BAYWOOD INTERNATIONAL INC, DEF 14A, 1997-03-18

BAYWOOD INTERNATIONAL INC
DEF 14A, 1997-03-18
PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

BAYWOOD INTERNATIONAL, INC.
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

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

2) Aggregate number of securities to which transaction applies:

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

3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):

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

4) Proposed maximum aggregate value of transaction:

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

5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.

1) Amount previously paid:

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2) Form, Schedule or Registration No.

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3) Filing party:

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4) Date filed:

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<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTICE OF 1997

ANNUAL MEETING OF STOCKHOLDERS

AND PROXY STATEMENT

YOUR VOTE IS IMPORTANT!

PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY IN THE
ENCLOSED ENVELOPE
<PAGE>
BAYWOOD INTERNATIONAL, INC.

March 17, 1997

Dear Stockholder:

On behalf of the Board of Directors, it is my pleasure to invite you to
attend the Annual Meeting of Stockholders of Baywood International, Inc. on
April 10, 1997, in Scottsdale, Arizona. Information about the meeting is
presented on the following pages.

In addition to the formal items of business to be brought before the
meeting, members of management will report on the Company's operations and
answer stockholder questions.

Your vote is very important. Please ensure that your shares will be
represented at the meeting by completing, signing, and returning your proxy card
in the envelope provided, even if you plan to attend the meeting. Sending us
your proxy will not prevent you from voting in person at the meeting should you
wish to do so.

Sincerely,

/s/ Harvey Turner

Harvey Turner
Chairman of the Board, President and C.E.O.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

March 17, 1997

The Annual Meeting of Stockholders of Baywood International, Inc. (the
"Company") will be held at the Doubletree Paradise Valley Resort, 5401 North
Scottsdale Road, Scottsdale, Arizona on April 10, 1997 at 10:00 A.M. local time
for the following purposes:

1. To elect the directors of the Company to serve for the ensuing
year;

2. To ratify the selection of King, Weber & Associates, P.C. as
independent auditors for the Company;

3. To approve of the change of the Company's corporate domicile
from Nevada to Arizona;

4. To approve a reverse 1 for 2 1/2 split of the Company's common
stock; and

5. To transact any other business as may properly come before the
meeting.

The Board of Directors has fixed the close of business on February 20,
1997 as the record date for the determination of stockholders entitled to notice
of and to vote at the meeting. A list of such stockholders will be available
during regular business hours at the Company's office at 14950 North 83rd Place,
Suite 1, Scottsdale, Arizona, on and after April 1, 1997, for inspection by any
stockholder for any purpose germane to the meeting.

By Order of The Board of Directors,

/s/ Neil Reithinger

Neil Reithinger
Secretary
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Baywood International, Inc. (the
"Company") for use at the Annual Meeting of Stockholders of the Company to be
held at the time and place and for the purposes set forth in the foregoing
Notice of Annual Meeting of Stockholders. The address of the Company's principal
executive offices is 14950 North 83rd Place, Suite 1, Scottsdale, Arizona,
85260. This Proxy Statement and the form of proxy are being mailed to
stockholders on or about March 17, 1997.

REVOCABILITY OF PROXY AND VOTING OF PROXY

A proxy given by a stockholder may be revoked at any time before it is
exercised by giving another proxy bearing a later date, by notifying the
Secretary of the Company in writing of such revocation at any time before the
proxy is exercised, or by attending the meeting in person and casting a ballot.
Any proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated on the proxy,
the proxy will be voted for the election of the nominees for directors named
herein and in favor of all other proposals described herein. Because abstentions
with respect to any matter are treated as shares present or represented and
entitled to vote for the purposes of determining whether that matter has been
approved by the stockholders, abstentions have the same effect as negative
votes. Broker non-votes and shares as to which proxy authority has been withheld
with respect to any matter are not deemed to be present or represented for
purposes of determining whether stockholder approval of that matter has been
obtained.

The Company knows of no reason why any of the nominees named herein
would be unable to serve. In the event, however, that any nominee named should,
prior to the election, become unable to serve as a director, the proxy will be
voted in accordance with best judgment of the persons named therein. The Board
of Directors knows of no matters, other than as described herein, that are to be
presented at the meeting, but if matters other than those herein mentioned
properly come before the meeting, the proxy will be voted by the persons named
in a manner that such persons (in their judgment) consider to be in the best
interests of the Company.

RECORD DATE AND VOTING RIGHTS

Only stockholders of record at the close of business on February 20,
1997 are entitled to vote at the meeting. On such record date the Company had
outstanding and entitled to vote 17,498,115 shares of Common Stock. Each
stockholder entitled to vote shall have one vote for each share of Common Stock
registered in such stockholder's name on the books of the Company as of the
record date.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)

On February 18, 1997, the Board of Directors established a Standing
Nominating Committee which shall continually be comprised of three directors.
The directors appointed to serve on the committee until their successors have
been elected or appointed and shall qualify are: Dr. Michael Shapiro, Glen Holt
and Karl Rullich. The Board of Directors, on February 18, 1997 authorized the
Nominating Committee to determine the Board's nominations for directors. On
March 4, 1997, the Nominating Committee unanimously nominated the following
persons as the recommendation of the Board of Directors for directors of the
Company:

Nominee Name Age Director Since
------------ --- --------------

Harvey Turner 58 1996
Karl H. Rullich 63 1991
Stephen L. Kuehn 50 1991
Glen Holt 66 1993
Michael B. Shapiro, M.D. 41 1995
Neil Reithinger 27 1997

Vote Required and Recommendation

Information Related to Election of Directors

All directors hold office until the Annual Meeting of Stockholders of
the Company and until their successors have been elected and qualified.
Information about each nominee for director is given below.

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 appointed President
and Chief Executive Officer on the same date. Before he became a director and
officer, 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
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

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. 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. Keuhn has
served as a consultant to the Company in the area of sales since 1992. 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 with Pfizer was as Managing Director for
Pfizer Hospital Products Group United European Division based in London. He has
also 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 of 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. Neil Reithinger was appointed as a director of the Company to fill
a vacancy on February 18, 1997. Mr. Reithinger has been Controller of the
Company since January 1994 and was appointed Secretary, Treasurer and Chief
Financial Officer on October 28, 1996. Prior to joining the Company, he was an
operations specialist with Bank of America from July 1992 through December 1993.
Mr. Reithinger received a Bachelors degree in accounting from the University of
Arizona in December 1992, and received his Certified Public Accountant
certification in 1996.

