INTERNATIONAL MERCANTILE CORP



                               FILING TYPE: 10QSB
                          DESCRIPTION: QUARTERLY REPORT
                                  FILING DATE:
                            PERIOD END: JUN 30, 2000


                      PRIMARY EXCHANGE: OTC BULLETIN BOARD
                                  TICKER: IMTL




<PAGE>


                                TABLE OF CONTENTS


PART I.........................................................................2
Item 1.........................................................................2
Balance Sheet Assets...........................................................3
Balance Sheet Liabilities......................................................4
Income Statement...............................................................5
Table 4........................................................................7
Cash Flow Statement............................................................8
Table 6.......................................................................14
Table 7.......................................................................15
Table 8.......................................................................15
Table 9.......................................................................16
Table 10......................................................................16
Table 11......................................................................18
Table 12......................................................................18
Item 2........................................................................19
PART II.......................................................................22
Item 1........................................................................22
Item 2........................................................................22
Item 3........................................................................23
Item 4........................................................................23
Item 5........................................................................23
Item 6........................................................................23
Exhibit 27 Table..............................................................25


<PAGE>


                     U.S. Securities and Exchange Commission

                              Washington, DC 20549

                                   Form 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  For the quarterly period ended March 31, 1999

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

                   For the transition period from ---- to ----

                          Commission File number 0-7693

                      INTERNATIONAL MERCANTILE CORPORATION
                      ------------------------------------
                     (Exact name of small business issuer as
                            specified in its charter)

          Missouri                                            43-0970243
          --------                                            ----------
(State of other jurisdiction of                             (IRS Employer
 incorporation or organization)                           Identification No.)

                  1625 Knecht Avenue, Baltimore, Maryland 21227
                  ---------------------------------------------
                    (Address of principal executive offices)

                                 (410) 242-5000
                                 --------------
                           (Issuer's telephone number)

              (Former name, former address, and former fiscal year,
                          if changed since last report)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15 (d) of the  Exchange Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements  for the past 90 days.
Yes [X]    No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable date:

     As of June 30, 2000,  there were outstanding  27,190,183  shares of Class A
Common Stock,  $0.01 par value,  and  2,000,000  shares of Class B Common Stock,
$0.01 par value.

     Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION

                                Form 10-QSB Index
                                  June 30, 2000
                                                                            Page


Part I: Financial Information ............................................     3

   Item 1. Financial Statements ..........................................     3

      Balance Sheets as of December 31, 1999 and June 30,
       2000 (unaudited)..................................................    6-7

      Statement of Operations for the period September 2, 1999
       (Date of Inception) through December 31, 1999 and the
       Six Months Ended June 30, 2000.....................................     8

      Statement of Changes in Stockholder's Equity for the
       period September 2, 1999 (Date of Inception) through
       December 31, 1999 and the Six Months Ended June 30, 2000 ..........     9

      Statement of Cash Flows for the period September 2, 1999
       (Date of Inception) through December 31, 1999 and the Six
       Months Ended June 30, 2000 .......................................     10

      Notes to Financial Statements......................................  11-20

   Item 2. Management's Discussion and Analysis or Plan of
       Operation ........................................................     21

Part II:   Other Information ............................................     24

   Item 1.    Legal Proceedings .........................................     24

   Item 2.    Changes in Securities .....................................     24

   Item 3.    Defaults Upon Senior Securities ...........................     25

   Item 4.    Submission of Matters to a Vote of Security Holders .......     25

   Item 5.    Other Information .........................................     25

   Item 6.    Exhibits and Reports on Form 8-K ..........................     25

Signatures ..............................................................     27


                                        2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION


Item 1.  Financial Statements



                                       3

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION



      Balance Sheets as of December 31, 1999 and June 30, 2000 (Unaudited)
            Statements of Operations, Changes in Stockholders' Equity
            and Cash Flows for the Period September 2, 1999 (Date of
          Inception) Through December 31, 1999 and the Six Months Ended
                           June 30, 2000 (Unaudited)






                                        4

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                                TABLE OF CONTENTS
                 DECEMBER 31, 1999 AND JUNE 30, 2000 (Unaudited)

                                                                      Page
                                                                      ----

       Balance Sheets ............................................     F-1

       Statements of Operations ..................................     F-2

       Statements of Changes in Stockholders' Equity .............     F-4

       Statements of Cash Flows ..................................     F-5

       Notes to the Financial Statements .........................  F-7 - F-16



                                        5
<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                                 BALANCE SHEETS
                    AS OF DECEMBER 31, 1999 and JUNE 30, 2000

                                                                       June 30,
                                                       December 31,      2000
                                                          1999         Unaudited
                                                          ----         ---------
               ASSETS

Current Assets
  Cash and Cash Equivalents ........................    $   37,699    $   61,840
  Marketable Securities ............................       715,075             0
  Accounts Receivable Net of Allowance
    for Doubtful Accounts ..........................       849,471     1,306,594
  Inventory ........................................       475,626       565,151
  Prepaids and Other Assets ........................        14,298        21,418
                                                        ----------    ----------
     Total Current Assets ..........................     2,092,169     1,955,003

Investments
  Investment in VLDC Technologies, Inc. Stock ......     2,725,642     3,000,000

Fixed Assets
  Fixed Assets, net of Accumulated Depreciation ....       200,008       221,574

Other Assets
  Organization Costs, Net of Amortization ..........       196,832       191,415
  Deposits .........................................        18,330        36,042
                                                        ----------    ----------
     Total Other Assets ............................       215,162       227,457
                                                        ----------    ----------
          Total Assets .............................    $5,232,981    $5,404,034
                                                        ==========    ==========



                      See Notes to Financial Statements

                                       F-1

<PAGE>

                      INTERNATIONAL MERCANTILE CORPORATION
                                 BALANCE SHEETS
                    AS OF DECEMBER 31, 1999 and JUNE 30, 2000


                                                                        June 30,
                                                      December 31,        2000
                                                         1999          Unaudited
                                                         ----          ---------
       LIABILITIES & STOCKHOLDERS' EQUITY

Current Liabilities
  Accounts Payable and Accrued Expenses ..........   $   745,218    $ 1,011,136
  Accrued Interest Payable .......................         9,052         47,214
  Due to Related Party ...........................       261,322         39,573
  Warranty Reserve - Current Portion .............         2,442          2,442
  Note Payable - Related Parties,
    Current Portion ..............................       596,609        596,609
  Line of Credit .................................             0        698,946
  Loans Payable ..................................       750,124        247,500
  Capitalized Lease Payable - Current Portion ....        10,221         10,221
                                                     -----------    -----------
     Total Current Liabilities ...................     2,374,988      2,653,641

