BAYWOOD INTERNATIONAL INC, 10KSB, 1997-03-06

BAYWOOD INTERNATIONAL INC
10KSB, 1997-03-06
PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549

FORM 10-KSB

ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]

For the fiscal year ended December 31, 1996
Commission file No. 33-10236

BAYWOOD INTERNATIONAL, INC.
(Name of small business issuer in its charter)

Nevada
(state or other jurisdiction of incorporation or
organization)
77-0125664

(I.R.S. Employer Identification No.)
14950 North 83rd Place, Suite 1
Scottsdale, Arizona
(Address of principal executive offices)

85260
(Zip Code)

Issuer's telephone number, including area code: (602) 951-3956

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
$.001 par value common stock

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 periods 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 checkmark 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 the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year were $4,000,139.

The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $5,031,434 as of February 20, 1997.

The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date of February 20, 1997 was 17,498,115.
<PAGE>
Baywood International, Inc.

FORM 10-KSB

FOR THE YEAR ENDED DECEMBER 31, 1996

"CAUTION REGARDING FORWARD-LOOKING STATEMENTS"

CERTAIN STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT RELATED TO
HISTORICAL RESULTS, INCLUDING, WITHOUT LIMITATIONS, STATEMENTS REGARDING THE
COMPANY'S BUSINESS STRATEGY AND OBJECTIVES AND FUTURE FINANCIAL POSITION, ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT AND INVOLVE RISKS AND UNCERTAINTIES.
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS ON WHICH THESE
FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO ASSURANCE
THAT SUCH ASSUMPTIONS WILL PROVE TO BE ACCURATE AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH IN THE FOLLOWING SECTION, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS REPORT. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT ARE
QUALIFIED IN THEIR ENTIRETY BY THIS CAUTIONARY STATEMENT.

Factors That May Affect Future Results

The Company believes that results of operations in any annual period
may be impacted by factors such as delays in the shipment of new or existing
products, difficulty in the manufacturer acquiring critical product components
of acceptable quality and in required quantity, timing of product introductions,
increased competitions, the effect of announcements and marketing efforts of new
competitive products, a slower growth rate in the Company's target markets, lack
of market acceptance of new products and adverse changes in economic conditions
in any of the countries in which the , company does business. Specifically, the
timing of registration of new or existing products in different countries in
which the Company is doing business or may do business could delay orders. Also,
the significant portion of sales and net income contributed by international
operations, specifically by one customer, could affect the Company's results of
operations and financial condition in a particular year. Due to the factors
noted above, the Company's future earnings and stock price may be subject to
significant volatility. Any shortfall in revenues or earnings from levels
expected by the investing public or securities analysts could have an immediate
and significant adverse effect on the trading price of the Company's common
stock.

PART I

Item 1 - Description of Business
- --------------------------------

General

The predecessor to Baywood International, Inc. (the "Company"), Baywood
Financial, Inc., was originally incorporated in Nevada on June 13, 1986. In late
1986, Baywood Financial, Inc. completed an initial public offering (the
"Offering") for the purpose of capitalizing the Company. On January 11, 1988
-2-
<PAGE>
Baywood Financial Inc. acquired all of the assets of Helth-Pro International,
Inc. ("Helth-Pro"), a Nevada corporation. Helth-Pro's primary business was the
marketing of animal food supplements and other related products under an
exclusive marketing agreement previously acquired by Helth-Pro. Helth-Pro is no
longer an active entity and was dissolved.

From 1988 until 1992, Baywood Financial, Inc. was inactive. In March
1992, the Company changed its name from Baywood Financial, Inc. to Baywood
International, Inc. Thereafter, the Company commenced the acquisition of
formulas, trademarks, marketing rights and product lines of nutrition and
dietary and beauty and hygiene products from several companies. The Company had
expanded its product lines into fragrances for men and women and into animal
health products for horses and domestic pets. Due to the higher demand and
marketability of products within the nutrition and dietary and beauty and
hygiene lines, the Company significantly scaled down its efforts to promote and
sell the fragrance and animal health lines. Net sales of nutrition and dietary
and beauty and hygiene products comprised 68.2% and 31.4% of total net sales,
respectively, for the year ended December 31, 1996.

All products are currently manufactured by subcontractors. Private
labeling is the focus of the Company's marketing strategy. The Company defines
its role as a private label company by designating products with individual
store or entity names. The Company creates distinct formulas with unique
packaging and either produces a product to the customer's specifications or
actually researches and develops a product for the customer. The Company also
has available existing formulas, packaging designs, finished products and brand
names for the customer to choose from to market, license or customize further,
with emphasis on pure and natural ingredients. Products that are not necessarily
new to the market such as aloe based products, bee pollen, royal jelly,
propolis, toners, cleansers, creams and lift treatments are the types that have
generated particular interest mostly in the Pacific Rim. The Company believes
that in the decades ahead, increasing consumer consciousness regarding improved
fitness, well being and health may cause consumers to refrain from products of
chemical and artificial content.

Since its inception, the Company has directed most of its sales efforts
toward international markets and has established either distribution or
registration of its products into companies in the Pacific Rim Countries (China,
Malaysia, Hong Kong, Taiwan, Indonesia and Korea) as well as Europe (Italy,
Germany, Austria, England and Switzerland). Establishing distribution into chain
drug stores, grocery chains, network marketing companies and warehouse
distributors in the United States is also part of the Company's marketing
strategy. Although domestic sales now make up less than 4% of total net sales,
the Company is attempting to build domestic distribution levels to more evenly
balance its international distribution.

The Company's principal executive offices are located at 14950 North
83rd Place, Suite 1, Scottsdale, Arizona 85260 and its telephone number is (602)
951-3956.

Significant Sales and Distribution Developments During 1996

During 1996 the Company continued strong sales of nutrition and dietary
products to the Pacific Rim. The majority of distribution involved one
particular product, Aloe Minerals Plus(TM), to one particular customer in China.
Sales of beauty and hygiene products increased significantly. The increase in
distribution was through one particular customer in China with several products
in the La Vraie(TM) line including cleanser, toner, nurture cream, activator and
lift powder. This customer accounted for 89.8% of total net sales.
-3-
<PAGE>
The Company continued its attempts in the domestic market to distribute
the cholesterol reduction product, LDL Tab(TM). The Company anticipates this
product to be a significant source of interest and future distribution in 1997
and beyond in both the domestic and international markets. LDL Tab (TM) plays a
substantial part in the Company's marketing strategy to target the domestic
market with a new product that will open up inroads for other new or existing
products to follow.

The Company also introduced in December of 1996 a new and natural
product to stop snoring. This product is being marketed toward the Company's
international markets.

Business Strategy

Commitment to New and Innovative Products
-----------------------------------------

Creating new and innovative products containing all-natural
ingredients is a primary focus of the Company with emphasis on satisfying
existing consumer demand or creating awareness for health and fitness with the
use of natural products. Through consistent active involvement in the trends
that affect the nutritional products industry either in the nutrition and
dietary or beauty and hygiene lines, the Company creates or improves products to
fit market needs.

Emphasis on Sales and Marketing
-------------------------------

The Company recognizes the benefits of manufacturing its own
products to take fullest advantage of their proprietary nature and may consider
manufacturing its own products in future years. The Company presently believes,
however, that it is more important to maintain itself as a sales and marketing
organization with lower overhead, lower inventory costs made possible by more
volume of product being shipped directly from the manufacturer and higher
emphasis on promotion and packaging of new and innovative products. The focus on
marketing for 1997 is important for the Company to establish itself in the
marketplace in the following year.

Products and Customers

The Company currently markets approximately 65 products to
approximately 45 customers. The Company includes as separate products multiple
sizes, labels and forms of certain products. The Company includes in its
customer base the total of all customers who have purchased product in the last
twelve months. (See Note 9 to the Financial Statements, incorporated herein by
this reference, for a breakdown of sales by product line and territory).

Private Labeling

Private labeling is the focus of the Company's marketing strategy. The
Company defines its role as a private label company as one of designating
products with individual store or entity names. The Company creates distinct
formulas with unique packaging and either produces a product to the customer's
specifications or actually researches and develops a new product for the
customer. Some products, such as the freeze dried aloe vera drink, Aloe Minerals
Plus(TM), do not necessarily represent new formulas, but are designated as
private label because of label or packaging modifications created to meet
customer requirements and tastes or market needs. Likewise, common, yet popular
products such as pollen, propolis and royal jelly may be packaged or labeled
uniquely for customers in the Far East as compared to the Company's other
existing labels or packaging. Although the Company may currently sell a certain
number of products with certain labels, private labeling makes the number of
products and
-4-
<PAGE>
the mix in the types of products sensitive to change constantly toward the
demands of what customers or the markets desire. In addition, the Company may
also supply its products in bulk. The Company also has available existing
formulas, packaging designs, finished products and brand names for the customer
to choose from to market or customize further, with emphasis on pure and natural
ingredients. Foreign customers usually have certain logos that they develop a
market with. The Company supports these customers in the registration of their
products for import.

Brand Products

The Company has available existing formulas, packaging designs and
finished products for the customer to choose from to sell into the market that
are considered brand products. The Company's cholesterol reduction product is
being marketed under several labels, one of which is the brand label LDL
Tab(TM). CountDown 200(TM) is a private label for the cholesterol reduction
product which was designed for a domestic customer. As the Company's domestic
distribution increases into chain drug stores, grocery stores and other retail
chains, and as the availability of private labeling on existing products or
product lines becomes an increasingly viable option for customers to designate
individual identity, it will also be increasingly important for the Company's
growth and recognition to emphasize brand products with the Company designation
on the label.

Nutrition and Dietary Products

The Company's nutrition and dietary products include bee pollen,
propolis, royal jelly, aloe vera based products, protein drinks, carbohydrate
drinks, amino acid supplements, energy supplements, grape seed and grape skin
extracts, multi-vitamins, multi-minerals, antioxidants, chromium based
supplements and a cholesterol reduction product.

Beauty and Hygiene Products

The Company's beauty and hygiene products include cleansers, toners,
skin creams, lift treatments, alpha hydroxy gels and facial treatments. The
company also includes as part of this category of products its fragrance line,
Cello by Annette(TM). Due to the Company's focus on products for nutrition and
dietary use and also the high costs involved with the promotion of fragrances,
the Company is evaluating the sale of the Cello by Annette(TM) line and the
discontinuation of the promotion and production of fragrances.

Animal Health Products

The Company's animal health products include a nutritional pet
supplement for domestic pets and shampoos, conditioners, heat lotions and aloe
vera gels for horses. The Company did not actively market its animal health
products in 1996 and 1995. This product line is not considered to be significant
in the Company's future operations.

Research and Development

The Company has not consistently incurred substantial research and
development costs associated with its products. The Company often presents to
its subcontracted manufacturers new or prospective formulas and concepts for
products to be produced and then tested for possible distribution to customers.
Historically, the Company has acquired product lines and related formulas from
its manufacturers and has typically allowed the manufacturer to incur the costs
of product research and
-5-
<PAGE>
development. The Company's research and development expense was zero in 1996 and
$15,000 in 1995.

Sales and Marketing

The Company markets its products principally through sales
representatives overseas and brokers domestically who are directed by the
Company's sales managers. Product marketing activities include distribution of
sales and product literature describing the Company's products and their
benefits, publication of technical articles, attendance at trade shows and
conferences and ongoing communications with the Company's existing customer and
client distribution base.

The Company's products are generally shipped directly from the
manufacturers to the distributor or customer pursuant to the Company's shipping
orders.

Generally, seasonality does not impact the Company's marketing efforts.

There currently exists no backlog of orders that the company believes
to be firm as to dollar amount, delivery date or amounts deemed not to be
reasonably filled within the current fiscal year.

Customer Support Service

The Company's in-house personnel provide the necessary amount of
support required for the Company to handle sales issues. Returns of merchandise
must be pre-approved by the Company, as the Company authorizes the return of
resalable merchandise only. Products which have been opened are considered not
resalable and cannot be returned. Sales returns in past years have not been
considered significant.

Vendors and Suppliers

There are numerous companies that produce or supply the types of
products the Company distributes. The Company purchases products as needed to
meet its customers' demands, and generally does not maintain any written
agreement or understanding committing its suppliers to provide any minimum
quantities or to maintain fixed prices. Currently, the Company purchases
products through two principal manufacturers.

Competition

The Company is aware of a variety of companies with private label or
brand label nutrition, dietary and skin care products which are similar to the
Company's products. The Company expects to meet significant competition in its
marketing operation from major companies which will undoubtedly be in a better
position to finance research and development of their products and to take the
products to market. The Company has entered into a mature industry, with a large
number of competitors possessing greater financial resources than the Company.
However, the Company evaluates the characteristics of the products of its
existing competitors, and has positioned itself with its ability to develop
products which it believes are of equal quality. Management can give no
guarantee as to the future viability of the Company given the dramatic nature of
the industry.

Proprietary Information

The Company does not hold any patents and currently relies upon a
combination of contractual
-6-
<PAGE>
rights, trademark laws and specially formulated products to protect its
proprietary rights in its products or packaging. The Company seeks to protect
its proprietary rights in its formulas through restrictions on disclosure and
use. Despite the Company's efforts to protect its formulas, it may be possible
for third parties, without authorization, to copy or duplicate proprietary
formulas or packaging, or to obtain and use its proprietary information.
Existing trademark laws afford only limited practical protection for the
Company's product lines. The laws and the level of enforcement of such laws in
certain foreign countries where the Company markets its products often do not
protect the Company's proprietary rights in its products to the same extent as
the laws of the United States. Because of the rapid pace of the Company's
development and acquisition of formulas, the Company believes that the legal
protection for its products is less significant to the Company's success than
the knowledge, technical expertise and marketing skills of the Company's
personnel, the frequency of product expansion and timeliness of order
fulfillment provided by the Company.

Product Liability

The Company believes that its distribution of consumable products
generally involves a higher level of risk for product liability claims than the
distribution of its non-consumable products. The Company protects itself from
possible claims through product liability insurance coverage that is reviewed
and renewed annually depending on the changes in distribution and sales of the
Company's consumable and non-consumable products. In addition to carrying its
own coverage, the Company also requires its manufacturers to carry product
liability insurance.

Regulatory

All of the Company's dietary supplement products comply with the
Dietary Supplement Health and Education Act of October 1994 which applies to the
dietary supplement industry in the United States. All of the Company's products
are manufactured in facilities approved by the Food and Drug Administration.

Overseas, registration is mandatory in each country prior to
distribution. This process may take from several months to over a year. The
Company, at any one time, may have several products awaiting approval for
registration and eventual distribution. Several of the Company's products are in
the process of registration in China, Malaysia, Hong Kong, Taiwan, Indonesia,
Korea, Italy, Germany, Austria, England, Switzerland, Israel and Russia. The
Company can provide no assurance as to the timing of such approvals.

Employees

At December 31, 1996, the Company had five (5) full-time employees. The
Company also uses part-time or temporary help as needed in warehousing, mailing,
shipping and packaging. Consultants and advisors are utilized as needed in
marketing and sales. Commissioned personnel include four representatives
overseas in addition to independent brokers that work with domestic accounts.
-7-
<PAGE>
Item 2 - Description of Property
- --------------------------------

The Company's principal office is at 14950 North 83rd Place, Suite 1,
Scottsdale, Arizona 85260. The Company leases its offices and warehouse under an
operating lease that expires on July 31, 1997. Future minimum annual lease
obligations for the remaining term of the lease are as follows:

1997 $ 44,352
=========

The Company holds no other real estate interests.

Item 3 - Legal Proceedings
- --------------------------

In September 1996, Pershing Products, Inc. filed a lawsuit against the
Company in Nevada state court, seeking monetary damages and an injunction to bar
the Company's manufacturing, marketing and sales of LDL Tab(TM). The Company
successfully defeated two attempts by Pershing to obtain a restraining order in
Nevada. In a related proceeding, on September 13, 1996, the Company filed an
action against Pershing and Dr. Jackie See in Federal District Court in Arizona
to recover the Company's payments under an Exclusive Licensing Agreement related
to the LDL Tab(TM) product, as well as other damages and relief. Nevada counsel
for the Company has moved to dismiss the Nevada lawsuit in favor of the
Company's Arizona action but the Company currently remains a defendant in
Nevada.

On October 10, 1995, St. Anthony's Parish of Somerville, MA and the
Pious Society of Missionaries of St. Charles Boromeo, Inc. filed suit against
Krystal Kleer, Inc. and included the Company as a defendant in the suit. The
plaintiff filed its complaint in the Supreme Court of the State of New York,
seeking repayment of three loans to Krystal Kleer for $100,000 each. The Company
was named in the lawsuit as a result of a disclosure in its prior financial
statements that it had issued certain common stock in exchange for all of the
equipment, fixtures and furnishings of Krystal Kleer. The Company has moved for
its dismissal as a defendant and a hearing has been set in April 28, 1997.

A printing company previously filed suit against the Company in Arizona
state court, alleging that the Company was responsible for obligations of Royal
Products, Inc. The Company vigorously pursued its defense of this action, and
the plaintiff recently agreed to dismiss their claims against the Company. The
Company accepted this offer on February 5, 1997. The parties are currently in
the process of finalizing the documentation of the dismissal.

On March 3, 1997, former director and officer Georgia Aadland filed a
demand for arbitration against the Company with the American Arbitration
Association. The demand briefly states that Ms. Aadland seeks $210,374 plus
interest, attorney's fees and costs for a breach of an employment agreement, but
does not further specify the nature of the claim. The Company will respond to
the claim after it is able to learn the factual basis for Ms. Aadland's
allegations.