Standing Audit and Compensation Committees

On August 29, 1996, the Board of Directors established Standing Audit
and Compensation Committees which would each be continually comprised of three
directors, two (2) of which would be
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BAYWOOD INTERNATIONAL, INC.

outside directors and one (1) of which would be and inside director. The
directors appointed to serve on the committees until their successors have been
elected or appointed and shall qualify are:

Audit Committee Compensation Committee
--------------- ----------------------

Harvey Turner Harvey Turner
Stephen Kuehn Dr. Michael Shapiro
Glen Holt Glen Holt

Neither the Audit Committee nor the Compensation Committee held
meetings in 1996. The Compensation Committee acted by unanimous written consent
in lieu of a meeting on January 29, 1997 to grant certain options under the 1996
Incentive Stock Option Plan, which the Compensation Committee is charged with
administering. The Compensation Committee's duties also include reviewing and
approving salaries and other matters relating to compensation of the executive
officers of the Company. The Compensation Committee also acted by unanimous
consent in lieu of a meeting on February 18, 1996 to approve amendments to a
bonus compensation plan for Harvey Turner and Neil Reithinger.

The Audit Committee's duty is to recommend for approval by the Board of
Directors a firm of certified public accountants whose duty it is to audit the
financial statements of the Company for the fiscal year in which they are
appointed, and monitors the effectiveness of the audit effort, the Company's
internal financial and accounting organization and controls and financial
reporting. The Audit Committee acted by unanimous written consent in lieu of a
meeting on February 18, 1997 to recommend the ratification of the appointment of
the accounting firm of King, Weber & Associates, P.C. of Tempe, Arizona to audit
the Company's financial statements for the Company's fiscal year ended December
31, 1996 and to recommend that the Board appoint King, Weber & Associates, P.C.
as its auditors for the fiscal year ending December 31, 1997. The foregoing acts
of the Compensation and Audit Committees were ratified by the Board of Directors
on February 18, 1996.

Key Employees Other Than Officers & Directors

Mr. D.G. Safeer Hopton is not a nominee for a director position. He is
a key employee of the Company, however. On February 3, 1997, Mr. Hopton was
appointed as the Company's National Marketing Director, with responsibility for
all of the Company's sales in the United States. In 1991, Mr. Hopton created and
founded the Natural Grocer Radio Shows, a related newsletter and retail network
of approximately 250 health food stores. He has been a marketing consultant in
the natural products industry for over five years. Prior to coming into the
health food industry, he served as a marketing and sales consultant to such
companies as General Motors, Sears, ABC/Capital Cities, Eckerd Drug, Rite-Aid
and Payless.

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

directors; and (iii) all officers and directors as a group. The percentages of
beneficial ownership are based on 17,498,115 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)
Scottsdale, AZ 3,372,000 19.27%
Common Linda Lee (2)
Hong Kong, China 1,466,147 8.38%
Common Ronald Patterson (3)
Robbinsville, NJ 894,000 4.96%
</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 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 former director of the
Company. Ms. Lee resigned from the Board of Directors on June 28, 1996.
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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

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)
Scottsdale, AZ 870,000 4.92%

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

Common Karl Rullich (3)(8)
Scottsdale, AZ 505,000 2.88%

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

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

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

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

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

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

Common All Officers and Directors
as a Group (1) - (8) 5,820,100 33.26%
</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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

(3) Mr. Rullich is a director. Mr. Rullich beneficially owns 480,000
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 and 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 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 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 May 6, 1996, the Company issued 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. Ms. Lee is also a prior director of the Company. 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
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

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.

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 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.

On May 17, 1996, the Company entered into bonus plans with Mr. Turner
and Mr. Reithinger. 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. Mr. Brin resigned as the Company's National Sales Manager on January 31,
1997.

On May 3, 1996, the Company paid $111,000 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 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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

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.

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.

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 that 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.

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.

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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.

The Company paid Mr. Rullich total salary and commission compensation
of $43,962 during fiscal year 1996. In addition, on January 29, 1997, the
Company granted Mr. Rullich an option to purchase 25,000 shares of the Company's
common stock at $0.42 per share. Mr. Rullich may exercise his Option Grant
anytime between January 29, 1997 and January 29, 2007. The Company issued Mr.
Rullich's Option Grant pursuant to its 1996 Incentive Stock Option Plan, which
is incorporated by reference at Exhibit 1 to this Schedule 14A and is
incorporated herein by this reference. 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 incorporated by reference at Exhibit
2 to this Schedule 14A and 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 to purchase 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 incorporated by reference at Exhibit 3 to this Schedule 14A and is
incorporated herein by this reference. Unrelated to his services as Chief
Executive Officer and President, 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.

Summary Compensation Table

Summary compensation information for Mr. Karl Rullich, the Company's
Chief Executive Officer during the fiscal years ended 1994 and 1995, and until
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 96 $81,000 $30,000 -0- $26,550 200,000 -0- $49,600(4)
CEO(3) 95 - - - - - - -
94 - - - - - - -
</TABLE>
- 13 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

(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 Acknowledgment and
Release of Invalid Options dated February 24, 1997.

(2) The Company paid Mr. Rullich a phone allowance totaling $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
President and Chief Executive Officer of the Company 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.

Director Compensation Table

<TABLE>
<CAPTION>
Cash Compensation Security Grants
------------------------------------------ --------------------------------
Number of
Securities
Annu Consulting Underlying
al Meeting Fees/Other Number of Options/SAR
Name Retai Fees ($) Fees ($) Shares (#) s (#)
(a) ner (c)(1) (d)(2) (e)(3) (f)
Fees
($)
(b)
- --------------------- -------- ----------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Glen Holt -0- $1,000 -0- -0- -0-
Stephen Kuehn -0- $1,000 -0- -0- -0-
Michael Shapiro, -0- $1,000 -0- -0- -0-
M.D.
</TABLE>
- 14 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

<TABLE>
<S> <C> <C> <C> <C> <C>
William Brin -0- -0- -0- 100,000 -0-
Harvey Turner -0- -0- $49,600 100,000 -0-
Karl Rullich -0- -0- $600 -0- -0-
</TABLE>

(1) Each "outside" director not residing in Arizona (Messrs. Holt,
Kuehn, Shaprio) received $1,000 in fiscal year 1996, and reimbursement for
travel-related expenses 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 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. Mr. Brin 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.
- 15 -
<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

RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
(ITEM 2 ON PROXY CARD)

The Company, on January 4, 1996, engaged King, Weber & Associates, P.C.
("King, Weber) of Tempe, Arizona as its principal accountant to audit the
Company's financial statements beginning with the Company's fiscal year ended
December 31, 1995. The Board of Directors appointed King, Weber as the Company's
independent certified public accountants for the Company for the fiscal year
ending December 31, 1996 and acting upon the recommendation of the Company's
Audit Committee, has appointed the firm to continue as the Company's independent
certified public accountants for the fiscal year ending December 31, 1997. It is
not anticipated that a representative of King, Weber will be present at the
Annual Meeting of Stockholders to respond to questions or make a statement.

