and Treasurer

Arthur Faulkner (1) 58 Director

Alfred F. Casteleyn 56 Director, Vice President Sales and Marketing

Ernest Potter (1) 58 Director

R. Gary Saliba 44 Director

Jim Caudle, Sr. (1) 63 Director

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
- ----------

(1) Member of the Compensation Committee

The Board of Directors of the Company is composed of seven directors who are
elected for one year terms. The officers of the Company are elected by the Board
of Directors and serve until their successors are duly elected and qualified.

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.

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

29
<PAGE>
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.

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.

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

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

MARY W. WILLIAMS. Ms. Williams is a director of the Company and has served
in this capacity since its incorporation. Prior to retiring as an employee on
January 19, 1996, Ms. Williams served as the Company's Manager of the Company
Information Systems (MIS), Secretary and Treasurer.

ARTHUR FAULKNER. Mr. Faulkner is a director of the Company and has served
in this capacity since 1986. He is a Certified Public Accountant with
Faulkner, Shannon, Hill and Fogg in Huntsville, Alabama, and has been a
certified public accountant for 26 years.

ERNEST POTTER. Mr. Potter is a director of the Company and has served in
this capacity since 1986. Mr. Potter is an Attorney who practices law in
Huntsville, Alabama, and has practiced law since 1963.

JIM CAUDLE, SR. Mr. Caudle is a director of the Company and has served in
this capacity since 1986. Mr. Caudle is the founder and a member of the Board
of Directors of United Plating, United Printed Circuits, and United Circuits,
all located in Huntsville, Alabama. Mr. Caudle is the retired president of
Snapper, Inc.

R. GARY SALIBA. Mr. Saliba is a director of the Company and has served in
this capacity since 1990. Mr. Saliba is President of Saliba Financial
Economics Group, which is the firm that has annually prepared the valuation of
the Company and its Common Stock. Mr. Saliba formerly served as Senior Vice
President and Trust Officer of SouthTrust Bank, and Senior Vice President and
Chief Investment Officer of Colonial Bank.

COMPENSATION COMMITTEE

The Board has established a compensation committee currently comprised of
Arthur Faulkner, Ernest Potter and Jim Caudle. The Company's compensation
committee awards incentive or nonqualified stock options to employees, officers
and directors; makes recommendations to the board for approval of any
compensation changes or bonuses for officers of the Company; and makes
recommendations to the board for any stock or cash bonus awards to any employee.

30
<PAGE>
DIRECTOR COMPENSATION

Directors not employed by the Company receive a fee of $550 for each board
meeting attended and $200 for each committee meeting attended which is held
independently of a board meeting. Employee directors do not receive compensation
for attending board meetings or committee meetings.

Non-employee directors are eligible to receive options pursuant to the
Company's Non-qualified Stock Option Plan as determined by the Compensation
Committee. The purpose of awarding stock options to directors is to promote the
interests of the Company by strengthening the Company's ability to attract and
retain the services of experienced and knowledgeable non-employee directors and
by encouraging such directors to acquire an increased proprietary interest in
the Company. See "Stock Incentive Plans, Options and Awards."

INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors except for liability arising
out of i) a breach of their duty of loyalty to the corporation or its
stockholders, ii) acts or omissions not in good faith or which involve
intentional misconduct as a knowing violation of law, iii) unlawful payments of
dividends or unlawful stock repurchases or redemption as provided in Section 174
of the Delaware General Corporation Law, or iv) for any transaction from which
the director derived an improper personal benefit. This provision offers persons
who serve on the Board of Directors of the Company protection against awards of
monetary damages resulting from breaches of their duty of care or fiduciary duty
(except as provided above). As a result of this provision, the ability of the
Company or a shareholder of the Company to successfully prosecute an action
against a director for a breach of his duty of care is limited. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his or her duty of
care.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company, and the Company is not
aware of any threatened litigation or proceeding which may result in a claim for
indemnification.

STOCK INCENTIVE PLANS, OPTIONS AND AWARDS.