The Company's Management has determined, after investigation and
consultation with the Company's legal counsel, that options to purchase shares
of the Company's common stock, allegedly granted on January 1, 1993, to John A.
Shannon (1,000,000), Karl H. Rullich (300,000), and Georgia Aadland (300,000)
are legally invalid. Mr. Shannon, the former Chairman of the Board of the
Company, contests the determination and may bring a claim against the Company
seeking to enforce the alleged grant of options.
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Apart from the foregoing, the Company is involved in other non-material
litigation or ordinary routine litigation incidental to its business as of
December 31, 1996, which are not disclosed under this item. Reference should
also be made to Note 18 of the financial statements, which is incorporated
herein by this reference.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1996.

PART II

Item 5 - Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------

The Company's common stock under the registered name of Baywood
International, Inc. was first quoted in May of 1992, and began trading on the
Over-the-Counter ("OTC") Bulletin Board under the symbol "BYWD".

Set forth below are the high and low closing prices for the Company's
common stock as reported on the OTC Bulletin Board for the last eight quarters:

Year Ended December 31, 1996 High Low
- ---------------------------- ---- ---

March 31, 1996 .56 .31
June 30, 1996 .57 .41
September 30, 1996 .55 .40
December 31, 1996 .60 .34

Year Ended December 31, 1995
- ----------------------------

March 31, 1995 2.50 1.37
June 30, 1995 2.25 1.06
September 30, 1995 2.00 .88
December 31, 1995 1.44 .31

The above quotations represent inter-dealer quotations without retail
markup, markdown or commissions and may not represent actual transactions.

As of December 31, 1996, there were approximately 700 holders of record
of the Company's common shares not including those shares held in brokerage
accounts.

Historically, the Company has not paid dividends on its common shares
and has no present intention of paying dividends in 1997. The declaration and
payment of dividends and the amount paid, if any, is subject to the discretion
of the Board of Directors and will necessarily be dependent on the earnings,
financial condition, capital and surplus requirements of the Company and any
other factors the Board of Directors may consider relevant.
-9-
<PAGE>
Item 6 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------

General

Private labeling is the focus of the Company's marketing strategy. The
Company defines its role as a private label company by designating products with
individual store or entity names. The Company creates distinct formulas with
unique packaging and either produces a product to the customer's specifications
or actually researches and develops a product for the customer. The Company also
has available existing formulas, packaging designs, finished products and brand
names for the customer to choose from to market, license or customize further,
with emphasis on pure and natural ingredients. Products that are not necessarily
new to the market such as aloe based products, bee pollen, royal jelly,
propolis, toners, cleansers, creams and lift treatments are the types that have
generated particular interest mostly in the Pacific Rim. The Company believes
that in the decades ahead, increasing consumer consciousness regarding improved
fitness, well being and health may cause consumers to refrain from products of
chemical and artificial content.

During 1996 the Company continued strong sales of nutrition and dietary
products to the Pacific Rim. The majority of distribution involved one
particular product, Aloe Minerals Plus(TM), to one particular customer in China.
Sales of beauty and hygiene products increased significantly. The increase in
distribution was through one particular customer in China with several products
in the La Vraie(TM) line such as cleanser, toner, nurture cream, activator and
lift powder. During the last six months of 1995, expansion of one customer's
distribution in the Far East was the major factor which gained sales volume for
the Company's nutrition and dietary and beauty and hygiene lines for 1996. This
customer accounted for 89.8% of total net sales. Net sales of nutrition and
dietary and beauty and hygiene products comprised 68.2% and 31.4% of total net
sales, respectively, for the year ended December 31, 1996.

The Company's major source of revenue comes from several main nutrition
and dietary and beauty and hygiene products that have proven to be the most
highly demanded and desirable in the Far East including freeze dried aloe, bee
pollen, propolis, royal jelly, cleanser, toner, lift treatment and skin cream.
The Pacific Rim Countries will continually be an area of focus for the Company
due to the high population of people demanding these products. Particular areas
of focus include China, Malaysia, Hong Kong, Taiwan, Indonesia, Korea, Italy,
Germany, Austria, England, Switzerland, Israel and Russia.

The Company concentrates on increasing profits by expanding sales
volume while containing or reducing costs since growth opportunities in the
Company's markets are driven by volume increases rather than price increases.
The Company's cost reduction efforts will be driven by economies of scale and
out-sourcing of components of the production items supplied to the manufacturer,
such as packaging, labels and labor. The Company is continually focusing on new
and innovative products to establish widespread distribution domestically and to
consistently provide overseas customers with leading products.
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<PAGE>
The Company anticipates that future growth of its business will come
from additional sales of existing products, introduction of new products and the
continuous expansion in the international and domestic markets. The Company is
currently evaluating several new products to bring to the market. The Company
can provide no assurance as to the timing of any introduction or acceptance of
new products.

Results of Operations

The following table sets forth income statement data of the Company as
a percentage of net sales for the periods indicated.

1996 1995
% %
- -
Net Sales 100.0 100.0
Cost of Sales 58.4 68.5
----- -----
Gross Profit 41.6 31.5
S, G & A Expenses:
Marketing 15.3 54.1
General and Administrative 17.7 88.3
Research and Development - .9
Depreciation and Amortization 1.3 3.7
Other (Income) and Expense - net (5.1) 45.9
----- -----
Income (Loss) Before Income Taxes and Extraordinary Item 12.4 (161.5)
----- -----
Income Tax Benefit 3.8 -
Income (Loss) Before Extraordinary Item 16.2 (161.5)
Extraordinary Gain - 4.4
Net Income (Loss) 16.2 (157.1)
===== =======

Comparisons of Year 1996 to 1995:

Net sales for the year ended December 31, 1996 were $4,000,139 compared
to net sales of $1,726,684 for the year ended December 31, 1995, an increase of
131.7%. The increase in net sales is attributable to the increase in nutrition,
dietary and beauty and hygiene product sold to the Far East, particularly to one
major customer. In 1996 international sales represented 96.6% of the Company's
sales compared to 79.1% for 1995. The decrease in domestic distribution is
primarily due to one major order sold to a domestic customer in 1995 which did
not recur in 1996. Distribution of the nutrition and dietary line remained as
the main source of revenue for 1996. Net sales of the nutrition and dietary and
beauty and hygiene lines for 1996 were $2,726,260 or 68.2% of net sales and
$1,256,454 or 31.4% of net sales, respectively. Net sales of the nutrition and
dietary and beauty and hygiene lines for 1995 were $1,537,338 or 89% of net
sales and $160,001 or 9.3% of net sales, respectively. Sales of fragrances and
animal health products in 1996 and 1995 were $17,425 and $29,345, respectively.
These product lines are not considered to be significant in the Company's future
operations. The Company did not actively market its fragrance and animal health
products in 1996 and 1995. Due to high demand for nutrition and dietary products
both domestically and internationally for health and well being, the Company
anticipates this line to be the primary foundation for revenue growth and
profitability in the future.
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<PAGE>
The Company's gross profit margin for the year ended December 31, 1996
was 41.6% compared to 31.5% in 1995. The increase in gross profit for the year
ended December 31, 1996 is mainly due to more volume of higher margin products
in the beauty and hygiene line sold to the Far East. Additionally, cost of sales
in 1995 included an additional write-down of $100,000 in the Company's fragrance
inventories.

Impairment losses on intangible assets of $443,465 were incurred for
the year ended December 31, 1995. Contracts and formula rights related to
fragrance product lines, Scandinavian and other European distribution rights
were written down to the net realizable values as estimated by the Company. The
Company had not recognized significant revenue under these agreements and rights
and estimates that significant costs would be incurred to market the fragrance
line and generate future revenue. No impairment losses were incurred on any of
the Company's remaining intangible assets for 1996.

Marketing, general and administrative expenses for the year ended
December 31, 1996 were $1,322,097, a decrease of 46.3%, compared to $2,460,060
for the same period ended December 31, 1995. The value of stock issued as
payment for services rendered and higher general corporate expenditures in 1995
were the factors in the decrease in operational expenses for 1996. The value of
common stock issued for services was $26,000 and $541,102 for the years ended
December 31, 1996 and 1995, respectively. The Company incurred no research and
development expense in 1996 compared to $15,000 for 1995 which was due to cash
paid for clinical research on the Company's cholesterol reduction product, LDL
Tab(TM).

The Company issued 90,000 shares of its common stock in 1996 as payment
for inducements made in 1995 to make loans to the Company. The Company had been
estimating the value of these common shares and had recorded an accrual for
estimated value at December 31, 1995 of $126,780. The value of the stock had
dropped to $21,240 when it was actually issued and the obligation paid in 1996.
The difference in the estimate resulted in a gain of $105,540 which is included
in miscellaneous income for the year ended December 31, 1996. In addition, the
Company had accrued expenses of $69,409 at December 31, 1995 that were settled
or negotiated without payment. That amount is included in miscellaneous income
for the year ended December 31, 1996.

Net income (loss) before income taxes and extraordinary item for 1996
was $646,891 compared to $(2,788,136) for 1995. An extraordinary gain was
recorded in 1995 for extinguishment of debt through the issuance of common
stock. The value of the stock issued at the time of extinguishment was less than
the carrying amount of the notes payable. There were no extraordinary gains or
losses for the year ended December 31, 1996.

Other Information

Interest Expense was $22,172 and $351,147 in 1996 and 1995,
respectively, a 93.7% decrease due to the value that was recorded for common
stock issued or to be issued as inducements to third parties to provide capital
to the Company in 1995. In addition, the Company paid off all of its interest
bearing debt as of June 1996.

The majority of the Company's interest revenue was generated by the
interest due from contracts with the sale of the right to distribute and use the
products in the Aurore-B Line to Royal Products, Inc. The Company also keeps
most of its cash in an interest-bearing money market account from which interest
was earned in 1996.
-12-
<PAGE>
The nutritional products industry is highly competitive. There are many
companies with greater financial strength and marketing and distribution
capabilities than the Company. As indicated in industry publications, the
industry is undergoing major restructuring as the United States market becomes
saturated. Many recent acquisitions and mergers have positioned the industry for
a global marketplace, including emerging markets in Latin America, Eastern
Europe, and around the Pacific Rim countries.

The Company recognizes that its business in natural products in the
private label industry may be at risk because the Company is small and competes
against better known companies with large advertising and marketing budgets and
substantially greater sales volume and financial resources.

Capital Expenditures

During 1996 and 1995, the Company purchased property and equipment of
$1,571 and $9,036, respectively. As of December 31, 1996, the Company had no
material commitments for capital expenditures.

Liquidity and Capital Resources

As of December 31, 1996, the Company had $1,519,093 in current assets
of which $768,952 was cash. Total current liabilities for the same period
totalled $782,256. The balance of notes payable as of the end of 1996 was zero.
Trade accounts payable remained in good standing due to good relations, credit
terms and payment histories with major suppliers and vendors. The Company
believes that as it increases its sales volume, liquidity will improve greatly.
Sales terms generally include either a 50% deposit at the time of the order and
the balance prior to shipment or 100% payment prior to shipment for new
customers. The Company has from time to time extended credit to its major
customers once they have established good payment histories. The Company drop
ships most of its shipments directly from the manufacturer and therefore does
not require large inventories to satisfy customer demand. The need for
significant working capital is not anticipated for accounts receivable and
inventories due to timely turnover on accounts receivable and the use of drop
shipments. Cash flows from financing activities in 1996 consisted of $800,000
raised through issuance of 1,466,147 common shares and 800,000 shares of
redeemable preferred stock. These funds were used to pay off notes payable and
reduce accounts payable.

The Company neither anticipates any significant capital expenditures
nor are material capital expenditures required to meet expected growth through
existing operations. The Company may require additional capital and may attempt
to raise capital through the sale of preferred and common stock and through
private placements in the short and long term for the purpose of acquiring other
companies. Management recognizes the need to expand its distribution not only
through effective marketing of its current products in order to maintain its
competitive position in the marketplace, but also through the acquisition of
other companies in the same industry.

At this time the Company does not anticipate any large expenditures of
cash for research and development costs. Marketing costs associated with the
distribution of new products will be paid for by cash flows from existing
operating activities or by debt or equity financing.
-13-
<PAGE>
Item 7 - Financial Statements and Supplementary Data
- ----------------------------------------------------

An audited balance sheet for the year ended December 31, 1996 and
audited statements of income, changes in stockholders' equity and cash flows for
the years ended December 31, 1996 and 1995 are set forth commencing on page 26.

Item 8 - Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------

The Company's Amended Current Report on Form 8-K, filed January 24,
1996, reporting a change in auditors, is incorporated herein by reference as an
exhibit to this Form 10-KSB and in response to this item.

PART III

Item 9 - Directors, Executive Officers, Promoters and Control Persons;
- --------------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------

Directors and Executive Officers

Name Age Position or Offices Held
- ---- --- ------------------------

Harvey J. Turner 58 Chairman of the Board of Directors,
President and Chief Executive Officer
Neil T. Reithinger 27 Director, Chief Financial Officer,
Secretary and Treasurer
Karl H. Rullich 63 Director
Stephen L. Kuehn 50 Director
Glen Holt 66 Director
Dr. Michael B. Shapiro, M.D. 41 Director
William Brin 58 Director

Mr. Harvey J. Turner was elected as a director and Chairman of the
Board of Directors of the Company on April 19, 1996. He was also appointed
President and Chief Executive Officer on the same date. Prior to his election
and appointment, Mr. Turner acted as a consultant to the prior Chairman of the
Board, John A. Shannon, from January to April 1996. Since 1985, he has also been
the President of Turner Realty and Investments, a consulting and commercial real
estate firm. From November 1993 to April 1996 he served as Chief Operating
Officer and Executive Vice President of Action Performance Companies, Inc. a
Tempe, Arizona automobile die casting company. He served as Executive Vice
President of Carefree Leisure Products, a Tempe, Arizona spa manufacturing
company, from November 1980 to November 1985. Mr. Turner also has over 25 years
of retail industry experience serving companies such as May Department Stores,
Yankee Department Stores and Paddock Pool & Casual World with responsibilities
ranging from merchandising, purchasing and operations to executive management.
He holds a Bachelors degree in business from Washington University at St. Louis,
Missouri. Mr. Turner resides in Scottsdale, Arizona.

Mr. Neil T. Reithinger was elected as a director on February 18, 1997.
He was elected Chief Financial Officer, Secretary and Treasurer on October 28,
1996. Mr. Reithinger had been Controller of the Company since January 1994.
Prior to joining the Company and from July 1992 through December
-14-
<PAGE>
1993, Mr. Reithinger worked as operations specialist for Bank of America. He
received a Bachelors degree in accounting from the University of Arizona in
December 1992 and his certification as a Certified Public Accountant in April
1996.

Mr. Karl H. Rullich has been a director since 1991. He has served as
the Company's Director of International Sales since May 1996. Prior to April 19,
1996, he served as President, Chief Executive Officer and Treasurer of the
Company. He worked as a Marketing Director, General Manager and Vice President
for Pfizer Hospital Products Group in their international businesses and
operations for over 25 years. Mr. Rullich holds a degree in economics from the
Business College in Essen, Germany. He emigrated from Germany to the United
States in 1956 and became a naturalized citizen in 1961.

Mr. Kuehn has been a Director of the Company since 1991. Mr. Kuehn
previously served as a consultant to the Company in the area of sales. He is
currently President & C.E.O. of J.I.T. Medical Supply, Inc., a highly
computerized disposable medical supply fulfillment house in Clearwater, Florida.
He has domestic and international business experience including a number of
years serving Pfizer. His last position was as Managing Director for Pfizer
Hospital Products Group United European Division based in London. He served as
International Managing Director and Partner of KBA Associates of Slough, England
and as Sales Director of PMSI of Tampa, Florida. He attended Lycoming Pre-med
and studied business at Penn State University.

Mr. Holt has been a Director of the Company since 1992. As a rancher
and successful breeder for over 35 years, Mr. Holt, is an expert on animal
health and nutrition. He is a graduate from the University of Smith Cornel. He
is married to actress Annette Funicello, who is associated with the Company's
Cello by Annette(TM) fragrance line.

Dr. Shapiro has been a director of the Company since August 1995. Dr.
Shapiro is an ophthalmologist at the University of Wisconsin, Madison. He has
also been Chairman of Davis Duehr Eye Associates, S.C. in Wisconsin since 1994
and is currently President of Eye-Deal Ocular Safety Products. Dr. Shapiro
received his degree in medicine from the Washington University in St. Louis,
Missouri. He completed his internship at Mercy Hospital and Medical Center at
the University of San Diego and his residency at the University of Wisconsin,
Madison. Dr. Shapiro has consulted for companies such as Bausch and Lomb,
Allergan and Unilens.

Mr. Brin served as a director of the Company from November 1995 to
February 1997 and served as the Company's National Sales Manager from May 1996
to January 31, 1997. Prior to his work for the Company he was the President and
Chief Executive Officer of FANS Publishing, Inc., a sports publishing company,
from 1992 through 1995. He served as Executive Vice President in the area of
sales and manufacturing for Interactive Media Technologies, Inc., a multi-media
manufacturing firm, from 1989 to 1992. He is also a sales consultant to Karpro
Marketing, Inc., a U.S. based distribution and marketing company in the
healthcare field. He received his Bachelor of Science degree in 1963 from Depaul
University.

Ms. Linda Lee resigned from the Board of Directors on June 28, 1996.
Ms. Georgia Aadland resigned from the Board of Directors on November 11, 1996.
Mr. John Shannon resigned from the Board of Directors on December 13, 1996. None
of the above-mentioned persons currently holds any position with the Company.
-15-
<PAGE>
Compliance with Section 16(a) of the Exchange Act

The following persons were, during the last fiscal year, either
directors, officers, or beneficial owners of more than ten percent (10%) of a
class of equity securities registered pursuant to Section 12 of the Exchange Act
of 1934 and failed to file the following reports on a timely basis reports
required by Section 16(a) during the most recent fiscal year or prior years and
which have not previously been disclosed:

William Brin filed one late Form 4 on December 9, 1996 reporting 8
transactions that were not reported on a timely basis and that should have been
reported previously in four Forms 4.