Vote Required and Recommendation

The affirmative vote of a majority of the shares of common stock
present or represented by proxy and voting at the Annual Meeting of Stockholders
is required for approval of this proposal. The Board of Directors unanimously
recommends that the stockholders vote FOR approval of the ratification of the
appointment of King, Weber & Associates, P.C. as the Company's independent
certified public accountants for the fiscal year ending December 31, 1996.

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 by reference at Exhibit 4
to this Schedule 14A and is incorporated by this reference in response to this
item.

APPROVAL OF CHANGE OF DOMICILE TO ARIZONA
(ITEM 3 ON PROXY CARD)

Description of Change of Domicile

On August 29, 1996, the Board of Directors passed a unanimous
resolution authorizing a change of corporate domicile from Nevada to Arizona.
Management believes the change is consistent with the geographic focus of the
Company's personnel and operations. The Company's predecessor,
- 16 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

Baywood Financial, Inc., was originally incorporated in Nevada on June 13, 1986.
For a number of years, however, the Company's principal offices, center of
operations and employees have all been located in Scottsdale, Arizona. The
Company has no physical plant or employees in Nevada, nor does it conduct
substantial operations from or with Nevada.

If the shareholders approve of the change of domicile, the Company will
file the Articles of Domestication set forth at Exhibit 5, along with a
Certificate of Disclosure and a Certificate of Good Standing from the Nevada
Secretary of State with the Arizona Corporation Commission. The Articles of
Domestication set forth, among other things, the Company's Articles of
Incorporation. The Company will take this opportunity to simplify certain
provisions in its existing Nevada Articles of Incorporation and to take
advantage of greater flexibility afforded by certain provisions of Arizona's
recently amended corporate code. The Company's current Nevada Articles of
Incorporation are included at Exhibit 6. Shareholders are urged to thoroughly
examine the differences between Exhibits 5 and 6. Following is a summary of
certain differences between Arizona and Nevada law:

Cumulative Voting
- -----------------

Arizona allows stockholders to cumulate their votes for the election of
directors. Stockholders are entitled to multiply the total number of shares they
are entitled to vote by the total number of directors for whom they are entitled
to vote, and may apply that product to the election of a single director or
distribute that product among two or more candidates. For example, at a meeting
where three directors were to be elected, a stockholder holding 100 voting
shares could cast 300 votes for a single candidate, or could cast any
combination totalling 300 votes for two or more candidates;

Filing Fees
- -----------

In Nevada, fees associated with filing certain corporate documents,
such as an amendment to the Company's Articles of Incorporation, are calculated
based on the aggregate par value of the Company's total authorized capital.
Arizona charges a flat-rate filing fee, regardless of the Company's capital
structure. For example, the Company would pay $175 to file an amendment to its
Articles of Incorporation in Nevada, compared with a fee of $25 in Arizona.

Limitation of Liability for Directors
- -------------------------------------

Nevada and Arizona both allow a corporation to eliminate or limit its
directors' liability to the company and its shareholders if the company provides
for such a limitation in its Articles of Incorporation. Nevada allows this
limitation for breach of fiduciary duty, but not for acts such as intentional
misconduct or fraud. Arizona allows elimination or limitation of liability for
any act or failure to act as a director with certain exceptions, such as receipt
of a financial benefit to which the director is not entitled or an intentional
violation of a criminal law. The Company's current Nevada Articles of
Incorporation do not include a provision for a limitation of directors'
liability; the Arizona Articles will include such a provision.

The Company must publish Articles of Domestication in Arizona. After
the Articles of Domestication become effective in Arizona, the Company must also
file the Articles of Domestication
- 17 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

with the Nevada Secretary of State, along with a Certificate of Dissolution to
discontinue the Company's Nevada existence.

Vote Required and Recommendation

APPROVAL OF REVERSE STOCK SPLIT
(ITEM 4 ON PROXY CARD)

In connection with the amendment of the Company's Articles of
Incorporation to effect a redomestication from Nevada to Arizona (see Item 3,
above), the Board of Directors of the Company approved, subject to the
stockholders' approval solicited hereby, a one-for-two-and-one-half reverse
stock split (the "Reverse Stock Split"). Effective upon the filing of the
Company's Articles of Domestication in the Office of the Arizona Corporation
Commission (the "Effective Date"), each two-and-one-half issued shares of the
Company's Common Stock (whether outstanding or held as treasury stock), par
value $.001 per share ("Old Common Stock") shall thereupon be combined into and
reclassified as one share of Common Stock, par value $.001 per share ("New
Common Stock"). Each certificate that theretofore represented shares of Old
Common Stock shall thereupon represent the number of shares of New Common Stock
into which the shares of Old Common Stock represented by such certificate shall
be combined. The Company shall arrange for the disposition of fractional shares
on behalf of those record holders of Old Common Stock at the close of business
on the Effective Date who would otherwise be entitled to a fractional share as a
result of the Reverse Stock Split.

Although the Company's Board of Directors believes as of the date of
this Proxy Statement that a one-for-two-and-one-half Reverse Stock Split is
advisable, the Board may abandon the Reverse Stock split at any time before,
during or after the Annual Meeting. In addition, depending upon prevailing
market conditions, the Board of Directors may deem it advisable to implement the
Reverse Stock Split and concurrently declare a Common Stock dividend in an
amount to be determined, in order to partially offset the decrease in the number
of issued shares of New Common Stock resulting from the Reverse Stock Split.
Such Common Stock dividend would not require stockholder approval. No such
Common Stock dividend is presently contemplated.

Background and Reasons For the Reverse Stock Split
- --------------------------------------------------

On February 18, 1997, the Board of Directors voted in favor of the
Reverse Stock Split and directed that the Reverse Stock Split be placed on the
agenda for stockholders' consideration at the Annual Meeting. The Board of
Directors believes that the recent per share price of the Company's Common Stock
has negatively affected the marketability of the existing shares, the amount and
percentage of transaction costs paid by individual stockholders and the
potential ability of the
- 18 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

Company to raise capital by issuing new shares. The Company believes that the
following reasons, summarized below, largely account for such effects.