The Company maintains an Incentive Stock Option Plan, a Nonqualified Stock
Option Plan for Non-employee directors ("Outside Directors"), an Employee Stock
Purchase Plan, and annually awards stock and cash bonuses. Based upon the
Company's operating results for fiscal year 1998, incentive options to purchase
88,637 shares of Common Stock were issued under the Company's Incentive Option
Plan, 10,000 of which were issued to the Company's officers. For fiscal year
1998, each Outside Director was awarded 1,000 options under the Nonqualified
Option Plan, for a total of 5,000 nonqualified options. The Company also awards
cash and stock bonuses each year based on the Company's performance or
individual employee performance. Awards to particular officers and employees are
based in part upon the performance of the respective areas of responsibility of
the employees and officers. The Compensation Committee makes recommendations to
the Board for stock or cash bonus awards to officers. As of September 30, 1998,
there were 520,919 options outstanding, with a range of exercise prices from
$4.90 to $11.50, and a weighted average exercise price of $8.51. As of September
30, 1998 198,538 options were exercisable with a weighted exercise price of
$6.64. See "Employee Benefit Plans" and "Director Compensation."

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid or accrued by the
Company for the fiscal year ended September 30, 1998, for its Chief Executive
Officer and the four highest compensated executive officers of the Company whose
total annual salary and bonuses determined at August 31, 1998, exceeded $100,000
(collectively, the "Named Executive Officers"):

<PAGE>

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

Annual Compensation
Year Ended All Other Number of Shares
Name and Principal Position August 31, 1998 Compensation Subject to Options
--------------------------- ------------------- ------------ ------------------

<S> <C> <C> <C>
Carroll E. Williams $211,000 $25,000 0
President and Chief Executive Officer

George Meares 125,000 $ 7,500 0
Vice President, Marketing

Gordon Hubbert 92,000 $ 5,000 0
Vice President and Chief Financial Officer

Charles McDonald 109,000 $ 7,500 0
Executive Vice President, Operations

Alfred F. Casteleyn (1) 170,292 $13,400 0
Vice President, Sales and Marketing

-------
(1) includes Sales Commission

</TABLE>

EMPLOYEE BENEFIT PLANS

INCENTIVE STOCK OPTION PLAN

The Company has a stock option plan under which 1,062,000 shares of common
stock have been reserved for issue to certain employees, officers, and directors
through incentive stock options at September 30, 1998. 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.

OPTION GRANTS TO THE NAMED EXECUTIVE OFFICERS IN FISCAL YEAR 1998

<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value At
----------------- Assumed Annual Rates Of Stock Price
Appreciation For Option Term (1)
-----------------------------------

Percent Of
Total Exercise Of
Number of Options Base Price
Options Granted In ($/Sh) Expiration
Name Granted FY 1998 Date 5% 10%
---- --------- ---------- ----------- ---------- -- ---

<S> <C> <C> <C> <C> <C> <C>
0 0 11.50 09/30/2009 $0 $0
George Meares 2000 2.5 11.50 09/30/2009 $3,877 $19,797
Gordon Hubbert 1500 1.9 11.50 09/30/2009 $2,908 $14,848
Charles McDonald 2000 2.5 11.50 09/30/2009 $3,877 $19,797
Alfred F. Casteleyn 3000 3.8 11.50 09/30/2009 $5,815 $29,695
</TABLE>

(1) Based on the price of the Common Stock on December 31 of $8.25, which is set
each December by VMIC's Board of Directors using a share price for VMIC stock
calculated by an external valuation company.

32
<PAGE>
STOCK AWARDS

In addition to the stock options granted under the stock option plan, the
Company has granted to employees stock awards, which vest in variable terms, not
to exceed five years. The nonvested shares of the stock awards outstanding at
September 30, 1998 and 1997 were 362,885 and 369,918, respectively. During 1998
and 1997, 7,033 and 11,750, respectively, shares of the Company's common stock
were issued.

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, 1998 and 1997 in the accompanying balance sheets,
is approximately $117,500 and $130,200, respectively, withheld from employees to
purchase the Company's common stock under the Stock Plan.

401(K) 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 vesting after one year and becomes 100% vested after five
years. Amounts expensed for the Savings Plan amounted to approximately $110,300,
$106,200, and $71,200 in 1998, 1997, and 1996, respectively.

CERTAIN TRANSACTIONS

1997 PRIVATE PLACEMENT

33
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth as of September 30, 1998, certain information
with respect to beneficial ownership of the Common Stock and the common stock of
VMIC by: i) each person known by the Company to be the beneficial owner of more
than five percent of the outstanding Common Stock, ii) each director and
executive officer of the Company, and iii) all directors and executive officers
of the Company as a group.

