<PAGE>

                                                                   EXHIBIT 10.16


                        UPGRADE INTERNATIONAL CORPORATION
                          1411 Fourth Avenue-Suite 629
                            Seattle, Washington 98101
                                 (206) 903-3116



July 11, 2000


Mr. Carey F. Daly II
President, Chief Executive Officer and Chairman
The Pathways Group, Inc.
14201 N.E. 200th Street
Woodinville, Washington 98072

Dear Mr. Daly:

         The purpose of this letter of intent ("Letter") is to set forth certain
nonbinding understandings and certain binding agreements between Upgrade
International Corporation, a Florida corporation ("UPGD"), and The Pathways
Group, Inc., a Delaware corporation ("PTHW"), with respect to a merger
transaction (the "Merger") to be accomplished as set forth below.

         The numbered paragraphs below constitute a general guide to the
material terms of the Merger, but they do not constitute a definitive agreement
and they shall not be enforceable unless and until the parties reach and execute
definitive agreement regarding the Merger.

         1. TRANSACTION STRUCTURE. The parties contemplate that UPGD shall form
a wholly-owned subsidiary ("Newco"), that PTHW shall merge with and into. Owners
of equity interests in PTHW shall receive comparable equity interests in UPGD,
as more fully described below. The parties contemplate that the Merger shall
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended. If the parties determine that a transaction structure resulting in a
direct combination of UPGD and PTHW would facilitate the combined entity being
listed on a desired stock exchange, UPGD may elect to have the transaction
proceed according to such structure. If such alternative structure would
technically result in the survival of PTHW, the economic substance of the
transaction set out in this Letter shall still prevail, and the surviving entity
would be renamed "Upgrade International Corporation". The officers and directors
of UPGD shall be the officers and directors of the surviving parent corporation,
and Carey Daly II will be appointed to the UPGD Board of Directors at Closing.
Existing PTHW officers and directors shall remain the officers and directors of
Newco, or,


<PAGE>

if an alternative structure is used, shall remain the principals in
charge of the business unit conducting PTHW's business.

         2. DUE DILIGENCE. UPGD shall have a reasonable period of time, not to
exceed 10 days, after execution of the definitive agreement regarding the
Merger, within which it shall finish its due diligence investigation of PTHW.
UPGD shall have the right to terminate the agreement if, at the conclusion of
such period of time, it is not reasonably satisfied with the results of its
investigation. During the period prior to Closing, each party shall permit the
other reasonable access to its books, records, facilities and personnel.

         3. CONVERSION RATIO. Subject to paragraph 7, below, the "Conversion
Ratio" shall be fourteen and three tenths (14.3) shares of PTHW common stock in
exchange for one (1) share of UPGD common stock. PTHW shareholders shall receive
UPGD shares in the Merger based on the quotient obtained by dividing their total
shares of common stock by the Conversion Ratio.

         4. PREFERRED STOCK. At Closing, PTHW shall have no preferred stock
outstanding, and there shall be no securities outstanding that are convertible
into preferred stock.

         5. WARRANTS AND OPTIONS. Outstanding PTHW warrants and options shall be
converted into UPGD warrants and options on the following bases with respect to
each economically distinct warrant or option: (a) the number of such UPGD
warrants or options shall be equal to the quotient obtained by dividing the
number of such holder's economically distinct PTHW warrants or options by the
Conversion Ratio, and (b) the new UPGD exercise price shall be equal to the
product of the PTHW exercise price multiplied by the Conversion Ratio.

         6. CAPITAL STRUCTURE. The capitalization of PTHW at the Closing shall
not exceed 26,250,000 shares of stock outstanding on a fully diluted basis.

         7. INTERIM FINANCING. The parties shall agree on an interim financing
plan for PTHW, based on a budget to be submitted by PTHW and approved by UPGD.
For each $100,000 advanced to PTHW, the Conversion Ratio shall be increased by
0.313%, which is intended to provide UPGD the economic effect of purchasing
shares in PTHW at $1.2413 per share during the period prior to Closing. For
example, if UPGD provides interim financing of $500,000 to PTHW during the
period prior to Closing, the Conversion Ratio would be adjusted as follows:

              [($500,000/$100,000) * .00313 * 14.3] +14.3 = 14.524

If the Merger is not consummated, the funds advanced by UPGD shall become an
investment in PTHW's senior secured notes, participating pari passu with
existing senior secured noteholders in all benefits of the notes, including
without limitation security interests and warrant coverage.


                                      -2-
<PAGE>


         8. FINANCIAL CONDITION. At Closing, exclusive of PTHW's software
license fee payable of $700,000, PTHW's current assets shall exceed its current
liabilities. There shall be no decrease in PTHW's noncurrent assets, other than
in connection with normal and recurring depreciation and amortization. At
Closing, other than its current liabilities and the software license fee payable
of $700,000, PTHW's liabilities, which shall include any PTHW obligations to pay
money (whether in connection with debt or equity securities), shall be no more
than $6,250,000. The definitive agreement shall contain terms indicating which
of the liabilities shall be paid at Closing and which shall be paid subsequently
over time. All PTHW financial information shall be presented in accordance with
generally accepted accounting principles on a consistent basis.

         9. FILINGS AND APPROVALS. UPGD and PTHW shall cooperate to prepare and
cause to be filed a registration statement on Form S-4 to obtain shareholder
approval of the Merger. UPGD and PTHW shall further cooperate to prepare all
other filings required to effect the transaction. Each party shall bear its own
costs in connection with these filings and approvals.