Karl Rullich filed one late Form 5 on January 28, 1997 reporting one
transaction that was not reported on a timely basis and that should have been
reported previously in a Form 4.

William Brin filed one late Form 4 on December 9, 1996 reporting 8
transactions that were not reported on a timely basis and that should have been
reported previously in a Form 4.

Harvey Turner filed one late Form 5 on February 21, 1997 reporting one
transaction that was not reported on a timely basis and that should have been
previously reported on one Form 4.

John Shannon timely filed a Form 5 on or about February 12, 1997
amending a prior Form 5 and reporting six transactions that were not reported on
a timely basis and that should have been reported previously in four Forms 4.

Item 10 - Executive Compensation
- --------------------------------

Officers

Mr Karl Rullich served as the Company's Chief Executive Officer during
fiscal years 1994 and 1995. Mr. Harvey Turner became the Company's Chief
Executive Officer on April 19, 1996.

The Company paid Mr. Rullich total salary and commission compensation
of $43,962 during fiscal year 1996. Management has determined, after
investigation and consultation with the Company's legal counsel, that options to
purchase 300,000 shares of the Company's common stock, allegedly granted to Mr.
Rullich on January 1, 1993 are legally invalid. In a letter dated January 30,
1997 and an Acknowledgement and Release of Invalid Options dated February 24,
1997, Mr. Rullich accepted the Company's determination regarding the invalidity
of the options. Mr. Rullich also received $600 for a phone allowance during 1996
in his capacity as a director of the Company.

The Company paid Mr. Harvey Turner total salary compensation of $81,000
during fiscal year 1996. In addition, Mr. Turner earned bonus compensation of
$30,000 based on a bonus plan entered into on May 17, 1996 between Mr. Turner
and the Company. Mr. Turner's bonus plan is attached to this Form 10-KSB as
Exhibit 10.4, which is incorporated herein by this reference. Mr. Turner also
holds options, approved by the Company's Shareholders on August 29, 1996, to
purchase 100,000 common shares at $0.52 per share, which expire April 18, 2006,
and an additional 100,000 common shares at $0.52 per share effective April 19,
1997, which expire April 18, 2007. Mr. Turner's Stock Option Agreement is
attached to this Form 10-KSB as Exhibit 10.5, which is incorporated herein by
this reference. Mr. Turner received $40,000 cash and 100,000 shares of the
Company's common stock in his capacity as a consultant to the Company from
February 15, 1996 until his appointment as Chief Executive Officer on April 19,
1996. Mr. Turner also received a car allowance and phone allowance totalling
$9,000 and $600, respectively, in his capacity as Chairman of the Board.
-16-
<PAGE>
Summary Compensation Table

Summary compensation information for Mr. Karl Rullich, the Company's
Chief Executive Officer, during the fiscal years ended 1995 and 1994 and from
January 1, 1996 to April 19, 1996, and for Mr. Harvey Turner, the Company's
Chief Executive Officer beginning April 19, 1996 (the only "named executive
officers" within the meaning of Regulation S-B, Item 402(a)(2) Instruction (1))
is as follows:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Name and Annual Stock Securities All Other
Principal Compen- Awards Underlying LTIP Payouts Compensation
Position Year Salary ($) Bonus ($) sation ($) ($) Options/SARs (#) ($) ($)
-------- ---- ---------- --------- ---------- --- ---------------- --- ---

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Rullich 96 43,962 -0- -0- -0- (1) -0- 600 (2)
CEO 95 -0- -0- -0- -0- -0- -0- -0-
94 21,875 -0- -0- -0- -0- -0- -0-

Mr. Turner (3) 96 81,000 30,000 -0- $26,550 200,000 -0- 49,600 (4)
CEO 95 - - - - - - -
94 - - - - - - -
</TABLE>

(1) Subsequent to Management's determination that options to purchase
300,000 shares of the Company's common stock, allegedly granted to Mr. Rullich
on January 1, 1993, were legally invalid, Mr. Rullich accepted the Company's
determination in a letter dated January 30, 1997 and an Acknowledgement and
Release of Invalid Options dated February 24, 1997.

(2) The Company paid Mr. Rullich a phone allowance totalling $600 in
fiscal year 1996 in his capacity as a Director of the Company.

(3) Mr. Turner was elected Chairman of the Board and appointed as
President and Chief Executive Officer on April 19, 1996.

(4) The Company paid Mr. Turner a car allowance and phone allowance of
$9,000 and $600, respectively, during fiscal year 1996 in his capacity as
Chairman of the Board. Mr. Turner also received $40,000 cash and 100,000 shares
of the Company's common stock in his capacity as a consultant to the Company.

Directors

The Company's "outside" Directors not residing in Arizona each received
compensation of $1,000 and reimbursement for travel related expenses during
fiscal year 1996 associated with their attendance at the Company's annual
meeting. During fiscal year 1996, Mr. Turner received a car allowance and phone
allowance of $9,000 and $600, respectively, in his capacity as Chairman of the
Board. Mr. Rullich received a phone allowance of $600 during fiscal year 1996,
in his capacity as a Director of the Company.
-17-
<PAGE>
Director Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c)(1) (d)(2) (e)(3) (f)
Number of
Securities
Annual Retainer Consulting Number of Underlying
Name Fees ($) Meeting Fees ($) Fees/Other Fees ($) Shares (#) Options/SARs (#)
---- -------- ---------------- ------------------- ---------- ----------------

<S> <C> <C> <C> <C> <C>
Harvey Turner -0- -0- 49,600 100,000 -0-

Karl Rullich -0- -0- 600 -0- -0-

Stephen Kuehn -0- 1,000 -0- -0- -0-

Glen Holt -0- 1,000 -0- -0- -0-

Dr. Michael Shapiro -0- 1,000 -0- -0- -0-

William Brin -0- -0- -0- 100,000 -0-
</TABLE>

(1) Each "outside" Director not residing in Arizona (Messrs. Holt,
Kuehn and Shapiro) each received compensation of $1,000 and reimbursement for
travel related expenses during fiscal year 1996 associated with their attendance
at the Company's annual meeting.

(2) Mr. Turner received a car allowance and a phone allowance of $9,000
and $600, respectively, in his capacity as Chairman of the Board. Mr. Turner
also received $40,000 cash and 100,000 shares of the Company's common stock in
his capacity as a consultant to the Company. Mr. Rullich received a phone
allowance of $600 in his capacity as a Director of the Company.

(3) Mr. Brin received 100,000 restricted common shares valued at
$26,000 in his capacity as a consultant to the Company during fiscal year 1996.
Mr. Brin resigned his position as National Sales Manager on January 31, 1997 and
resigned as a director on February 5, 1997. He currently holds no position with
the Company. Mr. Turner also received $40,000 cash and 100,000 shares of the
Company's common stock in his capacity as a consultant to the Company.

Employment Contracts

The Company entered into an employment contract with Harvey Turner on
July 19, 1996. The employment contract includes the grant of stock options,
subsequently approved by shareholders on August 29, 1996 and subject to his
continued employment for two years, to purchase 100,000 shares of Common Stock
at a purchase price of $0.52 per share exercisable immediately and until April
18, 2006 and 100,000 shares of Common Stock at a purchase price of $0.52 per
share exercisable on April 19, 1997 and until April 18, 2007. Mr. Turner's
contract also includes a $12,000 annual automobile allowance and a lump sum
equal to 12 months compensation if the Company terminates his employment without
cause.

The following table summarizes certain terms and conditions of the
employment contracts.

1995 1996 and 1997
Common Stock ---- -------------
Name Option (Shares) Compensation Compensation
---- --------------- ------------ ------------

Harvey Turner 1996 - 100,000 - 1996 - $108,000
1997 - 100,000 1997 - $125,000

Additional Information Concerning the Board of Directors of the Company

During 1996, the Board of Directors held four meetings. All directors
attended at least 75% of the meetings. In addition to regularly scheduled
meetings, a number of directors were involved in numerous informal meetings with
management, offering advice and suggestions on a broad range of corporate
matters.
-18-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

On October 28, 1996, the Board of Directors approved the following
changes in the Company's management and on February 18, 1997, pursuant to
Article II, section 2 of the Bylaws, filled one vacancy in the Board of
Directors:

NAME PRIOR POSITION(S) HELD CURRENT POSITION(S)
- ---- ---------------------- -------------------

Neil Reithinger Controller Director, Chief Financial Officer,
Secretary and Treasurer

Item 11 - Security Ownership of Certain Beneficial Owners, Management and
- --------------------------------------------------------------------------------
Changes in Control
- ------------------

The following table sets forth certain information regarding shares of
common stock beneficially owned as of February 20, 1997 by (i) each person or
group, known to the Company, who beneficially owns more than 5% of the common
stock; (ii) each of the Company's officers and directors; and (iii) all officers
and directors as a group. The percentage of beneficial ownership is based on
17,523,115 shares outstanding on February 20, 1997 plus, for each person or
group, any securities that person or group has the right to acquire within 60
days pursuant to options, warrants, conversion privileges or other rights.
Unless otherwise indicated, the following persons have sole voting and
investment power with respect to the number of shares set forth opposite their
names:

Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Amount and Nature of Percent of
-------------------- ----------
Title of Class Name and Address of Beneficial Owner Beneficial Owner Class
- -------------- ------------------------------------ ---------------- -----

<S> <C> <C> <C>
Common John Shannon (1) 3,372,000 19.27%
Scottsdale, AZ

Common Linda Lee (2) 1,466,147 8.38%
Hong Kong, China

Common Ronald Patterson (3) 894,000 4.96%
Robbinsville, NJ
</TABLE>
(1) Mr. Shannon resigned as a director and as Vice Chairman of the Board of
Directors on December 13, 1996. Mr. Shannon beneficially owns 3,372,000
common shares of which he holds 748,000 directly of record and
2,200,000 jointly with his wife, Darlene Shannon through JDS
Investments Limited Partnership, an estate planning vehicle. Mr.
Shannon is the beneficial owner of 424,000 common shares which are held
of record or beneficially by Royal Products, Inc. (7,000), Krystal
Kleer, Inc. (100,000), and Desert Health Products, Inc. (317,000). Mr.
Shannon owns 70% of the outstanding stock of Royal Products, Inc., 80%
of the outstanding stock of Krystal Kleer, Inc., and 100% of the
outstanding stock of Desert Health Products, Inc. Management has
determined, after investigation and consultation with the Company's
legal counsel, that options to purchase 1,000,000 shares of the
Company's common stock, allegedly granted to Mr. Shannon on January 1,
1993, are legally invalid. Mr. Shannon contests the determination and
may bring a claim against the Company seeking to enforce the alleged
options.

(2) Ms. Lee is a citizen of Hong Kong, China and a prior director of the
Company. Ms. Lee holds 1,466,147 common shares. She also holds 800,000
preferred shares which may each be converted to one common share or
redeemed for cash on May 6, 1997, provided that certain conditions are
met regarding the average share price of the Company's common shares.
Ms. Lee communicated to the Company that she has no present intention
to convert or redeem her preferred shares.

(3) Mr. Patterson owns 394,000 common shares and holds an option, dated May
4, 1995, and expiring May 4, 2000, to purchase 500,000 common shares at
$1.00 per share.
-19-
<PAGE>
Security Ownership of Management
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Amount and Nature of Percent of
-------------------- ----------
Title of Class Name and Address of Beneficial Owner Beneficial Owner Class
- -------------- ------------------------------------ ---------------- -----

<S> <C> <C> <C>
Common Harvey Turner (1)(8) 870,000 4.92%
Scottsdale, AZ

Common Neil Reithinger (2)(8) 44,000 0.25%
Scottsdale, AZ

Common Karl H. Rullich (3)(8) 540,000 3.08%
Scottsdale, AZ

Common Stephen Kuehn (8) 117,000 0.67%
Tampa, FL

Common Glen Holt (4)(8) 275,000 1.57%
Encino, CA

Common Dr. Michael Shapiro (8) 160,000 0.91%
Madison, WI

Common William Brin (5) 30,000 0.17%
Scottsdale, AZ

Common Georgia Aadland (6) 412,100 2.36%
Scottsdale, AZ

Common John Shannon (7) 3,372,000 19.27%
Scottsdale, AZ

Common All Officers and Directors 5,820,100 33.26%
as a Group (1) - (8)
</TABLE>

(1) Mr. Turner is the Chairman of the Board of Directors and the President
and Chief Executive Officer of the Company. Mr. Turner holds 670,000
common shares and options, approved by the Company's Shareholders on
August 29, 1996, to purchase 100,000 common shares at $0.52 per share,
which expire April 18, 2006, and an additional 100,000 common shares at
$0.52 per share effective April 19, 1997, which expire April 18, 2007.

(2) Mr. Reithinger is a director and the Secretary, Treasurer and Chief
Financial Officer of the Company. He holds 24,000 common shares and an
option, granted January 29, 1997, which expires January 29, 2007 to
purchase 20,000 common shares at $0.42 per share. Members of Mr.
Reithinger's immediate family hold an additional 154,000 common shares
for which Mr. Reithinger disclaims all beneficial interest and control.

(3) Mr. Rullich is a director. Mr. Rullich beneficially owns 515,000
shares, 150,000 shares of which are owned in joint tenancy with his
wife, Florence Rullich. He also holds an option, granted January 29,
1997, which expires January 29, 2007, to purchase 25,000 common shares
at $0.42 per share. Management has determined, after investigation and
consultation with the Company's
-20-
<PAGE>
legal counsel, that options to purchase 300,000 shares of the Company's
common stock, allegedly granted to Mr. Rullich on January 1, 1993, are
legally invalid. In a letter dated January 30, 1997 and an
Acknowledgment and Release of Invalid Options dated February 24, 1997,
Mr. Rullich accepted the Company's determination regarding the
invalidity of the options.

(4) Mr. Holt directly owns 125,000 common shares. He also beneficially owns
150,000 common shares held by his wife Annette Funicello, who is
associated with the Company's Cello by Annette(TM) fragrance line.

(5) Mr. Brin resigned as a director on February 5, 1997 and currently holds
no position with the Company.

(6) Ms. Aadland resigned as a director on November 11, 1996 and currently
holds no position with the Company. Management has determined, after
investigation and consultation with the Company's legal counsel, that
options to purchase 300,000 shares of the Company's common stock,
allegedly granted to Ms. Aadland on January 1, 1993, are legally
invalid.

(7) Mr. Shannon resigned as a director and as Vice Chairman of the Board of
Directors on December 13, 1996. He currently holds no position with the
Company. Mr. Shannon beneficially owns 3,372,000 common shares of which
he holds 748,000 directly of record and 2,200,000 jointly with his
wife, Darlene Shannon through JDS Investments Limited Partnership, an
estate planning vehicle. Mr. Shannon is the beneficial owner of 424,000
common shares which are held of record or beneficially by Royal
Products, Inc. (7,000), Krystal Kleer, Inc. (100,000), and Desert
Health Products, Inc. (317,000). Mr. Shannon owns 70% of the
outstanding stock of Royal Products, Inc., 80% of the outstanding stock
of Krystal Kleer, Inc., and 100% of the outstanding stock of Desert
Health Products, Inc. Management has determined, after investigation
and consultation with the Company's legal counsel, that options to
purchase 1,000,000 shares of the Company's common stock, allegedly
granted to Mr. Shannon on January 1, 1993, are legally invalid. Mr.
Shannon contests the determination and may bring a claim against the
Company seeking to enforce the alleged options.

(8) Director

Changes in Control

On April 11, 1996, the Company agreed to issue 1,466,147 common shares,
representing 10% of the outstanding shares as of December 31, 1995, and 800,000
preferred shares in a private placement to Linda Lee, an independent investor
and citizen of Hong Kong. Linda Lee subsequently was elected to a vacancy on the
Board of Directors, but resigned from such position on June 28, 1996. The rights
and limitations of the preferred shares held by Lee include the right to convert
such shares to common stock or redeem the shares for cash on May 6, 1997,
provided that certain conditions are met regarding the average share price of
the Company's common shares. Ms. Lee communicated to the Company that she has no
intention to convert or redeem her preferred shares.

Item 12 - Certain Relationships and Related Transactions
- --------------------------------------------------------

The Company issued an aggregate of 100,000 restricted shares to Karl H.
Rullich on January 24, 1995 in satisfaction of a note payable from the Company
dated September 9, 1994. Mr. Rullich was the President and Chief Executive
Officer of the Company at the time of the issue.

Prior to becoming a director and officer of the Company, Mr. Turner
acted as a consultant to the prior Chairman of the Board, John A. Shannon, from
January to April 1996. As a finder's fee for his
-21-
<PAGE>
work as a consultant in the private placement with Linda Lee, the Company issued
100,000 common shares to Mr. Turner on May 9, 1996. As general compensation for
his work as a consultant, Mr. Turner received 500,000 common shares from Aloe
Vera Development Corporation, in a private placement in satisfaction of
agreements with Mr. Shannon dated February 12, 1996. Mr. Turner and Mr. Shannon
personally guaranteed the repayment of $800,000 to Ms. Linda Lee in a letter
dated April 22, 1996. A copy of the guarantee is attached as Exhibit 10.8 and
incorporated herein by this reference.

On May 17, 1996, the Company entered into bonus plans with Mr. Turner
and Mr. Reithinger. Copies of the plans are set forth at Exhibits 10.4 and 10.6
and are incorporated herein by this reference. At the time of entry into the
plans, Mr. Turner was a director and an officer of the Company and Mr.
Reithinger was an employee.

The Company issued an aggregate of 100,000 restricted shares to Mr.
William Brin on July 9, 1996 in satisfaction of past compensation owed. Mr. Brin
was a director and the Company's National Sales Manager at the time of the
issue.

On May 3, 1996, the Company paid $111,000 in cash to Dr. Michael
Shapiro in repayment of all of the principal and certain interest due under a
note payable. On September 20, 1996, the Company issued 30,000 shares to Dr.
Shapiro in satisfaction of the remaining interest payable under the note. At the
time of the payments and issuance of stock, Dr. Shapiro was a director of the
Company.