Number of Shares Percentage of
Beneficially Held Common Stock

Carroll Williams 1,140,768 26%
Mary W. Williams 561,440 13%
Alfred F. Casteleyn 128,366 3%
Jim Caudle, Sr. 9,084 *
Arthur Faulkner 22,496 *
Ernest Potter 93,632 *
R. Gary Saliba 29,066 *
Gordon Hubbert 35,000 *
Executive officers and
directors as a group 1,974,406 45%

* less than one percent

(1)In accordance with Securities and Exchange Commission rules, a person is
deemed to have beneficial ownership of any securities as to which such
person, directly or indirectly, has or shares voting power or investment
power and of any securities with respect to which such person has the right
to acquire such voting or investment power within 60 days. Except as
otherwise noted in the accompanying footnotes, the named persons have sole
voting and investment power.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 10 million shares of
Common Stock, par value $.10 per share. As of September 30, 1998, the Company
had issued and outstanding 4,462,917 shares of Common Stock.

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote per share for the
election of directors and all matters to be submitted to a vote of the Company's
shareholders. The holders of shares of Common Stock are entitled to share
ratably in such dividends as may be declared by the Board of Directors and paid
by the Company out of funds legally available therefor. In the event of a
dissolution, liquidation, or winding up of the Company, holders of shares of
Common Stock are entitled to share ratably in all assets remaining after payment
of all liabilities and liquidation preferences, if any. Holders of shares of
Common Stock have no preemptive, subscription, redemption, or conversion rights.
The outstanding shares of Common Stock are duly authorized, validly issued,
fully paid, and nonassessable. The Company acts as its own transfer agent and
registrar.

34
<PAGE>
LEGAL MATTERS

The validity of this Registration Statement will be passed upon for the
Company by Lanier Ford Shaver & Payne P.C., Huntsville, Alabama. Members of the
law firm own 10,000 shares of common stock of the Company

INDEPENDENT ACCOUNTANTS

The financial statements of the Company appearing in this Registration
Statement have been audited by PricewaterhouseCoopers LLP, independent
accountants, to the extent indicated in their reports thereon.

ADDITIONAL INFORMATION

The Exchange Act Registration Statement and the exhibits and schedules
thereto filed by VMIC may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 5th Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005 or accessed electronically
by means of the Commission's home page on the Internet (http://www.sec.gov).

Following the registration of VMIC's Common Shares, VMIC will be required to
comply with the reporting requirements of the Exchange Act and will file annual,
quarterly and other reports with the Commission. VMIC will also be subject to
the proxy solicitation requirements of the Exchange Act and, accordingly, will
furnish audited financial statements to its stockholders in connection with its
annual meetings of stockholders.

No person is authorized by VMIC to give any information or to make any
representations other than those contained in this document, and if given or
made, such information or representations must not be relied upon as having been
authorized.

<PAGE>

INDEX TO VMIC, INC. CORPORATION
FINANCIAL STATEMENTS

Report of Independent Accountants................... F-1
Balance Sheets...................................... F-2
Statements of Income................................ F-3
Statements of Changes in Stockholders' Equity....... F-4
Statements of Cash Flows ........................... F-5
Notes to the Financial Statements................... F-6

<PAGE>

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., formally known as VME
Microsystems International Corporation (the Company) as of September 30, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. 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 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
Birmingham, Alabama
November 2, 1998

F-1

<PAGE>

<TABLE>
<CAPTION>
VMIC, INC
BALANCE SHEETS
September 30, 1998 and 1997
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and Cash Equivalents $ 527,972 $ 339,101

Accounts Receivable (includes allowance for doubtful accounts of
$384,383 and $300,462 in 1998 and 1997, respectively) 4,366,330 3,941,132
Inventories 4,943,239 4,132,236
Prepaid Expenses 250,733 91,216
Income Tax Receivable 573,771 278,583
Deferred Income Taxes 954,929 513,627
---------------- -------------
Total Current Assets 11,616,974 9,295,895
Property, plant, and equipment, net 9,033,922 7,661,575
Purchased product and software costs, net 967,852 930,244
Software development costs 3,543,030 1,819,560
---------------- -------------
$ 25,161,778 $ 19,707,274
================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 2,367,397 $ 1,161,396
Current portion of notes, mortgages, and capital leases 2,104,777 1,264,518
Accrued liabilities 2,421,180 2,176,859
---------------- -------------

