Edgar Filing: UPGRADE INTERNATIONAL CORP /FL/

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

FORM 10-KSB

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

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

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 0-27649

UPGRADE INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

WASHINGTON 58-2441311
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

1411 FOURTH AVE., SUITE 629; SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ( ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 903-3116

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

_______________________________ _________________________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
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(TITLE OF CLASS)

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(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]

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

The registrant's revenues for the fiscal year ended September 30, 2000 were
$-0-.

The aggregate market value as of January 6, 2001 of the voting and
non-voting common equity held by non-affiliates of the registrant computed by
reference to the closing price on January 5, 2001, was $52,776,318.

There were issued and outstanding 21,543,886 shares of the Registrant's
common stock as of January 6, 2001.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES

FORM 10-KSB

SEPTEMBER 30, 2000

INDEX

PAGE
----
PART I
Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 17

PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . 18
Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 19
Item 7 Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . 24
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 57

PART III
Item 9 Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . 58
Item 10 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Item 11 Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . 59
Item 12 Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . 61
Item 13 Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

PART 1

ITEM 1. BUSINESS

GENERAL

Upgrade International Corporation (the "Company") is a Washington
corporation that was originally incorporated in Florida in 1997 and intends to
be a fully integrated smart card solutions provider. The business is centered
on developing and marketing a patented data storage technology that incorporates
hard drive type of memory storage into a standard credit card format.

The ULTRACARD technology provides increased data storage that enables a
combination of high security, privacy and a greater amount of personal,
transportable data storage-at the lowest cost in the industry. ULTRACARD
operates in conjunction with a read/write device and operating software that the
Company is also developing. In addition, Upgrade may acquire and is developing
application software and systems for specific applications of the ULTRACARD
technology, as well as conventional smart card solutions.

Upgrade intends to first complete the commercialization process of its core
patented technology through its UltraCard, Inc. subsidiary. In conjunction with
the completion of this commercialization, the Company intends to leverage off
this technology through its ownership interest in:

- EFORNET CORPORATION, a smart card research and development company,
- CQUE CORPORATION (formerly Centurion Technologies, Inc.), a smart card
application provider for the medical industry, and
- The GLOBAL CYBERSYSTEMS group of companies will provide European smart
card sales and marketing.

And by pending acquisition of an ownership interest in:
- THE PATHWAYS GROUP, INC., a fully integrated smart card solutions
provider specializing in transaction processing (definitive agreement
pending)

These companies are developing applications software and systems for specific
applications of the UltraCard technology as well as conventional smart card
solutions. The acquisition and development of existing smart card solutions to
be provided by these groups represent a market strategy designed to accelerate
the effective integration of UltraCard technology into newly developing and
existing markets.

Upgrade intends to further leverage off its technology platform by making
additional acquisitions that will vertically integrate its technology into
numerous business applications. This tracks with Upgrade's goal to become the
high capacity transportable data storage standard.

Upgrade's principal executive office is currently located in Seattle,
Washington.

Our Vision
Upgrade International Corporation's vision is to be the leader in developing and
providing state of the art ultra high capacity portable data storage technology
designed to become the new smart card industry platform for existing and newly
developing markets.

Our Mission
Upgrade's mission is to create shareholder value through the development and
commercialization of UltraCard patented technologies, and then leverage those
technologies to create new smart card products and applications solutions.

Business Strategy
Upgrade intends to first complete the commercialization process of its core
patented technology through its UltraCard, Inc. subsidiary. In conjunction
with the completion of this commercialization, the Company intends to leverage
off this technology through its ownership interest in EforNet Corp., a smart
card application research and development company, cQue Corporation (formerly
Centurion Technologies, Inc.), a smart card application provider for the medical
industry, and the Global Cybersystems companies, which provide European smart
card sales and marketing. In addition, Upgrade has entered into a definitive
agreement with The Pathways Group, Inc., an electronic data transaction
processor. The family of companies are developing applications software and
systems for specific applications of the UltraCard technology as well as
conventional smart card solutions. The development of solutions to be provided
by these entities is an integral part the Company's market strategy and is
designed to accelerate the integration of UltraCard technology into newly
developing and existing markets.

Subsidiaries
Upgrade owns a controlling interest in the following companies:

- ULTRACARD, INC.-a 53% subsidiary holding the patented technology that
is Upgrade's core technological platform. UltraCard is developing and
marketing ultra high capacity data storage and retrieval in a credit
card format, a read/write device, and a supporting operating system.

- CQUE CORPORATION (formerly Centurion Technologies, Inc.)-a 51%
subsidiary of Upgrade that is developing a medical card on a smart
card platform capable of providing a host of interrelated services on
line for the medical industry including such services as pharmacology
conflict analysis.

- EFORNET CORPORATION-a wholly-owned subsidiary of Upgrade is a research
and development resource to the Upgrade group of companies. EforNet
provides alternative smart card solutions for specific markets in
addition to the conventional smart card and the high memory capacity
UltraCard.

- GLOBAL CYBERSYSTEMS INC. (U.S. Corporation), GLOBAL CYBERSYSTEMS S.A.
(a Swiss Corporation), and GLOBAL CYBERSYSTEMS PLC (a U.K.
Corporation)-provide European marketing and sales for the products
developed by the Upgrade group of companies.

Upon completion of the pending acquisition, Upgrade will own 100% of the
following company:

- THE PATHWAYS GROUP, INC.-Pathways and its subsidiaries design, market
and service custom smart card applications and services. Pathways
develops unique solutions for creating and processing data and
ensuring secure electronic transactions by utilizing proprietary
hardware and application software systems. A key element of Pathways'
business plan is the processing of transactions associated with its
current and prospective smart card installations.

Upgrade provides its subsidiaries with strategic direction, financial and
financing services, administrative and investor relations services, and
additional services facilitating the development of each business unit's
operating plans. Upgrade intends to hold substantial interests in, and maintain
an active involvement with the companies and technologies it has developed.

Organizational Structure
Upgrade International Corporation will have the following organizational
structure, once acquisitions in progress are complete:

[GRAPHIC: Organization chart shows Upgrade at the top level and the following
five subsidiaries side-by-side on the next level: 51% owned cQue, described as
"Health Care"; 100% owned EforNet, described as "Operating System"; 76.5% owned
Global Cyber Systems, described as "Eurpoean Marketing"; 100% owned Pathways
Group, described as "Transaction Processing"; 53% owned UltraCard, described as
"Core Technology".]

ULTRACARD

UltraCard is a Nevada corporation which was formed in 1997. It is
headquartered in Los Gatos, CA with research and development facilities in
Campbell, Newport Beach, and San Jose California. UltraCard's principal assets
are patented, patent pending and unpatented proprietary intellectual property,
that it either owns or holds a license to use. UltraCard is a development stage
company; its operations to date have principally been limited to research and
development activities.

UltraCard is the developer of UltraCard(TM) technology for high
security, high capacity, portable information storage in a wallet size credit
card for existing and future market sectors. The UltraCard technology combines
hard disk drive technology, magnetic stripe technology, smart card "chip"
technology and UltraCard patented technology to achieve a new platform in data
storage which allows the sharing, exchange, archiving and transport of large
amounts of data storage - all on the familiar credit card form factor.

This enterprise represents the combination of scientists, engineers,
marketing and management personnel from the computer storage, the e-commerce and
the credit card transaction industries. The development of the initial stages
of the technology was completed in late 1998. At that time, the company
conducted a proof of concept demonstration for a panel of independent engineers
and technical advisors. With this milestone under its belt, the company
embarked on the commercial Alpha unit launch of the technology. On November 16,
1999, at Comdex '99 in Las Vegas, UltraCard introduced the 5 MB data storage
card.

THE TECHNOLOGY & THE PRODUCT

What Is UltraCard?

- UltraCard uses a variety of proprietary and patented technologies to
provide a reliable, secure reader/writer and a secure and private data
storage card.

- The UltraCard product line will start with 5 MB of data on a "credit card"
sized media - a form factor that is familiar and highly accepted by
consumers

- UltraCard has developed a way to use hard disk drive media technology in a
credit card profile with a reader/writer design that will interface with
computers, hand held devices, ATM terminals, cash registers and other
devices. The UltraCard is fully downward compatible with existing card
reader installations, both mag-stripe and smart card chips.

- The patent protected technology enables, for the first time, high capacity
re-writeable credit card-sized memory cards with enough capacity to store
powerful error protection schemes, redundant data areas, high-resolution
biometric information and sophisticated encryption and privacy schemes.
Invisible card watermarking, several biometric recognition programs,
FBI-level fingerprints, handprints, iris scans, photographs, x-rays,
voiceprints, can all be accommodated on the high capacity UltraCard.

- The patent protected technology can be used to eliminate fraud and skimming
which is a major problem with current credit cards and smart cards. Because
of the increased storage capabilities, several encryption libraries can
reside on the card. The UltraCard high capacity memory, the magnetic
stripe, the smart card chip and a PIN or biometric can all be
mathematically tied together with encryption technology to validate the
card and user 4 ways. That means it's secure, and private, not public. No
hackable web site is needed to validate either the card or user. The card
itself can also provide the biometric recognition program and a digital
signature in order to deliver a "non-repudiatable" transaction and
faultless authentication.

Where Does UltraCard Stand Against the Competition?

Memory cards on the market today include:

1. Magnetic Stripe Card: 256K memory; ATM cards, POS readers, door entry,
phone cards.

2. IC Smart Cards: 2K-64K memory, also with magnetic strip; look like credit
cards.

3. Optical Cards: 4.1MB to 40 MB memory; lasercards with proprietary readers
or trimmed discs with standard CD-ROM readers.

4. Magnetic: 2 KB; Cards: magnetically treated plastic card.

5. Flash Cards: 2MB - 128 MB; portable, removable and interchangeable memory
chips (similar to computer chip); cell phones, digital cameras, MP3 audio.

Management believes the UltraCard can replace all of the competitive cards
listed above and will solve the inherent deficiencies of each such as:

1 Magnetic Stripe Card: low memory and prone to wear and accidental erasure.

2 IC Smart Cards: more memory capacity than magnetic stripe cards, but
expensive, require a special card reader, and more fragile.

3 Optical Cards: memory capacity competes with magnetic media, but only
available with Write Once Read Many ("WORM") capability; lasercard time to
read and write is slow and prone to deterioration with high humidity;
trimmed optical discs unconventional and hardware to write on disc is
expensive.

4 Magnetic: slightly higher storage than magnetic stripe, but not significant
compared to smart cards, optical cards and flash cards and need different
readers than magnetic stripe.

5 Flash Cards: fast and versatile, but very expensive to manufacture and
prone to damage at connectors and breaking in field use.

WHAT IS THE ULTRACARD TECHNOLOGY ADVANTAGE?

- 5MB card entry level product offers more memory than any of the current
credit card sized cards, 20,000 times the capacity of magnetic stripe cards
and 2,500 times the capacity of the most popular smart cards (2KB)

- Lowest price per megabyte in comparison to other popular forms of data
storage.

- Hard disk media magnetic recording technology permits very fast read/write
capability while still being cheaper to manufacture than smart cards or
flash cards. The magnetic recording industry has historically and always
been a step ahead of any other technology attempting to displace magnetic
data storage technology.

- Fully editable-the UltraCard may be written on, edited and read similar to
the hard disk on your computer. Data storage files can also be formatted in
a Read Only Memory (ROM), Random Access Memory (RAM) or overwritable.

- A patented scheme of card protection is available that ensures magnetic
data is not vulnerable to accidental erasure by common household fields.
Proprietary magnetic layers over the media are also available to prevent
the stored magnetic fields from being detected by unauthorized readers.

- Compatibility with existing smart card and magnetic stripe technology. As a
result, UltraCard technology can integrate existing technologies, is
backwards compatible with conventional card readers and offers a clear
migration path to increased capabilities.

WHAT TECHNOLOGY "FIRSTS" DOES ULTRACARD DELIVER?

- 20,000 times the capacity of magnetic stripe cards and 2,500 times the
capacity of the most popular smart cards (2KB): raises the bar in security,
privacy, and personal protection. The UltraCard and reader technology
enables true security of data access, internet transactions and
person-to-person communications, creating market opportunities prohibited
until now by limited technology.

- Answers the interoperability challenge: The high data storage capacity of
the UltraCard is the only technology that offers sufficient memory to
permit interoperability with multiple operating systems, several encryption
and biometic schemes, many application programs and still maintain
compatibility with existing technologies.

- Rugged: Because of a patent pending design, UltraCard holds up to the
"torturous" environment of the consumer wallet and daily abuse that may
leave a credit card inoperable.

- Highly resistant to fraud: The only way to ensure card-based data storage
that is both secure and private is to have the data reside on the card that
is in your possession and not on a "secure" web site. All web sites are
hackable. This allows the consumer to control how, when and from where the
data is put on and taken off the card.

- Scalable: the technology allows smooth transition to larger memory capacity
as needs and technology expands. Our entry product is based on technology
developed by IBM in 1953. We anticipate a lot of growth potential. 5MB is
just the beginning.

- Designed for high volume mass production: At the same time that
UltraCard represents a ramping up of capacity, security and privacy,
it represents a downward spiral of cost. It uses high volume,
high-throughput sputter technology that's a mature, proven production
process already cost-reduced substantially. For example, the UltraCard
sputter production equipmentcan produce up to a million memories for
cards per day. In terms of production projections, this speaks in terms
of transforming production dollars per megabytes into megabytes per
cents.

[GRAPHIC: Bar graph with heading "Competitive". Vertical axis denoted "Per MB".
Three vertical bars rise from the horizontal axis. The first bar (left to
right) is approximately 3 inches high, beneath the horizontal axis the caption
is "250 Characters", and above the bar the caption is "Magnetic Stripe Card
$3000". The second bar is approximately 1 inch high, beneath the horizontal
axis the caption is "2,000 Characters", and above the bar the caption is "2K
Smart Card $500". The third bar is less than 1/8 inch high, beneath the
horizontal axis the caption is "5 Million Characters", and above the bar the
caption is "UltraCard $0.20".]

HARD DISK DRIVE AERIAL DENSITY COMPARED TO ULTRACARD CAPACITY

[GRAPHIC: The graph is headed "IBM Areal Density Perspective 43 Years of
Technology Progress". The "IBM" logo appears in the lower left corner of the
graphic. Vertical axis labeled as "Areal Density Megabits/in2" (i.e., per
square inch), with scaling labeled from 10 to the minus 3rd power up to 10 to
the 5th power. Horizontal axis labeled as "Production Year", with scaling
labeled from 60 (meaning 1960) to 2010. The plot points form a line that slopes
upward to the right, denoting a continued increase in density with the advance
of time. At the far right of the graph, there is an indication of a 5 Million
times increase in density over the time period to which the graph applies. The
UltraCard is superimposed on IBM's graphic next to a plot point on IBM's line
that is denoted as "1st Thin Film Head". The UltraCard plot points also form a
line that slopes upward to the right, denoting a potential for increase in
density based on existing technological advances.]

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UltraCard is not inventing new core technology. UltraCard's idea was to
transfer a technology that is mature and proven to the credit card format.
Advances in disk drive storage densities have set the stage for the UltraCard
performance.

During the past 20 years, storage densities have multiplied from 2.5
million bits of information per square inch of media space to approximately 20
billion bits of information per square inch. And this growth is not about to
stop. Prior to 1991, the rate of increase in storage density accelerated at 60%
per year, setting the pace for the disk drive industry to follow. Since 1991,
that rate increase per year has approached 100%.

WHAT MAKES THE ULTRACARD REVOLUTIONARY?

- It will deliver a solution to re-invent an OEM business. UltraCard, the
product, delivers a whole new way to create and retain customers by
enabling a "personalized" relationship with the client, establishing
customer loyalty, offering a solution for a new application and entrance
into new markets. This means keeping current revenues in-house and creating
new revenues through new services, expanded market opportunities, and a
better solution to customers.

- It will store your life's information. Whether it's your car's service
history, health records, company inventory, financial transactions,
insurance benefits, credit history, Internet personal preferences,
passport, phone access, or school records, the UltraCard can store it all.

WHAT ARE THE POSSIBLE APPLICATIONS FOR ULTRACARD? Many applications and examples
of potential users for UltraCard are under investigation. Practically any
application requiring data that can be transported easily and accessed
inexpensively, can use UltraCard technology.

- GOVERNMENT: Access control, security cards, bill of lading shipping cards,
criminal record files, training records, VA benefit cards, all agency
interoperability General Services Administration, Department of Defense.

- FINANCE: e-Commerce, business-to-business, purse-to-purse, stored value
cards, transaction cards VISA, MasterCard, American Express.

- THE INTERNET: Personal preferences card, transaction card, micro payments,
privacy plus security for all transactions Hard Rock International, Disney,
VISA.

- ID SYSTEMS: Passports/immigrations, retail store, valued customer,
multi-biometrics, logical and physical access, multiple operating systems,
multiple security protocols General Services Administration, Department of
Defense.

- HEALTHCARE INDUSTRY: HMO loyalty cards, patient record cards and archival
processes, x-rays, insurance records & pharmacy transaction cards,
maternity and family care cards Blue Cross, Humana.

- TRANSPORTATION INDUSTRY: Mass transit payment cards, QC/Process control
records, parts lists, maintenance records, RF entry cards Virgin Airlines,
United Airlines, Aloha Airlines.

- COMMUNICATIONS: Cell phones, PDAs, universal phone cards, access control,
web access, subscriber ID Nokia, Ericsson, Sagem, Motorola.

THE MARKET

POTENTIAL WORLDWIDE MARKET FOR ULTRACARD

Market Segment 1999 2000 2001 2002
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ANNUAL % INCREASE -- 13.5% 15% (EST.) 20% (EST.)
(UNITS IN MILLIONS)
Payment Cards 2,755 3,118 3,586 4,303

Nonpayment Cards 2,824 3,211 3,693 4,432

Telephone Cards 2,251 2,557 2,941 3,529

Total Cards 7,830 8,886 10,220 12,264

Note: These numbers exclude the impact of UltraCard applications. Data source:
The Nilson Report, Aug., 2000, Issue 721

POTENTIAL MARKETS FOR ULTRACARD

The identified market for UltraCard is broken into three categories
based upon the technologies that are currently applied to these markets. The
first market is the Magnetic Stripe Card market, the second is the smart card
market and the third is the Computer Storage Media market. Each of these
markets has its own form of storage technology that UltraCard has the potential
to replace. There are currently an estimated 50 billion cards of all types in
circulation. In 1999, the total turnover was 10 billion cards (The Nilson
Report, Aug., 2000, Issue 721).