On August 9, 1995 the Company issued 364,000 restricted shares to pay
the principal and interest due under a note payable to Ronald Patterson. On
September 20, 1996, the Company issued an additional 30,000 restricted shares in
satisfaction of the remainder of interest due to Mr. Patterson. At the time of
the issuances, Mr. Patterson was a greater than 5% beneficial holder of the
Company's common shares.

Under the terms of a January 8, 1993 agreement between the Company and
Royal Products, Inc. ("Royal") for the sale to Royal of certain sales and
distribution rights relating to the Aurore-B beauty and hygiene line, Royal is
obligated to make annual payments to the Company including principal and
interest on July 1st of each year after July 1, 1993. John A. Shannon is a
director, officer and 70% shareholder of Royal.

Royal defaulted on the agreement by failing to make its July 1, 1996
payment. On September 25, 1996, in response to the Company's demands, Royal and
the Company entered a Payment Agreement to extend the payment date to October
25, 1996. The Payment Agreement provided that the delinquent payment amount
would be increased to reflect an interest penalty and that Royal would
immediately pay $5,000 against principal and deliver shares of the Company's
common stock as collateral for the remainder of the delinquent amount. Royal
paid the $5,000 on September 25, 1996 and delivered certificates for shares of
the Company's common stock as collateral, but failed to make any payment on
October 25, 1996. Upon Royal's failure to meet the Payment Agreement terms, the
Company executed on the collateral by cancelling the shares of common stock and
returning them to treasury. On February 18, 1997, the Board of Directors took
action to return all shares in treasury to the status of authorized and unissued
shares.
-22-
<PAGE>
Item 13 - Exhibits and Reports on Form 8-K

(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------

<S> <C> <C>
3.1 Articles of Incorporation, as amended *

3.2 By-Laws **

4.1 Specimen Common Stock Certificate ***

4.2 Description of Common Stock ****

4.3 Specimen Preferred Stock Certificate *****

4.4 Conditions of Preferred Certificate ******

10.1 1996 Incentive Stock Option Plan *******

10.2 Consulting Agreement dated February 15, 1996, between Exhibit filed herewith
Baywood International, Inc. and Harvey Turner

10.3 Employment Agreement dated July 30, 1996, between Exhibit filed herewith
Baywood International, Inc. and Harvey Turner

10.4 Bonus Plan dated May 17, 1996, between Baywood Exhibit filed herewith
International, Inc. and Harvey Turner

10.5 Stock Option Agreement dated July 30, 1996 between Exhibit filed herewith
Baywood International, Inc. and Harvey Turner.

10.6 Bonus Plan dated May 17, 1996, between Baywood Exhibit filed herewith
International, Inc. and Neil Reithinger

10.7 Personal Guarantee of Harvey Turner and John Shannon Exhibit filed herewith
related to agreement dated April 11, 1996, between
Baywood International, Inc. and Linda Lee

16.1 Amended Current Report on Form 8-K, regarding a change ********
in auditors

27.1 Financial Data Schedule Exhibit filed herewith

</TABLE>
* Incorporated by reference to Exhibit 3.1 of annual report on
Form 10-KSB (file no. 33- 10236) filed on April 18, 1996.

** Incorporated by reference to Exhibit 3 of Registration
Statement on Form S-1 (file no. 33-10236) filed on January 27, 1987, and
declared effective on February 14, 1988.

*** Incorporated by reference to Exhibit 1 of Registration
Statement on Form 8-A (File no.
-23-
<PAGE>
022024) filed on July 2, 1993, and declared effective on July 9, 1993.

**** Incorporated by reference to page 31 of Registration Statement
on Form S-1 (file no. 33- 10236) filed on January 27, 1987, and declared
effective on February 14, 1988.

***** Incorporated by reference to Exhibit 4.3 of annual report on
Form 10-KSB (file no. 33- 10236) filed on April 18, 1996.

****** Incorporated by reference to Exhibit 4.4 of annual report on
Form 10-KSB (file no. 33- 10236) filed on April 18, 1996.

******* Incorporated by reference to Exhibit 1 of Registration
Statement on Form S-8 (file no. 33-10236) filed on November 22, 1996.

******** Incorporated by reference to the Company's Amended Current
Report on Form 8-K (file no. 33-10236) filed January 24, 1996.

(b) Reports on Form 8-K

Subsequent to the year ended December 31, 1995, on January 24, 1996,
the Company filed an Amended Current Report on Form 8-K, which is included as an
exhibit hereto (incorporated by reference in Item 13(a)) to report a change in
accountants.
-24-
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Dated: March 04, 1997 /s/ Harvey Turner
Baywood International, Inc. -------------------------------------
Harvey Turner
Chairman of the Board of Directors,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:

SIGNATURE TITLE DATE
- --------- ----- ----

Chairman of the Board of Directors,
/s/ Harvey Turner President and Chief Executive Officer 03/04/97
- -------------------------
Harvey Turner

Director, Chief Financial Officer,
/s/ Neil Reithinger Secretary and Treasurer 03/04/97
- -------------------------
Neil Reithinger

/s/ Karl H. Rullich Director 03/04/97
- -------------------------
Karl H. Rullich

/s/ Stephen L. Kuehn Director 03/04/97
- -------------------------
Stephen L. Kuehn

/s/ Glen Holt Director 03/04/97
- -------------------------
Glen Holt

/s/ Dr. Michael Shapiro Director 03/04/97
- -------------------------
Dr. Michael Shapiro
-25-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
December 31, 1996 and 1995

INDEX TO FINANCIAL STATEMENTS
-----------------------------

PAGE
----

REPORT OF INDEPENDENT AUDITORS 27

BALANCE SHEET AS OF DECEMBER 31, 1996 28

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 29

STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1995 30

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 31 - 32

NOTES TO FINANCIAL STATEMENTS 33 - 46
-26-
<PAGE>
<TABLE>
<S> <C> <C>
KING, WEBER & ASSOCIATES, P.C. 1400 East Southern Avenue Telephone (602) 730-6023
Certified Public Accountants Suite 735 Facisimile (602) 730-5976
Tempe, Arizona 85285
</TABLE>

INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------

To the Stockholders and Board of Directors of
Baywood International, Inc.:

We have audited the accompanying balance sheet of Baywood International, Inc. as
of December 31, 1996 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1996. These financial statements are the responsibility of Baywood's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baywood International, Inc. as
of December 31, 1996, and the results of its operations and cash flows for each
of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

KING, WEBER & ASSOCIATES, P.C.

Tempe, Arizona
February 18, 1997

-27-

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS o TAX DIVISION AND SEC
PRACTICE SECTION

ARIZONA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
<TABLE>
<CAPTION>
BAYWOOD INTERNATIONAL, INC.

BALANCE SHEET
-------------
As of December 31, 1996

ASSETS
------
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 768,952
Accounts receivable (Notes 7 and 10) 503,826
Inventories (Note 3) 79,517
Interest receivable 7,648
Deferred income taxes (Note 13) 150,000
Prepaid expenses and other current assets 9,150
--------------------
Total current assets 1,519,093
--------------------

PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $84,010) 38,269
--------------------

OTHER ASSETS
Note receivable - related party (Notes 5 and 10)
(net of allowance of $73,466) 73,426
Contracts & marketing rights (Note 16)
(net of accumulated amortization of $57,318) 97,583
Formulas & product lines (Note 16)
(net of accumulated amortization of $57,318) 97,583
--------------------
Total other assets 268,592
====================
Total assets $ 1,825,954
====================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES
Accounts payable $ 644,951
Sales commissions payable 130,179
Accrued liabilities 7,126
--------------------
Total current liabilities 782,256
--------------------

REDEEMABLE PREFERRED STOCK - $1 par and redemption value (Note 6) 800,000
--------------------

STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value,
10,000,000 shares authorized (Note 6) 35,000
Common stock, $.001 par value, 50,000,000
shares authorized, 17,593,115 shares
issued and 17,498,115 outstanding (Notes 11 and 12) 17,593
Additional paid-in capital (Note 15) 5,510,144
Treasury stock at cost (Note 11) (96,100)
Accumulated deficit (Note 15) (5,222,939)
--------------------
Total stockholders' equity 243,698
====================
Total liabilities and stockholders' equity $ 1,825,954
====================
See accompanying notes to financial statements.
-28-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BAYWOOD INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS
------------------------

Year ended December 31,
1996 1995
----------------- -----------------
<S> <C> <C>
NET SALES $ 4,000,139 $ 1,726,684

COST OF SALES 2,334,201 1,182,894
----------------- -----------------
Gross profit 1,665,938 543,790
----------------- -----------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 612,215 934,843
General and administrative expenses 709,882 1,525,217
Research and development - 15,000
Depreciation and amortization 51,270 64,403
----------------- -----------------
Total selling, general and administrative expenses 1,373,367 2,539,463
----------------- -----------------
Operating profit (loss) 292,571 (1,995,673)
----------------- -----------------

OTHER INCOME (EXPENSE):
Write-down of impaired intangible assets (Note 16) - (443,465)
Interest income 25,252 16,514
Miscellaneous expense (1,086) (14,365)
Miscellaneous income (Notes 7 and 12) 202,376 -
Interest expense (22,172) (351,147)
----------------- -----------------
Total other income (expense) 204,370 (792,463)
----------------- -----------------

INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 496,941 (2,788,136)

INCOME TAX BENEFIT 149,950 -
----------------- -----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 646,891 (2,788,136)

EXTRAORDINARY GAIN: EXTINGUISHMENT OF DEBT (Note 14) - 76,742
----------------- -----------------

NET INCOME (LOSS) $ 646,891 $ (2,711,394)
================= =================

INCOME (LOSS) PER COMMON SHARE AND EQUIVALENT:
Before extraordinary item $ 0.037 $ (0.206)
Extraordinary item - 0.005
----------------- -----------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.037 $ (0.201)
================= =================

WEIGHTED AVERAGE OF COMMON SHARES
AND EQUIVALENTS OUTSTANDING 17,440,620 13,523,066
================= =================

See accompanying notes to financial statements.
-29-
</TABLE>
<PAGE>
BAYWOOD INTERNATIONAL, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
-------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,210,500 $ 1,210,500 12,538,857 $ 12,539 $ 2,821,573

Issuance of common stock for cash 878,111 878 733,566

Issuance of common stock for services,
debt conversion expense and
conversion of notes payable 1,244,500 1,245 1,466,255

Purchase of treasury stock at cost
NET LOSS
-------------- --------------- -------------- --------------- --------------
BALANCE, DECEMBER 31, 1995 1,210,500 $ 1,210,500 14,661,468 $ 14,662 $ 5,021,394

Issuance of common and preferred stock 800,000 800,000 1,466,147 1,466 (1,466)
stock for cash

Reclassification from stockholders' equity
for redemption feature of preferred stock (800,000) (800,000)

Conversion of preferred to common stock (1,175,500) (1,175,500) 1,175,500 1,176 1,174,324

Issuance of common stock for services
and for payment of interest payable 290,000 290 47,050

Fees paid in connection with offering of
common and preferred stock (82,729)

Reclassification (Note 15) (648,429)

Receipt of common stock as payment
for Note Receivable (Note 5)
NET INCOME
============== =============== ============== =============== ==============
BALANCE, DECEMBER 31, 1996 35,000 $ 35,000 17,593,115 $ 17,593 $ 5,510,144
============== =============== ============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Treasury Accumulated
Stock Loss Total
--------------- -------------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ - $ (3,806,867) $ 237,745

Issuance of common stock for cash 734,444

Issuance of common stock for services,
debt conversion expense and
conversion of notes payable 1,467,500

Purchase of treasury stock at cost (62,500) (62,500)
NET LOSS (2,711,394) (2,711,394)
--------------- -------------- ---------------
BALANCE, DECEMBER 31, 1995 $ (62,500) $ (6,518,261) $ (334,205)

Issuance of common and preferred stock 800,000
stock for cash

Reclassification from stockholders' equity
for redemption feature of preferred stock (800,000)

Conversion of preferred to common stock -

Issuance of common stock for services
and for payment of interest payable 47,340

Fees paid in connection with offering of
common and preferred stock (82,729)

Reclassification (Note 15) 648,429 -

Receipt of common stock as payment
for Note Receivable (Note 5) (33,600) (33,600)
NET INCOME 646,891 646,891
=============== ============== ===============
BALANCE, DECEMBER 31, 1996 $ (96,100) $(5,222,939) $ 243,698
=============== ============== ===============
</TABLE>
See accompanying notes to financial statements
-30-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 646,891 $(2,711,394)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization 51,270 64,403
Issuance of common stock as payment for services performed 26,000 541,102
Gain recognized in settlement of trade accounts payable (69,409) --
Extraordinary gain on extinguishment of debt -- (76,742)
Gain recognized for change in common stock valuation
related to interest accrual payment (98,903) --
Loss on sale of computers and equipment 1,061 --
Net decrease in inventory reserve (13,866) --
Allowance on note receivable 73,466 --
Common stock issued as part of debt conversion expense -- 147,783
Common stock issued as payment for interest on notes 21,240 175,356
Common stock received as payment of interest on note receivable (20,340) --
Write-down of intangible assets -- 443,465
Deferred income taxes (150,000) --
Changes in assets and liabilities:
(Increase) in accounts receivable (469,039) (27,151)
Decrease in interest receivable 610 2,143
(Increase) decrease in inventory 165,001 (2,765)
(Increase) in prepaid expenses (6,028) (1,122)
Increase (decrease) in interest payable (42,770) 96,682
Increase (decrease) in customer deposits (16,140) 16,140
Increase in accounts payable and accrued liabilities 272,119 393,139
----------- -----------
Net cash provided (used) by operating activities 371,163 (938,961)
----------- -----------

INVESTING ACTIVITIES:
Proceeds on sale of computers and equipment 1,280 --
Purchase of furniture, computers and equipment (1,571) (9,036)
Principal payments received on note receivable 5,000 16,895
----------- -----------
Net cash provided by investing activities 4,709 7,859
----------- -----------
</TABLE>
-31-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS (CONT'D)
---------------------------------

<TABLE>
<S> <C> <C>
FINANCING ACTIVITIES:
Issuance of common and preferred stock for cash 800,000 734,444
Fees paid in connection with offering of common and preferred stock (82,629) --
Purchase of treasury stock -- (62,500)
Proceeds from notes payable 50,000 562,000
Principal payments on notes payable (482,000) (450,000)
----------- -----------
Net cash provided by financing activities 285,371 783,944
----------- -----------

CASH AND EQUIVALENTS PROVIDED (USED) DURING YEAR 661,243 (147,158)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 107,709 254,867
=========== ===========
CASH AND EQUIVALENTS, END OF YEAR $ 768,952 $ 107,709
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 38,126 $ 79,367
Income taxes $ 50 $ 50

NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable with common stock $ -- $ 680,000
Principal payment received on note receivable
in the Company's common stock $ 13,260 $ --
</TABLE>

See accompanying notes to financial statements
-32-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Note 1 - ORGANIZATION AND BASIS OF PRESENTATION

The focus of Baywood International, Inc. is private labeling consumer
related products. The Company defines its role as a private label company by
designating products with individual store or entity names. The Company creates
distinct formulas with unique packaging and either produces a product to the
customer's specifications or actually researches and develops a product for the
customer. The Company also has available existing formulas, packaging designs,
finished products and brand names for the customer to choose from to market,
license or customize further, with emphasis on pure and natural ingredients.

The Company operates in one industry segment which is consumer products
in the health and beauty industry. Due to the nature of the products, production
processes, markets and marketing methods, the Company considers its business to
revolve around one industry segment.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition
- -------------------

Revenue is recognized when the product is shipped. A majority of the
product is shipped to the customer directly from the Company's suppliers and
manufacturers. Payments from customers prior to shipment are recorded as
customer deposits. Sales returns are recorded as a reduction to sales when a
customer and the Company agree a return is warranted. Sales returns historically
have not been significant.

Property, Equipment and Depreciation
- ------------------------------------

Furniture, fixtures, computers and equipment are depreciated using the
straight-line method over their estimated useful lives of five years.

Cash and Equivalents
- --------------------

The Company considers cash to be all short-term, highly liquid
investments that are readily convertible to known amounts of cash and have
original maturities of three months or less.

Inventories
- -----------

Inventories consist of finished product, packaging and labelling
materials and are recorded at the lower of cost or market on a first-in,
first-out basis.
-33-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Intangible Assets
- -----------------

The cost of marketing rights, contracts, investments in formulas and
product lines acquired by the issuance of preferred or common stock was recorded
at fair value of the stock issued or assets acquired. Fair value of restricted
common stock issued to acquire the assets was generally considered to be the
average bid price during the thirty day period prior to the transaction,
discounted 50 percent for the restrictions imposed on sale or transfer of the
stock for two years from date of issuance.

Intangible assets are amortized on a straight line basis over ten
years. The Company evaluates the carrying value of intangible assets based on
estimated future cash flows from product sales to which the specific contracts,
rights or formulas relate.

Common Stock Issued for Services Rendered
- -----------------------------------------

The Company has issued common stock to some of its employees and to
consultants and advisors as payment for services rendered. Stock issued for
services performed is recorded at the fair market value of the stock issued.
Fair market value is considered to be the average bid price during the
approximate period when the services were rendered. If the shares are
restricted, they are discounted 50 percent for the restrictions imposed on sale
or transfer of the stock for two years from date of issuance.

Stock-Based Compensation
- ------------------------

In accordance with Statements of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees." The proforma effect of the fair value method is discussed
in Note 11.

Income Taxes
- ------------

The Company accounts for income taxes under the liability method
pursuant to the Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." Deferred taxes arise from temporary differences,
due to differences between accounting methods for tax and financial
statement purposes.