         10. EXCLUSIVITY; ACQUISITION PROPOSALS AND BREAK-UP FEE. The definitive
documentation of the Merger shall include customary provisions regarding the
obligation of PTHW and its insiders not to solicit or encourage any competing
acquisition proposal, with appropriate flexibility left to PTHW's Board of
Directors to enable it to perform its fiduciary duty to its shareholders, the
violation of which shall result in PTHW paying UPGD a break-up fee of two
percent (2%) of the transaction value.

         11. OTHER TERMS. The definitive documentation of the Merger shall
include such other terms and conditions, including representations, warranties
and covenants, customary for transactions of this type.

                               *  *  *  *  *

         The following lettered paragraphs constitute the legally binding and
enforceable agreement of UPGD and PTHW (in recognition of the significant costs
to be borne by UPGD and PTHW in pursuing the execution of a definitive agreement
regarding the Merger).

         A. PTHW will not solicit or encourage any competing acquisition
proposal from any person other than UPGD, nor will PTHW, or any of its
stockholders, through any officer, director, agent, or otherwise, (1) solicit or
initiate, directly or indirectly, or encourage submission of inquiries,
proposals, or offers from any potential buyer (other than UPGD) relating to the
disposition of the assets or securities of PTHW, or any part thereof (other than
sales in the ordinary course) or (2) subject to fiduciary obligations under
applicable law as advised in writing by counsel, participate in any discussions
or negotiations regarding, or furnish to any person any information with respect
to, the disposition of assets or any securities of PTHW or any part thereof,
during the pendency of negotiations between UPGD and PTHW, and neither UPGD nor
PTHW will unilaterally terminate these negotiations during the term of this
Letter without cause.


                                      -3-
<PAGE>

         B. For violation of the preceding paragraph A by PTHW or any of its
stockholders, through any officer, director, agent, or otherwise, PTHW shall pay
UPGD a break-up fee of $638,000.

         C. PTHW shall conduct its business in the ordinary course consistent
with prior practices. PTHW will not make or become obligated to make any capital
expenditures or enter or become obligated to enter into any material contracts
outside of the ordinary course of business consistent with PTHW's prior practice
without UPGD's prior written approval or engage in any other transaction outside
the ordinary course of business consistent with PTHW's prior practice. PTHW will
not make any payment or distribution with respect to its share capital, whether
by way of management fee, redemption, dividend, bonus, pay increase or
otherwise. The definitive agreement shall contain other mutually acceptable
limits on PTHW's conduct of business during the period prior to Closing.

         D. Subject to the terms set forth in paragraph G below respecting
confidentiality and certain other matters, each party will afford the other's
employees, auditors, legal counsel, and other authorized representatives all
reasonable opportunity and access during normal business hours to inspect,
investigate, and audit their respective businesses. Such inspection,
investigation and audit shall be conducted in a reasonable manner during regular
business hours. In this regard, PTHW hereby affirms the accuracy as of the date
of this Letter its representation to UPGD that the capitalization of PTHW at the
Closing shall not exceed 26,250,000 shares of stock outstanding on a fully
diluted basis.

         E. UPGD and PTHW will negotiate in good faith and use their best
efforts to arrive at a mutually acceptable definitive agreement for approval,
execution, and delivery on the earliest reasonably practicable date. UPGD and
PTHW will thereupon use their best efforts to effect the Closing and to proceed
with the transactions contemplated by the definitive agreement as promptly as is
reasonably practicable.

         F. Each of the undersigned represents and warrants that he has all
necessary authority to execute this Letter and create a binding obligation
enforceable according to its terms against the party on whose behalf he signs.

         G. Each party agrees to treat all nonpublic information concerning
the other furnished, or to be furnished, by or on behalf of the other
(collectively, the "Information") in accordance with the provisions of this
paragraph, and to take, or abstain from taking, other actions set forth
herein. Each party shall use the Information of the other solely for the
purpose of evaluating the Merger, and it will be kept confidential by such
party on a need to know basis; provided that (i) any of such Information may
be disclosed to such party's officers, directors, employees, representatives,
agents, and advisors who need to know such Information for the purpose of
evaluating the Merger, (ii) any disclosure of such Information may be made to
which the other consents in writing and (iii) such Information may be
disclosed if so required by law. If the Merger is not consummated each party
will return to the other all material containing or reflecting the
Information and will not retain any copies,

                                      -4-
<PAGE>

extracts, or other reproductions thereof. The provisions of this paragraph G
shall survive the termination of this Letter.

         H. Before executing the definitive agreement, neither Buyer nor Seller
shall made any public release of information regarding the matters contemplated
herein except as mutually agreed or as required by law.

         I. Each party shall bear its own costs in connection with all matters
relating to the negotiation and execution of this Letter and the definitive
agreement.

         J. Except with respect to the enforcement of paragraphs A, B and G, if
the definitive agreement is not signed on or before August 15, 2000, either
party (if not in material breach of any of the binding provisions of this
Letter) may terminate this Letter and thereafter this Letter shall have no force
and effect and the parties shall have no further obligations hereunder.

         Please sign and date this Letter in the space provided below to confirm
our mutual understandings and agreements as set forth in this Letter and return
a signed copy to the undersigned. This letter may be signed in counterparts by
facsimile, all of which taken together shall be considered a single executed
original document. If we do not receive a signed copy of this letter on or
before July 12, 2000, we will assume you have no further interest in pursuing
this matter.

Very truly yours,


UPGRADE INTERNATIONAL CORPORATION


   /s/  Daniel Bland
---------------------------------
By      Daniel Bland
        Its President


Acknowledged and agreed to:


THE PATHWAYS GROUP, INC.


   /s/ Carey F. Daly II
---------------------------------
By     Carey F. Daly II                                   -----------------
       Its President, Chief Executive Officer             Date
              and Chairman




                                      -5-