THE MAGNETIC STRIPE CARD MARKET. The amount of information that is
stored on a common credit card today is quite small. Most credit cards have a
magnetic stripe installed across the back that contains an extremely limited
amount of information, usually no more than 256 bytes of data. Because of this
storage capacity limitation the common credit card is good for storage of no
more than cardholder name, credit card number and authorization codes. The
capacity to store any more information such as inventories of purchases or any
personal information about the cardholder is not available. But these cards
cost less than $1 to produce and can be read by relatively inexpensive card
readers (less than $100) at point-of-sale locations everywhere. The magnetic
card lasts about one year on average and less in cases of de-magnetization or
physical destruction. The magstripe market is the largest single application
market estimated to have exceeded 2 billion cards on a worldwide basis. The
growth rate for this market is projected at a modest 8% per year through the
year 2000 by various sources.

SMART CARD MARKET. Smart cards with greater storage capacity than the
magnetic stripe variety will be increasingly available over the next several
years. They can accommodate a variety of uses that allow users to make
purchases from a credit account, debit account, or stored value on the card.
These cards can even have multiple applications operating on them at one time.

The first of these is the so-called "smart card" that consists of an
integrated circuit (IC) chip imbedded in a credit card. These devices currently
can contain up to 64 kilobytes (kb) of data but are quite expensive (more than
$15 per card) and require a special card reader different from the ones
typically found at point-of-sale locations. The average memory capacity of
smart cards that are actually in use is much lower than their maximum capacity,
with over 90% of the smart cards on the market capable of only 2 kb of data
storage. This capacity is enough to store about one page of text. In addition
to their storage capacity shortcomings, smart cards are much more delicate than
magstripe cards and rarely last a year before requiring replacement.

There are at least ten subcategories in this market including phone
cards, GSM (Global System for Mobile communications) cards, health cards, brand
and loyalty cards, ID cards, transport tickets, pay TV cards, games, meters and
automatic dispensers. The single largest application for the smart card is the
telephone calling card which is used extensively in Europe. Recent
announcements by financial institutions such as Providian Financial and VISA USA
indicate an attempt to make the smart card popular as an e-Commerce tool in the
United States.

THE COMPUTER STORAGE MEDIA MARKET. There are many types of computer
storage media on the market today. The trend in this market is towards a higher
concentration of data in smaller and smaller packages. UltraCard is expected to
be quite competitive at the low-cost end of this storage market.

When UltraCard is marketed in the computer storage media market, it
will bring a new level of micro-packaged computer storage media that has the
potential to change the vast market for small floppy disks and to enhance the
growth of both flash memory and small hard disk memory media markets. This
market has the smallest impact viewed from today's technology but may hold the
largest opportunity for development and growth for UltraCard. It certainly
holds the greatest potential for high dollar volume specialty card applications.
Storage media in this market vary greatly in price with the flash card market
priced at less than $0.50 per unit. It is difficult to average prices in this
market but a price in excess of $5 per unit is not out of line for UltraCard.

APPLICATION SCENARIOS

WIRELESS

The future expectation for wireless market is driven by data and multi
media. There is significant unfulfilled demand for more storage capacity for
the mobile users. Today there are more than 365 million global GSM customers
and estimates are that the 500 million customer mark will be achieved early in
2001. The GSM Association today announced that a record 9 billion G-mails or
SMS (GSM mail or Short Message Service) text messages were sent over the world's
GSM wireless networks during August 2000.

UltraCard technology can provide a distinctive "smart card"that
enables more storage capacity to provide additional services for mobile users.
UltraCard offers the ability to cost-effectively extend the existing services to
new access channels such as mobile phones, personal digital assistants (PDAs),
or even the "new" access devices that combine voice, data, and perhaps video.
These products provide cardholders with the ability to: .

- Conduct banking
- Wireless commerce
- Pay bills
- Stock trading
- Make purchases
- Gather information
- Family photo, address book, and personal information

For merchants, the new storage capacity will allow multifunctional
Services onto the card:

- Advertising, promotion
- Target Marketing
- News, Sports, Weather
- Pictures, Video clips
- Location locator
- Driving direction
- Family area network value-added services
- Corporate inter communication value-added services

Consumers benefit as they become empowered with the ability to store
more information, and access these services with greater ease, security and
convenience.

BANKING AND FINANCIAL SERVICES

General purpose credit and debit cards displaying the brands of Visa,
MasterCard, American Express, JCB, and Diners Club totaled 1.24 billion at the
end of 1999, up 11.1% over 1998.

Banking and financial services industries are in the midst of
significant change resulting from the latest round of deregulation. The lines
between banks, brokerages and insurance companies are quickly blurring.
Additionally, financial services formerly offered only by large institutions are
now the domain of new, sometimes smaller firms. The Internet has emerged as the
great equalizer among these institutions. It has offered a tremendous
opportunity to reach the global user, and at the same time increases security
risk for identifying, and authenticating the proper authorizer.

UltraCard technology will allow multi-application solutions for
financial institutions far beyond the stored value smart card technology
available today. Encryption, digital signature, certification authority, PKI,
and biometric security solutions demand large data capacity. These solutions
will integrate directly into existing payment systems infrastructures, including
ATM networks, POS networks and automated clearinghouses and will support kiosks,
POS, ATM and PC-connected devices capable of loading value to the card.

Already there are worldwide applications in the banking and financial
services industries:

- Credit, Debit Cards
- Stored Value (Prepaid)
- Loyalty, Rewards
- Market segment, i.e., campus, corporate, etc
- ECommerce
- ETrade
- ELoan

TRAVEL AND ENTERTAINMENT

WEFA's report maintains that worldwide spending on core travel and
entertainment segments totaled $680 billion in 1997.

UltraCard technology will provide cost-effective marketing solutions
for the travel and entertainment industries. Theme parks, cruise lines,
resorts, golf courses and casinos can all benefit from high capacity, UltraCard
based "frequent customer" cards to promote brand loyalty. In addition to being
cost-effective and highly secure, they drastically reduce fraud and the inherent
costs associated with the handling of tickets, credit cards and cash. Further,
there is no need to incur the costs typical of expensive telecommunications
infrastructures or processing fees.

UltraCard based loyalty cards can be issued on-site on cruise ships,
at golf courses and at resorts. In addition to storing loyalty points, they can
also be used as identification/access devices and to make off-line purchases.
For example, one UltraCard could allow a cardholder to:

- Be identified as being able to attend a certain event, meal or participate
in an entertainment program functioning as a "paperless" ticket.

- Purchase gifts, golf balls, or even chips at a casino without the use of
cash or credit cards. This also allows the user of the card to
have a transaction record that can be used for further marketing and
promotional efforts.

- Automatically receive premiums, rewards and incentives for their
patronage.

- Traveling profiles

- True electronic ticketing (no identification necessary)

- Check-in and check-out access (remote, or in-room)

- Car rental and hotel room reservations

- Automatic updating of frequent flyer accounts

GOVERNMENT

On May 19, 2000, the USGSA created a pool of five vendor groups to
supply smart card systems to federal agencies. These awards could be worth up
to $1.5 billion over the next few years. These firms are expected to develop
interoperable, multi-application cards for use by any federal agency with
functions such as ID and authentication, access control, PKI and electronic
signatures, biometrics, health records and electronic purses-just to mention a
few.

However, because smart card technology has reached its limit in
capacity and capability they do not have the ability to support the data
capacity requirement of this GSA award that includes an interoperable operating
system. As a solution to this problem the common solution among these five
vendor groups is to use the smart card to its limited capacity where it will
access a "secure" web site where the bulk of the personal information will
reside.

This is a seemingly logical but flawed theory. There is not such
thing as a secure web site. All web sites are hackable. It has been estimated
that there are currently more than 2,000,000 active hackers trying to access
secure web sites. Hackers often look at security systems as a challenge, not an
obstacle.

The only way to ensure card based data storage that is both secure and
private is to have the data reside on the card. UltraCard is the only card that
has the increased storage capacity to put a full encryption library on the card.
In an age where most people have real concerns about control of personal and
private information, UltraCard is designed to ensure it.

ACCESS CONTROL AND AUTOMATIC IDENTIFICATION AND DATA COLLECTION

According to market research and industry sources, the overall market
for the security industry is projected to be $80 billion by the end of 1999.
The electronic segment of the industry is growing at 40% rate in 1999.

Hand-held capturing devices demand greater storage needs. Due to the
versatility of UltraCard technology and storage capacity, UltraCard offers
multiple applications from identification badge, access control, time and
attendance, and data capture and storage.

Workflow process, inventory control, product manuals, and training
materials are some of the information that UltraCard can store to provide
greater accountability and easy interface with larger manufacturing facilities.

PRODUCT DEVELOPMENT STRATEGY

The UltraCard product development strategy is guided by the tactic to
accumulate and retain ownership of as broad and comprehensive an intellectual
property package as possible. It is estimated that to date the two broad
patents already on file combined with the 2 issued patents will result in 20 to
40 individual patents covering all technical facets of both the card and the
reader/writer. To ensure UltraCard ownership of all intellectual property, all
R&D activities are funded and controlled in house by UltraCard.

After successful proof of concepts during the R&D phase and after
patent applications are on file, product specific development will be completed
by contract engineering firms and disk drive companies such as Pemstar. These
are companies with vast experience in taking an R&D data storage type of
platform from the soft-tooled R&D stage into beta and pilot quantities and hard
tooled for full scale production. This effort will be directed and managed by
the Product Engineering Group of UltraCard.

MEDIA

The magnetic recording media is the most critical component in the
UltraCard intellectual property package. Full control of the media from R&D
through full scale production will be maintained by UltraCard. This includes
process and quality control of the substrate, the sputter deposition equipment,
the magnetic film, the protective overcoats and inspection equipment and
material handling and automation technology for high volume production. The
volume production goal from day one has been to achieve one million "shims" or
media inserts per day. The current capability is several hundred thousand
"shims" and this can be expanded to meet the one-million-per-day goal. Card
bodies will be purchased from two to four venders including CPI and Cards &
More.

MANUFACTURING STRATEGY

UltraCard intends to use contract manufacturing to produce its
products. Because there is more than ample excess manufacturing capacity in the
disk drive industry today, the contract manufacturing approach will result in
lower short term investment, maximum ability to vary production levels to meet
demand and lower risk of early manufacturing start-up problems. In addition,
contract manufacturing will dramatically reduce UltraCard's required headcount
and will result in better return on assets than would be possible if UltraCard
were to invest in a manufacturing facility.

However, UltraCard does intend to maintain absolute control over
manufacturing from the perspectives of manufacturing process and inventory
exposure. UltraCard will purchase its own raw materials and will consign these
materials to the contract manufacturer for final assembly and test. UltraCard
also intends to control the quality processes in the plant including all
incoming inspection procedures, in-cycle quality assurance and final burn-in and
test. UltraCard also will set up an ongoing reliability inspection of UltraCard
products to fully meet specifications and reliability goals before they are
shipped.

CQUE CORPORATION

cQue Corporation (formerly Centurion Technologies, Inc.) is a systems and
communications developer that has created a database and secure network that
services the medical, educational and government markets. The Company was
formed in November 1996 in Redmond, Washington. Its product is in the final
stages of initial project implementation with:

- The University of Illinois Medical School at Chicago, and
- Department of Defense Health Records Automation Program.

A news article recently published by the Washington Post (November 30, 1999)
reads, "As many as 98,000 Americans die unnecessarily every year from medical
mistakes made by physicians, pharmacists and other health care professionals,
according to an independent report released that calls for a major overhaul of
how the nation addresses medical errors. More Americans die from medical
mistakes than from breast cancer, highway accidents or Aids, according to the
report from the Institute of Medicine. That costs the nation almost $9 billion
a year." cQue intends to provide a solution to this problem.

cQue has designed a Web-based software application called EPRIM that manages
data stored on a smart card and has the capability of disseminating private
information securely, easily and efficiently. EPRIM currently uses the
available smart card technology, although it is being upgraded to the UltraCard
platform. The application can be accessed through any dial up, dedicated,
hard-wired (Ethernet) or wireless connection running over a Virtual Private
Network or Windows NT Web or LAN Server. The primary market focus of this
technology is in the medical industry, developing a medical card on a smart card
platform capable of providing a host of interrelated services online including
such things as pharmacology conflict analysis.

Computerized prescribing is long overdue in the United States. Virtually all
prescriptions are still handwritten or even worse, verbally called into the
pharmacy. cQue's web-based software application permits both offline and online
access to portable smart card data, local client server, and national repository
(cQue global server). EPRIM Rx uses SmartCheck, an interactive medical advisory
database. Every Rx MD order is carefully reviewed for potential conflicts or
interactions with over-the-counter products, foods, herbals, and other
medications in use. A medical alert is displayed and sent directly to the
appropriate physician and pharmacist.

EPRIM is designed to connect any person around the globe with real-time
encrypted data transfer instantaneously. The smart card is a key component in a
system that uses EPRIM, because it provides off-line record access and provides
the security link to the database by keeping the passwords or other biometric
access controls on a computer chip embedded on a plastic card. Centurion's
Medical Division believes that it makes patient data readily available in a
secure, universally accessible, portable, nonproprietary, digital format, using
a Centurion smart card integrated into EPRIM application software-providing a
real-time, universal, online, interactive, MD-based order entry system.

The EPRIM workstation application manages the patient's data
through various screens. The entrance into a patient's data is through a
"profile" screen that shows all of the data. The profile screen displays a
summary of the information stored on a User's card in a flexible and intuitive
manner. The information is grouped by category into a series of boxes, which
the access user can arrange and resize to their liking. The profile screen
arrangement is stored on the access user's card-their preferences are present on
whatever workstation they use.

EPRIM stores a patient profile that consists of several blocks of
information including prescription medications, over-the-counter medications,
allergies, immunizations, foods, herbals and insurance coverage as well as other
patient information specific to the application. For example, Rx SmartCheck is
a component of EPRIM that can alert physicians and pharmacists to possible
conflicts, drug interactions or medical insurance coverage qualification.

The ability to provide proper identification of the patient is
important. The EPRIM system provides alternative identification options,
including: Voice print , finger print and photo identification. Two different
photo resolution versions could be created at patient registration. The higher
quality, size and larger digital file size photo would be stored either on the
work station or server and the thumbprint (e.g., drivers license size) could be
stored on the smart card.

Keeping a patient's medical history safe from computer intruders can
be accomplished by having them carry their personal health records in a wallet
or purse on smart cards or the new UltraCard. Centurion believes that new media
will change the way people think about prescription orders and medical records.
Through the use of secure encrypted data, smart cards (and soon UltraCards)
allow physicians and other healthcare providers to create, maintain and update
standardized patient medical information for use throughout the whole medical
community on a tightly controlled "right-to-know" basis. This is accomplished
through individual patient, pharmacist and physician personal smart cards (and
soon UltraCards), read/write card terminals and high security cryptographic
software globally tied together with the use of Internet and interlinked
networks.

The smart card (and soon the UltraCard) contains the patient's
emergency health details, established in compliance with most generally accepted
American medical standards. The patient's general practitioner, who possesses a
professional's card, may update the medical file, as permitted by legal
standards. Read and write access to the patient's card is protected by the
card-bearer's confidential code. The card also contains the name and address of
the patient and even details of insurance coverage, if necessary. A special
smart card reader (soon to be an UltraDrive), reads the card via the software
application program.

Data storage space on the smart card is very limited, unlike the
relatively larger storage capacity of the new UltraCard. Using existing smart
cards, in order to use the space effectively and efficiently, literal data
(text) is used sparingly. The Schlumberger Multiflex card, as an example, has
only 8192 bytes of available EEPROM (non-volatile storage space). Such a card
will only hold approximately 1-1/2 typewritten pages. The alternative to
storing literal data, such as a personal physician's demographic information, is
to provide a database table populated with this information for all relevant
physicians and a reference number, or "key" for each one stored. This method
requires much less space on the smart card than the literal data. A problem
associated with this method occurs when the database is stored on a server. A
connection to the server is required or some alternative method must be used to
retrieve the literal data associated with a key. With the introduction of the
UltraCard, the medical industry will be able to make portable in the form of
literal data much more of the patient information, while also using additional
UltraCard space to enhance data security.

EFORNET CORPORATION

EforNet Corporation, a wholly-owned subsidiary of Upgrade, is a software and
hardware development company focused upon the commercialization of smart card
initiatives.

EforNet's objective has been to extend the high capacity, hard disk storage
technology of the UltraCard by incorporating this technology into a new
innovative smart card solution. Currently activities at EforNet are dormant.

GLOBAL CYBERSYSTEMS

Global Cybersystems is a privately owned company based in London, England with
the exclusive rights to commercialize the UltraCard technology in Europe. The
purpose of the company is to provide a variety of services including the
distribution, trade and licensing of electronic data storage media, hardware,
and software. Currently activities at Global Cybersystems are dormant.

THE PATHWAYS GROUP, INC.

The Pathways Group, Inc. is currently under a definitive merger agreement with
Upgrade. The acquisition is subject to a number of conditions including
approval by the stockholders of Pathways and the registration of Upgrade common
stock to be exchanged for Pathway's stock. Either party to the agreement can
terminate the agreement after December 29, 2000.

The Pathways Group, Inc. was founded in 1993 as a successor to Pathways
International Ltd., which, in turn was established in 1988. Pathways and its
subsidiaries design, market and service unique solutions for creating and
processing data and ensuring secure electronic transactions by utilizing
proprietary hardware and application software systems. Pathways provide "turn
key" solutions in the smart card arena as a full service hardware integrator,
software developer and backroom transactions processor. Pathways systems
accommodate credit and debit payment methods, electronic benefit transfer,
electronic funds transfer and smart card systems utilizing its three-state
infrastructure of processing centers (California, Washington, and Hawaii) that
operate on a 24-hour, seven-day-a-week basis.