Income (Loss) Per Share
- -----------------------

Net income (loss) per share is calculated using the weighted average
number of shares of common stock outstanding during the year. Redeemable
preferred stock is considered a common stock equivalent and is included in the
weighted average number of shares outstanding. Outstanding options were not
considered in the calculation because the effect of their inclusion would be
antidilutive.

Advertising Expenses
- --------------------

The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $24,000 and $198,000 for the years ended December 31, 1996
and 1995, respectively, and is included in marketing expenses in the
accompanying financial statements.
-34-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Financial Instruments
- ---------------------

Financial instruments consist primarily of cash, accounts receivable, a
related party note receivable and obligations under accounts payable and accrued
expenses. The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments. The Company has not determined the fair value of the note
receivable due to the related party nature of the note and the difficulty in
evaluating the credit worthiness of the related party.

Use of Estimates
- ----------------

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Note 3 - INVENTORIES

Nutrition and Dietary $ 54,091
Beauty and Hygiene (including fragrances - net of allowance) 15,182
Animal Health 10,244
----------
$ 79,517
==========

Inventories include packaging materials of $24,975 at December 31,
1996. Fragrance inventory at December 31, 1996 was valued at $95,126, less an
allowance of $86,134. Due to several years of low sales volume of fragrances and
limited marketing efforts, the Company has estimated and recorded the allowance
to value remaining fragrance inventory at the net realizable value of that
inventory.

Note 4 - PROPERTY AND EQUIPMENT

Furniture and Fixtures $ 42,033
Computer Equipment 50,290
Other Equipment 29,956
Less: Accumulated Depreciation (84,010)
----------
$ 38,269
==========

Depreciation expense for the years ended December 31, 1996 and 1995 was
$20,290 and $33,423, respectively.

Note 5 - RELATED PARTY NOTE RECEIVABLE

In 1993 the Company sold all sales and distribution rights of the
Aurore-B beauty and hygiene product line covering the United States, Mexico and
Canada for a note receivable to Royal Products, Inc., an entity controlled by
the Company's former Chairman of the Board and single largest shareholder.
-35-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

The note was discounted assuming a 10% annual discount factor resulting in a
principal balance of $212,228. The note requires ten annual varying payments
commencing July 1, 1993. The Company encountered difficulties collecting the
1996 scheduled installment. The scheduled installment of $34,775 was due July 1,
1996. When payment was not received on the payment date, collection was pursued.
The Company received $5,000 cash and 70,000 shares of the Company's common stock
as payment. The common stock received was valued at $33,600 on the basis of
closing prices at and near the time of the transaction. Restrictions applied to
20,000 of the shares and the value of those shares was discounted by 50% of the
quoted closing price. The 70,000 shares are held in treasury. The note is
uncollateralized. Interest earned on the note was $19,370 and $16,514 for the
years ended December 31, 1996 and 1995, respectively. Interest income for the
year ended December 31, 1996 includes a late payment penalty of $4,128.
Management believes that the note is collectable and that Royal Products, Inc.
will continue to make payments as they become due under the terms of the note.
Management also believes that should the Company be required to pursue
collection, adequate sources of repayment exist. However, due to the uncertainty
of collection and difficulties in collecting the 1996 payment, the Company has
recorded an allowance of $73,466 or approximately 50% of the outstanding
principal balance of the note at December 31, 1996. The Company has not
determined the fair value of the note receivable due to the related party nature
of the note and the difficulty in evaluating the credit worthiness of that
related party. Remaining principal payments on the note at December 31, 1996 are
as follows:

1997 $ 19,761
1998 21,412
1999 23,228
2000 25,226
2001 27,424
2002 29,841
-----------
$ 146,892
===========

Note 6 - PREFERRED STOCK

The Company has issued preferred stock with differing features and
privileges. The first series of preferred stock ($1 par value, 35,000 shares
issued and outstanding at December 31, 1996) is convertible by the holder at any
time into common stock on the basis of one share of preferred for one share of
common stock. The preferred shares have a preference in liquidation of up to
$1.00 per share. The preferred shares are non-voting and have no stated dividend
preferences or rights.

In 1996, the Company issued 800,000 shares of $1.00 par value
redeemable and convertible preferred stock. The shares were issued from the
authorized preferred stock. The preferred shares were issued in conjunction with
the issuance of 1,466,147 shares of the Company's common stock where the Company
raised $800,000 cash less finder's fees of $80,000 for net capital raised of
$720,000. The preferred shares are convertible into common stock of the Company
at the option of the holder after May 6, 1997 in an amount equal to 800,000
divided by the average share price of the Company's common stock for the
previous three month period, provided, however, that the average price of the
Company's common stock for this period equals or exceeds $1.00 per share.
Alternatively, the holder may demand redemption of the preferred shares for the
par value of $1.00 per share ($800,000) payable in cash by the Company within 30
days of receipt of the election to redeem. The holder may elect for redemption
only
-36-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

if the average price of the Company's common stock for the three month period
prior to redemption is less than $1.00 per share. These preferred shares have
liquidation and dividend preferences and no voting rights (See Note 6). The
Board of Directors may determine any preferences and features for the unissued
shares of preferred stock as they are issued in the future.

Note 7 - RELATED PARTY TRANSACTIONS

The Company shared personnel, office and warehouse space in 1996 and
1995 with two companies controlled by the Company's former Chairman of the Board
and single largest shareholder. The related companies were not billed for space
and administrative services provided by the Company in 1995 and were billed
$8,300 during the year ended December 31, 1996. The Company recorded sales to
two related entities controlled by the former chairman of $56,200 and $22,700
for the years ended December 31, 1996 and 1995, respectively. The Company sold
product to the related companies at its cost plus 5% prior to July 1, 1996 and
at 25% gross margin thereafter.

The Company recorded sales of $3,800 and $7,100 for years ended
December 31, 1996 and 1995, respectively, to a company owned by a member of the
Board of Directors. The Company wrote off trade accounts receivable with this
related entity of $4,480 in 1996.

The Company had paid royalties to a company owned by the Company's
former Chairman of the Board. The royalty agreement was terminated in 1996.
Royalties earned in 1995 were $9,800. Payments of $46,500 were made in 1995
which represented accruals from 1994.

Prior to becoming an employee, the Company paid a finder's fee of
$40,000 cash and 100,000 shares of the Company's common stock to its current
President and Chairman of the Board in the year ended December 31, 1996. The fee
was paid in connection with the raising of $800,000 cash in the sale of common
and preferred stock.

The Company paid its former chairman consulting fees totalling $20,000
in the year ended December 31, 1996 and a finder's fee of $40,000 related to the
sale of common and preferred stock.

The Company had accrued expenses of $53,400 at December 31, 1995 due to
former and current officers or related entities that were settled or negotiated
without payment. That amount is included in miscellaneous income for the year
ended December 31, 1996.

Certain officers performed services in 1995 and did not receive
salaries. The officers waived rights to receive compensation for services
performed in 1995.

The Company sold product for $200,000 to one of its consultants in the
year ended December 31, 1995. The consultant holds a small interest in the
Company.
-37-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Note 8 - LEASE OBLIGATIONS

The Company leases its offices and warehouse under an operating lease
that expires on July 31, 1997. Future minimum annual lease obligations for the
remaining term of the lease are as follows:

1997 $ 44,352
==========

Rent expense was $74,000 and $73,000 for the years ended December 31,
1996 and 1995, respectively.

Note 9 - GEOGRAPHIC AREA DATA BY PRODUCT LINE

The following table outlines the breakdown of sales to unaffiliated
customers domestically and internationally:

1996 1995
---- ----
Sales to Unaffiliated Customers:
Nutrition and Dietary
Europe $ 8,276 $ 8,394
Pacific Rim 2,565,758 1,184,831
United States and Other 152,226 344,110
----------- -----------
TOTAL 2,726,260 1,537,335

Beauty and Hygiene (including fragrances)
Europe - 2,238
Pacific Rim 1,244,866 155,412
United States and Other 13,404 9,580
----------- -----------
TOTAL 1,258,270 167,230

Animal Health
Europe - 6,461
Pacific Rim 11,461 8,186
United States and Other 4,148 7,472
----------- -----------
TOTAL 15,609 22,119

Total Net Sales $ 4,000,139 $ 1,726,684
=========== ===========

-38-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Operating Income (Loss)
Nutrition and Dietary
Europe $ 605 $ (9,702)
Pacific Rim 187,660 (1,369,408)
United States 11,134 (398,267)
----------- ------------
TOTAL 199,399 (1,777,377)

Beauty and Hygiene (including fragrances)
Europe - (2,587)
Pacific Rim 91,051 (179,623)
United States 980 (11,072)
----------- ------------
TOTAL 92,031 (192,731)

Animal Health
Europe - (7,468)
Pacific Rim 838 (9,461)
United States and Other 303 (8,636)
----------- ------------
TOTAL 1,141 (25,565)

Total Operating Income (Loss) $ 292,571 $ (1,995,673)
=========== ============

NOTE 10 - CREDIT RISK AND OTHER CONCENTRATIONS

The Company generated 89.8% and 73% of its sales from one Asian
customer in years ended December 31, 1996 and 1995, respectively. Prior to 1996,
the Company's credit risk was limited because in most cases its obtained a 50%
deposit in U.S. dollars at the time of the order and the remaining 50% upon
shipment. In 1996 the Company began extending credit to this customer. Trade
accounts receivable at December 31, 1996 includes amounts due from this customer
of $408,387. Historically, there have been no significant write-offs or
collection difficulties with this customer.

From time to time, the Company's bank balances exceed federally insured
limits. At December 31, 1996, the Company's balance exceeded insured limits by
approximately $665,000.

The Company holds a note receivable from a related party with a
remaining balance of $146,892 at December 31, 1996. The Company maintains no
collateral on the note. The Company recorded an allowance for doubtful
collection against this note of $73,466 at December 31, 1996.

The Company receives virtually all of its products from two vendors.
Management believes alternative sources are available if required.

NOTE 11 - STOCKHOLDERS' EQUITY

The Company issues stock options from time to time to executives and
key employees. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and continues to account for stock based
-39-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation cost has been recognized for the stock options. Had
compensation cost for the Company's stock options been determined based on the
fair value at the grant date for awards in 1996 consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:

1996
----
Net Earnings - as reported $ 646,891
Net Earnings - pro forma $ 585,054
Earnings per share - as reported $ 0.037
Earnings per share - pro forma $ 0.033

Under the provisions of SFAS No. 123, the number of options granted for
the year ended December 31, 1996 of 100,000 fully vested plus 59,000
proportionately vested was used to determine net earnings and earnings per share
under a pro forma basis.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1996: no dividend yield; expected volatility of 0.925; risk-free interest rate
of 6.19% and expected life of 5 years.

Under the Employee Incentive Stock Option Plan approved by the
stockholders in 1996, the total number of shares of common stock that may be
granted is 500,000. The plan provides that shares granted come from the
Corporation's authorized but unissued common stock. The price of the options
granted pursuant to these plans will not be less than 100 percent of the fair
market value of the shares on the date of grant. The options expire ten years
from date of grant.
-40-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

The summary of activity for the Company's stock options is presented
below:
<TABLE>
<CAPTION>
Weighted
--------
Average
-------
1996 Exercise Price 1995
---- -------------- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 2,100,000 $ 0.43 1,600,000
Granted 200,000 0.52 500,000
Exercised 0 0
Options voided that were previously recognized (1,600,000) 0.25 0
Terminated 0 0
Options outstanding at end of year 700,000 0.86 2,100,000
Options exercisable at end of year 600,000 0
Options available for grant at end of year 500,000 0.92 0

Price per share of options outstanding $0.52 to $1.00 $0.25 to $1.00
Weighted Average fair value of options granted
during the year $ 0.39
</TABLE>

Management has determined, after investigation and consultation with
the Company's legal counsel, that options to purchase 300,000 shares of the
Company's common stock, allegedly granted to a director on January 1, 1993, are
legally invalid. In a letter dated January 30, 1997 and an Acknowledgment and
Release of Invalid Options dated February 24, 1997, the director accepted the
Company's determination regarding the invalidity of the options.

Management has determined, after investigation and consultation with
the Company's legal counsel, that options to purchase 1,000,000 shares of the
Company's common stock, allegedly granted to the Company's former chairman on
January 1, 1993, are legally invalid. The former chairman has contested the
determination and may bring a claim against the Company seeking to enforce the
alleged options.

These invalid options have not been included in the earnings per share
calculation.

In 1995, as an inducement to convert notes payable to common stock, the
Company issued options to purchase 500,000 shares of the Company's common stock
at $1.00 per share. The options expire on May 3, 2000. The options price
approximated the closing prices of the Company's common stock at the time the
options were granted.

The Company held 95,000 shares of its common stock in treasury at
December 31, 1996. Treasury stock is accounted for at cost.
-41-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

NOTE 12 - COMMON STOCK ISSUED FOR SERVICES RENDERED

The Company issues shares of its common stock from time to time as
payment for services rendered, inducements to lend to the Company and
inducements to convert existing debt. In 1996, the Company issued 100,000 shares
of its common stock as payment for a consulting fee. Those shares were valued at
$26,000. Also in 1996, the Company issued 90,000 shares of its common stock
valued at $21,240 as settlement of accrued interest on notes payable.

In 1995 the Company issued common stock valued at $541,000 as payment
for services including legal and consulting services. Common stock valued at
$175,000 was issued as inducements to lend to the Company and common stock
valued at $148,000 was issued as inducements to convert existing debt to common
stock in the year ended December 31, 1995. Valuation of common stock for these
transactions was generally a 90 day average of the closing price discounted, if
applicable, for restrictions on transferability. The value of the shares issued
for services and debt conversion expense is included in general and
administrative expenses in the statements of operations for the years ended
December 31, 1996 and 1995.

In addition to these transactions, the Company issued 90,000 shares of
its common stock in 1996 as payment for inducements made in 1995 to make loans
to the Company. The Company had been estimating the value of these common shares
and had recorded an accrual for estimated value at December 31, 1995 of
$126,780. The value of the stock had dropped to $21,240 when it was actually
issued and the obligation paid in 1996. The difference in the estimate resulted
in a gain of $105,540 which is included in miscellaneous income for the year
ended December 31, 1996.

Note 13 - INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. No deferred tax
liabilities existed at December 31, 1996.

Deferred tax assets totalling $2,106,000 were mostly offset by a
valuation allowance of $1,956,000 resulting in a net deferred tax asset of
$150,000. The valuation allowance was provided due to the uncertainty of future
realization of federal and state net operating loss carryforwards that give rise
to approximately $2,020,000 of the deferred tax asset. The balance relates to
differences in book and tax accounting relative to allowances on inventory and
the note receivable and income tax basis deferred compensation. The Company has
federal and state net operating loss carryforwards of $4,713,000 and $4,627,000,
respectively, at December 31, 1996. The deferred federal loss carryforwards
expire in 2002 through 2010 and state loss carryforwards expire 1998 through
2000.
-42-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Income taxes for years ended December 31:

1996 1995
---- ----
Current Provision $ (247,197) $ 0
Current Benefit 0 1,141,000
Deferred Benefit 397,144 27,000
Valuation Allowance 0 (1,168,000)
----------- ------------
Net income tax benefit $ 149,950 $ 0
=========== ============

Income tax returns for years prior to 1995 were amended in 1996
resulting in a reduction of the net operating loss carryforward. The effect
reduced the deferred income tax asset by $384,000 which was offset by an equal
reduction of the valuation allowance. The deferred income tax asset and
valuation allowance was further reduced by $247,197 for recognition of the net
operating loss carryforward for taxable income generated in the year ended
December 31, 1996. Management believes that the Company will continue to
generate taxable income and therefore reduced the valuation allowance by an
additional $120,422 as of December 31, 1996.

A reconciliation for the differences between the effective and
statutory income tax rates is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal statutory rates 34 % (34)%
State income taxes - net of federal benefit 6 % (9)%
Recognition of operating loss carryforward (50)% 0 %
Valuation allowance for operating loss carryforwards 0 % 43 %
Recognition of deferred tax asset and reduction of valuation allowance (20)% 0 %
--- ----
Effective rate (30)% 0 %
=== ====
</TABLE>

Since there was no net income tax provision or benefit for the year
ended December 31, 1995, the extraordinary gain as presented in the statement of
operations reflects no amount net of income taxes.

Note 14 - EXTRAORDINARY GAIN

The Company extinguished certain notes payable that did not contain
conversion features through the issuance of common stock in 1995. The notes did
not contain conversion features. Notes payable of $450,000 plus accrued interest
were converted by issuance of 464,000 shares of common stock. The transactions
were valued at the value of the Company's common stock at the time of
conversion, resulting in a net gain of $76,742.

Other notes payable totalling $230,000 were converted in 1995 for
279,000 shares of the Company's common stock. Changes were made to the original
conversion features of these convertible notes as inducements to convert. The
conversions were valued at the value of the Company's stock at the time of
conversion resulting in conversion expense of $148,000 which is included in the
loss before extraordinary item in the statement of operations for the year ended
December 31, 1995.
-43-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

Note 15 - RECLASSIFICATION AND PRIOR PERIOD ADJUSTMENTS

Certain errors were discovered in 1995 requiring adjustment to the
statements of operations, stockholder's equity and cash flows as previously
reported for the year ended December 31, 1994.

o Net sales was overstated by $1,110,000
o Cost of sales was understated by $631,000 due to overstated inventories
o Accrued interest was understated by $15,000
o Interest income was understated by $16,000
o Intangible assets were overstated by $435,000, net of amortization

The effect of these adjustments totaled approximately $2,175,000,
resulting in an adjusted net loss of approximately $1,964,000 for the year ended
December 31, 1994 rather than net income of $211,000 as previously reported. Per
share data is adjusted to a net loss per common share of $(0.161) as compared to
net income per share of $0.017 as previously reported. In addition, the note
receivable was overstated by $78,000 affecting years prior to 1994.