Most brokerage houses do not permit lower-priced stocks to be purchased
on margin or used as collateral for margin accounts. Moreover, the Board of
Directors believes that the current per share price of the Common Stock may
limit the effective marketability of the Common Stock because of the reluctance
of many brokerage firms and institutional investors to recommend lower-priced
stocks to their clients or to hold them in their own portfolios. Certain
policies and practices of the securities industry, such as time-consuming
procedures that make the handling of lower-priced stocks economically
unattractive, may tend to discourage individual brokers within those firms from
dealing in lower-priced stocks. Moreover, the brokerage commission on the
purchase or sale of a lower-priced stock may represent a higher percentage of
the price than the brokerage commission on a higher-priced stock.

The Board of Directors hopes that the decrease in the number of shares
of Common Stock outstanding as a consequence of the proposed Reverse Stock Split
and the resulting anticipated increased price level will encourage greater
interest in the Common Stock by the financial community and the investment
public.

THERE CAN BE NO ASSURANCES, HOWEVER, THAT THE FOREGOING EFFECTS WILL
OCCUR OR THAT THE MARKET PRICE OF THE COMPANY'S STOCK IMMEDIATELY AFTER THE
PROPOSED REVERSE STOCK SPLIT WILL RISE, AND IF IT RISES, THAT SUCH MARKET PRICE
WILL APPROXIMATE TWO-AND-ONE-HALF TIMES THE MARKET PRICE BEFORE THE PROPOSED
REVERSE STOCK SPLIT.

No dissenting stockholder rights exist under Arizona or Nevada law or
under the Company's Articles of Incorporation or Bylaws in connection with the
Reverse Stock Split, with the exception of a stockholder whose total Common
Shares will be reduced to a fraction of one share as a result of the proposed
Reverse Stock Split. The Company does not anticipate that the total holdings of
any stockholder will be reduced to a fraction of a share as a result of the
proposed Reverse Stock Split.

Effects of the Reverse Stock Split
- ----------------------------------

General Effects. If the stockholders approve the Reverse Stock Split,
the number of outstanding shares of Common Stock will be reduced from 17,498,115
shares to approximately 6,999,246 shares, based on share information as of
February 20, 1997. In order to avoid the expense and inconvenience of issuing
and transferring fractional shares of New Common Stock, the Company shall pay
cash to stockholders who would otherwise be entitled to receive a fractional
share of New Common Stock ("Fractional Stockholders") in lieu of issuing a
fractional share of New Common Stock. (See section on "Exchange of Shares and
Payment in Lieu of Issuance of Fractional Shares"). Please note that the Reverse
Stock Split will not change a stockholder's proportionate equity interest in the
Company, except that which may result from the elimination of a fractional
share.

Effect on Market For Common Stock. On February 28, 1997, the closing
sale price of the Common Stock was $0.375 per share. By decreasing the number of
shares of Common Stock
- 19 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

outstanding without altering the aggregate economic interest in the Company
represented by such shares, the Board of Directors believes that the trading
price will be increased to a price more appropriate for an exchange listed
security; however, there can be no assurance that this will occur. The New
Common Stock will continue to be traded on the Over-the-Counter Bulletin Board
under the symbol BYWD. In addition, the Company plans to seek listing of the
Company's New Common Stock on the NASDAQ SmallCap MarketSM if and when the
market price of the New Common Stock reaches the threshold required for such
listing and other requirements are satisfied.

Effect on Outstanding Options, Warrants and Convertible Securities. As
of March 3, 1997, the Company had outstanding options to purchase 755,000 shares
of Common Stock with exercise prices per share that ranged from $0.42 to $1.00.
Upon the effectiveness of the Reverse Stock Split, the Compensation Committee of
the Board of Directors shall make a proportional downward adjustment to the
number of shares subject to outstanding options and a corresponding upward
adjustment in the per share exercise prices to reflect the Reverse Stock Split.

Changes in Stockholders' Equity. As an additional result of the Reverse
Stock Split, the Company's stated capital, which consists of the par value per
share of Common Stock multiplied by the number of shares of Common Stock issued,
will be reduced by approximately $10,499 to $6,999 on the Effective Date.
Although the par value of the Common Stock will remain at $.001 per share
following the Reverse Stock Split, stated capital will be decreased because the
number of shares issued and outstanding will be reduced. Correspondingly, the
Company's additional paid-in capital, which consists of the difference between
the Company's stated capital and the aggregate amount paid to the Company upon
the issuance by the Company of all currently outstanding Common Stock, will be
increased by approximately $10,499.

Federal Income Tax Consequences
- -------------------------------

The following is a summary of the material anticipated federal income
tax consequences of the Reverse Stock Split to stockholders of the Company. This
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Department Regulations (the "Regulations")
issued pursuant thereto, and published rulings and court decisions in effect as
of the date hereof, all of which are subject to change. This summary does not
take into account possible changes in such laws or interpretations, including
amendments to the Code, applicable statutes, Regulations and proposed
Regulations or changes in judicial or administrative rulings, some of which may
have retroactive effect. No assurance can be given that any such changes will no
adversely affect the discussion in this summary.

This summary is provided for general information only and does not
purport to address all aspects of the possible federal income tax consequences
of the Reverse Stock Split and IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. In
particular, and without limiting the foregoing, this summary does not consider
the federal income tax consequences to stockholders of the Company in light of
their individual investment circumstances or to holders subject to special
treatment under the federal income tax laws (for example, life insurance
companies, regulated investment companies and foreign taxpayers). In addition,
this summary does not address any consequence of the Reverse Stock Split under
any state, local or foreign tax laws. As a result, it is the
- 20 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

responsibility of each stockholder to obtain and rely on advice from his or her
personal tax advisor as to: (i) the effect on his or her personal tax situation
of the Reverse Stock Split, including the application and effect of state, local
and foreign income and other tax laws; (ii) the effect of possible changes in
judicial or administrative interpretations of existing legislation and
Regulations, as well as possible future legislation and Regulations; and (iii)
the reporting of information required in connection with the Reverse Stock Split
on his or her own tax returns. It will be the responsibility of each stockholder
to prepare and file all appropriate federal, state and local tax returns.

No ruling from the Internal Revenue Service ("Service") or opinion of
counsel will be obtained regarding the federal income tax consequences to the
stockholders of the Company as a result of the Reverse Stock Split. ACCORDINGLY,
EACH STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO SUCH STOCKHOLDER,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.

The receipt of shares of New Common Stock (excluding fractional shares
of New Common Stock) in Reverse Stock Split should be a nontaxable transaction
under the Code for federal income tax purposes. Consequently, a stockholder
receiving shares of New Common Stock should not recognize either gain or loss,
or any other type of income, with respect to whole shares of New Common Stock
received as a result of the Reverse Stock Split. In addition, the tax basis of
such stockholder's shares of Common Stock prior to the Reverse Stock Split will
carry over as the tax basis of the stockholder's shares of New Common Stock.
Each Stockholder will be required to allocate his basis in his shares of Common
Stock ratably among the total number of shares of New Common Stock owned
following the Reverse Stock Split. The holding period of the shares of New
Common Stock will also include the holding period during which the stockholder
held the Common Stock, provided that such Common Stock was held by the
stockholder as a capital asset on the Effective Date.