Pathways' products are configurable for diverse communications and security
protocols associated with debit, ATM, credit and smart card transactions. Its
products are flexible and technologically capable of performing on-line,
off-line or a combination of data and transaction processing.

FOREIGN OPERATIONS

The Company does not engage in any operations in foreign countries.

COMPETITION

Upgrade and UltraCard, Inc. believe that the major competition for
the UltraCard will come from other smart cards providers. Smart cards are being
represented as the replacement to magnetic strip technology. Sophisticated
smart cards can hold as much as 100 times the amount of information of a
magnetic strip card. This increased storage capacity results in the ability to
incorporate tighter security measures and hold more data. Companies such as
Schlumberger, Gemplus and Bull lead the smart card market. It is estimated
there will be more than two billion smart card chips circulating by the end of
2000.

Upgrade and UltraCard, Inc. believe that the UltraCard can compete
successfully with other smart cards providers. Smart cards require frequent
replacement and are unlikely to remain operable for an extended period of time.
The UltraCard, on the other hand, offers the benefits of smart cards-and a
number of improvements-while not suffering from the primary limitations of smart
card technology. The UltraCard technology is comparable in price to magnetic
strip technology and stores orders of magnitude more data than smart cards,
permitting more security and fraud prevention techniques. The following table
summarizes the attributes of the cards that comprise the competition for the
UltraCard:

UltraCard(TM) Price/Memory Capacity Comparison

Average Price
Card Type Memory (MB) Price Range For Reader
------------- -------------- ------------- --------------
UltraCard 5.0 $ 4 to $6 $ 25 to $100
Lasercard 4.0 $ 6 to $8 $2000 to $3000
Magstrip Card .002 $.50 to $1.50 $ 25 to $75

High capacity smart cards (capacities greater than 32kb) are vastly
more expensive than magnetic strip cards, about $12 per card, and are even more
susceptible to damage. Although Upgrade realizes that price per megabyte will
not be a direct point of price comparison, because ultimately increased memory
capacity will drive new card uses, low capacity smart cards cost about $500.00
per megabyte of information while the UltraCard is only $0.80 per megabyte. The
UltraCard is also considerably more rugged than expensive smart card technology
and requires fewer replacements.

There are many companies engaged in electronic medical records
management, but few have moved to the new dynamic of the Web and data storage
cards. One notable exception is Healtheon/WebMD, which is engaged in developing
one of the leading platforms for MDs and other health providers. cQue's
competitive analyses of potential competitors are broken into categories:
e-prescribing, electronic medical records and managed care transactions.

- e-prescribing with personal desk accessories (palm pilots) or
devices: Allscripts, eMD, PocketScripts, Cyber-CARE, ePhysician,
ePorcrates, eScript, Healtheon/WebMD,HIE, iScribe, Med-I-Net,
TechRx,
- electronic medical records: Med-Assure (DataCard), LeapFrog,
National CacheCard, and most smart card integrators offer some
limited capability of medical applications.
- Managed care processing services: WebMD, CareInsite,
AmericasDoctor, HealthAxis, EDIC, SoftMed, PBX, IDX, HBOC

Most competitors use the traditional method of developing pilots, then continue
to expand from one provider to another to the process of building strategic
alliances. The pricing models are typically end-user licensing agreements
and/or site licensing.

PERSONNEL

As of September 30, 2000, the Company and its subsidiaries had 57 full
time employees and 4 part-time employees. The Company from time-to-time will
contract with outside programmers, engineers and other data processing
professionals, rather than hiring full-time staff. The employees are not
represented by a collective bargaining unit, and the Company considers its
relationship with its employees to be good. The Pathways Group on September 30,
2000 had 52 full time equivalent employees.

ITEM 2. PROPERTIES

The following table sets forth information relating to each of the
Company's offices as of September 30, 2000. The total net book value of the
Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at September 30, 2000 was
$1.8 million.

PRINCIPAL BUSINESS OFFICE:

1411 Fourth Avenue, Suite 629, Seattle, Washington 98101

SUBSIDIARY OFFICES:

Ultracard, Inc.
----------------
980 University Ave., Los Gatos, California 95032 (effective January
11, 2001)
16795 Lark Ave., Suite 102, Los Gatos, California 95032
(relocating to University Ave. effective Jan, 2001)

1550 S. Bascom Ave., Suite 100, Campbell, California 95008
4101 Westerly Place, Suite 108, Newport Beach, California 92660
2220 Eastman, Suite 106, Ventura, California 93003

cQue Corporation
-----------------
10900 NE 8th Street, Suite 900, Bellevue, Washington 98004

Efornet
-------
180 Knowles Drive, Suite 100, Los Gatos, California

The Pathway Group, Inc. (Pending)
---------------
1221 N. Dutton, Santa Rosa, California 95404
1455 N. Dutton, Santa Rosa, California 95404
14201 NE 189th St., Woodinville, Washington 98072
2500 Makai Tower, Grosvenor Center, Honolulu, Hawaii 96813
117 Aspen Airport Business Center, Suite 211, Aspen, Colorado 81611

Upgrade and all its subsidiaries lease their facilities for various
terms. Ultracard also owns a residence near the company's office which is used
by management when necessary. The Company believes that all of its properties
and equipment are well maintained, in good operating condition and adequate for
all present and anticipated needs of the Company. The premises are adequately
insured against perils consistent with industry standards.

ITEM 3. LEGAL PROCEEDINGS
----------------------------

Pursuant to a court order dated May 26, 2000, the three actions previously filed
against Upgrade and its president, Daniel S. Bland, have been consolidated into
one action, In Re Upgrade International Corporation Securities Litigation, U.S.
District Court, Western District of Washington at Seattle, c/a #C00-0298. A
Consolidated and Amended Class Action Complaint was filed July 24, 2000. Six
minority shareholders are named as lead plaintiffs. The complaint alleges that
material misrepresentations and omissions were made by Upgrade and Mr. Bland in
violation of the Securities Exchange Act of 1934. Specifically, the complaint
alleges that Upgrade and Mr. Bland made false statements regarding market
readiness and technological capabilities of its UltraCard technology, thereby
artificially inflating Upgrade's stock. The consolidated complaint seeks class
certification and payment of unspecified damages and attorneys fees. Upgrade has
engaged the firm of Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as defense
counsel. On August 8, 2000, Upgrade filed a motion to dismiss the complaint.
Oral arguments are scheduled for January 18, 2001. A ruling is expected
sometime thereafter.

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

On August 16, 2000 a special meeting of the shareholders was called to vote upon
the reincorporation of the Company from Florida into Washington via a merger
with a wholly owned subsidiary of the Company. The August 16, 2000, meeting was
adjourned due to lack of a quorum. The special shareholders' meeting was
reconvened on August 21, 2000. Shareholders present at the meeting, in person or
by proxy, represented 51.64% of common stock of the Corporation. The
shareholders approved the motion as follows:

In Favor of Motion: 9,927,325 shares representing 51.53%
Opposed to Motion 14,610 shares representing .08%
Abstain 5,270 shares representing .03%

PART II

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

The Company's common stock is traded on the OTC Bulletin Board Market under
the symbol "UPGD"as well as the Frankfort Stock Exchange. The approximate
number of stockholders of record of common stock as of January 6, 2001 was
368. Certain shares of the Company are held in "nominee" or "street" name
and accordingly, the number of beneficial owners of such shares are not known or
included in the foregoing number. Such shares are not separated to count actual
beneficial owners. As of January 6, 2001 there were 21,543,886 shares of common
stock outstanding. The following table presents quarterly market information
for the Company's common stock for the fiscal year ended September 30, 2000:

MARKET PRICE RANGE
-----------------------
LOW HIGH CLOSING
-----------------------

FISCAL YEAR 2000
----------------
Quarter ended September 30, 2000 $ 9.13 $20.25 $ 9.91
Quarter ended June 30, 2000 $ 8.00 $27.50 $14.88
Quarter ended March 31, 2000 $17.50 $89.88 $23.94
Quarter ended December 31, 1999 $ 3.00 $52.25 $40.50

FISCAL YEAR 1999
-----------------
Quarter ended September 30, 1999 $ 2.25 $ 3.88 $ 3.53
Quarter ended June 30, 1999 $ 1.88 $ 5.06 $ 3.50
Quarter ended March 31, 1999 $ 0.15 $ 5.63 $ 2.00
Quarter ended December 31, 1998 $ 0.15 $ 0.60 $ 0.20

During fiscal year 2000, the Company sold unregistered securities that have not
previously been disclosed in its filings on Form 10-QSB as follows:

In October 1999, Upgrade issued a $1,000,000 convertible debenture to The Gross
Foundation that bears 7% simple interest and is due October 15, 2001. The
debenture is convertible into shares of Upgrade's common stock at the lesser of
the average bid price of the stock for the five days prior to conversion or
$2.50. An additional 40,000 shares were issued to placement agents at $2.50 per
share in connection with the offering of the convertible debenture, and 70,000
shares were issued to Chaim Gross for services performed in connection with the
subordinated debenture agreement. These issuances were exempt under Rule 506
under and Section 4(2) of the Securities Act of 1933 (the "Act").

In December 1999 employees exercised 90,000 options at an exercise price of
$0.25 per share. The exercises were exempt pursuant to Rule 701 under the Act.

On July 24, 2000, Upgrade completed a private placement offering of 160,000
shares of its common stock to Devon Properties Ltd. at a price of $10.48 per
share for total proceeds of $1,676,800. The offer and sale of securities was
made pursuant to an exemption from registration under Regulation S of the Act
due to the foreign nationality of the investor.

In July 2000, Upgrade issued 130,000 shares of its common stock pursuant to
warrants exercised at prices between $0.25 and $2.50 per share for total
proceeds of $156,250. The sale of the securities was made pursuant to an
exemption from registration under Rule 506 and/or Regulation S under the Act due
to the foreign nationality of the relevant investors.

On August 16, 2000, Upgrade issued warrants to acquire 465,228 shares of its
common stock at an exercise price of $10.00 per share. The issuance of the
warrants was exempt from registration under Rule 506 of Regulation D under the
Act and under Regulation S under the Act, due to the foreign nationality of the
relevant investors.

On September 8, 2000, Upgrade completed a private placement offering of 408,164
shares of its common stock to Fonditel EGFP, SA, at a price of $12.25 per share
for gross proceeds of $5,000,000. The offer and sale of securities was made
pursuant to an exemption from registration under Regulation S under the Act due
to the foreign nationality of the investor.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

The following is a discussion and analysis of the Company's financial
position and results of operation and should be read in conjunction with the
information set forth under "General" in Item 1 and the consolidated financial
statements and notes thereto appearing elsewhere in this report. Certain
statements contained in this Annual Report on Form 10-KSB, including without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements." You should not place undue reliance on these forward looking
statements. Our actual results could differ materially from those anticipated
in these forward looking statements for many reasons, including the risks faced
by us described in the Annual Report and in other documents we file with the
Securities and Exchange Commission.

GENERAL

YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999.

Net losses from operations totaled $17.4 million for the fiscal year ended
September 30, 2000. This compares to a net loss of $10.6 million for the year
ended September 30, 1999. The loss reflects the Company's continuously growing
level of investment into the Company's subsidiaries technologies, production
processes and industrialization opportunities. The increase in the net loss as
compared to the prior year is also attributable to the operations of the
Company's subsidiaries whose operating results were included, primarily, using
equity accounting prior to September 30, 1999. In addition, due to continuous
losses incurred by the subsidiaries, the Company's minority interest was
eliminated and all losses are now included in the net loss of the Company.
The losses for the year ended September 30, 2000 borne by each subsidiary are as
follows: Ultracard 42%, cQue Corporation (formerly Centurion) 15%, EforNet 11%
and 32% the Company itself.

For all expense categories, changes are largely attributable to the
aforementioned differences in inclusion of subsidiaries operating results and
minority interest allocations in the fiscal year 2000 as compared to the fiscal
year 1999. Other specific explanations by expense categories follow.

Direct research and development expenditures increased by $5.7 million as
compared to the fiscal year 1999. This increase is due primarily to costs
incurred in developing Ultracard's technology. A significant portion of the
increase was due to the addition of new personnel, prototype development and
contracts with external research and development personnel.

All of the Company's research and development costs are expensed as incurred
except for capitalized cost of research and development equipment that has
alternative future uses. Research and development costs are expected to
accelerate in order to meet anticipated market opportunities.

In an effort to establish the Company's market for Ultracard's technology and
related products, and in order to augment internally developed research and
development initiatives, the Company anticipates licensing technology from
others, engaging others to develop components and/or acquiring other businesses
with similar strategic focus.

General and administrative expenses have increased from $2.0 to $8.8 million.
Included in expenses incurred during the year ended September 30, 2000, was a
noncash compensation of approximately $1 million in legal expenses incurred in
connection with defending the Company against the outstanding class action
lawsuit and approximately $0.5 million in other contract costs. In addition,
fiscal year 2000 general and administrative expenses include approximately $1
million in legal and other professional costs incurred in conjunction with
occurred and pending acquisitions. General and administrative costs are
expected to continue to grow in the foreseeable future.

Sales and marketing expenditures increased to approximately $2.0 million or 21%
reflecting Company's trade show attendances and efforts to increase market
awareness in anticipation of product launches.

In process research and development decreased in the fiscal year 2000 and
compared to 1999 as majority of the acquisitions occurred during the year ended
September 30, 1999.

YEAR ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1998

Net losses aggregated $10.6 million in fiscal year 1999 when compared to a $1.2
million loss in 1998. 1999 represented the first full year of developing
technology activities at the Company's subsidiaries. The loss reflects the
continued and growing level of investment into the subsidiary companies'
technologies, production processes. This increase in the net loss compared to
the prior year is, in the most part attributable to the operations of the
Company's subsidiary, UltraCard Inc., whose results of operations 1999 were
recorded using the equity method of accounting and purchased research and
development. The other two significant operating subsidiaries EforNet and cQue
Corporation (formally Centurion) contributed to the remaining loss reflecting
the results of those entities in developing software and smart card initiatives.
All of these entities are expanding their staff and scale of operations level
and losses are expected to be incurred for the foreseeable future.

Direct research and development expenditures of $1.1 million and purchased
research and development of $5.1 million for 1999, a significant increase over
1998, reflecting the increased costs incurred in establishing production
equipment, facilities and processes within UltraCard. The increase is also
comprised in part of refining and expanding upon the consolidated groups core
support technologies to establish a base of products for production. The costs
also reflects a focused effort at the establishment of an operating system by
Efornet that will form the standard for the UltraCard product. A significant
portion of the increase was due to the addition of new personnel, prototype
development and contracts with external research and development contractors.
For the near future research and development expenditures are expected to be
maintained and increase to meet the Company's anticipated market opportunities.
All of the Company's research and development costs are expensed as incurred.

In an effort to establish the Company's market with the UltraCard and related
products, and in order to augment internally developed research and development
initiatives, the Company will license technology from other businesses, engage
others to develop components and/or acquire other businesses as an alternative
to internal research and development and marketing efforts.

General and administrative expenses have increased from $.2 million to $1.1
million for 1999 compared to 1998. The significant portion of this loss is the
recording of the Company's equity position in the loss of Ultracard of $1.1
million compared to $.2 million in 1998. General and administrative costs
are expected to continue to grow as the subsidiaries commercialize their
products and develop more extensive infrastructures.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were approximately $0.4 million as of September 30,
2000, a decrease of $4.3 million from September 30, 1999. The decrease is due
to the increased research and development and administrative expense as well as
additional investments in subsidiaries and production equipment during the year.
During the year ended September 30, 2000, the Company raised approximately $13.7
million through common stock sales and another $0.7 million was received from
current shareholders that exercised various options and common stock warrants.
In addition, the Company completed a $1 million convertible debenture placement.
The Company's negative cash flow from operations is expected to continue and to
accelerate in the foreseeable future. The Company expects that its existing and
expected financings capital resources will be adequate to satisfy the
requirements of its current and planned operations until the end of the fiscal
year 2001.

The Company's ability to implement its business plan depends upon its continued
success raising capital. The US and international economy, conditions of world
capital markets, and other external factors impact the ability of the Company to
raise capital. During the last quarter of the fiscal year, the capital markets
willingness to invest in development companies has become more restrictive and
limited the Company's ability to fund the financing agreements of the
subsidiaries resulting in increased accounts payable balances. Subsequent to
September 30, 2000, the Company raised an additional $5.6 million through $2.9
million equity placements and $2.7 million in debt and convertible debenture
placements. The Company continues to devote extensive efforts in its ability to
raise capital, including the identification of a significant number of new
sources of capital.

SUBSEQUENT EVENTS

Since September 30, 2000, the following significant activities are detailed
below

Equity placements;

In October 2000, the Company issued 142,860 shares at $10.50 per share
pursuant to Regulation "S" for aggregate proceeds to the Company of
$1,500,030

In November 2000, the Company issued 233,333 shares at $6.00 per share
pursuant to Regulation "S" for aggregate proceeds to the Company of
$1,399,998

Debt placements;

During November 2000, the Company entered into agreements for the issuance
of convertible subordinated debentures aggregating $2,325,250. The
convertible subordinated debentures provide for 8% interest payable on the
principal amount of the debenture, have a term of 18 months and provide for
the following additional compensation comprised of 7% of the principal
amount of the debenture in common stock based upon a $6.00 share price and
warrants coverage equal to 10% of the value of the debenture again based
upon a $6.00 share price. Two debentures in the amount of $750,000 provided
for finder's fees aggregating 10% of the debenture payable as to 7% in cash
and 3% in shares calculated on a $4.50 share price was also payable.
Pursuant to the agreements, the Company issued additional compensation and
finder's fees aggregating cash of $52,500, common stock of 167,768 shares
and five year warrants to acquire 334,406 common shares at a purchase price
of $6.00 per share. Additional compensation equal to 2% to 3% of the
conversion shares is payable in the event that the common stock underlying
the convertible debentures are not registered by January 1, 2001.

In December 2000 the Company borrowed $400,000 pursuant to the terms of
four promissory notes. The notes have a term of 30 days, and bear interest
at a rate of 10% per annum. In the event that the loans are not repaid on
the maturity date, a penalty charge will be due and payable as follows;

- Warrants to acquire common stock will be issued equal to 12.5% of
the unpaid principal and interest at the loan maturity date
issued at a strike price being the average trading price of the
borrowers common stock on the maturity date.