Total current liabilities 6,893,354 4,602,773
Notes, mortgages, and capital leases, less current portion above 5,713,086 5,395,057
Deferred income taxes 808,101 312,358
---------------- -------------

Total liabilities 13,414,541 10,310,188
---------------- -------------

Commitments and contingencies (Note 10)

Stockholders' Equity:
Common stock, par value $.10 (5,000,000 shares authorized;
4,462,917 AND 4,214,535 shares issued and outstanding in
1998 AND 1997, respectively) 446,292 421,454
Additional paid-in capital 6,432,799 4,312,209
Retained earnings 4,868,146 4,663,423
--------------- -------------
Total stockholders' equity 11,747,237 9,397,086
--------------- -------------
$ 25,161,778 19,707,274
=============== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2

<PAGE>

<TABLE>
<CAPTION>
VMIC, INC.
Statements of Income
for the years ended September 30, 1998, 1997, and 1996
<S> <C> <C> <C>
1998 1997 1996

Hardware sales $ 30,329,726 $ 27,337,479 $ 23,415,889

Software sales 719,547 563,649 375,526
----------------- ----------------- -----------------

Total sales $ 31,049,273 $ 27,901,128 $ 23,791,415
----------------- ------------------ -----------------

Cost and expenses:
Cost of products sold 10,759,343 9,793,061 8,296,334
RESEARCH AND DEVELOPMENT EXPENSE 6,231,572 5,307,207 5,335,288
Selling, general, and administrative expense 13,301,730 10,994,853 9,660,821
---------------- ----------------- -----------------
30,292,645 26,095,121 23,292,443
Operating income 756,628 1,806,007 498,972

Other income (expense):
Interest income 81,544 25,497 34,208
Interest (557,849) (586,030) (451,147)
--------------- ---------------- -----------------
(476,305) (560,533) (416,939)
--------------- ---------------- -----------------
Income before income taxes 280,323 1,245,474 82,033

Provision for income taxes (75,600) (311,245) (40,747)
---------------- ----------------- -----------------
Net income $ 204,723 $ 934,229 $ 41,286
================ ================= =================
Net income per common and common equivalent share:
Basic $0.05 $0.23 $0.01
================ ================= =================
Diluted $0.04 $0.22 $0.01
Weighted average common and common equivalent ================ ================= =================
shares outstanding:
Basic 4,405,808 4,054,764 3,953,922
================ ================= =================
Diluted 4,554,448 4,189,113 4,047,989
================ ================= =================

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

F-3

<PAGE>

<TABLE>
<CAPTION>
VMIC, INC.
Statements of Changes in Stockholders' Equity For the years ended September 30,
1998, 1997, and 1996
<S> <C> <C> <C> <C> <C>
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ----------- ------------- ------------ ------------
Balance, September 30, 1995 1,950,639 $ 195,064 $ 2,482,378 $ 3,687,908 $ 6,365,350

Issuance of shares to effect
stock split (see Note 5) 1,950,639 195,064 (195,064) 0

Issuance of common stock 42,816 4,281 217,245 221,526

Exercise of stock options 51,386 5,139 82,709 87,848

Purchase of common shares for
constructive retirement (5,796) (580) (45,788) (46,368)

Income tax benefit from exercise
of nonqualified stock options 23,621 23,621

Net income 41,286 41,286
---------- ----------- ------------- ------------- -------------

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 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 204,723 204,723
--------- ----------- ------------- ------------- -------------
Balance, September 30, 1998 4,462,917 $ 446,292 $ 6,432,799 $ 4,868,146 $ 11,747,237
========= =========== ============ ============= =============

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

F-4

<PAGE>

<TABLE>
<CAPTION>
VMIC, Inc.
Statements of Cash Flows
for the years ended September 30, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996