In connection with the prior period adjustments recorded in 1995, one
of the adjustments was incorrectly classified in the accumulated deficit rather
than additional paid in capital. A reclassification of $648,429 between
additional paid in capital and accumulated deficit was made in 1996. The
reclassification had no effect on results of operations or net equity.

Note 16 - WRITE-DOWN OF CERTAIN ASSETS

The company evaluated its intangible assets for impairment and
determined that certain assets have been impaired. The Company estimated fair
value of the assets by expected future cash flows from certain contracts,
distribution rights and formulas. On the basis of the Company's analysis,
impairment losses of $443,463 have been recognized in the statements of
operations for the year ended December 31, 1995. The write-downs are comprised
of the following:
-44-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

<TABLE>
<CAPTION>
1995
----
<S> <C>
Write-off of formulas and contract rights related to the Company's
fragrance lines. Fragrance sales have been minimal. The product line
has not been marketed and the celebrity endorser has been unable to
promote the products. The assets were originally purchased from a
related party. Write-down is net of accumulated amortization of $ 318,185
$132,951.

Write-off of contract and distribution rights in Europe purchased from
a related party. The significant customer under these contracts has
terminated its relationship with the Company. Write-down is net of
accumulated amortization of $46,980 125,280

Write-off of interest in Health Life Systems, Inc. The entity
never commenced operations and was dissolved. -

Write-off of distribution rights and costs associated with licensing
products in Scandinavian Countries. The Company's sales in this region
have been minimal. -
----------
TOTALS $ 443,465
==========
</TABLE>

The Company concluded no further adjustment was necessary at December
31, 1996.

Note 17 - SUBSEQUENT EVENT

At is meeting on February 18, 1997, the Board of Directors approved
bonuses totalling $39,000 for two of the Company's officers. The bonuses were
based on 1996 earnings but were not payable until approved by the Compensation
Committee of the Board of Directors. No accruals for the bonuses was made in the
year ending December 31, 1996.

Note 18 - COMMITMENTS AND CONTINGENCIES

In the normal course of operations, the Company has entered into
royalty and commission agreements with non-employee brokers and sales personnel.
Royalties and sales commissions vary on sales volume. Royalties of $ 0 and
$13,900 and sales commissions of $396,000 and $146,000 were incurred in the
years ended December 31, 1996 and 1995, respectively and are included in
marketing expenses in the accompanying financial statements.

In 1995, the Company entered into an agreement with a third party to
license and distribute a dietary supplement product. The Company paid $100,000
at the inception of the agreement and additionally agreed to pay approximately
$237,000 for completion of clinical trials. The Company disputed certain
representations made in the agreement by the licensor and has not made payment
of the additional expenses. The Company believes that the agreement was breached
by the other party and that
-45-
<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995

it is not liable for the remaining expenses called for under the agreement. The
third party has filed a lawsuit against the Company alleging that the
distribution agreement was breached. The Company has made counterclaims against
the third party and its owner of $832,000. A trial date has been set for late
1997. Management intends to vigorously pursue its claims and defenses and
believes the outcome of these matters will not be materially adverse to the
Company.

The Company is involved in two disputes and claims with former
consultants and advisors. The total of the two claims is approximately $50,000.
One matter is scheduled for arbitration and the other will have a court hearing
in 1997. The Company has accrued approximately $20,000 of theses disputed fees
and management believes these matters will be settled at an amount less than the
accrued amount.

The Company entered into an employment agreement with its President and
Chairman in 1996. The employment period is from July 30, 1996 through April 18,
1998. The agreement requires compensation to be paid at an annual base salary of
$108,000 through April 18, 1997 and $125,000 from April 19, 1997 through April
18, 1998.

As discussed in Note 6, preferred stock is outstanding at December 31,
1996 that is redeemable at the option of the holder after May 6, 1997. The
redemption feature is only effective if the Company's common stock price for the
three month period prior to redemption averages less than $1.00 per share. The
price of the Company's common stock remains under $1.00 per share. A redemption
would require a payment of $800,000. Under the preferred stock agreement, the
holder is not required to exercise the redemption provision and may convert the
preferred shares to common stock or may continue to hold the preferred shares.
Management believes that the shares will not be redeemed. Should they be
redeemed, management believes it has adequate capital resources to make the
payment. Any potential redemption payment has been personally guaranteed by the
Company's current president and chairman and its former chairman.

The Company was named as a defendant in a $900,000 claim filed against
an entity controlled by its former chairman. The Company has moved to have the
case dismissed and believes no claim will be substantiated against the Company
in this matter.

A former director and officer filed a demand for arbitration against
the Company. The demand seeks $210,374 plus interest, attorney's fees and costs
for a breach of an employment agreement, but does not further specify the nature
of the claim. The Company believes that there was no breach of the employment
agreement.
-46-

Baywood International Inc.
- --------------------------------------------------------------------------------
A Public Company

February 15, 1996

LETTER OF AGREEMENT
-------------------

This is to confirm an agreement made on February 15, 1996 between Mr. Harvey
Turner acting as a Consultant to the Company and Baywood International, Inc.
whereby Mr. Turner agreed to raise funds for the Company.

It was further agreed that Mr. Turner will receive a 10%(percent) finders fee
and 100,000 shares of Baywood's Common Stock, on the raising of a minimum of
$500,000.00 or more.

/s/ Karl H. Rullich /s/ Harvey Turner
- ----------------------- ---------------------------
Karl H. Rullich Harvey Turner
President & CEO Turner Realty & Investments

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into as of this 30th day of July,
1996, by and between BAYWOOD INTERNATIONAL, INC., a Nevada corporation (the
"Corporation") and Harvey Turner ("Mr. Turner").

A. The Corporation wishes to employ Mr. Turner as President and Chief
Executive Officer of the Corporation.

B. Mr. Turner is willing to be employed by the Corporation on the terms
and conditions set forth below.

The Corporation and Mr. Turner agree as follows:

1. Employment. The Corporation will employ Mr. Turner as the President
and Chief Executive Officer of the Corporation. Mr. Turner will perform such
further duties consistent with his status as President and Chief Executive
Officer as may be required of him by the Corporation under and subject to the
instruction, direction and control of the Board of Directors of the Corporation.

2. Devotion to Employment. Mr. Turner accepts employment with the
Corporation on the terms and conditions of this Agreement, and will devote all
of his business time and effort to perform his duties on behalf of the
Corporation in his position as set forth in paragraph 1, provided, however that
nothing herein shall be construed to prevent Mr. Turner from making and
supervising personal investments. During the term of this Agreement, Mr. Turner
shall not be actively engaged in any other business activity which will in any
way impair his ability to properly meet his obligations to the Corporation or
represent any activity competitive with the Corporation or detrimental to its
business. Mr. Turner agrees to comply with the reasonable policies, standards
and regulations of the Corporation from time to time established.

3. Compensation and Benefits. The Corporation agrees to pay Mr. Turner
compensation for his services as follows:

3.1 Base Salary. The Corporation will pay Mr. Turner an annual
base salary, subject to withholding taxes and other normal payroll deductions,
as follows:

Annual Base Salary Dates
------------------ -----

$108,000 through April 18, 1997
$125,000 April 19, 1997 through April 18, 1998

3.2 Bonuses. In addition to the Base Salary, Mr. Turner may
receive such bonuses and increases in Base Salary, if any, as may be awarded to
him from time to time by the Corporation's Board of Directors.
- 1 -
<PAGE>
3.3 Benefits. Mr. Turner shall be entitled to such medical,
dental, disability, life insurance and other benefits and perquisites, if any,
no less favorable than such as are afforded to any other senior executive of the
Corporation, subject to applicable waiting periods and other conditions. Such
medical, dental and other health insurance shall also provide coverage for Mr.
Turner's spouse and dependent children, if any. Mr. Turner shall be entitled to
four weeks of vacation in each employment year.

3.4 Business Expenses. The Corporation will pay or reimburse
Mr. Turner for all transportation, hotel and other expenses reasonably incurred
by Mr. Turner on business trips and for all other ordinary and reasonable
out-of-pocket expenses actually incurred by him in the conduct of the business
of the Corporation against itemized vouchers submitted with respect to any such
expenses approved in accordance with customary procedures. The Corporation shall
provide Mr. Turner with a corporate credit card from a major issuer to
facilitate payment of such expenses.

3.5 Automobile Allowance. The Corporation shall pay Mr. Turner
the sum of $12,000 per year as an automobile allowance for business use. Mr.
Turner shall provide his own automobile insurance satisfactory to the
Corporation.

3.6 Indemnification. The Corporation shall indemnify Mr.
Turner and hold Mr. Turner harmless to the fullest extent allowed by law with
respect to any claim brought against Mr. Turner as a result of or in connection
with his employment hereunder or other affiliation with the Company or its
Affiliates, and/or in connection with liabilities under the Securities Act of
1933, as amended, whether such claim arises from events occurring during, prior
to or after the term of this Agreement, including reasonable attorneys' fees,
settlement costs, and all other costs and expenses which may be incurred by Mr.
Turner in connection with the defense or settlement thereof which fees, costs
and expenses shall be paid on behalf of, or reimbursed to, Mr. Turner as they
are incurred, to the extent legally permissible. The Corporation's obligations
under this Section 3.6 shall survive the termination of this Agreement.

4. Stock Options. In consideration of Mr. Turner's employment
hereunder, the Corporation and Mr. Turner are simultaneously executing a Stock
Option Agreement pursuant to which Corporation is granting Mr. Turner the option
to purchase 200,000 shares of the Corporation's Common Shares as follows:
subject to shareholder approval and subject to his continued employment until
April 19, 1997, when the Second Option vests, Mr. Turner has the option to
purchase 100,000 shares of Common Shares at a purchase price of $0.52 per share
exercisable immediately and until April 18, 2006 and 100,000 shares of Common
Shares at a purchase price of $0.52 per share exercisable on April 19, 1997 and
until April 18, 2007. The grant of options in the Stock Option Agreement are
subject to shareholder approval at the Corporation's 1996 Annual Meeting.
Failing shareholder approval of the options at the Annual Meeting, the Stock
Option Agreement will be voided, and thereupon the Corporation and Mr. Turner
will negotiate alternative compensation of equivalent value to him.
- 2 -
<PAGE>
5. Term. The term of this Agreement shall be deemed to be effective as
of the date hereof, and shall continue for a term of two (2) years from Mr.
Turner's appointment as President and Chief Executive Officer, continuing until
April 18, 1998, unless sooner terminated as provided herein.

6. Termination. This Agreement shall terminate:

6.1 Death or Disability. (a) Upon the death of Mr. Turner, or
(b) upon notice by the Corporation, if Mr. Turner fails, because of illness or
incapacity, to render the services contemplated by this Agreement for a period
of six consecutive months. If termination occurs under this paragraph 6.1, the
Corporation shall pay to Mr. Turner (or his estate, as the case may be), an
amount equal to his then-current compensation, including salary and bonuses, for
90 days following termination.

6.2 Termination by Corporation for Cause. For cause, upon
notice to Mr. Turner by the Corporation. As used herein, "cause" shall mean: (a)
the refusal or failure by Mr. Turner to carry out specific directions of the
Chief Executive Officer or the Board which are of a material nature and
consistent with his status as President and Chief Executive Officer, the refusal
or failure by Mr. Turner to perform a material part of his duties hereunder, or
a breach of any of Mr. Turner's fiduciary duties to the Corporation; (b)
fraudulent or dishonest action by Mr. Turner in his relations with Corporation
or any of its Affiliates, or with any customer or business contact of the
Corporation or any of its Affiliates ("dishonest" for those purposes shall mean
Mr. Turner's knowingly or recklessly making of a material misstatement or
omission for his personal benefit); or (c) the conviction of Mr. Turner of any
crime involving an act of moral turpitude. Notwithstanding the foregoing, no
"cause" for termination shall be deemed to exist with respect to Mr. Turner's
acts described in clause (a) above unless the Corporation shall have given
written notice to Mr. Turner specifying the "cause" with reasonable
particularity and, within five business days after such notice Mr. Turner shall
not have cured or eliminated the problem or thing giving rise to such "cause."
If termination occurs under this paragraph 6.2, Mr. Turner shall not receive any
salary, bonuses or other compensation relative to his termination or after his
termination. Salary or bonuses accrued prior to such termination shall not be
affected.

6.3 Termination by Mr. Turner. Upon not less than 10 days'
written notice by Mr. Turner to the Corporation. If termination occurs under
this paragraph 6.3, Mr. Turner shall not receive any salary, bonuses or other
compensation relative to his termination or after his termination. Salary or
bonuses accrued prior to such termination shall not be affected.

6.4 Termination Without Cause. The Board of Directors may
terminate Mr. Turner at any time without cause. If the Corporation terminates
Mr. Turner without cause, the Corporation will, upon termination, pay Mr. Turner
a lump sum equal to the amount of his salary, bonuses or other compensation
which he would have received for 12 months. For purposes of determining the
amount of the lump sum payment salary shall be set at the rates set
- 3 -
<PAGE>
forth in Section 3.1 hereof as if Mr. Turner continued his employment with the
Corporation for the period in question.

7. Resignation as Director. If, for any reason, (a) Mr. Turner
terminates his employment with the Corporation, or (b) the Corporation
terminates Mr. Turner's employment under the terms of this Agreement, or (c)
this Agreement expires without being renewed or extended, then Mr. Turner will
resign as a director, effective upon the occurrence of such termination or
expiration, whichever is applicable.

8. Protection of Confidential Information; Non-Competition.

8.1 Confidential Information. Mr. Turner warrants that he is
not subject to any restriction on his executing and performing this Agreement,
and acknowledges that:

(a) As a result of his employment by the Corporation, Mr.
Turner will obtain secret and confidential information concerning the
business of the Corporation and its Affiliates, including, without
limitation, financial information, patents and other proprietary
rights, trade secrets and "know-how," customers, and certain business
methodologies ("Confidential Information").

(b) The Corporation and its Affiliates will suffer substantial
damage which will be difficult to compute if, during the period of his
employment with the Corporation or thereafter, Mr. Turner should
divulge Confidential Information or, thereafter, Mr. Turner should
enter a business competitive with those of the Corporation.

(c) The provisions of this Agreement are reasonable and
necessary for the protection of the business of the Corporation and its
Affiliates.

8.2 Maintain Confidentiality. Mr. Turner agrees that he will
not at any time, either during the term of this Agreement or thereafter, divulge
to any person or entity any Confidential Information obtained or learned by him
as a result of his employment with the Corporation or any of its Affiliates,
except (a) in the course of performing his duties hereunder, (b) with the
Corporation's express written consent; (c) to the extent that any such
information is in the public domain other than as a result of Mr. Turner's
breach of any of his obligations hereunder; or (d) where required to be
disclosed by court order subpoena or other government process. If Mr. Turner
shall be required to make disclosure pursuant to the provisions of clause (d) of
the preceding sentence, Mr. Turner promptly, but in no event more than 72 hours
after learning of such subpoena, court order, or other government process, shall
notify, by personal delivery or by electronic means, confirmed by mail, the
Corporation and, at the Corporation's expense, Mr. Turner shall: (i) take all
reasonably necessary steps required by the Corporation to defend against the
enforcement of such subpoena, court order or other government process, and (ii)
permit the Corporation to intervene and participate with counsel of its choice
in any proceeding relating to the enforcement thereof.
- 4 -
<PAGE>
8.3 Records. Upon termination of his employment with the
Corporation, Mr. Turner will promptly deliver to the Company all original
memoranda, notes, records, reports, manuals, drawings, blueprints, formula and
other documents relating to the business of the Corporation and its Affiliates
and all property associated therewith, which he may then possess or have under
his control; provided, however, that Mr. Turner shall be entitled to retain
copies of such documents reasonably necessary to document his financial
relationship (both past and future) with the Corporation.

8.4 Non-Compete. During the 12-month period following the
termination of Mr. Turner's employment with the Corporation under the terms of
this Agreement, Mr. Turner, without the prior written permission of the
Corporation, shall not, anywhere in the United States of America, directly or
indirectly, (a) enter into the employ of or render any services to any person,
firm or corporation engaged in any business which is a "Competitive Business"
(as defined below); (b) engage in any Competitive Business for his own account;
(c) become associated with or interested in any Competitive Business as an
individual, partner, shareholder, creditor, director, officer, principal, agent,
employee, trustee, consultant, advisor or in any other relationship or capacity;
(d) employ or retain, or have or cause any other person or entity to employ or
retain, any person who was employed or retained by the Corporation in the
six-month period prior to the termination of Mr. Turner's employment; or (e)
solicit, interfere with, or endeavor to entice away from the Corporation, for
the benefit of a Competitive Business, any of its customers or other persons
with whom the Corporation has a contractual relationship. However, nothing in
this Agreement shall preclude Mr. Turner from investing his personal assets in
the securities of any corporation or other business entity which is engaged in a
Competitive Business if such securities are traded on a national stock exchange
or in the over-the-counter market and if such investment does not result in his
beneficially owning, at any time, more than 1% of the publicly-traded equity
securities of such Competitive Business.

8.5 Injunctive Relief. If Mr. Turner breaches, or threatens to
breach, any of the provisions of Sections 8.2, 8.3 or 8.4, the Corporation shall
have the right and remedy to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed by Mr. Turner that the services being rendered hereunder to the
Corporation are of a special, unique and extraordinary character and that any
such breach or threatened breach will cause irreparable injury to the
Corporation and that money damages will not provide an adequate remedy in the
Corporation.

8.6 Modification of Scope. If any provision of Section 8.2 or
8.4 is held to be unenforceable because of the scope, duration or area of its
applicability, the tribunal making such determination shall have the power to
modify such scope, duration, or area, or all of them, and such provision or
provisions shall then be applicable in such modified form.

9. Definitions. As used in this Agreement:

9.1 "Affiliate" shall mean any entity that, directly or
indirectly, is controlled by, controlling, or under common control with the
Corporation.
- 5 -
<PAGE>
9.2 "Competitive Business" shall mean a business which is
directly competitive with any business engaged in by the Corporation which
accounted for more than 10% of the Corporation's gross revenues for its last
completed fiscal year.