- Additional warrants to acquire common stock will be issued equal
to 20% of the unpaid principal and interest at the loan maturity
date calculated at the current market issued at a strike price of
$6.00.

- In the event that the loan principal and interest is not repaid,
an additional penalty will become due and payable every 30 days
following the maturity date.

Letters of Intent;

The Company has entered into letters of intent to acquire controlling
interest in Cards & More, etal, a manufacturer and producer of credit card
stock and other niche systems. Additionally the Company entered into a
letter of intent to acquire controlling interest in Rockster, Inc., a
software company that can conduct transactions on the internet which can
provide efficient, anonymous transactions on the web. Each acquisition
transaction is subject to the execution of a definitive agreement and is
subject to due diligence processes.

EforNet;

The Company suspended operations temporarily at its Efornet subsidiary on
December 1, 2000. Efornet, a research and development business for the
Company's business is expected to recommence activities during 2001. In the
meantime, management has taken all steps to significantly reduce all
non-essential operating expenses at Efornet. On December 1, 2000, the
Company acquired all outstanding shares of Efornet not previously owned by
the Company, and therefore now owns 100% of EforNet.

UltraCard funding agreement;

In order to permit Ultracard to explore strategic partnerships and other
funding alternatives, some of which could include equity participation;
Upgrade waived its provisions including its non-dilution clause contained
in its financing agreement with Ultracard. Upgrade and Ultracard continue
to work together to explore alternative methods and alliances which can
provide funding to the Company.

Liquidity and other financing activities;

The Company is actively pursuing over $60 million in new investment in the
Company. This financing can takes the form the equity, convertible
debentures and debt. The Company expects to close on at least $20 million
of these activities in the first three months of 2001.

The Company contemplates that any financings will be accomplished through
private transactions with persons the Company will contact through existing
relationships. This disclosure is not an offer to sell securities or a
solicitation of an offer to buy securities. No money or other consideration
is being solicited or will be accepted by way of this disclosure. Any
public offer of the Company's common stock will be made only by means of a
prospectus filed with the SEC.

FORWARD LOOKING STATEMENTS

Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial items
and similar statements are not guarantees of future performance, but are forward
looking statements. By their nature, these statements are subject to numerous
uncertainties that could cause actual results to differ materially from those in
the statements. Important factors that might cause the Company's actual results
to differ materially include, but are not limited to, the following:

- The Company's ability to continue the development of its products and
services in a timely manner;
- The Company's ability to adapt successfully to technological changes;
- The Company's ability to access cost effective funding; and
- Changes in financial markets and general economic conditions.

SELECTED FINANCIAL DATA

The following table sets forth certain consolidated financial and other
data of the Company at the dates and for the periods indicated. The information
is derived in part from and should be read in conjunction with the Company's
consolidated financial statements and notes thereto (dollars in thousands,
except common share data):

YEAR ENDED SEPTEMBER,
-------------------------------------
2000 1999 1998 1997(1)
-------------------------------------

STATEMENT OF OPERATIONS DATA:
Costs and expenses
Research and development $ 6,834 $ 1,108 $ 209 $
Purchased in-process research and development 426 5,122 424
Sales and marketing 1,973 1,642 -0-
General and administrative 8,771 1,972 404
-------------------------------------
18,004 9,844 1,037

Other expenses
Equity in losses of Ultracard -0- 1,088 177
Interest expense 953 11 -0-
Other, net 206 36 (1)
-------------------------------------
1,159 1,135 176

-------------------------------------
Minority interest in losses of subsidiaries (1,759) (356) -0-
-------------------------------------

-------------------------------------
Net Loss $17,404 $10,624 $1,213 $
-------------------------------------

COMMON SHARE DATA:
Basic and diluted loss per common share $ 0.93 $ 0.79 $ 0.15

1. Upgrade commenced operations February 5, 1997, the results of operations
during 1997 were negligible.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements and Report of
Independent Certified Public Accountants

UPGRADE INTERNATIONAL CORPORATION AND
SUBSIDIARIES
(A development stage enterprise)

September 30, 2000 and 1999

C O N T E N T S

Page

STATEMENT OF MANAGEMENT RESPONSIBILITY 26

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 27

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS 28

CONSOLIDATED STATEMENTS OF OPERATIONS 29

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 30

CONSOLIDATED STATEMENTS OF CASH FLOWS 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34

STATEMENT OF MANAGEMENT RESPONSIBILITY

Upgrade International's management is responsible for the preparation, integrity
and fair presentation of its published financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates made by management. Management also prepared other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.

The consolidated financial statements have been audited by an independent
accounting firm, Grant Thornton, LLP, which has been given unrestricted access
to all financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors and committees of the Board. Management
believes that representations made to the independent auditors during their
audit were valid and appropriate.

Management maintains a system of internal controls over the preparation of
its published financial statements, which is intended to provide reasonable
assurance to the Company's Board of Directors and officers regarding preparation
of financial statements presented fairly in conformity with generally accepted
accounting principles.

Management has long recognized its responsibility for conducting the
Company's affairs in a manner, which is responsive to the interest of employees,
stockholders, investors and society in general. This responsibility is included
in the statement of policy on ethical standards, which provides that the Company
will fully comply with laws, rules and regulations of every community in which
it operates and adhere to the highest ethical standards. Officers, employees and
agents of the Company are expected and directed to manage the business of the
Company with complete honesty, candor and integrity.

Internal auditors monitor the operation of the internal control system, and
actions are taken by management to respond to deficiencies as they are
identified. The Board, operating through its audit committee, which is composed
entirely of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process.

Even effective internal controls, no matter how well designed, have
inherent limitations, such as the possibility of human error or of circumvention
or overriding of controls, and the consideration of cost in relation to benefit
of a control. Further, the effectiveness of an internal control can change with
circumstances.

Upgrade International's management periodically assesses the internal
controls for inadequacy. Based upon these assessments, Upgrade International's
management believes that, in all material respects, its internal controls
relating to preparation of consolidated financial statements as of September 30,
2000 functioned effectively during the year ended September 30, 2000.

Daniel S. Bland Howard A. Jaffe
Chief Executive Officer Chief Financial Officer

Report of Independent Certified Public Accountants
--------------------------------------------------

Board of Directors
Upgrade International Corporation

We have audited the accompanying consolidated balance sheets of Upgrade
International Corporation and Subsidiaries (a development stage enterprise) as
of September 30, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended and
since inception (February 5, 1997). These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Upgrade
International Corporation and Subsidiaries as of September 30, 2000 and 1999,
and the results of their consolidated operations and their consolidated cash
flows for the years then ended and since inception, in conformity with
accounting principles generally accepted in the United States of America.

GRANT THORTON, LLP
Seattle, Washington
December 21, 2000 (except for Note B as to which the date is January 15, 2001)

UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A development stage enterprise)

CONSOLIDATED BALANCE SHEETS

ASSETS

September 30,
----------------------------
2000 1999
------------- -------------

CURRENT ASSETS
Cash and cash equivalents $ 398,989 $ 4,781,330
Restricted deposit 805,687 -
Subscriptions receivable 32,725 165,000
Prepaid expenses, deposits and other 121,491 209,054
------------- -------------

Total current assets 1,358,892 5,155,384

PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 1,791,257 1,003,381

EQUIPMENT UNDER CONSTRUCTION 3,301,625 -

ADVANCES TO THE PATHWAYS GROUP, INC. 1,900,825 -

OTHER ASSETS
Intangible and deferred assets, net of accumulated amortization 370,206 253,763
Deposits 328,051 135,032
------------- -------------

Total assets $ 9,050,856 $ 6,547,560
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable $ 1,993,796 $ 1,100,091
Accrued liabilities 733,241 843,493
Bridge loans 799,177 -
Equipment purchase contract payable 2,307,025 -
Royalty fee payable to Card Tech, Inc., net 487,500 -
Payable to related parties 175,240 607,635
------------- -------------

Total current liabilities 6,495,979 2,551,219

CONVERTIBLE DEBENTURES, net of unamortized discount 809,043 -

MINORITY INTEREST - 1,792,869

COMMITMENTS AND CONTINGENCIES - -

STOCKHOLDERS' EQUITY
Common stock - $.001 par value, 50,000,000 shares authorized 20,341 12,958
Stock subscriptions 323,640 12,344,613
Additional paid in capital 36,925,837 2,082,479
Receivable from stockholders of subsidiary (266,621) (400,000)
Accumulated development stage deficit (35,257,363) (11,836,578)
------------- -------------
1,745,834 2,203,472
------------- -------------

Total liabilities and stockholders' equity $ 9,050,856 $ 6,547,560
============= =============

The accompanying notes are an integral part of these statements.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

Cumulative
results of
Year ended September 30, operations since
-------------------------- inception
2000 1999 (February 5, 1997)
------------ ------------ -------------------

Costs and expenses
Research and development $ 6,834,508 $ 1,107,385 $ 8,150,672
Purchased in-process research and development 425,800 5,121,946 5,971,603
Sales and marketing 1,972,838 1,642,125 3,614,963
General and administrative 8,770,862 1,972,283 11,148,007
------------ ------------ -------------------
18,004,008 9,843,739 28,885,245
Other expenses
Equity in losses of UltraCard - 1,088,173 1,264,316
Interest expense 953,286 10,708 963,994
Other, net 205,787 36,472 242,148
------------ ------------ -------------------
1,159,073 1,135,353 2,470,458
------------ ------------ -------------------

Minority interest in losses of subsidiaries (1,759,091) (356,044) (2,115,135)
------------ ------------ -------------------

NET LOSS $17,403,990 $10,623,048 $ 29,240,568
============ ============ ===================

LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.93 $ 0.79 $ 2.74
============ ============ ===================

The accompanying notes are an integral part of these statements.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

STATEMENT OF STOCKHOLDERS' EQUITY

SINCE INCEPTION THROUGH SEPTEMBER 30, 2000

Voting common stock Common stock subscribed Additional Receivable from Accumulated
------------------- ------------------------ paid-in stockholders Development
Shares Amount Shares Amount capital of subsidiary stage deficit
---------- ------- ----------- ----------- --------- -------------- ---------------

Balance at February 5, 1997 - $ - - $ - $ - $ - $ -

Issuance of founder's shares at
$.03 per share in February 1997
adjusted for December 1997
1:2 reverse stock split 500,000 500 - - 29,500 - -

Issuance of common stock in
February 1997 at $.10 per
share adjusted for
December 1997 1:2 reverse
stock split 29,000 29 - - 5,771 - -

Issuance of common stock at
$.0025 per share in
December 1997 Reg. D
Rule 504 offering 4,000,000 4,000 - - 6,000 - -

Issuance of common stock in
December 1997 to an
officer in exchange for
property contribution 4,000,000 4,000 - - 47,250 - -

Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering 1,680,988 1,681 - - 838,813 - -

Common stock subscribed in
September 1998 at $.065
per share - - 2,250,000 146,250 - - -

Net loss for the year ended
September 30, 1998 - - - - - - (1,213,530)
---------- ------- ----------- ----------- --------- -------------- ---------------

Balances at September 30, 1998 10,209,988 10,210 2,250,000 146,250 927,334 - (1,213,530)

Issuance of subscribed shares
in November 1998 Reg. D
Rule 504 offering 2,250,000 2,250 (2,250,000) (146,250) 144,000 - -

Issuance of common stock in
January 1999 to satisfy trade
liabilities 437,500 438 - - 103,312 - -

Issuance of common stock
warrants at $.25 per share in
January 1999 - - - - 221,000 - -

Common stock subscribed at
$1.80 per share in February
1999 private placement - - 999,999 1,799,998 - - -

Issuance of common stock
warrants for services in
August 1999 - - - - 64,155 - -

Common stock subscribed at
$.25 per share in August
1999 through exercise of
common stock warrants - - 27,500 71,030 (64,155) - -

Issuance of common stock
warrants and options at exercise
prices of $.25 and $2.50 per
share in September 1999 for
services - - - - 671,893 - -

Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options 60,000 60 - - 14,940 - -

Total
------------

Balance at February 5, 1997 $ -

Issuance of founder's shares at
$.03 per share in February 1997
adjusted for December 1997
1:2 reverse stock split 30,000

Issuance of common stock in
February 1997 at $.10 per
share adjusted for
December 1997 1:2 reverse
stock split 5,800

Issuance of common stock at
$.0025 per share in
December 1997 Reg. D
Rule 504 offering 10,000

Issuance of common stock in
December 1997 to an
officer in exchange for
property contribution 51,250

Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering 840,494

Common stock subscribed in
September 1998 at $.0065
per share 146,250

Net loss for the year ended
September 30, 1998 (1,213,530)
------------

Balances at September 30, 1998 (129,736)

Issuance of subscribed shares
in November 1998 Reg. D
Rule 504 offering -

Issuance of common stock in
January 1999 to satisfy trade
liabilities 103,750

Issuance of common stock
warrants at $.25 per share in
January 1999 221,000

Common stock subscribed at
$1.80 per share in February
1999 private placement 1,799,998

Issuance of common stock
warrants for services in
August 1999 64,155

Common stock subscribed at
$.25 per share in August
1999 through exercise of
common stock warrants 6,875

Issuance of common stock
warrants and options at
prices of $.25 and $2.50 per
share in September 1999 for
services 671,893

Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options 15,000

The accompanying notes are an integral part of these statements.

CONTINUED
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued

SINCE INCEPTION THROUGH SEPTEMBER 30, 2000

Additional Receivable from Accumulated
Voting common stock Common stock subscribed paid-in stockholders Development
Shares Amount Shares Amount capital of subsidiary stage deficit
--------- ---------- ----------- ------------ ----------- -------------- --------------

Common shares subscribed
at $2.50 per share in
September 1999 - - 4,189,434 10,473,585 - - -

Receivable from UltraCard
stockholders for payroll
taxes and related charges in
connection with stock
issued by UltraCard as
compensation - - - - - (400,000) -

Net loss for the
year ended September 30,
1999 - - - - - - (10,623,048)
--------- ---------- ----------- ------------ ----------- -------------- --------------

Balances at September 30,
1999 12,957,488 12,958 5,216,933 12,344,613 2,082,479 (400,000) (11,836,578)

Common shares subscribed
by a broker at $2.50 per
share in October 1999 in
connection with placement
of $1 million in convertible
debentures - - 16,000 40,000 (40,000) - -

Issuance of common stock
warrants with a strike price
of $.25 per share in
October 1999 - - - - 339,500 - -

Issuance of subscribed shares
in November 1999 999,999 1,000 (999,999) (1,799,998) 1,798,998 - -

Issuance of common shares,
including shares
subscribed, in
November 1999 at $2.50
per share, net of
expenses 4,652,281 4,652 (4,045,583) (10,113,957) 11,521,038 - -

Common shares subscribed
by a broker at $2.50
per share in
November 1999
in connection
November 1999
private placements - - 24,000 60,000 (60,000) - -

Issuance of common stock at
$.25 per share in
December 1999 through
exercise of employee
stock options 90,000 90 - - 22,410 - -

Common shares issued for
services in December
1999 70,000 70 - - 242,830 - -

Allocation of debenture
proceeds to beneficial
conversion feature - - - - 676,360 - -

Allocation of debenture
proceeds to
stock warrants - - - - 323,640 - -

Issuance of common stock at
$44 per share in January
2000 through a private
placement, net of
expenses 100,000 100 - - 4,289,900 - -

Issuance of common stock at
$.25 and $2.50 per share
in February 2000
through exercise
of stock warrants 294,449 295 - - 304,046 - -

Total
------------

Common shares subscribed
at $2.50 per share in
September 1999 10,473,585

Receivable from UltraCard
stockholders for payroll
taxes and related charges in
connection with stock
issued by UltraCard as
compensation (400,000)

Net consolidated loss for the
year ended September 30,
(10,623,048)
------------

Balances at September 30,
2,203,472

Common shares subscribed
to by a broker at $2.50 per
share in October 1999 in
connection with placement
of $1 million in convertible
debentures -

Issuance of common stock
warrants with a strike price
of $.25 per share in
October 2000 339,500

Issuance of subscribed shares
in November 1999 -

Issuance of common shares,
including shares
subscribed, in
November 1999 at $2.50
per share, net of
expenses 1,411,733

Common shares subscribed
to by a broker at $2.50
per share in
November 1999
in connection
November 1999
private placements -

Issuance of common stock at
$.25 per share in
December 1999 through
exercise of employee
stock options 22,500

Common shares issued for
services in December
242,900

Allocation of debenture
proceeds to beneficial
conversion feature 676,360

Allocation of debenture
proceeds to
stock warrants 323,640

Issuance of common stock at
$44 per share in January
2000 through a private
placement, net of
expenses 4,290,000

Issuance of common stock at
$.25 and $2.50 per share
in February 2000
through exercise
of stock warrants 304,341

The accompanying notes are an integral part of these statements.