Cash flows from operating activities: $ 204,723 $ 934,229 $ 41,286

Net income adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,646,552 2,014,322 1,558,166
Provision for losses on accounts receivable 83,921 50,955 72,000
Stock issued in lieu of cash compensation 71,680 116,110 168,703
Gain on disposal of property and equipment (3,322)
Change in operating assets and liabilities:
Accounts receivable (509,119) (1,013,504) 448,655
Inventories (811,003) (844,236) (833,124)
Prepaid expenses (159,517) 40,422 (37,540)
Income tax receivable (295,188) (197,066) (81,517)
Deferred income taxes, net 54,441 53,928 16,244
Accounts payable 1,206,001 (540,483) 633,208
Accrued liabilities 244,321 385,233 348,279
Income taxes payable (92,968)
------------ ------------ ------------
Total adjustments 2,528,767 65,681 2,200,106
------------ ------------ ------------
Net cash provided by operating activities 2,733,490 999,910 2,241,392
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (3,304,007) (1,268,476) (3,449,362)
Purchased product and software costs (288,150) (332,471) (453,255)
Software development costs (2,195,068) (1,468,726) (584,958)
Proceeds from dispositions of property, plant,
and equipment 10,570
------------ ------------ ------------
Net cash used in investing activities (5,776,655) (3,069,673) (4,487,575)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,120,581 3,830,202 3,737,384
Principal payments on long-term debt (3,962,293) (3,264,167) (2,167,607)
Proceeds from issuance of common stock 1,882,398 1,698,691 140,671
Purchase of common stock for constructive retirement (105,424) (46,368)
Income tax benefit from exercise of nonqualified stock options 191,350 60,217 23,621
------------ ------------ ------------
Net cash provided by financing activities 3,232,036 2,219,519 1,687,701
------------ ------------ ------------
Net increase (decrease) in cash and
cash equilvaents 188,871 149,756 (558,482)
Cash and cash equivalents, beginning of year 339,101 189,345 747,827
------------ ------------ ------------
Cash and cash equivalents, end of year $ 527,972 $ 339,101 $ 189,345
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 558,150 $ 584,671 $ 481,543
============ =========== ============

Cash paid during the year for income taxes $ 125,000 $ 381,600 $ 175,368
============= =========== ============

The accompanying notes are an integral part of these financial
</TABLE>
F-5

<PAGE>
VMIC, INC.
Notes to Financial Statements

1. Summary of Significant Accounting Policies

VMIC,Inc., formally known as VME Microsystems International VMIC, Inc.,
formally known as VME Microsystems International Corporation (the Company)
primarily develops, manufactures, and markets VMEbus board level products,
including intelligent I/O controllers, and certain other products including
computer software. The products connect to a VMEbus that through its
elecrical and bussing structure permits the interconnection of microcomputers
and various types of board level products and I/O controllers. The Company,
which is located in Huntsville, Alabama, primarily sells within the United
States but has international sales.During the fiscal years ended September
30, 1998, 1997, and 1996, sales to customers in foreign countries composed
18%, 19% and 25%, respectively, of total revenues with 10%, 10%, and 11%,
respectively, of total revenues being derived from sales to European
countries and 5%, 5%, and 8%, respectively, of total revenues being derives
from sales to Asian countries. These international sales are denominated in
United States currency. 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 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 which approximate market.

PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated at
cost and depreciated using the straight-line method over the estimated
estimated useful lives of the assets of three to fifteen years. Maintenance
and repairs are charged to expense as incurred. Replacements and improvements
are capitalized and depreciated over the estimated remaining useful lives of
the assets. When items are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is included
in net income.

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, 1998, 1997, and 1996 was $250,542, $172,447,
and $78,748, 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 establishof
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 on a
product-by-product basis. The annual amortization shall be the greater of
the amount computed using the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues
for that product or the straight-line method over the remaining estimated
economic life of the product including the period being reported on. For
1998, 1997 and 1996, the straight-line basis was utilized on all products.
Amortization begins when a product master is made. Accumulated amortization
as of September 30, 1998, 1997, and 1996 was $705,722, $234,124, and $0,
respectively. Amortization expense for the years ended September 30, 1998,
1997, and 1996 was $471,598, $234,124, and $0, respectively.When
anticipated gross revenue estimates change, the carrying amounts of
capitalized software costs are adjusted accordingly. During the year ended
September 30, 1998, the Company expensed $67,479 to write-down certain
assets' carrying amount to the amount of the undiscounted cash flows
estimated to be generated by those assets.

F-6

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

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. There were no such losses recognized during
1998, 1997, or 1996.

LIABILITY FOR WARRANTY RETURNS - The Company's sales generally include a two
year warranty for product defects. The liability for warranty returns which
totaled approximately $630,000 and $600,000 at September 30, 1998 and 1997,
respectively, 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 in accrued liabilities in the balance
sheet.