Long Term Liabilities
  Committments and Contingencies
  Warranty Reserve Net of Current Portion ........         4,884         11,884
  Capitalized Lease Payable Net
    of Current Portion ...........................        23,787         17,987
  Note Payable - Related Party
    Net of Current Portion .......................       100,000         75,000
                                                     -----------    -----------
       Total Long Term Liabilities ...............       128,671        104,871
                                                     -----------    -----------
       Total Liabilities .........................     2,503,659      2,758,512

Stockholders' Equity
  Common stock-Class A - $.01 Par,
   31,000,000 shares authorized,
   5,102,441 shares outstanding @ 12/31/99
   and 27,190,183 shares outstanding @ 6/30/00 ...        51,024        271,902
  Common stock-Class B - $.01 Par,
    2,000,000 shares authorized, 1,000,000
    shares outstanding @ 12/31/99 and
    2,000,000 shares outstanding @ 3/31/00 .......        10,000         20,000
  Preferred stock - Series 1 - $.10 Par,
    10,000,000 shares authorized,
    -0- shares outstanding .......................             0              0
  Preferred stock - Series 2 - $.10 Par,
    2,000,000 shares authorized,
    2,000,000 shares outstanding @6/30/00 ........             0        200,000
  Preferred stock - Series 3 - $.10 Par,
    5,000,000 shares authorized,
    -0- shares outstanding @6/30/00 ..............             0              0

  Additional paid in capital .....................     2,967,742      3,252,577
  Unrealized gain/loss on investments ............             0        274,358

  Accumulated Deficit ............................      (299,444)    (1,373,315)
                                                     -----------    -----------
     Total Stockholders' Equity ..................     2,729,322      2,645,522
                                                     -----------    -----------

       Total Liabilities & Stockholders' Equity ..   $ 5,232,981    $ 5,404,034
                                                     ===========    ===========


                        See Notes to Financial Statements

                                       F-2

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                            STATEMENTS OF OPERATIONS
              FOR THE PERIOD SEPTEMBER 2, 1999 (Date of Inception)
        THROUGH DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000

                                                                       June 30,
                                                     December 31,         2000
                                                        1999           Unaudited
                                                        ----           ---------
Revenues
  Sales ........................................     $1,465,294      $4,045,914
  Cost of Merchandise Sold .....................      1,262,396       3,697,212
                                                     ----------      ----------
      Gross Profit .............................        202,898         348,702

Operating Expenses
  Amortization .................................         12,390          20,384
  Auto and Truck Expense .......................              0          15,993
  Bad Debts ....................................         17,336          34,625
  Bank Charges & Credit Card Fees ..............          4,718          18,470
  Donations ....................................              0           1,817
  Depreciation .................................         10,480          22,494
  Interest Expense .............................         11,436          88,454
  Marketing & Advertising Expense ..............         55,074           8,622
  Office Supplies & Expense ....................         32,021          86,627
  Professional Fees ............................         18,476         145,034
  Rent .........................................         42,823          86,989
  Repairs & Maintenance ........................          5,168           8,594
  Sales Expense ................................         61,848         224,957
  Salaries & Related Costs & Benefits ..........        188,706         515,114
  Subcontract Labor & Temporary Help ...........          9,725           8,329
  Telephone ....................................         16,559          46,584
  Travel & Promotion ...........................          3,267          62,897
  Utilities ....................................          4,989          19,588
  Warranty Reserve .............................          7,326           7,000
                                                     ----------      ----------
     Total Operating Expenses ..................        502,342       1,422,573
                                                     ----------      ----------
  Net (Loss) ...................................     $ (299,444)     $1,073,871)
                                                     ==========      ==========
  Earnings (Loss) per share of Common
    Stock - Basic (Note 1) .....................     $  (0.0513)     $  (0.0368)
                                                     ==========      ==========

  Weighted Average Shares - Basic ..............      5,835,166       9,190,183
                                                     ==========      ==========
  Earnings (Loss) per share of Common
    Stock - Diluted (Note 1) ...................     $  (0.0308)     $  (0.0368)
                                                     ==========      ==========

  Weighted Average Shares - Diluted ............      9,726,833       9,190,183
                                                     ==========      ==========


                        See Notes to Financial Statements


                                       F-3
<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                            STATEMENTS OF OPERATIONS
                       FOR THE QUARTER ENDED JUNE 30, 2000


                                                                      June 30,
                                                                        2000
                                                                      Unaudited
                                                                      ---------
Revenues
  Sales ....................................................         $1,835,668
  Cost of Merchandise Sold .................................          1,728,064
                                                                     ----------
      Gross Profit ................................................     107,604
Operating Expenses
  Amortization ....................................................      11,172
  Auto and Truck Expense ..........................................      11,629
  Bad Debts .......................................................      30,000
  Bank Charges & Credit Card Fees .................................      11,194
  Donations .......................................................           0
  Depreciation ....................................................      11,444
  Interest Expense ................................................      70,560
  Marketing & Advertising Expense .................................       8,622
  Office Supplies & Expense .......................................      48,070
  Professional Fees ...............................................     110,797
  Rent ............................................................      42,980
  Repairs & Maintenance ...........................................       4,041
  Sales Expense ...................................................     106,539
  Salaries & Related Costs & Benefits .............................     263,034
  Subcontract Labor & Temporary Help ..............................         855
  Telephone .......................................................      25,480
  Travel & Promotion ..............................................      38,805
  Utilities .......................................................       8,877
  Warranty Reserve ................................................       3,000
                                                                     ----------
     Total Operating Expenses .....................................     807,099
                                                                     ----------
  Net (Loss) ......................................................  $ (699,495)
                                                                     ==========
  Earnings (Loss) per share of Common Stock - Basic (Note 1) ......  $  (0.0240)
                                                                     ==========
  Weighted Average Shares - Basic .................................  29,190,183
                                                                     ==========
  Earnings (Loss) per share of Common Stock - Diluted (Note 1) ....  $  (0.0240)
                                                                     ==========
  Weighted Average Shares - Diluted ...............................  29,190,183
                                                                     ==========


                        See Notes to Financial Statements

                                      F-4

<PAGE>

                      INTERNATIONAL MERCANTILE CORPORATION
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE PERIOD SEPTEMBER 2, 1999 (Date of Inception)
        THROUGH DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000

<TABLE>
<CAPTION>
                                                          COMMON STOCK            ADDITIONAL
                                                        -------------------        PAID IN
                                                        SHARES       AMOUNT        CAPITAL        DEFICIT
                                                        ------       ------        -------        -------
<S>                                                     <C>         <C>           <C>             <C>
Balance,  September 2, 1999
  (Date of Inception) ..........................         1,000    $        10    $       490    $         0

Reverse acquisition, September 6, 1999
  Exchange of Micromatix.com, Inc., a
    Delaware corp
  Common Stock .................................        (1,000)           (10)          (490)             0