The receipt by a Fractional Stockholder of cash in lieu of a fractional
share of New Common Stock pursuant to the Reverse Stock Split will be a taxable
transaction for federal income tax purposes. The receipt of cash in lieu of
fractional shares of New Common Stock will result in gain or loss (rather than
dividend income) to the Fractional Stockholders assuming, as the Company
believes, that such cash distribution is undertaken solely for the purpose of
saving the Company the expense and inconvenience of issuing and transferring
fractional shares of New Common Stock. Gain or loss will be recognized by each
Fractional Stockholder equal to the difference between the amount of cash
received by such Stockholder and the portion of the aggregate tax basis in his
Common Stock allocable to his fractional share interest in New Common Stock. If
a Fractional Stockholder's shares of Common Stock are held as a capital asset on
the Effective Date, then such Fractional Stockholder's gain or loss will be a
capital gain or loss. Such capital gain or loss will be long-term capital gain
or loss if on the Effective Date the shares of Common Stock have been held by
the Fractional Stockholder for longer than one year.
- 21 -
<PAGE>
BAYWOOD INTERNATIONAL, INC.

Based on certain exceptions contained in the regulations issued by the
Internal Revenue Service, the Company does not believe that it or Fractional
Stockholders will be subject to backup withholding or informational reporting
with respect to the cash distributed to a Fractional Stockholder.

Exchange of Shares and Payment in Lieu of Issuance of Fractional Shares
- -----------------------------------------------------------------------

On or after the Effective Date, provided that the Board of Directors
does not abandon the Reverse Stock Split as provided for above, the Company will
mail to each stockholder a letter of transmittal. A stockholder will be able to
receive his or her shares of New Common Stock and, if applicable, cash in lieu
of a fractional share of New Common Stock only by transmitting to the Company's
Transfer Agent such stockholders' stock certificate(s) evidencing shares of Old
Common Stock outstanding prior to the Reverse Stock Split, together with the
properly completed and executed letter of transmittal and such evidence of
ownership of such shares as the Company may require. Stockholders will not
receive certificates for shares of New Common Stock unless and until the
certificates representing their shares of Old Common Stock outstanding prior to
the Reverse Stock Split are surrendered. Stockholders should not forward their
certificate(s) to the Company's Transfer Agent until they have received the
letter of transmittal, and should surrender their certificate(s) only with such
letter of transmittal.

No scrip or fractional share certificates for New Common Stock will be
issued in connection with the Reverse Stock Split. The Board of Directors has
authorized the Company's officers to pay to the Company's Transfer Agent an
amount of cash equal to the prevailing share price of New Common Stock as of the
Effective Date, multiplied by the total number of fractional shares that would
result from the Reverse Stock Split, plus a transaction fee charged by the
Transfer Agent for preparing a check to each Fractional Shareholder. The Company
estimates that the total payments arising from payment to Fractional
Shareholders in lieu of issuing a fractional share (including transaction fees)
will be less than One Hundred Dollars ($100.00). A payment in lieu of a
fractional share of New Common Stock will be made to a Fractional Stockholder
promptly after receipt of a properly completed letter of transmittal and stock
certificate(s) representing all of his or her shares of Old Common Stock
outstanding prior to the Reverse Stock Split.

Each stockholder will be responsible for paying a total service fee of
approximately Fifteen Dollars ($15.00) upon surrender of his or her
certificate(s) in exchange for New Common Stock certificate(s). However, as
noted above, as of the Effective Date, each two-and-one-half issued shares of
the Company's Common Stock (whether outstanding or held as treasury stock), par
value $.001 per share ("Old Common Stock") shall automatically (i.e., without
further stockholder action) be combined into and reclassified as one share of
Common Stock, par value $.001 per share ("New Common Stock"). Each certificate
that theretofore represented shares of Old Common Stock shall thereupon
represent the number of shares of New Common Stock into which the shares of Old
Common Stock represented by such certificate shall be combined.

Vote Required and Recommendation

The Board of Directors unanimously recommends that the stockholders vote FOR
approval of the Reverse Stock Split.

STOCKHOLDER PROPOSALS FOR 1997

Proposals of security holders intended to be presented at the Company's
1998 Annual Meeting of Stockholders must be received by the Company by not later
than December 15, 1997.

OTHER MATTERS

The cost of soliciting proxies will be borne by the Company and will
consist primarily of printing, postage and handling, including the expenses of
brokerage houses, custodians, nominees, and fiduciaries in forwarding documents
to beneficial owners. Solicitations also may be made by the Company's officers,
directors, or employees, personally or by telephone.

Scottsdale, Arizona
March 17, 1997
- 23 -
<PAGE>
PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
-----------------------------------------------
<TABLE>
<S> <C>
BAYWOOD INTERNATIONAL, INC. ANNUAL MEETING TO BE HELD ON 04/10/97 FOR HOLDERS AS OF 02/20/97

CUSIP: 073260101

THE UNDERSIGNED HEREBY APPOINTS HARVEY TURNER AND NEIL REITHINGER AS PROXIES, EACH WITH THE POWER TO APPOINT
HIS OR HER SUBSTITUTE, AND HEREBY AUTHORIZES THEM TO REPRESENT AND TO VOTE, AS DESIGNATED, ALL OF THE SHARES
OF COMMON STOCK OF BAYWOOD INTERNATIONAL, INC. HELD BY THE UNDERSIGNED ON FEBRUARY 20, 1997, AT THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 10, 1997 AT 10:00 A.M. AT THE DOUBLETREE PARADISE VALLEY RESORT,
5401 NORTH SCOTTSDALE ROAD, SCOTTSDALE, ARIZONA OR ANY ADJOURNMENT THEREOF. IF NO INSTRUCTIONS ARE INDICATED
ON THE PROXY, THE PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTORS NAMED HEREIN AND IN FAVOR
OF ALL PROPOSALS DESCRIBED HEREIN.

PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE: |_|

DIRECTORS DIRECTORS
- --------- ---------
(MARK X FOR ONLY ONE BOX - IF
NOT SPECIFIED, WILL BE VOTED
FOR ALL NOMINEES)

1. DIRECTORS RECOMMEND: A VOTE FOR |_| FOR ALL NOMINEES
ELECTION OF THE FOLLOWING DIRECTORS:
01-GLEN HOLT, 02-STEPHEN KUEHN |_| WITHHOLD ALL NOMINEES
03-NEIL REITHINGER, 04-KARL RULLICH
05-DR. MICHAEL SHAPIRO, 06-HARVEY TURNER |_| WITHHOLD AUTHORITY TO
VOTE FOR ANY INDIVIDUAL
NOMINEE. WRITE NUMBER(S) OF
NOMINEE(S) BELOW.