REVENUE RECOGNITION - The Company records sales upon shipment of the related
products, net of any discounts and provision for warranty returns.The Company
recognizes revenue from software licenses and sales and from the sale of
upgrades or enhancements to customers at the time of delivery. Revenue from
maintenance and service contracts is recognized over the contractual period.
Revenue is reduced for estimated customer returns and allowances.

RESEARCH AND DEVELOPMENT COSTS - Research and development costs incurred
prior incurred prior to the establishment of technological feasibility are
expensed as incurred.

ADVERTISING EXPENSE - Advertising costs are expensed as incurred. Advertising
expense totaled approximately $907,000, $849,000 and $689,000 for the years
ended September 30, 1998, 1997, and 1996, 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. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to 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 June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, which requires the reporting
and display of comprehensive income and its components in an entity's
financial statements, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which specifies revised guidelines for
determining an entity's operating segments and the type and level of
financial information to be required. The Company is required to adopt these
standards in fiscal 1999. The Company does not expect the impact of these
pronouncements to be material.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, to supersede SOP 91-1, the previously released SOP on this
topic. SOP 97-2 provides additional guidance on when revenue should be
recognized and in what amounts, for licensing, selling, leasing or otherwise
marketing computer software. The provisions of SOP 97-2 are

F-7

effective for transactions entered into in fiscal years beginning after
December 15, 1997. Adoption of SOP 97-2 is not expected to have a material
adverse affect on the Company's financial statements.

In February 1998 and in June 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Bene-
fits" and SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," respectively. Adoption of these standards is not
expected to impact the financial results of the Company.

2. INVENTORIES

At September 30, 1998 and 1997, inventories consist of the following:

1998 1997

Raw materials $ 2,388,844 $ 1,321,735
Work in process 829,125 1,775,673
Finished goods 1,725,270 1,034,828
------------- -------------
$ 4,943,239 $ 4,132,236
============= =============

3. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consists of the following at September 30,
1998 and 1997:

1998 1997

Land $ 676,313 $ 676,313
Buildings 4,664,693 4,664,693
Machinery and equipment 9,719,590 7,572,801
Furniture and fixtures 115,035 84,152
Automobiles 273,579 249,291
Construction in progress 1,058,742
------------ ------------
$ 16,507,952 $ 13,247,250
Less accumulated depreciation 7,474,030 5,585,675
------------ ------------
$ 9,033,922 $ 7,661,575
============ ============

F-8

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

4. NOTES, MORTGAGES, AND CAPITAL LEASES

Notes, mortgages, and capital leases payable at September 30, 1998 and 1997
consist of the following:

1998 1997

Short-term obligations:
Current portion of mortgage payable (1) $ 992,424 $ 109,704
Current portion of note payable (2) 1,112,353 754,814
Line of credit (3) 400,000
------------ ------------
$ 2,104,777 $ 1,264,518
============ ============
Long-term obligations:
Mortgage payable (1) $ 2,510,291 $ 2,741,925
Note payable (2) 3,202,795 2,653,132
------------ ------------
$ 5,713,086 $ 5,395,057
============ ============

(1) Mortgages on buildings and land with unpaid principal balances becoming
due from 1998 through 2012. Interest rates ranged from 7.5% to 8.5% at
September 30, 1998. The mortgages are collateralized by building,
construction-in-process, and land with a net book value of approximately
$4,880,000 at September 30, 1998.

(2) Automobile and equipment financing payable in monthly installments
ranging from $806 to $70,200 with the final payment due in May 2001;
payments payments include interest at rates ranging from 7.65% to 8.3% at
September 30, 1998. Automobiles and equipment with a net book value of
approximately $4,119,000 at September 30, 1998 serve as collateral.

(3) The Company can also borrow under a $7,000,000 revolving line of credit
with interest payable monthly at prime plus 0.5%. This line of credit is
collateralized primarily by accounts receivable and inventory of the
Company. The line of credit agreement expires on August 1, 1999. 1999.
The Company had $0 and $400,000 outstanding borrowings under this line of
credit agreement at September 30, 1998 and 1997, respectively.