Authorization of Common Stock of
  International Mercantile Corporation,
  a Missouri corp, to owners of
  Micromatix.com, Inc., a Delaware corporation
    Class B Common Stock, issued and outstanding             0              0              0              0

Outstanding Common Stock of International
  Mercantile Corporation, a Missouri corp.,
  9/2/99 to 12/31/99
    Class A  Common Stock ......................     5,102,441         51,024      2,967,742              0
    Class B  Common Stock ......................     1,000,000         10,000              0              0

Net (Loss) Accumulated During the
  Development Stage ............................             0              0              0       (299,444)
                                                   -----------    -----------    -----------    -----------
Balance,  December 31, 1999 ....................     6,102,441         61,024      2,967,742       (299,444)

Issuance of Common Stock of International
  Mercantile Corporation, a Missouri corp,
  to owners of Micromatix.com, Inc., a
  Delaware corporation
    Class A Common Stock .......................     1,500,000         15,000              0              0
    Class B Common Stock .......................     1,000,000         10,000              0              0

Issuance of Common Stock of International
  Mercantile Corporation, a Missouri corp.,
  1/1/00 to 6/30/00
    Class A  Common Stock ......................    20,587,742        205,878        284,835              0
    Class B  Common Stock ......................             0              0              0              0

Net (Loss) .....................................             0              0              0     (1,073,871)
                                                   -----------    -----------    -----------    -----------
Balance,  June 30, 2000 (Unaudited ) ...........    29,190,183    $   291,902    $ 3,252,577     (1,373,315)
                                                   ===========    ===========    ===========    ===========
</TABLE>



                        See Notes to Financial Statements


                                       F-5

<PAGE>

                      INTERNATIONAL MERCANTILE CORPORATION
                            STATEMENTS OF CASH FLOWS
              FOR THE PERIOD SEPTEMBER 2, 1999 (Date of Inception)
        THROUGH DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000


                                                                        June 30,
                                                      December 31,        2000
                                                         1999          Unaudited
                                                         ----          ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss .........................................   $  (299,444)   $(1,073,871)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
  Bad Debts ......................................        17,336         34,625
  Depreciation & Amortization ....................        22,870         42,878
  (Increase) Decrease In
     Marketable Securities .......................      (715,075)       715,075
     Accounts Receivable .........................      (866,807)      (491,748)
     Investment in VLDC Technologies, Inc. .......    (2,725,642)             0
     Inventory ...................................      (475,626)       (89,525)
     Prepaids & Other Assets .....................       (14,298)        (7,120)
     Deposits ....................................       (18,330)       (17,712)
     Organization Costs ..........................      (209,222)       (14,967)
   Increase (Decrease)
     Accounts Payable &  Accrued Expenses ........       745,218        265,918
     Due to Related Party ........................       261,322       (221,749)
     Accrued Interest ............................         9,052         38,162
     Warranty Reserve ............................         7,326          7,000
                                                     -----------    -----------
NET CASH (USED) IN OPERATING ACTIVITIES ..........    (4,261,320)      (813,034)

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisition of Fixed Assets ....................      (210,488)       (44,060)
                                                     -----------    -----------
NET CASH (USED) IN INVESTING ACTIVITIES ..........      (210,488)       (44,060)

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from Capitalized Leases ...............        34,008              0
  Proceeds from Loans and Line of Credit .........       775,124      1,105,000
  Payments on Loans ..............................       (25,000)      (933,678)
  Payments on Capital Lease ......................             0         (5,800)
  Capital Contributions ..........................     2,967,742        284,835
  Issuance of Capital Stock ......................        61,024        430,878
  Proceeds from Note Payable - related parties ...       696,609              0
                                                     -----------    -----------
NET CASH PROVIDED BY IN FINANCING ACTIVITIES .....     4,509,507        881,235
                                                     -----------    -----------
NET INCREASE (DECREASE) IN CASH ..................        37,699         24,141
CASH - BEGINNING .................................             0         37,699
                                                     -----------    -----------
CASH - ENDING ....................................   $    37,699    $    61,840
                                                     ===========    ===========


                        See Notes to Financial Statements


                                       F-6

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

ORGANIZATION

International  Mercantile  Corporation  (The  Company)  is a profit  corporation
organized  under  the  laws of the  State  of  Missouri  on  March  10,  1971 as
International  Mercantile  Corporation  (IMTL).  On July 31,  1999,  the Company
liquidated  its'  majority  interest  holdings  in its'  subsidiary,  University
Mortgage,  Inc.,  which  represented  the  Company's  operations,  through a new
issuance of University Mortgage, Inc. stock to a related third party investor in
consideration  of their  capital  investment in  University  Mortgage,  Inc. The
result of this action left an OTC Bulletin Board publicly traded company with no
substantial assets or liabilities. On September 6, 1999, the Company merged with
Micromatix.com,   Inc.  (the  predecessor  company),  a  newly  formed  Delaware
corporation which maintained an Internet based personal  computer  manufacturing
business that sells  build-to-  order unbranded or "white box" PC systems and PC
related hardware throughout the United States to value added retailers and other
marketers of micro computer  systems.  Shareholders of the  Predecessor  Company
received 2,500 shares of the Company's  stock for each share of the  Predecessor
Company;  a total  of  2,500,000  shares  issued,  in  exchange  for 100% of the
outstanding stock of the Predecessor  Company. The merger is being accounted for
as a capital  transaction  with no recognition  of goodwill or other  intangible
assets. The Company, however, has not completed the requisite articles of merger
and related documents,  which are required to be filed with the applicable state
authorities.  Subsequent  to the  transaction,  the  owners  of the  predecessor
company  assumed the management of the Company doing business as  Micromatix.net
and  owned  approximately  26.92%  of  the  outstanding  stock  of  the  Company
representing  48.32%  of the  voting  rights.  Since  this  transaction  is,  in
substance, a recapitalization of Micromatix.com,  Inc. (the Predecessor Company)
and  not a  business  combination,  pro  forma  information  is  not  presented.
Accordingly,  the historical data contained in the financial  statements is that
of the Predecessor Company.

REVENUE RECOGNITION

Revenues are derived primarily from sales of build-to-order  personal  computers
and  related PC hardware  via the  Company's  business  to business  e:commerce.
Revenues  related  to these  sales are  recognized  when a  computer  product is
shipped and invoiced.

INVENTORY

Inventory  consists of component  parts and work in process at period-end as all
finished  products were shipped prior to June 30, 2000. The Company  maintains a
perpetual inventory system and determines quantities by the average cost method.
Inventory  is valued at the lower of actual  cost or  market,  net of  inventory
allowance.


                                       F-7

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

ADVERTISING EXPENSE

The Company  recognizes  advertising  expenses in accordance  with  Statement of
Position  ("SOP") 93-7  "Reporting on  Advertising  Costs." As such, the Company
expenses the costs of producing  advertisements  at the time production  occurs,
and expenses the cost of  communicating  advertising  in the period in which the
advertising space or airtime is used.