CONTINUED
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued

SINCE INCEPTION THROUGH SEPTEMBER 30, 2000

Voting common stock Common stock subscribed Additional Receivable from Accumulated
--------------------- ------------------------- paid-in stockholders Development
Shares Amount Shares Amount capital of subsidiary stage deficit
--------- ---------- ----------- ------------ ----------- -------------- --------------

Issuance of common stock in
February 2000 subscribed
to in August 1999
through exercise of
common stock warrants 27,500 27 (27,500) (71,030) 71,003 - -

Issuance of common stock in
April 2000 in connection
with reverse acquisition
of Second CMA, Inc. 45,000 45 - - 1,155 - -

Issuance of common stock
options with a strike
price of $10.00 per
share in April 2000
for legal services - - - - 1,047,670 - -

Issuance of common stock at
$10 per share in
April 2000 through
a private placement,
net of expenses 50,000 50 - - 449,950 - -

Issuance of common stock at
$11.31 per share in
May 2000 through a private
placement, net
of expenses 80,000 80 - - 859,480 - -

Common shares subscribed
to through a cashless
exercise of common
stock warrants in
May 2000 - - 102,609 323,640 (323,640) - -

Issuance of common stock at
$2.50 per share in
June 2000 through exercise of
stock warrants 91,878 92 - - 229,603 - -

Issuance of common stock at
$10.48 per share in July
2000 through a private
placement 160,000 160 - - 1,676,640 - -

Issuance of common stock at
$.25 and $2.50 per share
in July 2000 through
exercise of stock
warrants 130,000 130 - - 156,120 - -

Distribution of common-
stock warrants on
August 16, 2000 - - - - 6,016,795 - (6,016,795)

Issuance of common stock at
$12.25 per share in
September 2000 through
a private placement, net
of expenses 408,164 408 - - 4,899,301 - -

Issuance of common stock in
September 2000
subscribed in
September 1999 143,851 144 (143,851) (359,628) 359,484 - -

Issuance of common stock in
September 2000
subscribed in
October and
November of 1999 40,000 40 (40,000) (100,000) 99,960 - -

Adjustment to market of
options granted for
services in April 2000 - - - - (118,885) - -

Adjustment to receivable
from subsidiary's
stockholders - - - - - 133,379 -

Net loss for the
year ended September 30,
2000 - - - - - - (17,403,990)
--------- ---------- ----------- ------------ ----------- -------------- --------------

Balances at September 30,
2000 20,340,610 $ 20,341 102,609 $ 323,640 $36,925,837 $ (266,621) $ (35,257,363)
========== ========== =========== ============ =========== ============== ==============

Total
-------------

Issuance of common stock in
February 2000 subscribed
to in September 1999
through exercise of
common stock warrants -

Issuance of common stock in
April 2000 in connection
with reverse acquisition
of Second CMA, Inc. 1,200

Issuance of common stock
options with a strike
price of $10.00 per
share in April 2000
for legal services 1,047,670

Issuance of common stock at
$10 per share in
April 2000 through
a private placement,
net of expenses 450,000

Issuance of common stock at
$11.31 per share in
May 2000 through a private
placement, net
of expenses 859,560

Common shares subscribed
to through a cashless
exercise of common
stock warrants in
May 2000 -

Issuance of common stock at
$2.50 per share in
June 2000 through exercise of
stock warrants 229,695

Issuance of common stock at
$10.48 per share in July
2000 through a private
placement 1,676,800

Issuance of common stock at
$.25 and $2.50 per share
in July 2000 through
exercise of stock
warrants 156,250

Distribution of common
stock warrants on
August 16, 2000 -

Issuance of common stock at
$12.25 per share in
September 2000 through
a private placement, net
of expenses 4,899,709

Issuance of common stock in
September 2000
subscribed in
September 1999 -

Issuance of common stock in
September 2000
subscribed in
October and
November of 1999 -

Adjustment to market of
options granted for
services in April 2000 (118,885)

Adjustment to receivable
from subsidiary's
stockholders 133,379

Net consolidated loss for the
year ended September 30,
(17,403,990)
-------------

Balances at September 30,
$ 1,745,834
=============

The accompanying notes are an integral part of these statements.

UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A development stage enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended September 30 Cumulative
---------------------------- since inception
Increase (Decrease) in Cash and Cash Equivalents 2000 1999 (February 5, 1997)
------------- ------------- -------------------

Cash flows from operating activities
Net loss $(17,403,990) $(10,623,048) $ (29,240,568)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 289,885 11,262 301,852
Amortization of beneficial conversion feature 676,360 - 676,360
Amortization of debenture discount 132,683 - 132,683
Adjustment to receivables from subsidiary's stockholders 133,379 - 133,379
Write off of option cost - 76,250 76,250
Equity in loss of UltraCard - 1,088,173 1,264,316
Purchased in-process research and
development 425,800 5,121,946 5,971,603
Warrants and options issued for services 1,268,285 1,962,205 3,230,490
Shares issued for services 242,900 55,750 298,650
Expenses incurred through loan assumption - 470,005 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property
charged to expense - 125,000 125,000
Minority interest (1,759,091) (356,044) (2,115,135)
Changes in assets and liabilities:
Prepaid expenses, deposits and other 244,544 615,902 858,710
Payables, accrued liabilities and other 1,382,446 204,215 1,797,624
------------- ------------- -------------------

Net cash used in operating activities (14,366,799) (1,248,384) (16,018,781)

Cash flows from investing activities
Advances to The Pathways Group, Inc. (1,885,000) - (1,885,000)
Payments on equipment under construction (1,200,000) - (1,200,000)
Acquisition of property and equipment (1,000,796) (55,862) (1,068,291)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired (350,000) (650,000) (1,000,000)
Acquisition of UltraCard, Inc., net of cash acquired (260,300) (4,710,805) (5,571,105)
Acquisition of equity interest in EforNet Corp.
from a minority shareholder (200,000) - (200,000)
Additions to intangible assets (117,178) - (117,178)
------------- ------------- -------------------

Net cash used in investing activities (5,013,274) (5,416,667) (11,041,574)

Cash flows from financing activities
Proceeds from sale of common stock and stock subscriptions13,720,077 11,770,829 26,523,450
Borrowings, net of loan costs 3,453,100 185,805 3,671,538
Principal payments on borrowings (2,082,544) (513,950) (2,642,743)
Purchase of collateral on subsidiary's letter of credit (805,687) - (805,687)
Proceeds from exercise of stock options and warrants 712,786 - 712,786
------------- ------------- -------------------
Net cash provided by
financing activities 14,997,732 11,442,684 27,459,344
------------- ------------- -------------------

Net increase (decrease) in cash and cash equivalents (4,382,341) 4,777,633 389,989

Cash and cash equivalents at the beginning of the period 4,781,330 3,697 -
------------- ------------- -------------------

Cash and cash equivalents at the end of the period $ 398,989 $ 4,781,330 $ 398,989
============= ============= ===================

Supplementary information:
Interest paid $ 54,793 $ - $ 54,793
============= ============= ===================

See note E for nonmontary exchanges and transactions.

The accompanying notes are an integral part of these statements.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2000 AND 1999

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Upgrade International Corporation (the Company or Upgrade) is a development
stage company incorporated on February 5, 1997 (inception) in the State of
Florida and currently headquartered in Seattle, Washington. In August 2000,
Upgrade reincorporated in the State of Washington. The Company is active in the
acquisition and development of proprietary hardware and software in the
information technology industry. Its primary business focus has been the
acquisition, development and commercial exploitation of the UltraCard
technology, a super high capacity data storage and retrieval device. The
aforementioned activities are conducted through its subsidiary, UltraCard, Inc.
In addition, the Company has investments in two technology companies that are
currently developing application software and "know-how" integral to
commercialization of the Company's base technology.

On April 6, 2000, Upgrade issued 45,000 shares of its common stock in exchange
for all the outstanding shares of common stock of Second CMA, Inc., a Colorado
corporation, pursuant to an Agreement and Plan of Merger dated as of April 4,
2000 between Upgrade and Second CMA. The transaction was accounted for as a
reverse acquisition resulting in a $1,200 credit to the Company's additional
paid in capital to record the issuance of the shares used in the exchange. In
addition, the Company expensed $300,000 in cash paid for this transaction. This
expense was included in other expenses in the consolidated statement of
operations for the year ended September 30, 2000.

1. Basis of Presentation
-----------------------

The Company consolidates all companies in which it invests when the Company has
a controlling financial interest in the investee. This generally occurs when
the Company owns more than 50% of the outstanding voting shares of the investee.
The Company also consolidates 50%-owned companies in which it has voting control
through agreements with other shareholders. Investments in companies where the
Company has significant influence through ownership of 20% to 50% of the
investors voting shares or contractual arrangements are accounted for by the
equity method.

The balance sheet, statement of operations and statements of cash flows as of
September 30, 2000, and for the year then ended, reflect the consolidated
financial position and results of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard), Centurion Technologies,
Inc. (Centurion), CTI Acquisition Corporation (CTI), Global CyberSystems, Inc.
(Global), Global CyberSystems PLC (Global PLC), Global CyberSystems SA (Global
SA) and EforNet Corporation (EforNet). The balance sheet as of September 30,
1999, reflects the consolidated financial position of the Company and UltraCard,
Centurion, CTI, Global, and EforNet. The statements of operations and cash
flows for the year ended September 30, 1999, reflect the consolidated results of
operations and cash flows of the Company and the results of the subsidiaries
beginning on the dates the Company acquired control. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority stockholders' proportionate share in
the equity of the Company's consolidated Subsidiaries. The losses incurred by a
subsidiary are allocated on a proportionate basis to minority interest until the
carrying amount of minority interest is eliminated. Further losses are then
included in the net loss of the Company.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

2. Property and Equipment
------------------------

Property and equipment are stated at cost. Depreciation expense is charged to
operations using the straight-line depreciation method over the estimated useful
life of the assets ranging as follows:

Equipment 3-5 years
Software 3 years
Office Furniture 10 years
Corporate Condominium 30 years
Leasehold Improvements Over the term of the related lease or life of
assets, whichever is shorter

The Company uses accelerated depreciation methods for tax purposes, when
allowable.

3. Intangible and Deferred Assets
---------------------------------

Intangible assets consist of capitalized license fees, patent and trademark
costs, and loan fees. Intangible assets are amortized using the straight-line
method over seven years, the estimated useful life of the underlying technology.
Loan fees are amortized on a straight-line basis over the life of the underlying
borrowing.

4. Research and Development
--------------------------

Research and development costs are expensed as incurred.

5. Software Development Costs
----------------------------

Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software developments costs subsequent to the
establishment of technological feasibility. The Company considers technological
feasibility to be established upon completion of a working model. The Company
believes that costs incurred between completion of a working model and the point
at which the product will be ready for general release will be insignificant.
As a result, all product development costs have been expensed as incurred.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

6. Cash Equivalents
-----------------

For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.

Included in cash and cash equivalents are trust accounts with the Company's
corporate counsel. The balances of the accounts were $15,719 and $1,725,460 at
September 30, 2000 and 1999, respectively.

The Company and its subsidiaries maintain their bank accounts with a number of
financial institutions. At September 30, 2000 and 1999, the balances in some of
these accounts were in excess of the $100,000 federally insured limit. The
Company has not experienced any losses with these cash accounts.

7. Financial Instruments
----------------------

The Company's financial instruments consist of cash, restricted deposit,
advances, accounts payable, payable to related parties, bridge loans and
debentures. The Company believes that the fair value of these financial
instruments approximates their carrying amounts based on their short-term nature
or current market indicators such as prevailing interest rates.

8. Loss per Common Share
------------------------

Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. The weighted
average number of shares outstanding was 18,635,082 and 13,467,876 for the years
ended September 30, 2000 and 1999, respectively, and 10,687,777 since inception
(February 5, 1997) through September 30, 2000. Diluted loss per share for all
periods presented equaled basic loss per share due to antidilutive effect of the
potentially dilutive securities. As of September 30, 2000 and 1999, total
warrants and options of 3,579,236 and 4,332,141, respectively, were not included
in loss per share computations due to their antidilutive effect.

9. Use of Estimates
------------------

In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity, the 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.

10. Reclassifications
-----------------

Certain reclassifications were made to prior year balances to conform to current
year presentation.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE B - MANAGEMENT PLANS

The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting its present
efforts into establishing a new business in the information technology industry
and, is currently in the process of identifying markets and establishing
applications for its technologies. Accordingly, no operating revenues have been
generated. The Company's operations to date have consumed substantial and
increasing amounts of cash. The Company's negative cash flow from operations is
expected to continue and to accelerate in the foreseeable future. The
development of the Company's technology and potential products will continue to
require a commitment of substantial funds. The Company expects that its existing
and expected financings will be adequate to satisfy the requirements of its
current and planned operations until the end of the fiscal year 2001.

However, the rate at which the Company expends its resources is variable, may be
accelerated, and will depend on many factors. The Company will need to raise
substantial additional capital to fund its operations and may seek such
additional funding through public or private equity or debt financing. There can
be no assurance that such additional funding will be available on acceptable
terms, if at all. The Company's continued existence as a going concern is
ultimately dependent upon its ability to secure additional funding for
completing and marketing its technology and the success of its future
operations.

In October 2000, the Company issued 142,860 shares at $10.50 per share pursuant
to Regulation "S" for aggregate proceeds to the Company of $1,500,030.
In November 2000, the Company issued 233,333 shares at $6.00 per share pursuant
to Regulation "S" for aggregate proceeds to the Company of $1,399,998.

During November 2000, the Company entered into agreements for the issuance of
convertible subordinated debentures aggregating $2,325,250. The convertible
subordinated debentures provide for 8% interest payable on the principal amount
of the debenture, have a term of 18 months and provide for the following
additional compensation comprised of 7% of the principal amount of the debenture
in common stock based upon a $6.00 share price and warrants equal to 10% of the
value of the debenture again based upon a $6.00 share price. Two debentures in
the aggregate amount of $750,000 provided for finder's fees aggregating 10% of
the debenture, payable 7% in cash and 3% in shares calculated on a $4.50 share
price. Pursuant to the agreements, the Company issued additional compensation
and finder's fees aggregating as follows: cash of $52,500; common stock of
167,768 shares; and five year warrants to acquire 334,406 common shares at a
purchase price of $6.00 per share. Additional compensation equal to 2% to 3% of
the conversion shares is payable in common stock in the event that the common
stock underlying the convertible debentures is not registered by January 1,
2001.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE B - MANAGEMENT PLANS - Continued

In December 2000, the Company borrowed $400,000 pursuant to the terms of four
promissory notes. The notes have a term of 30 days, and bear interest at a rate
of 10% per annum. In the event that the loans are not repaid on the maturity
date, a penalty charge will be due and payable as follows;

- 10% of the unpaid principal and interest at the maturity date
will be issued in common stock to the lender, calculated based
upon the average trading price of the common stock of the
Company on the loan maturity date.
- Warrants to acquire common stock will be issued equal to 12.5% of
the unpaid principal and interest at the loan maturity date
issued at a strike price of the average trading price of the
Companies' common stock on the maturity date.
- Additional warrants to acquire common stock will be issued equal
to 20% of the unpaid principal and interest at the loan maturity
date calculated at the current market issued at a strike price of
$6.00.
- In the event that the loan principal and interest is not repaid,
an additional penalty will become due and payable every 30 days
following the maturity date.

The Company is actively pursuing over $60 million in new investment in the
Company. This financing will takes the form the equity, convertible debentures
and other types of debt. The Company expects to close on at least $20 million
of these activities in the second quarter of fiscal year 2001.

NOTE C - INVESTMENTS

1. UltraCard, Inc.
----------------

On January 16, 1998, the Company entered into an agreement to acquire an 18.53%
equity interest in UltraCard, Inc., a high-tech development stage company
located in Campbell, California, for cash of $450,000. The agreement was
subsequently modified to provide Upgrade with an option to acquire additional
equity interest in UltraCard for $7,500,000 and bring its ownership interest to
a non-diluted 50%.

The Company's investment in UltraCard was accounted for using the equity method
until the Company acquired its controlling interest on September 30, 1999. On
this date, the investment was accounted for using the purchase method of
accounting, and accordingly, the balance sheet of UltraCard has been included in
the Company's consolidated balance sheet at September 30, 1999. At the date of
investment in UltraCard, the purchase price totaling $7,950,000 was allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition, which approximated the carrying amounts recorded by
UltraCard. The remaining unallocated amount of purchase price was allocated to
purchased in-process research and development (IPR&D). During the years ended
September 30, 2000 and 1999 and since inception through September 30, 2000, the
Company expensed, $225,800, $4,193,870, and $4,843,527, respectively, of IPR&D
associated with its investments in UltraCard.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE C - INVESTMENTS - Continued

On September 30, 1999, the Board of Directors of UltraCard approved an employee
stock option plan which authorized the issuance of up to three million shares
(after effect of 3:1 split) in the share capital of UltraCard to its directors,
officers and employees. In order to avoid dilution of the 50% equity interest
of Upgrade if these stock options are granted and exercised, the Company was
issued an additional 3,000,000 shares. In the event that UltraCard completes an
Initial Public Offering (IPO), UltraCard reserves the right to buy back from
Upgrade any portion of those shares issued to the extent that option grants have
not been completed under the terms of the employee stock option plan. As a
result, at September 30, 1999, the Company held shares equaling approximately
54% of the outstanding common shares of UltraCard. The Company cannot vote the
3,000,000 shares issued as a result of the antidilution provisions described
above until the occurrence of an IPO or the exercise of options and issuance of
shares under the UltraCard stock option agreement. In addition, a stockholder
of UltraCard has granted to the Company certain proxy rights that allow the
Company to vote an additional 2% of the outstanding common stock of UltraCard.
During the year ended September 30, 2000, the Company acquired an additional 1%
interest in UltraCard from one of UltraCard's stockholders, increasing the
Company's interest in UltraCard to approximately 55%.

The Company has expressed an intention to acquire an additional interest in
UltraCard and to continue funding its operations until UltraCard completes an
anticipated IPO. Under terms of the Funding Agreement between the Company and
UltraCard dated March 21, 2000, should UltraCard require additional financing
prior to an IPO, the Company has agreed to provide sufficient funds on a firm
commitment basis in an amount not to exceed $20 million. All such funds
advanced by the Company will be subject to a note payable agreement, the terms
of which will require the accrual of interest at the bank's prime interest rate
and repayment of principal and accrued interest on the earlier of the occurrence
of the following events: the payment of dividends to stockholders; the
completion of an IPO where the proceeds exceed $35 million subject to the
conversion provisions described below; or upon the occurrence of a change in
control of UltraCard; but no later than March 31, 2001. Pursuant to the terms
of the Funding Agreement, the unpaid principal and accrued interest is
convertible into common stock of UltraCard at specified conversion rates upon
the completion of an IPO. The graduated conversion rates range from $0.63 to
$5.00 per share depending on the amount owed to the Company at the time of
conversion. During the year ended September 30, 2000, the Company loaned to
UltraCard approximately $7,835,000 to fund its operations.

In order to permit Ultracard to explore strategic partnerships and other funding
alternatives, some of which could include outside equity participation, Upgrade
waived its provisions of the Funding Agreement including its non-dilution
clause. Upgrade and Ultracard continue to work together to explore alternative
methods and alliances that can provide funding to UltraCard.

UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES

(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE C - INVESTMENTS - Continued

2. EforNet Corporation
--------------------

On February 22, 1999, the Company and one of its directors formed EforNet, a
Washington corporation, each receiving a 50% interest in the company. At
formation, certain intellectual property assets under development, including
switching software valued at $250,000, was transferred to EforNet. Since the
intellectual property was still under development and had not yet reached
technological feasibility, it was considered contributed IPR&D, and accordingly
IPR&D in the amount of $125,000 (Upgrade's contribution) was charged to expense
during the year ended September 30, 1999. EforNet is currently developing an
application for the UltraCard technology, for secure, anonymous electronic
commerce over the Internet, utilizing the UltraCard technology and the switching
software referred to above. The results of operations of EforNet since
formation have been included in the accompanying consolidated financial
statements. The stockholders of EforNet have entered into a stockholder's
agreement that includes, among other things, a buy and sell agreement. In
addition, the other stockholder of EforNet has granted to Upgrade certain proxy
rights that allow Upgrade to vote an additional 1% of the outstanding common
stock of EforNet. During the second quarter of the year ended September 30,
2000, the Company acquired an additional 2% interest from other shareholder. In
connection with that acquisition, the Company recognized IPR&D of $200,000. As
of September 30, 2000 and 1999, Upgrade held a 54% and 51% voting interest in
EforNet, respectively. In January 2000, EforNet re-incorporated in the state of
California.

The Company suspended operations temporarily at its EforNet subsidiary on
December 1, 2000. EforNet, a research and development business, is expected to
recommence activities during the fiscal year 2001. In the meantime, management
has taken steps to significantly reduce all non-essential operating expenses at
EforNet. On December 1, 2000, the Company acquired all remaining outstanding
shares of EforNet for a nominal consideration. As a result, the Company owns
100% of EforNet.

3. CTI Acquisition Corporation and Centurion Technologies Inc.
-----------------------------------------------------------------

On May 12, 1999, the Company formed CTI Acquisition Corporation for the sole
purpose of acquiring an equity interest in Centurion Technologies, Inc.
(Centurion), a development stage company headquartered in Redmond, Washington.
Centurion is developing a proprietary transaction processing software "EPRIM,"
designed for the real-time transmission of encrypted data over the Internet with
a business focus in the medical, educational and government market niches. CTI
then acquired an option from one of the Centurion's stockholders' to purchase up
to 50% equity interest in Centurion. On May 13, 1999, CTI acquired a 50%
interest in Centurion for an aggregate price of $1,100,000, including the option
cost of $100,000. As of September 30, 1999, Upgrade owed $350,000 to Centurion
for its 50% interest, which was paid during the year ended September 30, 2000.
In addition, at September 30, 1999, Upgrade had a liability of $100,000 related
to the option to purchase shares of Centurion, which was included in loans
payable to related parties. This liability was satisfied during the year ended
September 30, 2000.

The results of operations of Centurion from the date of acquisition have been
recorded in these consolidated financial statements. The purchase price of the
acquisition in excess of the carrying amount of Centurion's net assets,
aggregating $803,076, was accounted for as IPR&D and was expensed during the
year ended September 30, 1999.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE C - INVESTMENTS - Continued

Two stockholders of Centurion have granted to Upgrade certain proxy rights that
allow Upgrade to vote an additional 1% of the outstanding common stock of the
Centurion. As a result, Upgrade holds a 51% voting interest in Centurion.

During November 2000, Centurion changed its name to cQue Corporation.

4. Global CyberSystems, Inc., Global CyberSystems PLC and Global
--------------------------------------------------------------------
CyberSystems SA
----------------

Global CyberSystems Inc., was incorporated in Nevada on January 12, 1998. As
part of the UltraCard acquisition agreement (see note C (1)), the Company
received a 50% interest in the newly formed corporation with the remaining 50%
being owned by UltraCard. On July 11, 1998, the Company entered into a master
distribution agreement with UltraCard which provided Global with the exclusive
distribution rights for the UltraCard products and technology in territories and
applications as follows: (1) in the U.S., Global holds the exclusive
distribution for banking applications and retail/convenience applications; and
(2) worldwide, Global holds the exclusive rights to gaming applications for the
UltraCard products and technology. As of September 30, 2000, Global had not
commenced its operations and the carrying amounts of its assets, liabilities and
stockholders' equity were nominal.

During the second quarter of the year ended September 30, 2000, the Company
formed Global CyberSystems PLC (incorporated in the United Kingdom) and Global
CyberSystems SA (incorporated in Switzerland). Global SA is 100% owned by
Global CyberSystems, Inc. and Global PLC is an 80% owned subsidiary of Global
SA. Neither of the European company has commenced its operations and each
had nominal assets and liabilities.

5. Purchased In-Process Research and Development Costs
--------------------------------------------------------

The purchased or contributed cost of in-process research and development
represents the value assigned in a purchase business combination to research and
development projects of the acquired business that had commenced but had not yet
reached technological feasibility at the date of the acquisition and have no
future alternative use. In accordance with Statement on Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, as clarified by
Financial Accounting Standards Board Interpretation No. 4, the amounts assigned
to IPR&D meeting these criteria are charged to expense as part of the allocation
of the purchase price of the business combination. A similar accounting was
also utilized for the Company's investment in UltraCard accounted for under the
equity method. Accordingly, charges totaling $425,800, $5,121,946, $5,971,603
were recorded as IPR&D during the years ended September 30, 2000 and 1999 and
for the period from inception through September 30, 2000, respectively, as part
of the allocations of purchase price and equity investment of the Subsidiaries.

Since all of the Subsidiaries are development stage companies, which had not
commenced their respective planned principal operations nor generated any
significant revenues, the entire amount of the excess of the purchase price or
investment amount over the fair market value of the identifiable assets and
liabilities of the investee, which approximated the carrying amount of these
assets and liabilities, was allocated to IPR&D. As a result, no amount of the
purchase prices or investment amounts were allocated to goodwill or other
intangibles, except those already recorded by the investees.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE D - RELATED PARTY TRANSACTIONS

Payable to related parties is comprised of the following as of September 30:

2000 1999
-------- --------

Bridge loan from a Centurion stockholder $147,500 $156,645
Stockholders and officers 27,740 213,625
Loan payable - 237,365
-------- --------

$175,240 $607,635
======== ========

The above borrowings bear interest at 7% to 15% and have stated terms of one
year or less.

In February 1999, the Company assumed liabilities of $470,005, including
principal and accrued interest. The original loan was entered into by the
Company's president and proceeds were used principally to fund research and
development activities. As a result, this amount was expensed as research and
development costs during the year ended September 30, 1999. As of the September
30, 1999, the outstanding balance of principal and interest on this
note was $137,365 and is included in loans payable above. The loan, including
accrued interest, was paid in full in October 1999.

During each of the years ended September 30, 2000 and 1999, the Company incurred
$60,000 in fees for consulting services provided by a company owned by one of
the Company's directors. These fees amounted to $125,000 for the period since
inception through September 30, 2000. At September 30, 2000 and 1999, $25,000
and $40,000, respectively, of the aforementioned fees were included in accounts
payable.

NOTE E - NONMONETARY EXCHANGES AND TRANSACTIONS

On the dates of acquisition and consolidation of the Subsidiaries, as described
in note C, the Subsidiaries had non-cash assets with an estimated fair value
aggregating approximately $2,000,000 and liabilities aggregating approximately
$1,300,000.

On December 12, 1997, the Company purchased options, to acquire equity interests
in Finet Corporation (Finet) and World Wide Wireless Web (WWWW) from the
Company's President in exchange for a note payable in the amount of $150,000,
bearing interest at prime rate plus two percent, and 4,000,000 shares of the
Company's common stock. The stock was valued at $51,250 based on the cost of
the assets received. During the year ended September 30, 1999, the option to
acquire WWWW lapsed, and was written off as a loss in the amount of $76,250.
The Finet option was transferred to EforNet, (see note C (2)) after negotiation
with Finet's controlling stockholder who, at the time, also held an interest in
EforNet.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE E - NONMONETARY EXCHANGES AND TRANSACTIONS - Continued

In connection with a Regulation D Rule 504 private placement in 1999, the
Company incurred the following costs: $645,529 fees accrued as a liability at
September 30, 1999, 143,851 shares of its voting common stock included in total
shares subscribed at September 30, 1999, and warrants to acquire 279,814 common
shares (with exercise prices of $0.25 per share for 100,000 shares and $2.50 per
share for 179,814 shares) that vested immediately at the date of grant on
September 30, 1999. See note O for additional information related to warrants.
These costs totaled $1,703,612 and are accounted for as placement costs.

In connection with private placements in fiscal year 2000 and 1999, the Company
recorded a subscription receivable from stockholders in the amount of $32,725
and $165,000, respectively. Since the subscriptions receivable has been
collected in full subsequent to September 30, 2000 and 1999, they were
classified as a current receivable at September 30, 2000 and 1999.

In December 1999, the Company issued 70,000 shares and 100,000 warrants with a
$.25 strike price in lieu of a payment for public relation services performed.
The shares were valued using the closing market price on October 18, 1999 and
were recorded as marketing expense of $242,900. See note O for warrant
information.

In connection with the October 1999 sale of $1,000,000 in convertible
debentures, the Company allocated $323,640 and $676,360 to 120,000 detachable
warrants and beneficial conversion feature, respectively, based on their
relative fair values and computation of the effective conversion rate. See note
K for additional information.

Also in connection with the October 1999 debenture and November 2000 equity
placements, the Company issued 68,194 warrants in lieu of placement fees.

Additionally, in connection with the same debt and equity offerings, the
Company issued 40,000 shares of its common stock to the same broker.

In April 2000, the Company granted 195,000 options to an outside legal counsel
for services to be performed in connection with the class action lawsuit
described in the note M. The options were granted with a $10 strike price and
were scheduled to vest in three tranches of 65,000. The first tranche vested
immediately and related to services to be performed from April through June 30,
2000. The second applies to services from July 1, 2000 through December 31,
2000, and the final tranche is a consideration for services to be performed from
January 1, 2001 through June 30, 2001. All options expire April 17, 2005. The
value of the first tranche as determined by the Black-Scholes option pricing
model using 184% volatility, 6% risk free rate and $14.88 price per share was
$1,047,670 and was recorded as additional legal expense.

As of September 30, 2000, in addition to the first 65,000 options, half of the
second tranche was considered earned and legal expense was recognized. The
additional expense was computed using the Black-Scholes model with a $9.91 stock
price and other assumptions discussed previously. In addition, the first
tranche was revalued using the current market price. The net result of these
computations was a reduction of legal expenses by $118,885.

On August 16, 2000, the Company distributed 465,228 warrants to stockholders
that acquired shares at $2.50 per share in a private placement during September
and October 1999 (See note O).

Upgrade International Corporation and Subsidiaries

(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE F - RESTRICTED DEPOSIT AND LINE OF CREDIT ARRANGEMENT

In connection with a building lease entered into by one of the Company's
subsidiaries on September 19, 2000, the subsidiary entered into a arrangement
with its bank to maintain a letter of credit and related loan agreement in the
amount of $805,687. The letter of credit guarantees the lessor has available up
to $805,687 in funds to cure defaults specified in the lease agreement. The
arrangement is collateralized by a $805,687 certificate of deposit. The loan
bears interest at the prime rate plus 2% and has no stated maturity date. The
certificate of deposit matures on September 15, 2001, which is also the
expiration date of the letter of credit. As of September 30, 2000, no funds
were drawn by the lessor. See note M for subsequent modifications of this
arrangement.

NOTE G - EQUIPMENT UNDER CONSTRUCTION

During February 28, 2000, a subsidiary of the Company entered into an agreement
with SciVac, Inc. to build a sputtering machine for use in its research and
development activities in the amount of $3,000,000. As of September 30, 2000,
the subsidiary had paid $1,200,000 and recorded a liability for the amounts
billed but unpaid as of September 30, 2000 equaling $2,307,025, inclusive of
sales tax and amounts due under a development contract with SciVac requiring
$50,000 monthly payments, which expired prior to September 30, 2000. The
machine is expected to be completed and installed by the second quarter of
fiscal year 2001.

NOTE H - PROPERTY AND EQUIPMENT

The composition of property and equipment is as follows as of September 30:

2000 1999
---------- ----------

Equipment $1,165,284 $ 344,933
Software 124,763 15,851
Office furniture and fixtures 71,310 43,766
Corporate condominium 651,353 643,532
Leasehold improvement 42,262 -
---------- ----------
2,054,972 1,048,082
Accumulated depreciation and amortization 263,715 44,701
---------- ----------

$1,791,257 $1,003,381
========== ==========

UPGRADE INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE I - ACCRUED LIABILTIES

Accrued liabilities are comprised of the following as of September 30:

2000 1999
-------- --------

Compensation $414,232 $283,021
Payroll taxes and related costs 134,074 539,850
Vacation and other 184,935 20,622
-------- --------

$733,241 $843,493
======== ========

NOTE J - BRIDGE LOANS

During the year ended September 30, 2000, the Company periodically borrowed
funds from various third parties on a short-term basis. The borrowings were
generally settled within a period of two to three days. On September 30, 2000,
there was $799,177 in bridge loans payable, which were paid in early October
2000, along with a finance fee of 5% of the principal amount of the loan.

NOTE K - CONVERTIBLE DEBENTURES

In October 1999, the Company issued $1,000,0000 in convertible debentures. The
debentures bear interest at the annual rate of 7%, are convertible immediately
and mature on October 5, 2001. In addition to the debentures, the holder
received 120,000 detachable common stock warrants expiring on December 31, 2004.

Each debenture is convertible into one share of the Company's common stock at a
rate equal to a 75% of the average bid price for the five trading days
immediately preceding conversion. However, the conversion price cannot exceed
$2.50 per share.

Each warrant can be exchanged into one share of the Company's common stock at a
price of $2.50 per share. The warrants contain cashless exercise provisions,
whereas the number of common stock shares to be received are determined as a
quotient of the number of warrants exercised multiplied by the difference
between the fair value of the stock on the date of exercise and the strike price
of the warrant divided by the fair value of the stock.

In connection with the issuance, the Company allocated $323,640 and $676,360 of
the proceeds to the detachable warrants and beneficial conversion feature,
respectively, based on their relative fair values and computation of the
effective conversion rate. Due to the immediate convertibility provisions of
the debentures, the allocated amount of the beneficial conversion feature was
charged to interest expense. The remaining discount related to the detachable
warrants is being amortized using the effective interest method over two years,
the contractual life of the debentures. During the year ended September 30,
2000, the Company recorded a total of $809,043 of interest expense related to
the amortization of the aforementioned allocated discounts.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE K - DEBENTURES - Continued

In May 2000, all warrants were exchanged for 102,609 shares of the Company's
common stock by means of a cashless exercise. As of September 30, 2000, these
shares are included in total shares subscribed as no certificates were issued
until November 2000.

No debentures were converted or repaid through September 30, 2000. At September
30, 2000, the unamortized discount of $190,957 is presented as a reduction in
the carrying amount of the debentures.

NOTE L - INCOME TAXES

The differences between financial and tax reporting are comprised primarily of
the timing in the recognition of net operating loss (NOL) and tax credit
carryforwards, vacation expenses and methods used to compute depreciation
expense. The income tax benefits reconciled to the tax computed at the
statutory rate were approximately as follows during the years ended September
30:

2000 1999
------------ ------------
Tax benefit computed at federal statutory rate $(7,530,000) $(3,600,000)
Non-deductible expenses 1,480,000 1,810,000
Research credit (410,000) (220,000)
Valuation allowance 6,460,000 2,010,000
------------ ------------

$ - $ -
============ ============

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE L - INCOME TAXES - Continued

Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized. Deferred income taxes reflect the net
tax effects of temporary differences between the consolidated carrying amounts
of assets and liabilities for financial reporting purposes and the respective
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows at September 30:

2000 1999
------------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 8,920,000 $ 1,390,000
Research credit 650,000 240,000
Equity in losses of UltraCard 430,000 430,000
Options, warrants and other (1,260,000) 220,000
------------- ------------
Total gross deferred tax asset 8,740,000 2,280,000
------------- ------------

Valuation allowance (8,740,000) (2,280,000)
------------- ------------

Net deferred tax asset $ - $ -
============= ============

Upgrade and its subsidiaries are each required to file their own corporate
federal and state tax returns. As of September 30, 2000, the Company and
Subsidiaries had aggregated NOL carryforwards and tax credits carryforwards of
approximately $29,700,000 and $730,000, respectively, of which the majority of
the carryforwards begin expiring in 2018 for federal purposes and earlier for
state purposes.

Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income that can be offset by carryforwards
after a change in control (generally greater than a 50% change in ownership).
As a result of these provisions, utilization of the NOL and tax credit
carryforwards may be limited.

NOTE M - COMMITMENTS AND CONTINGENCIES

1. License Agreements
-------------------

a. AMPEX Agreement

Effective October 1, 1999, UltraCard entered into a license agreement with AMPEX
Corporation (AMPEX) to use AMPEX developed proprietary technology, generally
referred to as Keepered Media Technology, for incorporation into UltraCard's
development, use and sale of its core product. The agreement is scheduled to
continue for the life of each Keepered Media patent, for the life of each
Keepered Media patent issued under a patent application, and for of each license
granted under the Keepered Media Technology, in perpetuity.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

Under the terms of the agreement, UltraCard is required to pay royalties
for each sale of the UltraCard's magnetic card product on a per card basis.
Additionally, in order for UltraCard to maintain an exclusive license
agreement, the minimum yearly payments are as follows:

Year ending September 30,
-------------------------
2001 $ 3,500,000
2002 15,000,000
Thereafter 24,000,000 per year

Either party has a right to terminate all or part of the agreement with 30
days notice. There were no fees incurred and paid under the agreement
through September 30, 2000.

b. CardTech Agreement

On October 10, 1997, UltraCard licensed the rights to two technology
patents from CardTech, Inc. (CardTech). UltraCard's President is also the
controlling stockholder of CardTech. The license agreement terminates upon
the expiration of the last licensed patent. Because the agreement covers
any new patent applications filed in conjunction with the original
technology patents, the agreement does not have a definite expiration date.