USE NUMBER ONLY
- --------------------

DIRECTORS
PROPOSAL(S) RECOMMEND FOR AGAINST ABSTAIN
- ----------- --------- --- ------- -------

2. RATIFICATION OF KING, WEBER & FOR |_| |_| |_|
ASSOCIATES, P.C. AS INDEPENDENT
AUDITORS AS DESCRIBED IN THE
PROXY STATEMENT RELATED TO
THE MEETING.

3. APPROVAL OF CHANGE OF DOMICILE FROM FOR |_| |_| |_|
NEVADA TO ARIZONA AS DESCRIBED IN THE
PROXY STATEMENT RELATED TO THE MEETING.

4. APPROVAL OF REVERSE STOCK SPLIT FOR |_| |_| |_|
AS DESCRIBED IN THE PROXY STATEMENT
RELATED TO THE MEETING.

5. AUTHORITY TO VOTE ON ANY FOR |_| |_| |_|
BUSINESS THAT MAY PROPERLY
COME BEFORE THE MEETING.

- ------------------------------ ---------
SIGNATURE(S) DATE

NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS ON YOUR STOCK CERTIFICATE. JOINT OWNERS SHOULD EACH SIGN. WHEN
SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
</TABLE>
- 24 -
<PAGE>
<TABLE>
<CAPTION>
LIST OF EXHIBITS

Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------

<S> <C> <C>
Exhibit 1 1996 Incentive Stock Option Plan *

Exhibit 2 Harvey Turner Bonus Plan **

Exhibit 3 Harvery Turner Stock Option Plan ***

Exhibit 4 Amended Current Report on Form 8-K ****

Exhibit 5 Articles of Domestication Exhibit Filed Herewith

Exhibit 6 Nevada Articles of Incorporation Exhibit Filed Herewith

Exhibit 7 Annual Report on Form 10-KSB Exhibit Filed Herewith
</TABLE>

* 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 Exhibit 10.4 of Annual Report on Form
10-KSB (file no. 33-10236) filed on March 6, 1997.

*** Incorporated by reference to Exhibit 10.5 of Annual Report on Form
10-KSB (file no. 33-10236) filed on March 6, 1997.

**** Incorporated by reference to Exhibit 16.1 of Annual Report on Form
10-KSB (file no. 33-10236) filed on March 6, 1997.

Undertaking to Provide Exhibits
-------------------------------

The exhibits briefly described in the schedule on page 23 of the
Company's Annual Report on Form 10-KSB are not included in the materials
provided to shareholders. The Company will furnish a copy of the exhibits upon
receipt of a written shareholder request. The shareholder's request should
include a check for $20.00 payable to the Company, to cover the Company's
expenses in furnishing the exhibits.

ARTICLES OF DOMESTICATION

BAYWOOD INTERNATIONAL, INC.
---------------------------

1. Name. The name of the corporation is: Baywood International, Inc.

2. Original Incorporation. The Corporation was originally incorporated
in the State of Nevada and the date of its incorporation in that state was June
13, 1986.

3. Documents Furnished. The official in charge of corporate filings in
the jurisdiction in which the Corporation was previously incorporated will be
provided with a copy of the Articles of Domestication filed in the State of
Arizona.

4. Purpose. The purpose for which this Corporation is organized is the
transaction of any or all lawful business for which corporations may be
incorporated under the laws of Arizona, as they may be amended from time to
time.

5. Initial Business. The Corporation initially intends actually to
conduct in the State of Arizona the business of Private Labeling and Direct
Marketing. This Corporation is organized for the purpose of transacting any or
all lawful business for which a corporation may be incorporated under the laws
of the State of Arizona, as amended from time to time.

6. Authorized Shares. The Corporation is authorized to issue fifty
million (50,000,000) common shares with $0.001 par value, and ten million
(10,000,000) preferred shares with a par value of $1.00. The Board of Directors
of the Corporation are hereby authorized, to the fullest extent provided under
Arizona law, to determine the preferences, limitations and relative rights of
all classes and series of shares to be issued by the Corporation.

7. Known Place of Business. The street address of the known place of
business of the Corporation is:

14950 North 83rd Place, Suite 1
Scottsdale, Arizona 85260

8. Statutory Agent. The name and address of the statutory agent of the
Corporation is:

TITUS, BRUECKNER & BERRY, P.C.
Scottsdale Centre, Suite B-252
7373 N. Scottsdale Road
Scottsdale, Arizona 85253-3527
1
<PAGE>
9. Board of Directors. The Board of Directors currently consists of six
(6) directors. The names and addresses of the persons who are serving as the
directors until the next annual meeting of shareholders or until their
successors are elected and qualify are:

Name Address
---- -------

Glen Holt 16102 Sandy Lane
Encino, California 91436

Stephen Kuehn 4780 Dolphin Cay Lane, Unit 108
St. Petersburg, Florida 33711

Neil Reithinger 15096 North 100th Way
Scottsdale, Arizona 85260

Karl Rullich 9040 North 86th Place
Scottsdale, Arizona 85258

Dr. Michael Shapiro 3620 Lake Mendota Drive
Madison, Wisconsin 53705

Harvey Turner 8180 East Shea Boulevard, Suite 1038
Scottsdale, Arizona 85260

The number of persons to serve on the Board of Directors thereafter
shall be fixed by the Bylaws.

10. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify any person who incurs expenses by reason of the fact
he or she is or was an officer, director, employee or agent of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another Corporation, partnership, joint venture, trust or
other enterprise. This indemnification shall be mandatory in all circumstances
in which indemnification is permitted by law.

11. Limitation of Liability. To the fullest extent permitted by Arizona
law, as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for any action taken or any failure to take any action as a
director, except liability for: (i) the amount of a financial benefit received
by a director to which the director is not entitled; (ii) an intentional
infliction of harm on the Corporation or the shareholders; (iii) an unlawful
distribution pursuant to A.R.S. ss. 10-833 or any amended or successor statute;
or (iv) an intentional violation of criminal law. No repeal, amendment or
modification of this article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director of the
Corporation occurring prior to such repeal, amendment or modification.
2
<PAGE>
12. Adoption. These Articles of Domestication have been adopted in
accordance with Arizona Revised Statutes Section 10-221. They were adopted by
the Board of Directors of the Corporation on February 18, 1997, and by the
shareholders of the Corporation on _____________.