PROPERTY AND EQUIPMENT

Property and  equipment is stated at cost.  Depreciation  is computed  using the
straight-line  method based on the estimated  useful lives of the assets,  which
range from three to five years.  Costs for routine  repairs and  maintenance are
expensed  as  incurred  and  gains  and  losses on the  disposal  of assets  are
recognized in the period such disposals occur.

SOFTWARE DEVELOPMENT COSTS

Internal  and  external  costs  incurred to develop  internal-use  software  are
capitalized  during the  application  development  stage and are being amortized
over three years.

INTANGIBLE ASSETS

Costs  incurred to organize  the Company  are  capitalized  and  reported on the
balance sheet as other assets.  The costs are being amortized over a period of 5
years using the straight-line method.

MARKETABLE SECURITIES

The Company's marketable  securities are comprised of equity and debt securities
and are  classified as trading  securities.  Trading  securities are recorded at
fair  value,  with the change in fair value  during the period  included  in net
earnings.  In the first  quarter  of the year 2000 the  Company  liquidated  its
entire marketable trading securities portfolio.

WARRANTY RESERVE

The Company  maintains  a depot  warranty on  components  sold and  manufactured
systems for three years; the equivalent  period of time that  substantially  all
components  from supplier  manufacturers  are warranted.  As the Company has not
established a history of warranty  service,  a warranty  reserve of 1/2 of 1% of
sales has been recorded at June 30, 2000.


                                       F-8

<PAGE>

                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

INCOME TAXES

The  Company  files its tax  return  with the  Internal  Revenue  Service as a C
Corporation.  Applying statutory tax rates to future year's differences  between
the tax  bases  and  financial  reporting  amounts  of  assets  and  liabilities
recognizes deferred income taxes. No deferred tax asset/valuation  allowance has
been recognized for the losses incurred to date, as it is not determinable  that
the Company will realize any tax benefit from such losses.  Loss  carryforwards,
if any, expire fifteen years following the tax year-end in which they occur.

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  requires that  management 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 revenues and expenses  during the respective  reporting
period. Actual results could vary from these estimates and assumptions.

CONCENTRATIONS OF RISK

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist   primarily  of  cash,  cash  equivalents  and  marketable
securities.  The Company maintains its cash and cash equivalents in bank deposit
accounts,  the balances of which, at times, may exceed federally insured limits.
Additionally,  the Company  assumes that computer  chip and memory  availability
will remain constant.  This assumption subjects the Company to concentrations of
risk should the availability of these items become uncertain in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial  Accounting  Standards  Board issued SFAS No. 133,  Accounting for
Derivative  Instruments and Hedging Activities effective for all fiscal quarters
of fiscal years  beginning  after June 15, 1999. The Company does not anticipate
the impact of this pronouncement will be material. Further, the Company does not
believe that any recently  issued,  but not yet effective  accounting  standards
will have a material  effect on the  Company's  financial  position,  results of
operations or cash flows.


                                       F-9

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

EARNINGS PER SHARE

As per Financial  Accounting  Standards Board Statement of Financial  Accounting
Standards  No. 128 (SFAS 128),  Earnings Per Share,  standards for computing and
presenting  earnings  per share (EPS)  applies to publicly  held common stock or
potential  common stock. It requires dual  presentation of basic and diluted EPS
on the face of the  income  statement  for all  entities  with  complex  capital
structures.  Basic EPS  excludes  dilution  and is computed  by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then  shared in the  earnings of the entity.  In  computing  EPS as a
result of the  reverse  acquisition,  the number of shares  outstanding  for the
period  from  September  2,  1999  until  the date of the  reverse  acquisition,
September  6,  1999,  is the  number of  shares  issued  by the  Company  to the
shareholders of the  predecessor  company.  For the period  September 6, 1999 to
December 31, 1999 the number of shares  considered to be outstanding is computed
as actual number of shares of the Company  outstanding  during that period.  The
average  number  of  shares  outstanding  for the  period  September  2, 1999 to
December  31,  1999 has been  computed by  averaging  these two  amounts.  Other
appropriate adjustments have been made to deal with changes in numbers of shares
issued during the period. Diluted EPS were computed as a result of the Company's
complex  capital  structure:  6,000,000  shares  of  Class A  Common  stock  and
1,000,000  shares of Class B Common  stock were  authorized  and  unissued as of
December  31, 1999.  The average  number of shares  outstanding  for the quarter
ended June 30,  2000 has been  computed  using  actual  numbers of shares of the
Company outstanding during that period.


2. Allowance for Doubtful Accounts

In accordance with Generally Accepted Accounting  Principles the Company records
anticipated  uncollectible  amounts by creating an allowance  account.  Bad Debt
Expense  is  recognized  using  the  Percentage  of Sales  method.  The  Company
recognized a Bad Debt Expense of $17,336 for the period ended  December 31, 1999
and an  additional  $34,625 for the six months ended June 30, 2000.  In 1999 and
during the six months ended June 30, 2000 no actual  receivables  were  directly
written off. As a result, the allowance account included on the balance sheet as
net of accounts  receivables is $17,336 and $51,961 respectively at December 31,
1999 and June 30, 2000.


                                      F-10


<PAGE>

                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

3. Related Party Transactions

The Company's  financing during its development  stage and during the six months
ended June 30, 2000 had been provided by interest  bearing  loans,  non-interest
bearing loans and capital  contributions  to the Company by its shareholders and
unrelated  third party  investors.  At  December  31, 1999 and June 30, 2000 the
Company  had  liabilities  to a  major  shareholder  of  $125,000  and  $100,000
respectively in the form of an unsecured note payable bearing interest at 8% per
annum.  The note calls for six annual  principal  installments  of $25,000  plus
accrued interest. In December, 1999 and January, 2000 the Company paid the first
two  annual  principal  installments  of  $25,000.  The note was  issued for the
purchase of machinery,  office  equipment and  furniture  from the  shareholder.
Accrued  interest on this note  through  December 31, 1999 and June 30, 2000 was
$3,775 and $4,228 respectively.

A B securities, a shareholder of IMTL, acquired authorized, but unissued, shares
of University  Mortgage,  Inc. (UMI) diluting the voting and equity  interest of
IMTL in UMI to less than 5%. The shares of UMI remaining after the dilution were
then exchanged in a stock for stock  transaction  for registered  shares of VLDC
Technologies,  Inc., a publicly traded  company,  trading under the symbol PCLO.
The investment is recorded at cost. On December 31, 1999 IMTL acquired 3,000,000
authorized but unissued shares of VLDC  Technologies,  Inc.'s  restricted common
stock in exchange for 3,000,000  shares of IMTL restricted Class A common stock.
The investment is recorded at the fair market value of VLDC  Technologies,  Inc.
stock as of the date of the exchange.