Through September 30, 1999, UltraCard had paid $30,000 for an initial
licensing fee, $950,000 in minimum royalty fees and $1,009,813 in capital
fees under the license agreement. Capital fees were paid as part of the
agreement requiring UltraCard to remit to the CardTech 12.5% of every
dollar received from equity financing. In October 1997, as required by the
license agreement, UltraCard issued 7,500,000 shares (after effect of 3:1
stock split) of its common stock, valued at the time of the issuance at
$250,000. Related to the shares issued, UltraCard capitalized as license
cost the amount of $250,000.

for the years ended September 30, 2000 and 1999, UltraCard has recorded
$650,000 and $1,484,636, respectively, in expenses related to this
agreement. Expenses for the year ended September 30, 1999, included
$919,375 in capital fees. Royalty fees are due on January 1 of each
calendar year. As of September 30, 2000, $650,000 in calendar year 2000
royalty fees remained unpaid, causing UltraCard to be past due on the
agreement. CardTech has deferred the required 2000 and 2001 payment to
march 30, 2001.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

AS OF SEPTEMBER 30, 2000, ULTRACARD'S REMAINING COMMITMENTS UNDER THE
LICENSE AGREEMENT ARE SUMMARIZED AS FOLLOWS:

- An earned royalty fee of 5% of the gross proceeds generated from
sales, leases or other distributions of products incorporating
the CardTech technology. The minimum annual royalty fee is
payable at $650,000 per calendar year through 2009.

- A capital fee equal to 12.5% of all equity capital invested in
the UltraCard until such time that CardTech has received a total
of $3,000,000 in such fees. The maximum remaining amount of the
commitment is $1,990,187.

2. Agreement with International Funding Corporation
----------------------------------------------------

Effective July 1, 1999, the Company entered into an agreement with International
Funding Corporation (IFC). Under the terms of the agreement, IFC provides
various investment banking services and assisted the Company in conducting its
private placement to sell shares at $2.50 in exchange for the following
consideration:

a) Warrant for the purchase of 100,000 shares of common stock at a price
of $0.25 which vest at the time the Company raises $6,000,000. As of
September 30, 2000, the warrant is fully vested; however, it has not
been exercised. It expires September 30, 2004.
b) Cash fee of 7% of the gross proceeds raised through the equity
placement;
c) Fee of 4% of the gross proceeds of the placement payable in the
Company's voting common stock;
d) Fee of 5% of the gross proceeds of the placement payable in common
stock warrants which would vest immediately and expire five years from
the date of grant.
e) Monthly fee of $18,750.

At September 30, 1999, the Company issued 143,851 shares of its voting common
stock and granted to IFC warrants to purchase 279,814 shares of common stock,
100,000 with an exercise price of $0.25 per share and 179,814 with an exercise
price of $2.50 per share. During the year ended September 30, 2000, the Company
granted IFC additional 68,194 warrants under provision (d) above. The number of
warrants was determined as contractual fee of 5% of the funds raised ($125,000)
divided by computed fair value of an individual warrant. The warrants issued
were valued using the Black-Scholes pricing model and the assumptions described
in the note N. In addition, IFC received 40,000 shares of the Company's common
stock and $105,000 in cash as required under provisions (b) and (c) above. All
of the costs associated with the warrants and cash fees payable were recorded
as a reduction of the proceeds from the offering.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

In addition to the aforementioned placement costs, during the year ended
September 30, 2000 and 1999, the Company incurred $247,500 and $30,000,
respectively, in consulting fees for investor relation services performed by
IFC. At September 30, 2000 and 1999, accounts payable include $75,000 and
$645,529, respectively, payable to IFC.

The IFC agreement expired on June 30, 2000, and was automatically renewed for an
additional year. In the event of any future private placements conducted
through IFC, fees described in (b)-(d) above are payable by the Company out of
the proceeds raised. In addition, IFC is entitled to a monthly retainer in the
amount of $7,500 and a reimbursement of expenses incurred while providing
services for the Company.

3. Employment and Consulting Agreements
---------------------------------------

UltraCard has entered into a number of employment and consulting agreements. The
agreements vary in length from one to five years with total remaining commitment
amounts, excluding shares to be issued, as follows:

Year ending
September 30,
-------------------
2001 $748,333
2002 577,500
2003 87,500
---------
1,413,333
=========

Certain of the employment and consulting agreements also call for issuance of a
specified number of shares of the Company's common stock. The estimated market
value of these shares issued were charged to expense in the period issued.
During the year ended September 30, 1999, the Company recorded $1,038,564 of
employee compensation and consulting expenses related to the issuance of these
shares of UltraCard's common stock. No shares were issued for compensation or
consulting services during the year ended September 30, 2000.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

4. Funding Agreements
-------------------

Upgrade has entered into funding agreements with each of its subsidiaries based
upon budgets and operating projections for one to three years prepared by each
subsidiary and submitted to and approved by the Board of Directors of Upgrade.
Those agreements provide to each of those subsidiaries funding commitments for
aggregate proceeds as follows to finance the expansion of their operations:

Funding Portion Funded through
Company Commitment September 30, 2000
--------- ----------- -----------------------
UltraCard $28 million $ 15.78 million
EforNet $ 5 million $ 2.9 million
Centurion $ 3 million $ 2.5 million

Each of these funding arrangements are convertible (or were partially converted)
into common stock in the subsidiary and bear an 8% interest rate.

5. Pending Acquisition of The Pathways Group, Inc.
-----------------------------------------------------

The Company entered into a letter of intent dated July 11, 2000 and on September
8, 2000 signed an Agreement and Reorganization Plan (the Agreement), with The
Pathways Group, Inc. (Pathways) to acquire 100% of Pathways. The acquisition
is subject to a number of conditions including approval by the stockholders of
Pathways and the registration of Upgrade common stock to be exchanged for
Pathways stock. Either party to the Agreement can terminate the agreement after
December 29, 2000. Pursuant to the Agreement, Pathways' stockholders will
receive one share of Upgrade common stock for each 14.3 shares of Pathways
common stock, subject to adjustment as described below.

Under the Agreement, the Company is required under certain conditions and
receipt of required documents, to advance up to $5,000,000 in interim finance
funds to Pathways at a rate of $385,000 every two weeks starting on September
15, 2000. As of September 30, 2000, Pathways has received $1,885,000, including
an up front advance by the Company. The advances are secured by a promissory
note that bears interest at 10% and matures on or before June 30, 2001. In
addition, the Company was issued two warrants to acquire up to an aggregate of
5,000,000 shares of Pathways with an exercise price $.65. The Company vests in
each warrant at a 1 for 1 rate (one warrant vested for each one dollar
advanced). The Company also has a right to reserve $500,000 of total advances
to be applied towards accrued interest on the advances made. Total funds
advanced through the date of the merger, including accrued interest, will be
entered into a computation of the share conversion ratio to be used in the
merger. The acquisition is subject to approval of Pathways' shareholders and
expected to be concluded during fiscal year 2001.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

6. Operating Lease Agreements
----------------------------

The Company and its subsidiaries have entered into operating lease agreements
for its office and engineering facilities located in Washington and California.
The leases have terms varying from monthly to five years, which expire in 2001
to 2005, some of which provide for one and two year extensions. Certain leases
provide for fixed annual increases in base rent and others require adjustments
based on the change in the Consumer Price Index and in facility maintenance
costs. Total minimum operating lease commitments for the Company are
approximately as follows:

Year ending
September 30,
----------------
2001 $1,526,000
2002 1,374,000
2003 1,406,000
2004 1,365,000
Thereafter 1,170,000
-----------
$ 6,841,000
===========

Consolidated rent expense for the year ended September 30, 2000 and 1999, was
approximately $747,000 and $55,000, respectively.

During the year ended September 30, 2000, UltraCard entered into a five-year
66,400 square foot building lease to expand its corporate headquarters and
research and development facilities. Pursuant to the lease terms, UltraCard
paid a refundable securities deposit of $190,313 and entered into a
letter-of-credit arrangement described in the note F. UltraCard is scheduled to
move into the new facilities during the second quarter of fiscal 2001.
Subsequent to September 30, 2000, the new building lease was amended, reducing
the amount of leased space to 41,330 square feet. The minimum lease schedule
above reflects the reduced rent amount based on the new square footage.
Pursuant to the same lease amendment, the letter of credit requirements were
reduced to $300,000 with collateral also replaced by a $300,000 certificate of
deposit.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE M - COMMITMENTS AND CONTINGENCIES - Continued

7. Legal Proceedings
------------------

Pursuant to a court order dated May 26, 2000, the three actions previously filed
against Upgrade and its president, Daniel S. Bland, have been consolidated into
one action, In Re Upgrade International Corporation Securities Litigation, U.S.
District Court, Western District of Washington at Seattle, c/a #C00-0298. A
Consolidated and Amended Class Action Complaint was filed July 24, 2000. Six
minority shareholders are named as lead plaintiffs. The complaint alleges that
material misrepresentations and omissions were made by Upgrade and Mr. Bland in
violation of the Securities Exchange Act of 1934. Specifically, the complaint
alleges that Upgrade and Mr. Bland made false statements regarding market
readiness and technological capabilities of its UltraCard technology, thereby
artificially inflating Upgrade's stock. The consolidated complaint seeks class
certification and payment of unspecified damages and attorneys fees. Upgrade
has engaged the firm of Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as defense
counsel Upgrade filed a motion to dismiss the complaint. Oral arguments on the
motion are scheduled to be held on January 18, 2001. A ruling on the motion is
expected sometime thereafter. Management and legal counsel are unable to
predict the ultimate outcome of the motion. If the case proceeds the company
plans to vigorously defend its position. The ultimate outcome of the case is
uncertain. As a result, no liability for the case is recorded in the
accompanying financial statements.

NOTE N - STOCK OPTION PLAN

In January 1999, the Company established the 1999 Stock Option Plan (1999 Plan).
The 1999 Plan allows the Company to grant options to employees, consultants, and
directors for up to 1,550,000 shares of common stock. On September 30, 1999,
the Company implemented the 2000 Stock Option Plan (2000 Plan) allotting an
additional 800,000 shares for grants to employees and contractors. Option
prices are generally equal to the fair market value of the shares of the
Company's common stock on the date of grant. Options, generally, vest over a
four-year period and expire four to five years from the date of the grant.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE N- STOCK OPTION PLAN - Continued

The following is a summary of the employee stock option information for the
years ended September 30, 2000 and 1999:

Weighted Average
Shares Exercise Price
----------------- ---------------
Options outstanding at September 30, 1998 - $ -

Options granted 2,310,000 1.05
Options exercised (60,000) 0.25
----------------- ---------------

Options outstanding at September 30, 1999 2,250,000 1.07

Options granted 100,000 12.50
Options exercised (90,000) 0.25
Options forfeited (75,000) 2.50
----------------- ---------------

Options outstanding at September 30, 2000 2,185,000 $ 1.52
================= ===============

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

Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Remaining Number Exercise
Exercise Prices Outstanding Price Contractual Life Exercisable Price
--------- ---------------- ----------- ---------

0.25 1,400,000 $ 0.25 3.30 1,350,500 $ 0.25
0.50 - $2.50 685,000 2.50 4.00 510,010 2.25
12.50 100,000 12.50 4.94 -
---------- ----------
2,185,000 1,860,510
========== ==========

The weighted average fair value of the options granted during the years ended
September 30, 2000 and 1999 was $12.13 and $0.98, respectively. No options
were granted with a strike price below the stock's market value on the date of
grant.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE N- STOCK OPTION PLAN - Continued

The Company accounts for its stock-based compensation plan in accordance with
Accounting Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, under which no compensation was recognized in connection with
options granted to employees. The Company adopted the disclosure requirements
SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company
is required to calculate and present the pro forma effect of all awards granted.
For disclosure purposes, the fair value of each option granted to an employee
has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following assumptions for the years ended September 30,
2000 and 1999, respectively: risk-free interest rate of 6.00% and 6.00%,
dividend yield 0% and 0%, and volatility of 189% and 218%, and expected lives of
4 and 5 years. Based on the computed option values and the number of the
options issued, had the Company recognized compensation expense, the following
would have been its effect on the Company's net loss:

Year ended Year ended
Net loss September 30, 2000 September 30, 1999
-------------- ------------------- -------------------

As reported $ 17,403,990 $ 10,623,048
Pro forma 18,689,702 10,918,275

Loss per share
As reported $ 0.94 $ 0.79
Pro forma 1.01 0.81

On September 30, 1999, the Company granted 40,000 options to non-employee
consultants. Options were granted at an exercise price of $2.50 per share which
at the time was equal to the private placement price of the underlying Company's
common stock. The options expire five years from the date of grant and vest
over a four-year period. The Company recorded $98,720 in compensation expense
in connection with the options granted to non-employees. At September 30, 1999,
3,336 of these options became exercisable. On April 18, 2000, the Company
granted 195,000 options to one of its legal counsels, as described in note E.

As of September 30, 1999, UltraCard adopted a stock option plan of up to
3,000,000 shares of its common stock and granted 841,998 options to its
employees, as adjusted for UltraCard's April 12, 2000, 3:1 stock split. The pro
forma effect on the consolidated loss was not material.

During the year ended September 30, 2000, UltraCard granted 289,500 additional
options. Also, during the year 88,750 post split options were forfeited due to
employment terminations. The net pro forma effect of the subsidiary's options
is approximately $294,000.

As of September 30, 2000, certain other subsidiaries had established stock
option plans. However, none of the plans had significant activities material to
the consolidated financial statements or for pro forma disclosure purposes.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE O - WARRANTS

During the years ended September 30, 2000 and 1999, the Company granted 753,422
and 2,069,641 warrants, respectively, to investment bankers, consultants and
other service providers as follows:

- On January 20, 1999, warrants to purchase 1,000,000 shares of common stock
were granted to a family trust in which the Company's President is the sole
trustee. The warrants have an exercise price of $0.25 per share (the fair
value price of the stock on the date of grant), vested immediately, and are
exercisable within two years. They were valued using the Black-Scholes
pricing model using a 6% risk-free rate, 218% volatility, and a 0% dividend
yield. The Company recorded a $221,000 expense in connection with this
grant.

- On August 1, 1999, warrants to purchase 27,500 shares of common stock were
granted to a consulting company. The warrants had an exercise price of
$0.25 per share, vested immediately and had a term of two years. On August
15, 1999, all of the warrants were exercised for $6,875. The warrants were
valued at the date of grant using the Black-Scholes model and assumptions
described in note E. In connection with the grant, the Company recorded an
expense of $64,155.

- On September 30, 1999, the Company granted warrants to acquire 762,327
shares of common stock to various consultants. The warrants have exercise
prices ranging $0.25 to $2.50, vested immediately and have contractual
lives of two and five years, respectively. The warrants were valued using
the Black-Scholes pricing model described in note E. In connection with the
grants, $1,642,485 was recorded as a professional service expense.

- In October 1999, the Company issued 100,000 warrants with a $0.25 strike
price in lieu of a payment for public relation services performed. The
warrants were valued at 339,500 on the date of grant (October 15, 1999)
using the Black-Scholes pricing model and the following assumptions:
volatility of 218%, risk free rate of 6% and a fair value of each
underlying share of $3.562. The warrants vested immediately and were
exercised in May 2000.

- In October 1999, in connection with a placement of convertible debentures,
the Company issued 120,000 warrants with a $2.50 strike price.

- Also in connection with the October 1999 debenture and the November 1999
equity placement, the Company issued 68,194 warrants in lieu of placement
fees. The number of warrants was determined as a placement contractual fee
of 5% of the funds raised ($125,000) divided by computed fair value of an
individual warrant. The value of a warrant was determined using the
Black-Scholes option pricing model with assumptions as follows: volatility
of 218%, risk free rate of 6%, dividend yield of 0% and the fair value of
underlying stock of $2.50 the per share (price received in the November
placement). Each warrant has a $2.50 strike price. The warrants are
scheduled to expire in five years from the date of issuance.

Upgrade International Corporation and Subsidiaries
(A development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000 and 1999

NOTE O - WARRANTS - Continued

- Due to unforseen delays in registering certain securtities, on
August 16, 2000, the Company distributed 465,228 warrants to
stockholders that acquired shares at $2.50 per share in a private placement
during September and October 1999. One warrant was issued for each 10
shares acquired through the aforementioned placement. On the date of the
grant, the stock was traded at $15 per share. The warrants have a strike
price of $10 and an expiration date of August 16, 2002. All warrants vested
immediately. The aggregate fair value of the warrants issued were
determined using the Black-Scholes pricing model with an 189% volatility
and 6% risk free rate was $6,016,795 and was recorded as a distribution on
the date of the grant.

At September 30, 2000 and 1999, there were 100,000 and 1,250,000 warrants
exercisable at $.25, and 594,008 and 792,141 warrants exercisable at $2.50 per
share, respectively. None of the 465,228 warrants with a strike price of $10.00
were exercised as of September 30, 2000.

NOTE P - OTHER SUBSEQUENT EVENTS

The Company entered into letters of intent to acquire controlling interest in
Cards & More, etal, a manufacturer and producer of credit card stock and other
niche systems. Additionally, the Company entered into a letter of intent to
acquire controlling interest in Rockster, Inc., a software company that can
conduct transactions on the internet which can provide efficient, anonymous
transactions on the web. Each acquisition transaction is subject to the
execution of a definitive agreement and is subject to due diligence processes.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE REGISTRANT

The following table sets forth the names and ages of, and all positions and
offices held by, each of Upgrade's directors and its executive officers, Mr.
Bland and Mr. Jaffe, and certain key employees of Upgrade's subsidiaries. Also
set forth are the dates Upgrade's directors were initially elected to the Board
of Directors, a summary of each identified person's business experience during
the last five years and any directorship(s) held in other companies with
securities registered under Section 12 or subject to the requirements of Section
15(d) of the Securities Exchange Act of 1934, as amended. Directors are elected
at Upgrade's annual meeting of shareholders and hold office until their
successors are elected at the next annual meeting and qualify. Officers hold
office at the pleasure of the Board of Directors.