13. Acceptance of State Laws. Upon transfer of domicile of the
Corporation to Arizona, the Corporation accepts and will be subject to the laws
of Arizona.

DATED as of this _____ day of ____________, 1997.

BAYWOOD INTERNATIONAL, INC.

By______________________________________

Its_____________________________________

________________________________________
Printed Name
3
<PAGE>
ACCEPTANCE OF APPOINTMENT BY STATUTORY AGENT

BAYWOOD INTERNATIONAL, INC.

The undersigned hereby acknowledges and accepts the appointment as
statutory agent of the above-named Corporation effective this _____ day of
_____________, 1997.

________________________________
Jon A. Titus
TITUS, BRUECKNER, & BERRY, P.C.
Scottsdale Centre, Suite B-252
7373 N. Scottsdale Road
Scottsdale, Arizona 85253-3527
4

FILED FILING FEE: $100.00
IN THE OFFICE OF THE SECRETARY OF STATE OF THE BY: ROSS H. BOYD
STATE OF NEVADA P.O. BOX 1800
JUN 13 1986 MORRO BAY, CA 93442
WM SAACEMANT SECRETARY OF STATE
/s/ Wm Saacement
4086-86

ARTICLES OF INCORPORATION

BAYWOOD FINANCIAL, INC.

ARTICLE ONE

The name of the corporation is BAYWOOD FINANCIAL, INC.

ARTICLE TWO

Its principal office in the State of Nevada is located at 115 Taurus
Circle, Reno, Nevada 89511. The address of its resident agent is 115 Taurus
Circle, Reno, Nevada 89511.

ARTICLE THREE

The purpose or purposes for which this corporation is organized are: To
engage, without qualification, in any lawful act or activity for which
corporations may be organized under the laws of the State of Nevada.

ARTICLE FOUR

The amount of the total authorized capital stock the corporation shall
have the authority to issue is Fifty Million (50,000,000) shares of Common
Stock, each having a par value of $0.001.

Each share of Common Stock issued and outstanding, shall be entitled to
one vote on all matters. Dividends
1
<PAGE>
shall be declared and paid only out of funds legally available therefor. Shares
of such stock may be issued for such consideration and for such corporate
purposes as the Board of Directors may from time to time determine. Fully paid
stock of this corporation shall not be liable to any further call or assessment.

ARTICLE FIVE

The governing board of this corporation shall be known as directors,
and the number of directors may from time to time be increased or decreased in
such manner as shall be provided by the bylaws of this corporation, provided
that the number of directors shall not be reduced to less than (3), except that
in cases where all the shares of the corporation are owned beneficially and of
record by either one or two stockholders, the number of directors may be less
than three (3) but not less than the number of stockholders.

The names and post office addresses of the first board of directors,
which shall be three (3) in number are as follows:

NAME ADDRESS
---- -------
1. Ross H. Boyd 265 Kern Avenue
Morro Bay, CA 93442

2. F. W. Sheldon 290 Sienna
Morro Bay, CA 93442

3. Jean P. Boyd 265 Kern Avenue
Morro Bay, CA 93442

The Board of Directors shall be limited in number to no less than three
(3) nor more than nine (9).
2
<PAGE>
Directors of the corporation need not be residents of the State of
Nevada and need not own shares of the corporation's stock.

ARTICLE SIX

The capital stock of the corporation, after the amount of the
subscription price has been paid in money, property, or services, as the
directors shall determine, shall not be subject to assessment to pay the debts
of the corporation, nor for any other purpose, and no stock issued as fully paid
up shall ever be assessable or assessed, and the Articles of Incorporation shall
not be amended in this particular.

ARTICLE SEVEN

The name and post office address of each of the incorporators signing
the Articles of Incorporation are as follows:

NAME ADDRESS
---- -------
1. Ross H. Boyd 265 Kern Avenue
Morro Bay, CA 93442

2. F. W. Sheldon 290 Sienna
Morro Bay, CA 93442

3. Jean P. Boyd 265 Kern Avenue
Morro Bay, CA 93442

ARTICLE EIGHT

The corporation is to have perpetual existence.

ARTICLE NINE

In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
3
<PAGE>
Subject to the bylaws, if any, adopted by the stockholders, to make,
alter, or amend the bylaws of the corporation.

To fix the amount to be reserved as working capital over and above its
capital stock paid in, to authorize and to cause to be executed mortgages and
liens upon the real and personal property of this corporation.

By resolution passed by a majority of the whole board, to designate one
or more committees, each committee to consist of one or more of the directors of
the corporation, which, to the extent provided in the resolution or in the
bylaws of the corporation, shall have any may exercise the powers of the board
of directors in the management of the business and affairs of the corporation,
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Such committee or committees shall have such name or names as
may be stated in the bylaws of the corporation or as may be determined from time
to time by resolution adopted by the board of directors.

When and as authorized by the affirmative vote of stockholders holding
stock entitling them to exercise at least a majority of the voting power given
at a stockholder's meeting called for that purpose, or when authorized by the
written consent of the holders of at least a majority of the voting stock issued
and outstanding, the board of directors shall have power and authority at any
meeting to sell, lease or exchange all of the property and assets of the
4
<PAGE>
corporation, including its good will and its corporate franchises, upon such
terms and conditions as its board of directors deem expedient and for the best
interests of the corporation.

ARTICLE TEN

Meetings of the stockholders may be held at such place within or
without the State of Nevada, if the bylaws so provide. The books of the
corporation may be kept (subject to any provision contained in the statutes)
outside the State of Nevada at such place or places as may be designated from
time to time by the board of directors or in the bylaws of the corporation.

ARTICLE ELEVEN

This corporation reserves the right to amend, alter, change or repeal
any provision contained int he Articles of Incorporation, in the manner now or
hereafter prescribed by the statute, or by the Articles of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.

ARTICLE TWELVE

No shareholder shall be entitled as a matter of right to subscribe for
or receive additional shares of any class of stock of the corporation, whether
now or hereafter authorized, or any bonds, debentures or other securities
convertible into stock, but such additional shares of stock or other securities
convertible into stock may be issued or disposed of by the board of directors to
such persons and on
5
<PAGE>
such terms as in its discretion it shall deem advisable.

WE, THE UNDERSIGNED, being each of the incorporators, herein-before
named for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Nevada, do make and file these Articles of
Incorporation, hereby declaring and certifying that the facts herein stated are
true, and accordingly have hereunto set our hands this 23rd day of May , 1986.