10. Notices. All notices provided for by this Agreement shall be made
in writing and shall be deemed given when (a) personally delivered to the party
entitled to receive it; (b) transmitted by electronic means; or (c) mailed first
class mail, by certified mail, return receipt requested, addressed to the person
entitled to it at the address set forth below (or at such other address as may
have been designated by written notice). The notice shall be deemed to be
received on the date of its actual delivery or electronic transmission to the
party entitled thereto, or three days after mailing. If sent to the Corporation,
notices shall be delivered to:

Baywood International, Inc.
14950 North 83rd Place, Suite 1
Scottsdale, Arizona 85260
Telecopier: (602) 483-2168

with copies to:

Jon A. Titus
Titus, Brueckner & Berry, P.C.
7373 North Scottsdale Road
Scottsdale Centre, Suite B-252
Scottsdale, Arizona 85253
Telecopier: (602) 483-3215

and, if sent to Mr. Turner, notices shall be delivered to:

Harvey Turner
8046 East Via De La Escuela
Scottsdale, Arizona 85258

Marked "Personal and Confidential"

11. Assignment. The rights and benefits of the Corporation under this
Agreement shall be transferable, and all covenants and agreements hereunder
shall inure to the benefit of and be enforceable by, its successors and assigns.
Mr. Turner may not assign this Agreement, but it shall inure to the benefit of
and be binding upon his heirs and legal representatives.

12. Arbitration. In the event of any dispute between the parties as to
the interpretation of any of the terms and provisions of this agreement, the
matter shall be submitted to arbitration in the following manner:

Either party shall serve written notice upon the other party
that they desire to submit the dispute to arbitration and within fifteen (15)
days of the date of any such written
- 6 -
<PAGE>
notice each party shall appoint an arbitrator within ten (10) days thereafter
the two arbitrators so selected shall appoint a third. In the event either party
shall fail to appoint an arbitrator within such fifteen-day period or if the two
arbitrators so appointed shall fail to select a third within such ten-day
period, then a judge of the Superior Court of Maricopa County or such other
court as may have jurisdiction thereover shall appoint such arbitrator. The
three arbitrators shall determine the controversy in accordance with the Rules
of the American Arbitration Association and a decision of the majority of the
arbitrators shall bind and be conclusive upon the parties. The parties shall pay
the expense of arbitration in the manner determined by the arbitrators and
judgment upon the award rendered by the arbitrators may, if permissible, be
entered in any court having jurisdiction.

13. Miscellaneous.

13.1 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona.

13.2 Waiver. No waiver or modification of this Agreement shall
be valid unless in writing and duly executed by the party to be charged
therewith. Waiver by either party hereto of any breach or default by the other
party of any of the terms and provisions of this Agreement shall not operate as
a waiver of any other breach or default, whether similar to or different from
the breach or default waiver.

13.3 Severability. All agreements, provisions,
representations, warranties and covenants contained herein are severable, and in
the event that any one or more of them shall be held to be invalid, illegal or
unenforceable in any respect by any court of competent jurisdiction, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected thereby, and this Agreement shall be
interpreted as if such invalid, illegal or unenforceable agreements, provisions
or covenants were not contained herein.

13.4 Entire Agreement. This Agreement, together with the Stock
Option Agreement being executed between the parties, constitutes and embodies
the full and complete understanding and agreement of the parties hereto
provided, and supersedes all prior under standings or agreements, whether oral
or in writing.

The parties have executed this Agreement the day and year first
above-written.

BAYWOOD INTERNATIONAL, INC. "Mr. Turner"

By: /s/ Georgia Aadland /s/ Harvey Turner
------------------------ ---------------------------
Harvey Turner

Its Secretary
-----------------------
- 7 -

Baywood International Inc.
- --------------------------------------------------------------------------------
A Public Company

17 May 1996

Harvey Turner
14950 North 83rd Place, Suite One
Scottsdale AZ 85260

RE: Bonus compensation plan for fiscal year 1996

Dear Harvey,

The company has determined the following bonus plan to be in effect during the
1996 fiscal year. Please be advised that payment under this plan is subject to
approval by Baywood's Board of Directors at the end of the fiscal year - 1996.

Harvey Turner Bonus Plan 1996
- ------------------------------------------------

Base: $120,000 $108,000 - W-2 $12,000 - Car allowance

Bonus on net Profit: 25% of Base on $500,000
50% of Base on $750,000
100% of Base on $1 Million
125 % of Base on $1.25 Million
150% of Base on $1.5 Million
175% of Base on $1.75 Million
200% of Base on $2 Million +

The foregoing information is for your attention only and should be viewed as
confidential.

BAYWOOD INTERNATIONAL, INC. BAYWOOD INTERNATIONAL, INC.

/s/ Georgia Aadland /s/ Harvey Turner
- ---------------------------------- ---------------------------------------
Georgia Aadland/VP of Operations Harvey Turner, President

- --------------------------------------------------------------------------------
14950 N. 83rd Place, Suite 1 P.O. Box 5543
Scottsdale, Arizona 85260 USA Scottsdale, Arizona 85261 USA
Phone: +1 (602) 951-3956 Fax: +1 (602) 483-2168
<PAGE>
Baywood International Inc.
- --------------------------------------------------------------------------------
A Public Company

AMENDMENT TO BONUS COMPENSATION PLAN FOR FISCAL YEAR 1996

February 18, 1997

Harvey Turner
8180 East Shea, #1038
Scottsdale, AZ 85260

Dear Harvey:

As per your original bonus plan of May 17, 1996, the following
amendments have been incorporated into the agreement:

1. The bonus is not payable until approved by the Compensation Committee
of the Board of Directors.
2. In the event that you are terminated or resign from the employment of
the Company prior to the Compensation Committee's approved payable
date, February 18, 1997, your bonus will not accrue and not be payable
to you.

The foregoing two amendments are intended to clarify further the terms
of your original bonus plan.

BAYWOOD INTERNATIONAL, INC. BAYWOOD INTERNATIONAL, INC.

/s/ Dr. Michael Shapiro /s/ Glen Holt
- ---------------------------------- ---------------------------------------
Dr. Michael Shapiro Glen Holt
Compensation Committee Compensation Committee
Member Member

STOCK OPTION AGREEMENT

THIS AGREEMENT is made and entered into as of this 30th day of July,
1996, by and between BAYWOOD INTERNATIONAL, INC., a Nevada corporation (the
"Corporation") and Harvey Turner ("Mr. Turner").

A. The Corporation has entered into an EMPLOYMENT AGREEMENT with Mr.
Turner which includes certain stock options as set forth in this Stock Option
Agreement; and

B. The grant of options in this Stock Option Agreement are subject to
shareholder approval at the Corporation's 1996 Annual Meeting. Failing
shareholder approval of the options at the Annual Meeting, the present Stock
Option Agreement will be voided, and thereupon the Corporation and Mr. Turner
will negotiate alternative compensation of equivalent value to him.

The Corporation and Mr. Turner agree as follows:

1. Option Grant. Pursuant to a resolution of the Board of Directors on
July 30, 1996 an Employment Agreement was entered between Mr. Turner and the
Corporation and Mr. Turner was granted options to purchase Two Hundred Thousand
(200,000) shares of the Corporation's Common Stock, $0.001 par value (the
"Stock") as follows: One Hundred Thousand (100,000) shares of the Corporation's
Common Stock at a price of Fifty Two Cents ($0.52) per share exercisable
immediately and until April 18, 2006 (the "First Option") and One Hundred
Thousand (100,000) shares of the Corporation's Common Stock at a price of Fifty
Two Cents ($0.52) per share exercisable on April 19, 1997 and until April 18,
2007 (the "Second Option") (collectively, the "Options").

2. Agreement Defined. The Options granted are separate from the options
described in the 1996 Incentive Stock Option Plan, but are nonetheless subject
to the same terms and conditions of the Corporation's 1996 Incentive Stock
Option Plan (the "Plan") and such additional terms and conditions as are set
forth in this Stock Option Agreement (collectively the "Agreement"). The terms
of the Plan are incorporated by reference in this Agreement and govern the
granting, holding and exercise of the options as though herein set forth in
full, except that where the terms set forth herein differ from the terms in the
Plan, the terms set forth herein shall control. A copy of the Plan is attached
as Exhibit A.

3. Procedure to Exercise. The Options may be exercised only in
accordance with Paragraphs 4-11 below, by delivery to the Corporation (in care
of its Secretary) at the principal offices of the Corporation, presently located
at 14950 North 83rd Place, Suite 1, Scottsdale, Arizona 85260 written
irrevocable notice of exercise in the form attached to this Agreement as Exhibit
B, specifying the number of shares with respect to which the Options are being
exercised, together with payment of the exercise price for those shares in cash
or by check. Any other form of exercise or tender may be refused by the
Corporation, acting through the Board or otherwise, in its discretion.
1
<PAGE>
4. Vesting. The First Option shall vest and become exercisable
immediately upon shareholder approval at the 1996 Annual Meeting following the
execution of this Agreement. The Second Option shall vest and become exercisable
on April 19, 1997, subject to Mr. Turner's continued employment until such date.

5. Transfer. The Options are not transferable other than by will or the
laws of descent and distribution and are exercisable, during Mr. Turner's
lifetime, only by Mr. Turner. Mr. Turner may not assign or otherwise transfer or
encumber his Options or any interest in his Options to any person in any way.

6. Termination. Notwithstanding any other provision of this Agreement
(other than Paragraph 11 below), the Options, to the extent not previously
exercised, shall automatically terminate and be of no further force or effect as
to all remaining shares of Stock as of five o'clock p.m., M.S.T., on April 18,
2006, with respect to the First Option and on April 18, 2007, with respect to
the Second Option.

7. Exercise Upon Termination of Employment. In the event Mr. Turner
leaves the employment of the Corporation for any reason whatsoever, including
termination by Mr. Turner's voluntary resignation or at the direction of the
Corporation, with or without cause, or upon death or Permanent Disability, then,
at Mr. Turner's option, or the option of his personal representative, Mr. Turner
or his personal representative may exercise the Options to the extent not
previously exercised or expired, such exercise to occur no later than sixty (60)
days following Mr. Turner's last day of employment with the Corporation or the
date of Mr. Turner's death or Permanent Disability, as applicable, and the
Corporation (or its nominee) shall have the right (but not the obligation) to
purchase any shares of Stock acquired pursuant to exercise of options under the
Plan held by Mr Turner and shares acquired pursuant to exercise of the Options
(along with shares acquired pursuant to this sentence) at a price equal to the
Appraised Value per share of such Stock, determined in accordance with Paragraph
9. The Corporation (or its nominee) shall exercise this right to repurchase the
shares of Stock, if at all, within six (6) months following the date of the
termination of Mr. Turner's employment with the Corporation by delivering
written notice of exercise to Mr. Turner or his personal representative. Payment
on such exercise by the Corporation shall be made in not more than five equal
annual installments of principal and accrued interest (at an annual interest
rate, adjusted on a daily basis, equal to the prime rate of interest publicly
announced as such from time to time by Bank One in Phoenix, Arizona due
commencing on the Corporation's (or its nominee's) purchase and on the next four
(4) anniversaries of such purchase. The date for consummating such purchase
shall be the sixtieth (60th) day following delivery of the Corporation's notice
of exercise, provided that such date may be extended by Mr. Turner or his
personal representative by written notice to a date not later than the earlier
of ten (10) days after all holding periods under Section 422A of the Internal
Revenue Code expire or consummation of a transaction (e.g., merger,
consolidation, stock sale) pursuant to which the holder of Mr. Turner's shares
would be entitled to receive consideration of any kind.
2
<PAGE>
8. Transfer and Right of First Refusal. In the event any shares of
Stock acquired pursuant to exercise of Options hereunder or any interest
therein, are to be transferred, voluntarily or involuntarily (including, without
limitation, any sale, encumbrance, foreclosure or transfer in lieu thereof, or
by operation of law, any division of marital property on account of divorce or
legal separation being deemed a "transfer" for purposes hereof, but excluding
transfers to which Paragraph 7 hereof applies), the Corporation (or its nominee)
shall have a right of first refusal as follows: Mr. Turner (or the holder of
such shares if not Mr. Turner) shall give the Corporation advance written notice
detailing all the terms of the proposed transfer. The Corporation (or its
nominees) shall have the right (but not the obligation), exercisable upon
delivery to the transferring shareholder of written notice of acceptance within
thirty (30) days following receipt of the notice of proposed transfer described
in the preceding sentence, to repurchase all or any of such shares on the terms
and conditions set forth in such notice; provided that the per share purchase
price shall be the lesser of (i) the price, plus the Appraised Value of any
non-cash consideration (determined in accordance with the procedures specified
in Paragraph 9 below) (or, if applicable, 110% of the loan amount), stated in
the notice or (ii) the Appraised Value of the shares, determined in accordance
with Paragraph 9 (and shall be the Appraised Value, determined in accordance
with Paragraph 9, in the event of a transfer not involving any consideration);
and provided further than the purchase price shall be payable, at the election
of the Corporation (or its nominees), either on the terms set forth in the
transferor's notice or in up to five equal annual installments of principal and
accrued interest (at an annual interest rate, adjusted on a daily basis, equal
to the prime rate of interest publicly announced as such from time to time by
Bank One in Phoenix, Arizona) due commencing on the Corporation's (or its
nominee's) purchase and on the next four (4) anniversaries of such purchase. The
date for consummating such purchase shall be the sixtieth (60th) day following
delivery of the Corporation's (or its nominees') notice of exercise, provided
that such date may be extended by the transferring shareholder by written notice
to a date not later than the earlier of ten (10) days after all holding periods
under Section 422A of the Code expire. Failure by the Corporation (or its
nominees) (without default by the transferring shareholder) to close such
purchase within the above 60-day period shall give the transferring shareholder
the right to transfer such shares or interest therein on the terms and to the
person described in the notice during the 60 days following expiration of the
original 60-day period; provided that the shares or interest therein to be
transferred shall for all purposes remain subject to this Agreement. If the
transferring shareholder fails to close the proposed transfer on those terms
within such second 60-day period, the proposed transfer shall again be subject
to the terms of this Paragraph 8. Notwithstanding the foregoing, such shares may
be transferred or retransferred without invoking this right of first refusal
between Mr. Turner and trusts of which Mr. Turner and/or Mr. Turner's spouse are
the sole beneficiaries by giving prior written notice certifying such a transfer
is to be made; provided that following any such transfer, such shares shall
remain subject to this right of first refusal and all the other provisions of
this Agreement. For so long as the Corporation's right to repurchase the Stock
as set forth in this Paragraph 8 remains effective, neither Mr. Turner, nor Mr.
Turner's personal representative(s), devisee(s), heir(s), successor(s), or
assignee(s) shall sell, assign or otherwise transfer any shares of Stock or
interest therein without obtaining the written agreement of the purchaser,
assignee or transferee that the shares remain subject to this
3
<PAGE>
repurchase right, and Mr. Turner agrees that certificates evidencing the Stock
may be legended to reflect the foregoing restrictions.

9. Appraised Value. "Appraised Value" of a share shall mean the market
value of the share. If no market value exists, "Appraised Value" shall mean that
value determined pursuant to the remainder of this Paragraph 9. The Appraised
Value may be mutually agreed upon by the selling and acquiring parties of the
shares of Stock. If the parties cannot mutually agree on the Appraised Value of
a share of Stock within ten (10) days after delivery of a written notice of
exercise of a purchase right or obligation hereunder, then the Appraised Value
of a share of Stock shall be equal to the fair market value of such share as
determined as of the date of termination of Mr. Turner's employment with the
Corporation and in the following manner: the fair market value shall be
determined by a Board of Arbitration comprised of three (3) members, one of whom
shall be selected by the selling party and another of whom shall be selected by
the acquiring party. The third arbiter shall be appointed by the two arbiters so
selected. If either side fails to select an arbiter within fifteen (15) days
after written request to do so, then the other party's arbiter shall
unilaterally establish the Appraised Value in a written opinion. The decision of
the majority of said arbiters, or of the single arbiter if applicable, shall be
binding upon the parties hereto. If no two arbiters agree upon a single fair
market value, it shall be the arithmetic average of the values determined by the
two arbiters whose estimates are closest in value, which average value shall be
binding upon the parties hereto. The arbiters shall render a written decision
and shall conduct all proceedings pursuant to the Uniform Arbitration Act as
adopted in the State of Arizona and to the then existing rules of the American
Arbitration Association governing commercial transactions to the extent such
rules are not inconsistent with such Act and this Agreement. Costs of
arbitration shall be borne as determined by the arbiters. In determining the
Appraised Value, no value shall be placed on the good will or name of the
Corporation (except that good will may be valued at an amount not exceeding its
unamortized cost to the extent it represents a cost to the Corporation, and all
shares shall be valued equally, i.e., without regard to majority or minority
status of such shares.

10. Permanent Disability. "Permanent Disability" means that Mr. Turner
(1) is under a legal decree of incapacity or disability pursuant to title 14 of
Arizona Revised Statutes or other applicable statutes the date of such decree
being deemed to be the date on which such disability occurred for purposes of
this agreement), or (2) submits any claim for disability insurance benefits or
for early distribution of the amounts from a qualified pension or profit-sharing
plan maintained by the Corporation on account of disability (the date of the
earliest of such claims shall be the date on which such disability shall be
deemed to have occurred), or (3) are determined to be disabled pursuant to a
Determination of Disability. A determination of Disability means a determination
that Mr. Turner, because of a medically determinable disease, injury, or other
mental or physical disability, is unable to perform substantially all of Mr.
Turner's regular duties and that such disability is determined or reasonably
expected to last at least twelve (12) months, based on then-available medical
information. The Determination of Disability will be based on the written
opinion of the physician regularly attending Mr. Turner. If the Corporation
disagrees with the opinion of such physician (the First Physician"), it may
engage at its own expense another physician (the "Second Physician") to examine
Mr. Turner. The Second Physician shall confer with the First Physician and, if
they together agree in writing
4
<PAGE>
that Mr. Turner is or is not disabled, their written opinion shall be conclusive
as to such disability. If the First and Second Physicians do not agree, they
shall choose a third consulting physician (the expense of which shall be borne
by the Corporation), and the written opinion of a majority of these three (3)
physicians shall be conclusive as to such disability. The date of any written
opinion which is conclusive to such disability is the date on which such
disability, if that is the conclusion, will be deemed to have occurred unless
the opinion expressly establishes the date of occurrence. In conjunction with
this Section, Mr. Turner consent to such examination, to furnish any medical
information requested by any examining physician, and to waive any applicable
physician-patient privilege that may arise because of such examination. All
physicians except the First Physician selected hereunder must be board-certified
in the specialty most closely related to the nature of the disability alleged to
exist.