The aggregate maturities of notes and mortgages at September 30, 1998 are
as follows:

1999 $ 2,104,777
2000 1,320,475
2001 1,347,935
2002 661,426
2003 399,600
Thereafter 1,983,650
-----------
$ 7,817,863
===========

F-9

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

5. STOCK SPLIT

On December 9, 1995, the stockholders approved the recommendation of the the
Board of Directors to increase the authorized common stock from 3 million
shares to 5 million shares, par value $.10. The Company declared a 2 for 1
stock split, which was effected through a stock dividend, payable on December
9, 1995 to stockholders of record on December 9, 1995. All common stock
information included in the financial statements, except the statements of
changes in stockholders' equity, gives retroactive effect to this stock
split.

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, 1998. 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 1998, 1997, and 1996, which reflect the retroactive effect
of the stock split in 1996 discussed in Note 5, are as follows:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted-
Average
Number of Range of Exercise
Options Exercise Prices Price
------------ ------------------ ------------
Options outstanding, October 1, 1995 447,856 $2.125-$4.00 $ 2.29
Options granted 110,850 $4.00-$8.00 $ 7.89
Options exercised (57,394) $2.125-$4.90 $ 2.54
Options canceled (37,882) $2.125-$2.45 $ 2.30
------------ ----------------- ------------
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, September 30, 1998 520,919 $4.90-$11.50 $ 8.51
============ ================ ===========
</TABLE>
F-10

<PAGE>

VMIC, INC. NOTES TO FINANCIAL STATEMENTS- (CONTINUED)

The following table summarizes information about stock options outstanding at
September 30, 1998:

<S> <C> <C> <C> <C> <C>
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 1998 Life Price 1998 Price
----------- ------------- ----------- -------- ------------- ---------

$4.90-$8.00 96,611 0.69 $4.90 9,5171 $4.90
$8.00-$10.00 209,640 4.56 $8.00 9,1169 $8.00
$10.00-$11.50 214,668 9.28 $10.63 12,198 $10.00
------------- -------------
520,919 198,538
============= =============
</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>
<S> <C> <C> <C>
1998 1997 1996

Net income - as reported $ 204,723 $ 934,229 $ 41,286
Net income (loss) - pro forma $ 9,605 $ 754,430 $ (22,029)
Diluted earnings per share - as reported $ 0.04 $ 0.22 $ 0.01
Diluted earnings per share - pro forma $ 0 $ 0.18 $ (0.01)
</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:

1998 1997 1996

Dividend yield 0% 0% 0%
Expected life (years) 7 6 6
Risk-free interest rate 4.76%-6.63% 5.87%-6.63% 5.67%-6.63%

F-11

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

In addition to the stock options granted under the stock option plan, the
Company has granted to employees stock awards, which vest in variable terms,
not to exceed five years. The nonvested shares of the stock awards
outstanding at September 30, 1998 and 1997 were 362,885 and 369,918,
respectively. During 1998 and 1997, 7,033 and 11,750, respectively, shares
respectively, shares of the Company's common stock were issued and $71,680
and $116,110, respectively, was charged to expense relating to the following:

1998 1997
--------------------- ----------------------
Shares Shares
Issued Amounts Issued Amounts
--------- ---------- --------- ----------
Employee bonuses 7,033 $ 71,680 7,850 $ 77,500
Employee compensation 3,900 38,610
--------- --------- --------- -------
7,033 $ 71,680 11,750 $ 116,110
========= ========= ========= =========

7. INCOME TAXES

The components of the provision for income taxes for the years ended
September 30, 1998, 1997, and 1996 are as follows:

1998 1997 1996
Current:
Federal $ 13,598 $ 223,816 $ 19,686
State 7,560 33,501 4,817
---------- --------- --------
Total current 21,158 $ 257,317 24,503
Deferred 54,442 53,928 16,244
---------- ---------- ---------
Total provision for income taxes $ 75,600 $ 311,245 $ 40,747

Temporary differences which generated deferred tax assets and liabilities at
September 30, 1998 and 1997 are as follows:

1998 1997

Current deferred tax assets:
Accounts receivable $ 139,224 $ 74,568
Inventory 418,702 213,629
Tax credits 554,291
Accurals and other 397,003 (328,861)
------------ ------------
Net current deferred tax asset $ 954,929 $ 513,627
============ ============

F-12

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

1998 1997

Noncurrent deferred tax liability:
Property, Plant, and equipment $ 75,886 $ (7,279)
Software development costs (1,251,307) (422,683)
Loss carryfordwards 300,183
Tax credits 67,137
Other 117,604
------------ ---------
Net noncurrent deferred tax liability $ (808,101) $ (312,358)