At December  31, 1999 and June 30, 2000 the Company had  outstanding  a $571,609
note payable to a major stockholder due in one lump sum payment of principal and
interest on or before November 23, 2000. The note bears interest at a rate of 8%
per annum, and is unsecured.

In  addition,   shareholders'   contribution  amounts  totaling  $3,028,766  and
$3,744,479 as of December 31, 1999 and June 30, 2000  respectively  are recorded
as par value  class A and class B common  stock,  par value  preferred  series 2
stock and as additional paid in capital.

The Company  owed  $261,322  to an  officer/director  for monies  advanced as of
December  31,  1999.  As of June 30,  2000 the  liability  has been  reduced  to
$39,573. The advance includes interest at 14% per annum and is due on demand.

4. Commitments

The  Company  leases its  corporate  offices  and  manufacturing  facilities  in
Baltimore,  Maryland under a six-year lease agreement, which began on October 1,
1999. The lease encompasses commercial facilities of approximately 40,000 square
feet.  Rent for the first year is $14,274 per month plus  applicable  sales tax,
utilities,   maintenance  and  property  tax  reimbursement  and  will  increase
approximately  5% in each of the succeeding five years.  An additional  security
deposit of $14,274 was paid to the landlord on February  21,  2000.  The Company
leases sales offices in New York, NY under a one-year lease agreement, beginning
March 1, 2000.  The lease  encompasses  office  facilities of 1,000 square feet.
Rent is $1,774 per month.


                                      F-11

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

Commitments cont'd

Future minimum requirements as of December 31, 1999 are:

                               Baltimore       New York         Total
                              ----------       --------       ----------
        FYE 12/31/00 .......  $  174,205       $ 17,744       $  191,949
        FYE 12/31/01 .......     182,371          3,549          185,920
        FYE 12/31/02 .......     187,040            -0-          187,040
        FYE 12/31/03 .......     189,957            -0-          189,957
        FYE 12/31/04 .......     195,790            -0-          195,790
        Thereafter .........     130,257            -0-          130,257
                              ----------       --------       ----------
                              $1,059,890       $ 21,293       $1,081,183
                              ==========       ========       ==========

Future minimum requirements as of June 30, 2000 (Unaudited) are:
                               Baltimore       New York         Total
                              ----------       --------       ----------
        FYE 12/31/00 .......  $   88,561       $ 10,648       $   99,209
        FYE 12/31/01 .......     182,371          3,549          185,920
        FYE 12/31/02 .......     187,040            -0-          187,040
        FYE 12/31/03 .......     189,957            -0-          189,957
        FYE 12/31/04 .......     195,790            -0-          195,790
        Thereafter .........     130,257            -0-          130,257
                              ----------       --------       ----------
                              $  973,976       $ 14,197       $  988,173
                              ==========       ========       ==========


5. Capital Lease Obligations


The Company  leases its  operational  and  accounting  software  under a capital
lease,  which expires in December,  2002. The lease requires monthly payments of
principal and interest of $1,235 plus applicable sales tax.  Interest is imputed
at 13.25% per annum.  The lease agreement  concludes with a $1 buy option at the
end of the lease term. Approximate future lease payments under the capital lease
are as follows:

                                                              Unaudited
                                            12/31/99           6/30/00
                                            --------          --------
     FYE 12/31/00 ........................  $ 14,821          $  7,411
     FYE 12/31/01 ........................    14,821            14,821
     FYE 12/31/02 ........................    13,586            13,586
                                            --------          --------
                                              43,228            35,818
Less Amount representing interest ........     9,220             7,610
                                            --------          --------
                                              34,008            28,208
Less current maturities ..................    10,221            10,221
                                            --------          --------
Long-term debt, less current maturities ..  $ 23,787          $ 17,987
                                            ========          ========


                                      F-12

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

6. Officers' Compensation

Prior to the reverse  acquisition,  the  Company's  day to day  activities  were
managed  by  certain  officer/shareholders,  who  contributed  their time on the
Company's  behalf  without  compensation  in either cash or stock.  No value for
these  services has been  determined or recorded on the  accompanying  financial
statements.  The officers and all other employees are currently  employed by the
Company at their administrative and operating facilities in Baltimore, Maryland,
and sales office in New York, New York.

7. Fixed Assets

Fixed assets for the Company consisted of the following at December 31, 1999:

                                                  Accumulated
                                 Fixed Asset      Depreciation         Balance
                                 -----------      ------------        ---------

Website Development ...........   $   3,017        $     176           $   2,841
Furniture & Fixtures ..........      32,000            1,333              30,667
Manufacturing/Warehouse Equip .      33,000            1,375              31,625
Computer Hardware .............      61,163            3,231              57,932
Transportation Equip ..........       7,000              408               6,592
Office Equipment ..............      30,959            1,806              29,153
Software Systems ..............      39,349            2,151              37,198
Leasehold Improvements ........       4,000               --               4,000
                                  ---------        ---------           ---------
                                  $ 210,488        $  10,480           $ 200,008
                                  =========        =========           =========


Fixed  assets  for the  Company  consisted  of the  following  at June 30,  2000
(Unaudited):


                                                  Accumulated
                                 Fixed Asset      Depreciation         Balance
                                 -----------      ------------        ---------

Website Development ...........   $   8,226        $     738           $   7,488
Furniture & Fixtures ..........      33,117            3,699              29,418
Manufacturing/Warehouse Equip .      38,026            4,008              34,018
Computer Hardware .............      75,986            9,452              66,534
Transportation Equip ..........       7,000            1,108               5,892
Office Equipment ..............      36,724            5,297              31,427
Software Systems ..............      51,470            6,673              44,797
Leasehold Improvements ........       4,000            2,000               2,000
                                  ---------        ---------           ---------
                                  $ 254,549        $  32,975           $ 221,574
                                  =========        =========           =========


                                      F-13

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

8. Employee Stock Option Plan

The Company's Board of Directors has authorized officers of the Company to offer
certain  employees  benefits  under an  unqualified  Employee  Stock Option Plan
which, as of the date of these financial  statements,  has not been consummated.
The terms of such options are contracted  between each eligible employee and the
Company on a case by case basis. As of the date of these financial statements, 7
such  plans  are  either  active,  pending  the  start  of  employment  or under
negotiation; none are vested.