11. Waiver or Extension of Expiration Dates. In its sole discretion,
the Board may waive or accelerate vesting of Options, or waive or extend
expiration dates, other than the final expiration date.

12. Reservation of Underlying Stock. The Corporation will reserve or
keep available at all times sufficient shares of its common stock to permit the
exercise of Mr. Turner's Options and all other options granted or to be granted
under the Plan.

13. Contemplated Registration on Form S-8. The Corporation
contemplates, upon approval of the Options by shareholders at the 1996 Annual
Meeting, that it will thereafter amend its registration statement on Form S-8 to
reflect the then-current status of all authorized options under all Corporation
plans and grants, including the Options set forth herein. If the Corporation is
successful in registering such Options, then paragraph 14 shall not apply,
except to such extent that shares acquired by an affiliate continue to be
subject to restrictions on resale under Rule 144 pursuant to the Securities
Exchange Act of 1933.

14. Effect if No Registration. If, however, the Corporation is not
successful in registering the Options under such registration statement on Form
S-8, then the common stock in the Corporation to be issued to Mr. Turner upon
exercise of the Options will not be registered under the Securities Act of 1933,
as amended (the "Act") or any applicable state securities laws, in reliance on
exemptions from registration thereunder. If in the opinion of counsel
satisfactory to the Corporation no exemption from registration is then
available, or if such issuance is otherwise in violation of applicable law at
the time purchase rights are exercised under this option, then the Corporation's
obligation to issue shares of its common stock upon exercise of the Options
shall terminate. If such an exemption is available in the opinion of such
counsel, and such issuance is not otherwise in violation of applicable law, Mr.
Turner (or his personal representative(s), devisee(s), or heir(s)) will deliver
to the Corporation as a condition precedent to giving notice of each exercise,
an investment letter agreement in form and substance satisfactory to the
Corporation to enable the Corporation to comply with the Act or other applicable
securities laws and which may, among other things, limit or condition the right
to dispose of shares of Stock acquired by exercise of the Options will be
permitted only if in the opinion of counsel satisfactory to the Corporation such
disposition is not in violation of the Act,
5
<PAGE>
any applicable state securities laws or any other applicable law, regulation or
rule, and Mr. Turner (or Mr. Turner's personal representative(s), devisee(s), or
heirs(s)) deliver to the Corporation a letter agreement in form and substance
satisfactory to the Corporation whereby Mr. Turner's successor(s) or assign(s)
agrees to be bound by the terms and conditions of paragraphs 3-11 above and this
Paragraph 14. Mr. Turner (and Mr. Turner's personal representative(s),
devisee(s), or heirs(s)) agree to pay all costs of obtaining any legal opinions
and all costs in connection with proposed exercise of the Options or
dispositions of shares acquired pursuant to the Options.

15. Taxes; Notice of Disposition. Mr. Turner agrees to pay to the
Corporation or to make arrangements satisfactory to the Committee to pay to the
Corporation, at such time as any income is recognized by Mr. Turner with respect
to the Options, any Federal, state, or local taxes of any kind required by law
to be withheld on such income by the Corporation. In the event of disposition or
other transfer by Mr. Turner of common stock issued to Mr. Turner upon exercise
of Mr. Turner's Options, Mr. Turner agree to provide to the Corporation promptly
written notice describing in reasonable detail the disposition or transfer,
including without limitation the sale price, if any, and date of transfer or
disposition.

16. Plan Amendments. The Board may effect certain amendments to the
Plan (within the limitations prescribed by the Plan) which may affect the terms
of the Options and the Board has the ultimate and conclusive authority to
interpret and administer the Plan and the Options.

17. Governing Law. The Agreement and the Options granted to Mr. Turner
hereunder are governed by, and shall be interpreted according to, the laws of
the State of Arizona.

18. Further Measures. Each party hereto agrees to do all such things
and take all such actions, and to make, execute and deliver such other documents
and instruments, as shall be reasonably requested to carry out the provisions,
intent and purposes of this Agreement.

19. Possible Tax Treatment. Section 422A of the Internal Revenue Code
of 1986, as amended, provides for advantageous tax treatment upon the
disposition of shares acquired pursuant to incentive stock options and such
treatment may apply to the Options Mr. Turner has been granted. However, in
order to qualify presently for such advantageous treatment Mr. Turner must make
no disposition of Corporation shares acquired by Mr. Turner pursuant to the
Options within two (2) years from the date of grant of the Options nor within
one (1) year after the shares of the Stock are transferred to Mr. Turner.
Although the foregoing holding period requirements do not represent a term or
condition of the Options, Mr. Turner may find that it is in Mr. Turner's best
interests to comply with them. Because the tax effect may vary depending on Mr.
Turner's personal circumstances, and the tax law may change from time to time,
it is strongly recommended that Mr. Turner consult with tax counsel or a tax
advisor in order to realize any available tax benefits associated with this
Options. This paragraph 18 is for Mr. Turner's information purposes only and
does not constitute a warranty by the Corporation as to any tax treatment
applicable to the Options.
6
<PAGE>
20. Not an Employment Agreement. This letter only grants the Options
described above and is not an employment agreement or a promise or assurance of
continued employment for any period of time including any period of time
necessary to permit full exercise of the Options under Paragraph 1 above.

The parties have executed this Agreement the day and year first
above-written.

The "Corporation" "Mr. Turner"
BAYWOOD INTERNATIONAL, INC.
a Nevada Corporation

By: /s/ Georgia Aadland /s/ Harvey Turner
------------------------------- -----------------------------

Its Secretary
------------------------------
7
<PAGE>
EXHIBIT "A"

Baywood International, Inc.

1996 INCENTIVE STOCK OPTION PLAN

1. Purpose. The purpose of the Plan is to advance the interests of
Baywood International, Inc. (the "Company") by encouraging and enabling the
acquisition of a financial interest in the Company by key employees through
options granted under the Plan. Management believes that this Plan will aid the
Company in attracting and retaining key employees upon whose judgment, interest
and special efforts the Company is largely dependent for the successful conduct
of its operations and in competing effectively with other enterprises for the
services of new employees as may be needed for the continued success of the
Company. It is believed that the acquisition of such option grants will
stimulate the efforts of such key employees on behalf of the Company and
strengthen their desires to remain in the employ of the Company.

2. The Stock. The shares of stock (the "Stock") available for the grant
of options under the original Plan shall consist of 500,000 shares of Common
Stock of the Company or the number and kind of shares of stock or other
securities which shall be substituted for such shares or to which such shares
shall be adjusted as provided in Section 6 hereof. Such numbers of shares may be
set aside out of the authorized but unissued shares of Common Stock of the
Company not reserved for any other purposes or out of shares of Common Stock
held in or acquired for the treasury of the Company. All or any shares of Stock
subjected under this Plan to an option which, for any reason, terminates,
expires, or is cancelled unexercised as to such shares, may again be subjected
to an option under this Plan.

3. Administration. The Plan shall be administered on behalf of the
Board of Directors of the Company (the "Board") serving as the Compensation
Committee of the Board (the "Committee"). The Committee shall initially consist
of all the members of the Board of Directors, and such make-up shall continue
until the Board names additional or different members to the Committee.

The Committee shall determine, within the limits of the express
provisions of the Plan, the individuals to whom, and the time or times at which,
options shall be granted, the number of shares to be subject to each option, the
duration of each option, the option price under each option, and the time or
times within which (during the term of the option) all or portions of each
option may be exercised. In making such determinations, the Committee may take
into account the nature of the services rendered by such individuals or classes
of individuals, their present and potential contributions to the Company's
success, and such other factors as the Committee in its discretion shall deem
relevant. Each employee to whom an option is granted shall enter into a written
agreement ("Option Agreement") with the Company setting forth the terms and
conditions of the option granted to him, which agreement shall contain such
terms and conditions consistent with the Plan as the Committee shall approve.
- 1 -
<PAGE>
Subject to the express provisions of the Plan, the Committee may
interpret the Plan, prescribe, amend, and rescind rules and regulations relating
to it, determine the terms and provisions of the respective Option Agreements
(which need not be identical), and make all other determinations necessary or
advisable for the administration of the Plan.

The determination of the Committee on the matters referred to in this
Section 3 shall be conclusive.

4. Eligibility. Options may be granted only to key employees of the
Company and/or a subsidiary thereof. The term "subsidiary" shall mean any
corporation which the Company controls either directly or indirectly through
ownership of fifty percent (50%) or more of the total combined voting power of
all classes of stock of such corporation.

5. Grant, Terms and Conditions of Options. Options may be granted at
any time and from time to time prior to the termination of the Plan. The day on
which the Committee approves the granting of an option shall for all purposes of
this Plan be considered the date on which such option is granted. Except as
hereinafter provided, Options granted pursuant to the Plan shall be subject to
the following terms and conditions:

(a) Price. The purchase price of the shares of Stock shall be
determined by the Committee. In no event shall the initial exercise price of an
option be less than the fair market value of such Stock on the date of grant.
The term "fair market value" shall mean as applied to the Stock on any day as
shall be determined in good faith by the Committee without regard to any
restriction other than a restriction which, by its terms, never lapses. The
purchase price shall be paid in full on the date of exercise, in cash, by check
or in such other consideration (including stock of the Company) as expressly
permitted by the terms of the particular option.

(b) Withholding of Taxes. The Company's obligation to deliver
shares of Stock pursuant to this Plan shall be subject to applicable federal,
state and local tax withholding requirements.

(c) Duration of Options. Options may be granted for terms of
up to but not exceeding ten (10) years from the date the particular option is
granted.

(d) Cancellation of Options. In the event the market value of
Stock subject to option under the Plan shall be less than the option price for
such Stock, the Committee may, in its discretion and with the consent of the
optionee, cancel such options and grant new options consistent with the terms of
the Plan.

(e) Limitation on Grant of Options. The aggregate fair market
value (determined as of the time the option is granted) of the Stock as to which
options are exercisable for the first time by an eligible employee during any
calendar year (under the Plan and under
- 2 -
<PAGE>
any other stock option plan of the Company or any subsidiary of the Company)
shall not exceed One Hundred Thousand Dollars ($100,000).

(f) Transferability of Options. No option granted to an
employee under the Plan shall be transferable by such employee, other than by
will or the laws of descent and distribution, and all such options shall be
exercisable, during such employee's lifetime, only by such employee.

6. Adjustment in Number of Shares and in Option Price. In the event
there is any change in the shares of the Company's Common Stock through the
declaration of stock dividends or a stock split-up, or through recapitalization,
resulting in share split-ups, or combinations or exchange of shares, or
otherwise, the number of shares of the Stock available for option, as well as
the shares subject to any option and the option price thereof, shall be
appropriately adjusted by the Committee.

7. Amendment. The Board may alter or amend the Plan and may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option in the manner and to the extent it shall deem desirable to carry the
Plan into effect without further action on the part of the stockholders of the
Company; but the Board may not without the approval of the Company's
stockholders make any alteration or amendment thereof which (a) makes any change
in the class of eligible employees as defined in Section 4 hereof; (b) increases
the total number of shares of Stock for which options may be granted under the
Plan; (c) extends the terms of the Plan or the maximum option period provided
under the Plan; or (d) decreases the minimum option price provided in Section 5
hereof.

The Committee may, with the consent of the grantee, amend an option or
otherwise modify an option in any manner, provided that the terms of the amended
option are consistent with the principles of this Plan.

It is intended that this Plan will comply with the requirements of
Section 16(b) under the 1934 Act and Rule 16b-3 thereunder, as applicable during
the term of the Plan. Should such requirements change, as interpreted by the
Committee and its counsel, the Board may amend this Plan or the Committee may
amend any rules or practices adopted hereunder accordingly, without the
necessity for stockholder approval, consistent with applicable law.

8. Effective Date and Termination of Plan. All provisions of this Plan
are effective as of July 30, 1996. This Plan shall terminate on the earliest of
(a) the date when all shares of the Stock shall have been acquired through
exercise of options granted under the Plan; (b) ten (10) years after the date of
adoption of the Plan by the Board on July 30, 1996; or (c) such earlier date as
the Board may determine. Any option outstanding under the Plan at the time of
its termination shall remain in effect in accordance with its terms and
conditions and those of the Plan.
- 3 -
<PAGE>
9. Use of Proceeds. The proceeds from the sale of Stock pursuant to the
Plan will be used for general corporate purposes.

10. Governing Law. The Plan shall be governed by and interpreted
according to the laws of the State of Arizona.

Date of Adoption by Board of Directors: July 30, 1996.
- 4 -
<PAGE>
EXHIBIT "B"

NOTICE OF EXERCISE OF OPTION
TO PURCHASE SHARES OF
BAYWOOD INTERNATIONAL, INC.
AND RECORD OF STOCK TRANSFER

I hereby exercise my Stock Option(s) granted pursuant to the Stock
Option Agreement executed July 30, 1996 by and between Harvey Turner and Baywood
International, Inc. (the "Agreement") subject to all the terms and provisions
referred to in the Agreement, and notify you of my desire to purchase ________
shares of Common Stock of Baywood International, Inc. (the "Company") which were
offered to me pursuant to said Option(s). Enclosed is my check in the sum of
$_____________ in full payment for such shares.

I hereby represent that the _________ shares of the Company's Common
Stock to be delivered to me pursuant to the above-mentioned exercise of the
Option granted to me on July 30, 1996 are being acquired by me as an investment
and not with a view to, or for sale in connection with, the distribution of any
such shares. I also represent that I have read and fully understand the
Agreement, including without limitation all applicable restrictions on transfer
of the shares hereby being acquired and the Company's repurchase rights with
respect to such shares. I agree to indemnify the Company and its subsidiaries,
together with their respective officers and directors, against any and all
liabilities, losses, damages and expenses (including reasonable attorney fees)
arising from or in connection with any disposition of the shares hereby being
acquired, or any interest therein, in violation of applicable securities laws or
regulations. I further represent that I have been given access to all
information necessary to allow me to make a decision as to the advisability of
an investment in the Company's stock and the value of such stock, and that I
have the skill and experience necessary to make such decision.

DATED: ______________________________, 19___.

------------------------------
Harvey Turner

------------------------------
Signature of Mr. Turner's Spouse
<PAGE>
Receipt is hereby acknowledged of the delivery to me by
___________________ on __________________ of stock certificates for ________
shares of Common Stock purchased by me pursuant to the terms and conditions of
the Stock Option Agreement referred to above, which shares were transferred to
me on Baywood International, Inc.'s stock record books on ___________________,
19___.

------------------------------
Harvey Turner

Baywood International Inc.
- --------------------------------------------------------------------------------
A Public Company

7 May 1996

Neil Reithinger
14950 North 83rd Place, Suite One
Scottsdale AZ 85260

RE: bonus compensation plan for fiscal year 1996

Dear Neil,

Neil Reithinger Bonus Plan 1996
- ------------------------------------------------

Base: $30,000

The foregoing information is for your attention only and should be viewed as
confidential.

BAYWOOD INTERNATIONAL, INC. BAYWOOD INTERNATIONAL, INC.

/s/ Harvey Turner, /s/ Georgia Aadland
- ---------------------------------- ---------------------------------------
Harvey Turner, President Georgia Aadland/VP of Operations

AMENDMENT TO BONUS COMPENSATION PLAN FOR FISCAL YEAR 1996

February 18, 1997

Neil Reithinger
15096 North 100th Way
Scottsdale, AZ 85260

Dear Neil:

As per your original bonus plan of May 17, 1996, the following
amendments have been incorporated into the agreement:

1. The bonus is not payable until approved by the
Compensation Committee of the Board of Directors.
2. In the event that you are terminated or resign from the employment of
the Company prior to the Compensation Committee's approved payable
date, February 18, 1997, your bonus will not accrue and not be payable
to you.
3. The bonus will be based on your current base salary of $36,000.

The foregoing two amendments are intended to clarify further the terms
of your original bonus plan.

BAYWOOD INTERNATIONAL, INC. BAYWOOD INTERNATIONAL, INC.

/s/ Harvey Turner, /s/ Dr. Michael Shapiro
- ---------------------------------- ---------------------------------------
Harvey Turner Dr. Michael Shapiro
Compensation Committee Compensation Committee
Chairman Member

/s/ Glen Holt
---------------------------------------
Compensation Committee
Member

Baywood International Inc.
- --------------------------------------------------------------------------------
A Public Company

CONFIDENTIAL

22 April 1996

Ms. Linda Lee
23/F., Block E-L, Superluck Industrial Centre (Phase 2)
57 Sha Tsui Road, Tsuen Wan
Hong Kong

Dear Ms. Lee,

In the event that Baywood International, Inc. Cannot repay the USD800,000
according to the terms of the agreement, Harvey Turner and Johnny Shannon
personally guarantee repayment.

Thank you for accepting your appointment to Baywood's Board of Directors.

Sincerely,

/s/ Harvey Turner
- ---------------------------
Harvey Turner

/s/ Johnny Shannon
- ---------------------------
Johnny Shannon
Vice-Chairman

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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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