Director
Name Age Since Position(s)
-------------------------------------- -------- -------- --------------------------

Daniel S. Bland 42 12/11/97 President, Secretary,
Director of Upgrade

Malcolm P. Burke 58 6/30/98 Director of Upgrade

Ronald P. Erickson 56 8/15/98 Director of Upgrade

Brian J. Kerr 55 9/8/00 Director of Upgrade

Howard A. Jaffe 47 1/3/01 Executive Vice President,
Chief Operating and Financial
Officer & Director of Upgrade

Daniel Kehoe 54 n/a President & Director of
UltraCard

John A. French 56 n/a President & Director of
Centurion

David I. Zucker(1) 61 n/a President and Director of
Efornet

(1) Mr. Zucker resigned as a member of the Board of Directors in September
2000 and as CEO of EforNet in December 2000.

Daniel S. Bland is the founder of Upgrade and has served as its President since
1997. He also was a founder, and from 1993 to 1996 served as a director and
the chief executive officer of, Empyrean Diagnostics Ltd., a reporting company
in British Columbia under the British Columbia Securities Commission.

Malcolm P. Burke is the founder, and since 1998 to present has been the
president and chief executive officer, of Primary Ventures Corp., a Vancouver,
British Columbia company providing financial and strategic consulting services
to start-up companies. He also is president of Sopio Investments Ltd., a family
holding company. From 1992 to 1998 Mr. Burke was president and chief executive
officer of Interactive Entertainment Limited, an NASD Small Cap Market company.

Ronald P. Erickson has served as a director and senior executive officer
(currently chairman of the board of directors) of eCharge Corporation, a Seattle
based provider of Internet billing solutions, from October 1997 to present.
From January 1996 through August 1998, Mr. Erickson was chairman of the board of
directors and chief executive officer of GlobalTel Resources, Inc., an
international provider of telecommunications services, messaging and intranet
solutions. From September 1994 to January 1996, Mr. Erickson was managing
director of GlobalVision LLC, a consulting firm. Mr. Erickson also was a
co-founder of Egghead Software, a leading software retailer, where he was
variously chairman, vice chairman, president and chief executive officer from
1992 to 1994.

Brian J. Kerr, the former President of the Institute of Chartered Accountants of
British Columbia, and a past member of the Board of Governors of that entity is
a financial professional with substantial business experience including the
directorship of a senior reporting Company, Clearly Canadian Beverage
Corporation. Mr. Kerr is a business owner with interests in retail and internet
businesses, a former partner of BDO Dunwoody Chartered Accountants, current
business owner of a chain of Grocery and convenience stores in British Columbia,
and a candidate for the Malahat Juan de Fuca liberal party riding in British
Columbia, Canada.

Howard A. Jaffe, joined the Company in October 2000 as a consultant and in
January 2001 as the Chief Operating and Financial Officer. Mr. Jaffe is a
business and financial professional with substantial experience in mergers and
acquisitions and other capital market transactions. During the prior five years
Mr. Jaffe was the Executive Vice President and Chief Financial Officer of MB
Financial and Manufacturers Bank a $1.4 billion financial institution.

Daniel Kehoe has held the position of President and director of UltraCard Inc.
since 1997. Prior thereto, from 1994 to 1997 Mr. Kehoe operated as an
independent consultant to various technology companies specializing in strategic
business development. Mr. Kehoe has a degree from Northwestern School of Law.

John A. French has been the President of cQue Corporation since 1996, a
subsidiary of Upgrade which specializes in the development and implementation of
online Web Access software products for instant data retrieval featuring the
latest products in IT technology, including the smart card. Prior to that Mr.
French worked as a business consultant with Horizon Resources/2000 specializing
in the software and smartcard development business.

David I. Zucker has been the President of EforNet since the date of its
inception in February 1999 until December 1, 2000. He served as a director of
Upgrade until September 2000. Prior to that, he served as senior consultant of
Innovative Consulting Services. From August 1996 to June 1998, he was president
of the Eyestream Group of Quadstate Corporation, where he was engaged in
Internet video development. From January 1995 to July 1996, Mr. Zucker was
employed by Altamira Group as manager of product development for a fractal
compression plug-in for Adobe Photoshop software. Previously, Mr. Zucker
developed the point of sale credit card switching and merchant authorization
processing software base upon which ATM point of purchase processing was based.

Upgrade is not aware of any arrangements or understandings pursuant to which its
directors or executive officers are nominated or selected, other than
arrangements or understandings with directors or officers of Upgrade acting
solely in their capacities as such.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based on a review of Forms 3, 4 and 5 filed with the Company and inquiry of the
Company directors and officers, the Company believes that all required forms
were timely filed.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

Executive officers of the Company currently do not receive any remuneration
in their capacity as Company executive officers. The following table sets forth
information concerning the compensation of the Named Officers for services in
all capacities to the Bank for the years ended September 30, 2000, 1999 and
1998.

SUMMARY COMPENSATION TABLE

NAME AND FISCAL ANNUAL LONG TERM COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR COMPENSATION AWARDS COMPENSATION($)
------------------------------------- --------- ---------------------- ----------------------- ---------------
OPTIONS/
SALARY BONUS RESTRICTED STOCK WARRANTS
($) $) AWARD(S)($)(2) (#)(3)
--------------- ----- ---------------- --------

Daniel S. Bland 2000 $ 175,000 $ - $ - -
President and Chief Executive 1999 115,000 - - 1,750,000 -
Officer 1998 112,500 - - -

Daniel Kehoe 2000 350,000 $ - - - -
President Ultracard, Inc. 1999 204,166 - - - -
1998 132,199 - $ 234,862 - -

John A. French 2000 125,000 $ - - - 6,600(4)
President, cQue Corporation 1999 108,814 - - - 4,200(4)
1998 54,000 - - - -

David I. Zucker (5) 2000 149,000 $ - - - 6,000(4)
President, EforNet Corporation 1999 81,250 - - - -
Officer 1998 60,000 - - - -

Howard A. Jaffe (1) 2000 $ - $ - - - -
Executive Vice President and 1999 - - - - -
Chief Operating & Financial Officer 1998 - - - - -

__________
(1) Mr. Jaffe was hired as a consultant in October 2000 and as an executive officer in January 2001.
(2) Represents restricted stock issued.
(3) Represents warrants, or incentive and non-qualified stock options granted pursuant to the Company's Stock Option
Plans. All options were granted at or above the market price of the stock on the date of the grant and vest up to
Three years.
(4) Represents automobile allowance.
(5) Mr. Zucker resigned as President of EforNet on December 1, 2000.

STOCK OPTIONS

The following table sets forth certain information with respect to stock
options granted to the Named Officers during the fiscal year ended September
30, 2000.

In addition to providing the number of options granted in the Summary
Compensation Table, the following table discloses the range of potential
realizable values at various assumed appreciation rates. The table discloses for
the Chief Executive Officer and other Named Officers the gain or "spread" that
would be realized at the end of the option term for the options granted during
2000, if the price of the Common Stock appreciates annually by the percentage
levels indicated from the market price on the date of grant.

OPTION GRANTS IN 2000

% OF TOTAL
OPTIONS
GRANTED TO POTENTIAL REALIZABLE VALUE AT
EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS IN FISCAL PRICE PER EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED 2000(1) SHARE DATE OPTION TERM
---- ------- ------- ----- ---- -----------
5.00% 10.00%
----- ------

Daniel S. Bland -0- -0- -0- -0- -0- -0-
Daniel Kehoe -0- -0- -0- -0- -0- -0-
John A. French -0- -0- -0- -0- -0- -0-
David I. Zucker -0- -0- -0- -0- -0- -0-
Howard A. Jaffe -0- -0- -0- -0- -0- -0-

The following table sets forth information with respect to shares of the Common
Stock acquired in 2000 through the exercise of stock options, including the
value realized upon the exercise, and the value of all stock options held at
September 30, 2000.

OPTION EXERCISES, HOLDINGS AND VALUES TABLE

SHARES NUMBER OF VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
NAME ON EXERCISE REALIZED AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 2000 (1)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE

Daniel S. Bland -0- -0- 950,000 -0- $8,302,000 $ -0-
Daniel Kehoe -0- -0- -0- -0- -0- -0-
John A. French -0- -0- -0- -0- -0- -0-
David I. Zucker 90,000 $ 22,500 25,000 75,000 185,250 555,750
Howard A. Jaffe -0- -0- -0- -0- -0- -0-

__________
(1) Represents the difference between the closing price of the Common Stock on September
30, 2000 ($9.91 per share) and the exercise price of the stock options.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 6, 2001, certain information
as to the beneficial ownership of Common Stock by: (i) those persons or entities
known by management to beneficially own more than 5% of the Company's
outstanding shares of Common Stock; (ii) the Company's Chief Executive Officer,
its Chairman of the Board and the other executive officers of the Company (the
"Named Officers"), and (iii) all directors and executive officers of the Company
as a group.

SHARES
BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED (1) OF CLASS
---------------------------------------------------------- ------------- ---------

Daniel S. Bland (2) 6,226,100 28.90%
Chief Executive Officer, President,
Secretary and Director

Malcom P. Burke (3) 251,333 1.17
Director

Ronald P. Erickson (4) 591,667 2.75
Director

Brian J. Kerr (6) 12,500 0.00
Director

Howard A. Jaffe (7) 223,601 1.04
Executive Vice President and
Chief Operating and Financial
Officer and Director

Daniel Kehoe -0- -0-
President and CEO of Ultracard, Inc.

John A. French -0- -0-
President and CEO of cQue Corporation

David I. Zucker (5) 165,000 0.77
President and CEO of EforNet

Directors and executive officers as a group
(8 persons) 7,470,201 34.67%

(1) Includes shares held directly, in retirement accounts, in a fiduciary
capacity or by certain affiliated entities or members of the named individuals'
families, with respect to which shares the named individuals and group may be deemed
to have sole or shared voting and/or dispositive powers.

(2) Comprised of 4,000,000 shares and 800,000 warrants (exercisable at $0.25 per
share and expiring 1/20/2001) owned by the Bland Family Trust, as to which Mr.
Bland, as trustee, has sole voting and investment powers, 476,100 shares owned by
International Internet Corporation, which Mr. Bland controls, and 600,000 options
(exercisable at $0.25 per share and expiring 1/20/2004) owned directly by Mr. Bland,
and 350,000 options (exercisable at $2.50 per share and expiring 09/30/2004) owned
directly by Mr. Bland.

(3) Comprised of 7,500 shares and 150,000 options (exercisable at $0.25 per share
and expiring 1/20/2004) owned directly by Mr. Burke, and 200,000 options
(exercisable at $2.50 per share and expiring 09/30/2004) owned directly by Mr.
Burke. In addition 10,500 shares owned by Primary Ventures Corporation, a company
controlled by Mr. Burke.

(4) Comprised of 550,000 options (exercisable at $0.25 per share and expiring
1/20/2001) and 100,000 options (exercisable at $2.50 per share and expiring
09/30/2004) owned directly by Mr. Erickson.

(5) Comprised of 140,000 shares owned directly by Mr. Zucker and 100,000
options, all currently exercisable at $2.50 per share until September 30, 2004.

(6) Comprised of 100,000 options to acquire shares at a price of $2.50 per share
vesting quarterly commencing December 28, 2000, owned directly by Brian Kerr.

(7) Comprised of 200,000 options to acquire shares at a price of $2.50 per share
fully vested, and 200,000 options to acquire shares at a price of $2.50 vesting
quarterly over a period of three years, owned directly by Howard Jaffe.

There are no arrangements known to the Company that may result in a change in
control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Under the rules of the SEC Mr. Bland is considered a promoter of the
Company. His interests in the Company are disclosed in Items 10 and 11, above.

On October 10, 1997, UltraCard licensed the rights to two technology patents
from CardTech, Inc. (CardTech). UltraCard's President Daniel Kehoe is also the
controlling stockholder of CardTech. The license agreement terminates upon the
expiration of the last licensed patent. Because the agreement covers any new
patent applications filed in conjunction with the original technology patents,
the agreement does not have a definite expiration date.

Through September 30, 1999, UltraCard had paid $30,000 for an initial licensing
fee, $950,000 in minimum royalty fees and $1,009,813 in capital fees under the
license agreement. Capital fees were paid as part of the agreement requiring
UltraCard to remit to the CardTech 12.5% of every dollar received from equity
financing. In October 1997, as required by the license agreement, UltraCard
issued 2,500,000 shares of its common stock, valued at the time of the issuance
at $250,000. Related to the shares issued, UltraCard capitalized as license
cost the amount of $250,000.

For the years ended September 30, 2000 and 1999, UltraCard has recorded $650,000
and $1,484,636, respectively, in expenses related to this agreement. Expenses
for the year ended September 30, 1999, included $919,375 in capital fees.
Royalty fees are due on January 1 of each calendar year. As of September 30,
2000, $650,000 in calendar year 2000 royalty fees remained unpaid, causing
UltraCard to be past due on the agreement. CardTech has deferred the required
2000 and 2001 payment to March 30, 2001.

As of September 30, 2000, UltraCard's remaining commitments under the license
agreement are summarized as follows:

- An earned royalty fee of 5% of the gross proceeds generated from sales,
leases or other distributions of products incorporating the CardTech
technology. The minimum annual royalty fee is payable at $650,000 per
calendar year through 2009.

- A capital fee equal to 12.5% of all equity capital invested in the
UltraCard until such time that CardTech has received a total of $3,000,000
In such fees. The maximum remaining amount of the commitment is
$1,990,187.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------------

A. Exhibits

Exhibit
Number Description
---------- -----------

3.1(3) Articles of Incorporation
3.2 Articles of Merger
3.3(3) Bylaws
4.1(1) Specimen Stock Certificate
4.2 $1,000,000 Subordinated Debenture
4.3 Form of Warrant
4.4 Form of Warrant (with Cashless Exercise)
10.1 Merger Agreement by and between Upgrade and The Pathways Group, Inc.
10.2(1) Upgrade Form of 2000 Stock Option Plan
10.3(1) Upgrade Form of 1999 Stock Option Plan, as Amended and Restated
10.4(4) Upgrade Form of Stock Option Agreement
10.5 UltraCard Inc. Employee Stock Option Plan
10.6 UltraCard, Inc. Stock Purchase, Voting and Cancellation Rights and Redemption Agreement
10.7 Option Agreement by and between Upgrade and UltraCard for acquisition of UltraCard stock, as amended
10.8 License Agreement between AMPEX Corporation and UltraCard Inc. for Keepered Media technology
10.9 Agreement by and between SciVac and UltraCard for development of vacuum system
10.10(2) Funding Agreement by and between Upgrade and UltraCard, Inc.
10.11 Exclusive License Agreement by and between UltraCard and CardTech, Inc.
10.12 Sub-Distribution Agreement by and between Global CyberSystems, Inc. and Financial Electronic Systems, Inc.
10.13 Letter of Intent by and between National CacheCard Company and Upgrade to purchase Smart Card assets
10.14 Assignment Of Intellectual Property Rights By Work Product Investment Trust and David Zucker to EforNet Corporation
10.15 Funding Agreement by and between Upgrade and EforNet Corporation
10.16 Loan Agreement by and between Upgrade and EforNet Corporation
10.17 Voting Trust Agreement by and between Upgrade and Work Product Investment Trust
10.18(4) UltraCard Los Gatos Lease
10.19 Acquisition of Centurion Technologies which contains funding agreement by and between Centurion and Upgrade
10.20 Joint Development and Supply Agreement for Card Substrates by and between UltraCard and Colorado Plasticard
10.21(4) Design Agreement for UltraCard Writer/Reader Devices by and between UltraCard and PEMSTAR INC.
10.22(2) Stock Purchase Agreement between Upgrade and Zucker
10.23 Letter of Intent by and between Upgrade and Cards & More, Inc.
10.24 Letter of Intent by and between Upgrade and Rockster, Inc.
16.1(5) Letter on Change of Certifying Accountant
21.1 Subsidiaries
27.1 Financial Data Schedule (Upgrade)
27.2 Financial Data Schedule (UltraCard)

(1) Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on April 6, 2000.
(2) Incorporated by reference from our Form 10-QSB filed with the Securities and Exchange Commission on May 15, 2000.
(3) Incorporated by reference from our Definitive Proxy Statement filed with the Securities and Exchange Commission July 24,
2000.
(4) Incorporated by reference from our Form 10-QSB filed with the Securities and Exchange Commission on August 14, 2000.
(5) Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on September 22, 2000.

B. Reports on Form 8-K

On July 6, 2000, the Company filed a Form 8-K reporting under Item 5, Other
Events, a clarification in the manner that its public filings could be accessed
via the Internet.

On July 21, 2000, the Company filed a Form 8-K reporting under Item 5, Other
Events, that on July 11, 2000, it had entered into a letter of intent to acquire
The Pathways Group, Inc.

On September 22, 2000, the Company filed a Form 8-K reporting under (1) Item 4,
Changes in Accountant, that on September 18, 2000 it received a reply from
Comiskey and Comiskey in connection with a prior change in accountants, and (2)
Item 5, Other Events, (A) the resignation of David Zucker effective September 1,
2000, (B) a $5,000,000 private placement closed on September 8, 2000, (C) that
on September 7, 2000, it had entered into a letter of intent to acquire Cards &
More, and (D) that effective September 18, 2000, its reincorporation into
Washington state was effective.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

UPGRADE INTERNATIONAL CORPORATION

/s/ Daniel S. Bland /s/ Howard A. Jaffe
---------------------- ----------------------
By Daniel S. Bland, President Howard A. Jaffe Executive Vice President

Dated: January 12, 2001

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

/s/ Daniel S. Bland
-------------------------
Daniel S. Bland President, Secretary and Director 1/12/01
--------
(Date)

/s/ Howard A. Jaffe
Howard A. Jaffe Executive Vice-President, Chief Operating and 1/12/01
Financial Officer, and Director --------
(Date)
/s/ Malcolm P. Burke
-------------------------
Malcolm P. Burke Director 1/12/01
--------
(Date)
/s/ Ronald P. Erickson
-------------------------
Ronald P. Erickson Director 1/12/01
--------
(Date)
/s/ Brian J. Kerr
-------------------------
Brian J. Kerr Director 1/12/01
--------
(Date)

EXHIBIT INDEX

Exhibit
Number Description
---------- -----------