9. Notes Payable

Notes Payable Related Party
  consists of the following:                                           Unaudited
                                                    December 31,        June 30,
                                                        1999              2000
                                                        ----              ----
Note Payable - related party
  dated September 1999 .......................       $ 125,000        $ 100,000
Note Payable - related party
  dated November 1999 ........................         571,609          571,609
                                                     ---------        ---------
                                                       696,609          671,609
     Less Current Portion ....................         596,609          596,609
                                                     ---------        ---------
     Long Term Portion .......................       $ 100,000        $  75,000
                                                     =========        =========
Loans Payable consist of the following:

Loan Payable - Dated November, 1999 ..........       $   7,500        $   7,500
Loan Payable - Dated March, 2000 .............              --           50,000
Loan Payable - Dated April, 2000 .............               0          150,000
Loan Payable - Dated May, 2000 ...............               0           40,000
                                                     ---------        ---------
                                                         7,500          247,500
     Less Current Portion ....................          (7,500)        (247,500)
                                                     ---------        ---------
     Long Term Portion .......................       $      --        $      --
                                                     =========        =========

Based on the borrowing rates  currently  available to the Company for loans with
similar terms and average maturities,  the fair value of the Company's long term
debt  approximates the carrying amount.  Interest expense on the above notes for
the  periods  ended  December  31,  1999 and the six months  ended June 30, 2000
amounted to $9,052 and $88,454 respectively.

10. Line of Credit

On March 22,  2000 the Company  entered  into a  factoring  arrangement  with an
unrelated  third party to fund the  purchase of  inventory  to fulfill  purchase
orders under an agreement to manufacture  approximately 2,000 white-box computer
units per month for a national satellite  distributed  program network marketing
group. The factoring  arrangement is in the form of a one-year revolving line of
credit,  which allows for the drawing of funds by the Company in an amount equal
to 75% of the purchase  orders  received from the marketing  group.  The line of
credit is capped at $750,000 representing up to $1,000,000


                                      F-14

<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

Line of Credit cont'd

of purchase orders. The financing calls for the payment of 3 points per month on
open  invoices and is secured by an  assignment  of the  underlying  receivable,
acquired  inventory  related  to  the  contract,  and  1,500,000  shares  of the
Company's Class A common stock.  The Company issued 650,000 shares to the lender
as a fee for  securing  the  financing.  For the period  ended June 30, 2000 the
Company has accrued or paid  $54,605 in financing  costs  related to the line of
credit.

11. Contingencies

The  Company's  management  has  confirmed  that as of the date of the financial
statements  the Company is not involved in any lawsuits nor is there any pending
litigation.

An unwind provision exists as part of the merger  agreement,  whereby the merger
agreement  could  be  rendered  void.  Management,  however,  believes  that the
provision will not be exercised as all other  provisions of the merger agreement
have been fulfilled.

12. Segment Information

The Company  operates  primarily in two industry  segments:  (1) whitebox system
sales and (2) computer component sales. The accounting  policies of the segments
and the products and services  provided by the operating  segments are described
in Note 1. The table  below  presents  information  about  reported  segments at
December 31, 1999:

                              System      Component
                               Sales        Sales        Other          Total
                               -----        -----        -----          -----
Sales ......................  $547,955     $917,339   $       --     $1,465,294
Gross Profit ...............    74,464      128,434           --        202,898
Operating Income (Loss) ....    18,160       47,272     (364,876)      (299,444)
Assets .....................   510,410      844,207    3,878,364      5,232,981
Capital Expenditures .......    14,956       25,044      170,788        210,488
Depreciation Expense .......       667        1,116        8,697         10,480


                                      F-15


<PAGE>


                      INTERNATIONAL MERCANTILE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

Segment Information cont'd

The table below presents  information  about reported  segments at June 30, 2000
(Unaudited):


                             System       Component
                              Sales         Sales        Other           Total
                              -----         -----        -----           -----
Sales .................... $2,791,753    $1,240,028   $    14,132   $ 4,045,913
Gross Profit .............    230,853       103,716        14,132       348,701
Operating Income (Loss) ..     82,381        27,230    (1,183,483)   (1,073,872)
Assets ...................  1,633,742       544,581     3,303,066     5,404,034
Capital Expenditures .....      5,209         1,125        37,726        44,060
Depreciation Expense .....      1,562         2,633        18,299        22,494


13. Subsequent Events

The  Company  has issued  2,200,000  shares of Class A Common  Stock,  which the
Company is  holding  in escrow in  anticipation  of the  consummation  of future
capital contributions by certain prospective investors.

The company has entered into a $3,000,000 funding  arrangement with H. A. A., an
unrelated entity, to provide operating capital for future growth.  The agreement
calls for initial  funding of $500,000 with monthly  payments of $250,000  every
month  thereafter.  Payments will begin upon  ratification  by the board and the
filing of the SB-2 registration. H. A. A. will be issued approximately 2,400,000
shares of class A common stock and has an option to purchase  additional  shares
at 120% of the initial purchase price for $3,000,000 additional funding.


                                      F-16
<PAGE>


Item 2. Management's Discussion and Analysis or Plan of Operation.

     This Quarterly Report on Form 10-QSB contains  forward-looking  statements.
For this  purpose,  any  statements  contained in it that are not  statements of
historical fact should be regarded as forward-looking  statements.  For example,
the words  "believes,"  "anticipates,"  "plans," and  "expects"  are intended to
identify  forward-looking  statements.  There are a number of important  factors
that could cause the Company's  actual results to differ  materially  from those
indicated by such forward-looking statements.  These factors include those shown
at the end of this section  under the caption  "Certain  Factors That May Affect
Future Results."

     The  following  discussion  for the  Company's  results of  operations  and
financial  condition should be read in conjunction with the Company's  Financial
Statements listed in Part I, Item 1 and the Notes thereto appearing elsewhere in
this Form 10-QSB,  and the Company's Audited Financial  Statements and the Notes
thereto appearing in the Company's 1999 Annual Report on Form 10-KSB.

(a.) Results of Operations

     For the period of operations since inception on 9/2/99 and ending 12/31/99,
our Company  posted  total sales of  $1,465,294.  Total sales for the six months
ended  6/30/00 were  $4,045,913.  While sales for the first quarter were strong,
sales  for the  second  quarter  were  subject  to a  flattening  due to  market
conditions  that were reflected  throughout the technology  industry as a whole.
Average  monthly sales for the six months ended  6/30/00  increased 38% over the
average  monthly  sales for the fourth  quarter of 1999. We were able to realize
this  degree of growth due to the  groundwork  we  established  during the first
quarter of our operations.  Our management  recruited top sales personnel,  with
significant  customer bases,  which reflect our goals in both our target markets
and  reseller  qualifications.  As a result of  hiring  these  salespersons,  we
obtained an immediate  clientele with existing  purchasing  power, and increased
sales  began  to  materialize.  Since  our  manufacturing,  warehouse  facility,
administration,  technical support and purchasing  departments are fully staffed
with  quality  personnel,  we were able to respond  and fulfill the needs of our
customers.  As a result of our proactive outlook, our SG&A for the quarter ended
12/31/99 is higher than would occur under normal business  conditions  given the
level of sales generated. The SG&A of $502,065, as a percentage of sales for the
period  since  inception  on  9/2/99  and  ending  12/31/99  was 35%.  This is a
reflection  of the quality of the personnel  and our  Company's  positioning  to
allow it to handle the higher  sales  volume  once it is  realized.  For the six
months ended June 30, 2000, SG&A is $1,422,573, or again, 35% of sales.