During 1998 and 1997, 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 $800,000 and $663,000 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>
<S> <C> <C> <C>
1998 1997 1996

Income tax expense at statutory federal income tax rate $ 95,310 $ 423,461 $ 27,890
Effect of tax credits (40,488) (174,366)
State income taxes - net of federal income tax benefit 7,102 25,830 3,180
Miscellaneous 13,676 36,320 9,677
------------ ------------- -----------
Total provision for income taxes $ 75,600 $ 311,245 $ 40,747
============ ============== ===========
</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 vesting after one one year and
becomes 100% vested after five years. Amounts expensed for the Savings Plan
amounted to approximately $110,300, $106,200, and $71,200 in 1998, 1997, and
1996, respectively.

F-13

<PAGE>

VMIC, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

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, 1998 and 1997 in the
accompanying balance sheets, is approximately $117,500 and $130,200,
respectively, withheld from employees to purchase the Company's common stock
under the Stock Plan.

10. CONTINGENCIES

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.

11. EARNINGS PER SHARE

A summary of the calculation of basic and diluted earnings per share for the
years ended September 30, 1998, 1997 and 1996 is as follows:

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

1998
<S> <C> <C> <C>

Basic EPS:

Income available to common stockholders $ 204,723 4,405,808 $ .05

Effect if 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

F-14

<PAGE>

1996

Basic EPS:

Income available to common stockholders $ 41,286 3,953,922 $ .01

Effect of dilutive securities:

Stock Options 94,067

Diluted EPS $ 41,286 4,047,989 $ .01

</TABLE>

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 20, 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.

All options to purchase common stock were included in the 1996 diluted EPS.

F-15

PART II

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------

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*

27.1 Financial Data Schedule (for SEC use only)**

- ------------------
*Management contract or compensatory plan or arrangement
**To be filed by amendment
+ Previously filed

II-1

<PAGE>

Report of Independent Accountants

To the Board of Directors
VMIC, Inc.
Huntsville, AL

Our report on the consolidated financial statements of VMIC, Inc. has been
included on page F-1 of this Form 10. In connection with our audit of such
consolidated financial statements, we have also audited the related financial
statement schedule listed in the index on page 36 of the Form 10. In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

PricewaterhouseCoopers LLP
Birmingham, AL

November 2, 1998

II-2
<PAGE>
<TABLE>
<CAPTION>

VALUATION & QUALIFYING ACCOUNTS
SCHEDULE 2

<S> <C> <C> <C> <C> <C>
Beginning Charged to Charged to Ending
Description Balance Expenses Accounts Deductions (1) Balance
- ----------- ------- -------- ---------- -------------- -------

Year ended September 30, 1996;
Allowance for doubtful accounts $177,507 $ 72,000 $0 $249,507
Liability for warranty returns $525,707 $ 355,293 -$401,000 $480,000

Year ended September 30, 1997;
Allowance for doubtful accounts $249,507 $ 51,462 -$507 $300,462
Liability for warranty returns $480,000 $645,000 -$525,000 $600,000

Year ended September 30, 1998;
Allowance for doubtful accounts $300,462 $ 90,000 -$6,079 $384,483
Liability for warranty returns $600,000 $501,000 -$471,000 $630,000

(1) Deductions consist of specific accounts receivable written off against the
allowance for doubtful accounts.

</TABLE>

II-3

<PAGE>
SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, VMIC, Inc. has duly caused this amendment to the Registration Statement
on Form 10 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Huntsville, State of Alabama on July 28,1999.

VMIC, INC.

Carroll E. Williams
By:___________________________________________
Carroll E. Williams, President,
CEO and Chairman of the Board

Mary W. Williams
By:____________________________________________
Mary W. Williams, Director,
Secretary and Treasurer

Arthur Faulkner
By:____________________________________________
Arthur Faulkner, Director

Alfred F. Castelyn
By:____________________________________________
Alfred F. Castelyn, Director,
Vice President Sales and Marketing

By: Ernest Potter
____________________________________________
Ernest Potter, Director

R. Gary Saliba
By:____________________________________________
R. Gary Saliba, Director

Jim Caudle, Sr.
By:____________________________________________
Jim Caudle, Sr., Director

II-4