     In the second quarter of 2000,  management  began taking measures to reduce
the SG&A as a pro-active  correction should the market  conditions  continue for
any length of time.

     The industry  trends which  effected the  company's  sales also effects our
customer's  ability to pay their  balances to us in a timely  manner.  While the
majority of our customers are current and paying  timely,  our largest  customer
has slowed its payment  commitments  to us, which affects our ability to provide
inventory to support current sales volumes.  Management is actively working with
this customer to bring them more in line with the terms of our arrangement  with
them, and believes that the account will be rectified shortly.

(b) Plan of Operation

     Our  primary  emphasis  through  December  31,  1999  was  placed  upon our
capitalization,  the establishment of our website, our internal  infrastructure,
our production  lines and the development of our marketing team.  During the six
months ended June 30, 2000, this emphasis,  while continuing to be of importance
to the growth of the  company,  shifted more to sales and  production,  which we
expect to continue to be our emphasis  throughout the remainder of the year 2000
so that we can increase sales by capturing a larger  percentage of the growth in
the white box market.  Based upon our current  SG&A rate,  we believe that sales
revenue of $2.0 million per month,  at a gross  margin of 10%, is our  Company's
break even level.

                                      F-17


<PAGE>

     Management  believes that this sales revenue is  achievable.  Our growth is
projected  to result from an increase in sales equal to or greater than 50% each
quarter,   which  would  annualize  to  approximately   $18  million  in  sales.
Potentially,  should  all of the  contracts  that we are  currently  negotiating
materialize,  annual sales could exceed $40 million for the calendar  year 2000.
Coinciding with this  anticipated  growth is the anticipated need for additional
financing.  The company  currently has utilized a majority of a $750,000 line of
credit to the Company in the form of a factoring arrangement,  secured by (i) an
assignment of the underlying receivable,  (ii) acquired inventory related to the
receivable,  and (iii) 1,500,000 shares of the Company's Class "A" common stock.
For the quarter ended June 30, 2000,  sales and production were in line with our
capital limitations. With our projected increase in capital described below, the
company believes that it will attain the goals established.

     The company has also entered into a funding arrangement which would provide
$3,000,000 in operating capital over the course of the next year in exchange for
class A common stock as outlined in the financial  statements.  This arrangement
is subject to an SB-2  registration,  which should be completed  prior to August
15, 2000.

     In addition,  future growth strategies may include  strategic  acquisitions
should  opportunities arise which would not jeopardize current operations.  This
anticipated  growth,  along with the growth  already  experienced,  has and will
strain our financial and operational resources.  Additional funding is necessary
to achieve the results  projected.  Multiple funding avenues are currently being
explored to provide the resources  needed to fund the growth while  allowing our
Company to maintain debt at a manageable level for our cash flow.

Marketing

     We currently have a sales force consisting of six account executives,  with
varying degrees of experience,  but all with knowledge of computers essential to
assisting customers in configuring their orders optimally.  In addition, we have
an account executive specializing in government sales and marketing,  along with
the management of our strategic  corporate  accounts  (Fortune 500). Our website
allows our customers  and potential  customers to view our specials and to apply
for  active  account  status.  In the year 2000,  we have  plans to upgrade  our
website to allow our customers to custom  configure  their orders  online,  with
real-time  interaction  with our  inventory  software to allow them to ascertain
availability  of product,  and an order  tracking  function which will allow the
customer to monitor their orders progress through production. We anticipate that
this upgrade will cost approximately $125,000. Our sales department is currently
faxing  to all  current  customers  and  potential  customers  in our  extensive
database our specials on a weekly basis.  Additionally,  we have  tele-marketers
calling and updating our database of prospective  customers on a daily basis. We
expect  that we will need to hire a minimum  of 5  additional  sales  persons in
order for us to attain our projected sales goals.

Production

     Our  production  department  is designed for  flexibility  and staffed with
skilled assemblers and system integration technicians.  Small to medium quantity
orders can be easily  produced on our existing  custom  configuration  line.  In
addition,  we have the  capability,  at very  short  notice,  of  activating  an
assembly line of skilled workers for large production builds. As these contracts
increase in consistency and quantity,  these additional workers will be utilized
on a permanent basis. Our production facility has the capacity to add additional
assembly lines on an as needed basis. We have completed the required independent
audit for ISO 9002  certification  and we were  certified on April 26, 2000. The
ISO  9002  certification  is  an  internationally   accredited  standard,  which
guarantees that our product is processed to the highest quality


                                      F-18

<PAGE>

standards.  In addition,  it allows our Company to participate in and be awarded
state and federal government contracts.

Inventory

     We manage the quantity and quality of our component  inventory  through our
experienced  purchasing  personnel and  warehousing  policy and  procedures.  We
strive to maximize our responsiveness to customer  requirements while optimizing
inventory  turns.  Inventory  management  is  critical  to  the  success  of our
business.  Our  strategy is to focus on products  with high  turnover  ratios to
reduce exposure to product obsolescence,  changing consumer demands and declines
in  market  prices,  while  still  fulfilling  the needs of our  customers.  Our
software program facilitates the control of purchasing,  inventory, and accounts
payable.  Each sales representative has available real-time data with respect to
our inventory levels. We believe that we are able to take advantage of synergies
and efficiencies arising out of the combination of system assembly and inventory
warehousing in a single facility.

Vendor Relations

     Our Company has accounts with numerous  suppliers  that provide us with the
components  required to custom configure systems for our customers.  Pricing and
availability primarily govern our purchasing decisions. We currently do not have
any guarantees to purchase from specified vendors for any parts. Conversely,  we
also do not have any contracts that require any vendor to segregate and maintain
inventory  for our  consumption.  As a  result,  we are at the  mercy of  market
conditions  to obtain  products  at  reasonable  prices that allow us to operate
profitably. Should market conditions experience any shortages or price hikes, we
would be subject to such  conditions  and would be unable to compete  with other
companies with supplier contracts.

     In the second  quarter we were  extended  additional  credit by many of our
vendors,  or have made  arrangements to repay debts in  installments  until such
time as the company can complete it's arrangements for additional funding.

Certain Factors That May Affect Future Results

     The white box PC industry  is highly  competitive.  Competition  is largely
based on  price,  quality,  range of  service  offered,  shipping  capabilities,
customer service, and product availability.  Many of our competitors are larger,
more established,  and have greater name recognition and financial and marketing
resources  than  our  Company.  As a  result,  we could  potentially  experience
downward pricing pressure and increased competition,  which would drive down our
revenues by either forcing a cut in our sales or in our prices.  There is always
the risk of general market down turn,  which could adversely impact our revenues
and our growth.

     We are  considered  a start-up  company and have no  significant  operating
history as Micromatix.net.  We have not generated significant revenue to date to
support  operations on an ongoing  basis.  We cannot assure that we will achieve
sufficient  revenues to offset our anticipated  operating  costs. Our viability,
profitability  and  growth  depend  upon our  meeting  our  sales  goals and our
attaining  sufficient  financing to purchase inventory at competitive prices. We
cannot  assure  that  we  will be able  to  generate  revenues  or ever  achieve
profitable operations.

     We have no significant  capital.  We have required  significant  capital to
develop our  business and to date all of our costs have been funded via sales of
common stock and loans. We will continue


                                      F-19

<PAGE>

to require  significant  funds as we grow. We are currently  generating  limited
revenue from our operations.  Other than as discussed  elsewhere herein, we have
no  current  arrangements  in  place  with  respect  to  sources  of  additional
financing. If we have to arrange for financing to further the development of our
business,  we cannot assure that such  financing will be available on acceptable
terms or at all. Our  inability  to obtain  additional  financing,  when needed,
would have a material adverse effect on us, including  possibly  requiring us to
curtail or cease our operations.

     Demand and market acceptance for white box PC systems are subject to a high
level of uncertainty.  We cannot assure that widespread  acceptance of white box
PC systems, or our products in particular, will occur. We will rely on VAR's who
utilize  white box PC systems to purchase  our  products.  In order for us to be
successful, these VAR's must perceive us as their partner, not their competitor.
Further,  issues  concerning the  reliability,  cost and quality of white box PC
systems  may  affect our  market.  We cannot  assure  that VAR's will view us as
"partners"  and  utilize our  products.  If our  products do not achieve  market
acceptance, our business, results of operations and financial condition could be
materially adversely affected.


                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings

     Not Applicable

Item 2. Change in Securities

     During April 2000,  we sold  135,400  shares of our common stock at various
prices  ranging  from  $0.30 to $0.50  per share  (depending  upon  OTCBB  price
quotations for our common stock at the time of sale),  $67,200 in the aggregate,
pursuant to a private placement transaction.  The exemptions we relied upon were
Sections 4(2),  4(6) and Regulation D of the Securities Act of 1933, as amended.
The  stock  was  sold  to 22  individuals  and/or  entities,  all of  whom  were
"accredited" investors as that term is defined in Regulation D. The net proceeds
to our  Company for the sale of the 135,400  shares were  approximately  $37,789
after  offering   expenses  and  commissions  of   approximately   $29,411.   No
underwriting  discounts  were  paid  by  our  Company  in  connection  with  the
abovementioned transactions.

     During May 2000,  we sold  161,500  shares of our  common  stock at various
prices  ranging  from  $0.30 to $.50  per  share  (depending  upon  OTCBB  price
quotations for our common stock at the


                                      F-20

<PAGE>


time of  sale),  $80,000  in the  aggregate,  pursuant  to a  private  placement
transaction.  The  exemptions  we  relied  upon  were  Sections  4(2),  4(6) and
Regulation D of the Securities Act of 1933, as amended.  The stock was sold to13
individuals  and/or entities,  all of whom were  "accredited"  investors as that
term is defined in Regulation D. The net proceeds to our Company for the sale of
the 161,500  shares were  approximately  $53,287  after  offering  expenses  and
commissions of approximately $26,713. No underwriting discounts were paid by our
Company in connection with the abovementioned transactions.

     During June 2000,  we sold  187,500  shares of our common  stock at various
prices  ranging  from  $0.25 to $0.35  per share  (depending  upon  OTCBB  price
quotations for our common stock at the time of sale),  $45,000 in the aggregate,
pursuant to a private placement transaction.  The exemptions we relied upon were
Sections 4(2),  4(6) and Regulation D of the Securities Act of 1933, as amended.
The  stock  was  sold  to 12  individuals  and/or  entities,  all of  whom  were
"accredited" investors as that term is defined in Regulation D. The net proceeds
to our  Company for the sale of the 421,268  shares were  approximately  $29,877
after  offering   expenses  and  commissions  of   approximately   $15,123.   No
underwriting  discounts  were  paid  by  our  Company  in  connection  with  the
abovementioned transactions.


Item 3. Defaults Upon Senior Securities

     Not Applicable

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

     Not Applicable

Item 5. Other Information

     Not Applicable

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits.

  (3)(i)(a) Articles of  Incorporation  (incorporated by reference to our Report
            on Form 10-K for the year ended December 31, 1981).

       (b)  Articles of  Amendment  (incorporated  by reference to our Report on
            Form 10-K for the year ended December 31, 1981).

       (c)  Articles of  Amendment  (incorporated  by reference to our Report on
            Form 10-K for the year ended December 31, 1998).

       (d)  Articles of  Amendment  (incorporated  by reference to our Report on
            Form 10-K for the year ended December 31, 1998).

  (3)(ii)   Bylaws  (incorporated  by reference to the Company's  Report on Form
            10-K for the year ended December 31, 1987).

       (4)  Instruments   defining  the  rights  of  holders   (incorporated  by
            reference to Exhibit (3) herein).


                                      F-21
<PAGE>

  (10)
          (1)  Our Acquisition  Agreement with Red River Trading  Company,  Inc.
               and  Micromatix.com,  Inc. and Addendum thereto  (incorporated by
               reference to our Report on Form 10-K for the year ended  December
               31, 1999).

          (2)  Our   compensation   plan  agreement  with  Frederic   Richardson
               (incorporated  by  reference  to our  Report on Form 10-K for the
               year ended December 31, 1999).

          (3)  Our Lease Agreement  (incorporated  by reference to our Report on
               Form 10-K for the year ended December 31, 1999).

          (4)  Our Note  Payable  to Sarah  Saul Simon  Trust  (incorporated  by
               reference to our Report on Form 10-K for the year ended  December
               31, 1999).

          (5)  Our Note Payable to Red River Trading  (incorporated by reference
               to our Report on Form 10-K for the year ended December 31, 1999).

   (11) Earnings per share (See Financial Statements).

   (27) Financial Data Schedule.


                                      F-22
<PAGE>

                                   SIGNATURES

     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

INTERNATIONAL MERCANTILE CORPORATION

By: /s/ C. Timothy Jewell
    --------------------------
        C. Timothy Jewell,
           Chief Exec. Officer
           President, Director

Date: August 4, 2000



By: /s/ C. Timothy Jewell
    --------------------------
        C. Timothy Jewell,
           Chief Exec. Officer
           President, Director

By: /s/ Frederic S. Richardson
    --------------------------
        Frederic S. Richardson,
           Director

By: /s/ Max W. Apple
    --------------------------
        Max W. Apple,
           Director

Date: August 4, 2000


                                      F-23