/s/ Ross H. Boyd
--------------------------------------
ROSS H. BOYD

/s/ F. W. Sheldon
--------------------------------------
F. W. SHELDON

/s/ Jean P. Boyd
--------------------------------------
JEAN P. BOYD

STATE OF CALIFORNIA )
) ss
COUNTY OF SAN LUIS OBISPO )

On this 23rd day of May , 1986 before me, the undersigned, a Notary
Public in and for the county and state aforesaid, personally appeared ROSS H.
BOYD, F. W. SHELDON, and JEAN P. BOYD known to me to be the persons described in
and who executed the foregoing instrument and who acknowledged to me that they
executed the same freely and voluntarily and for the uses and purposes therein
mentioned.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

Barbara M. Wilde
---------------------------------------
NOTARY PUBLIC in and for San Luis Obispo
County, California

[NOTARY PUBLIC STAMP]
6
<PAGE>
FILED RECT: #41256 TS/MC
IN THE OFFICE OF THE FILING FEE: $85.00
SECRETARY OF STATE OF THE FILED BY: BAYWOOD INT'L, INC.
STATE OF NEVADA C/O RON STOEKLEIN
14950 N. 83RD PLACE, STE. 1
MAR 20 1992 SCOTTSDALE, AZ 85260

CHERYL A. LAU SECRETARY OF STATE

/s/ Cheryl A. Lau
4056-86

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BAYWOOD FINANCIAL, INC.

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

The undersigned do hereby declare and certify that:

(1) They are respectively the President and Secretary of Baywood Financial,
Inc., a Nevada corporation.

(2) That this Certificate of Amendment was authorized and adopted by a
majority of the Shareholders of the Corporation, and,

(3) That the Amendments contained herein were adopted, ratified, and
approved by more than a majority of the shares outstanding of this
corporation, there being 6,555,000 shares of the corporation issued and
outstanding, and the following resolution being adopted by 4,100,000
shares voting in favor of with no objects at the Special Shareholders
Meeting held the 10th day of January, 1992.

"RESOLVED, that article one of the articles of incorporation of the
corporation be changed from Baywood Financial, Inc. To the new name of
Baywood International, Inc. and that the officers of the Corporation
are hereby empowered and directed to file with the Secretary of the
State of Nevada, the requisite certificate setting forth the name
change hereby authorized and effected."

The undersigned do further declare and certify that they have made and
filed this Certificate of Amendment pursuant to the Resolutions adopted by the
shareholders and Directors of this corporation as hereinabove stated.

We, Karl Rullich and Georgia Aadland, do hereby certify that we are
respectively the duly elected President and the duly elected and qualified
Secretary and keeper of the records and corporate seal of Baywood Financial,
Inc., a corporation organized and existing under the laws of the State of
Nevada, and that the above is a true and correct copy of a resolution duly
adopted at a meeting of the Shareholders thereof, convene and held in accordance
with law and the Bylaws of said Corporation on the 10th day of January, 1992 and
that such resolution is now in full force and effect.
<PAGE>
IN WITNESS THEREOF, we have affixed our names as President and as
Secretary of the Corporation this 16th day of March, 1992.

/s/ Karl Rullich /s/ Georgia Aadland
- ---------------------------- ------------------------------
/s/ Karl Rullich, President /s/ Georgia Aadland, Secretary

IN WITNESS WHEREOF, the undersigned has placed his hand and seal this 16th day
of March, 1992

/s/ Karl Rullich
- ---------------------------------------------
Georgia Aadland
- ---------------------------------------------

The foregoing Amended Articles of Incorporation of Baywood Financial, Inc., was
subscribed and sworn to before me this 16th day of March, 1992, by Karl Rullich
and Georgia Aadland.

WITNESS my hand official seal [SEAL]

My commission expires: Nov. 13, 1995.
-------------
Lisa Hinkle
- ------------------------------------
Notary Public

RECEIVED
MAR 20 1992
Secretary of State
<PAGE>
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA

APR 05 1992

DEAN HELLER SECRETARY OF STATE

/s/ Dean Heller
4086-86

CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
BAYWOOD INTERNATIONAL, INC.

Karl H. Rullich, President, and Georgia Aadland, Secretary, of Baywood
International, Inc., a Nevada corporation, do hereby certify the following:

(1) that the Board of Directors, adopted resolutions setting forth
proposed amendments to the Articles of Incorporation involving
(I) the change of the name of the corporation and (ii) the
increase of the corporation's authorized stock and versting in
the Board of Directors authority to prescribe additional
classes of stock, and declared the advisability of such
amendments, and called a special meeting of stockholders
entitled to vote for the consideration thereof for January 10,
1992;

(2) that notice of the meeting was given to each stockholder
entitled to vote on such amendments and that a vote of
stockholders was taken for and against the proposed amendments
at the meeting on January 10, 1992;

(3) that each of the amendments were adopted, ratified and approved
by more than a majority of the shares outstanding of the
corporation, therebeing 6,555,000 shares of the corporation
issued and outstanding, and the amendments were adopted by
4,100,000 shares voting in favor thereof and with no
objections;

(4) that a Certificate of Amendment was filed with the Office of
the Secretary of the State of Nevada on Mach 20, 1992, under
file number 4086-86 for the change of name of the corporation
from Baywood Financial, Inc. To Baywood International, Inc.,
amending Article One of the Articles of Incorporation;

(5) that the amendment regarding the change in authorized capital
stock which was approved at the same January 10, 1992 meeting
was as follows:

THAT Article Four of the Articles of Incorporation be amended
to additionally authorize a new class of stock, preferred
stock, authorized in the amount of 10,000,000 shares, $1.00 par
value, that the corporation is empowered to issue newly
authorized preferred stock in lieu of debt or to capitalize the
corporation as long as the issuance conforms to applicable
state and federal law; and that notwithstanding any other
provision in the Articles of Incorporation to the contrary,
authority is vested in the Board of Directors to prescribe the
classes, series and the number of each class or series of stock
and the voting powers, designations, preferences, conversion
features, restrictions and relative rights of each class ro
series of stock and that the foregoing may be fixed and
determined by resolution of the Board of Directors, without
further amendment to the Articles of Incorporation.

To the extent not inconsistent with this Certificate of Amendment, the
Articles of Incorporation of Baywood International, Inc., are confirmed in their
entirety.
<PAGE>
The said change and amendment has been consented to and approved by a
vote of the shareholders holding at least a majority of each class of stock
outstanding and entitled to vote thereon.

/s/ Karl H. Rullich
-----------------------------------
Karl H. Rullich, President

STATE OF ARIZONA )
) ss.
County of Maricopa )

The foreoging Certificate of Amendment was acknowledged before me this
4 day of April, 1996, by Karl H. Rullich, President of Baywood International,
Inc., a Nevada corporation, on behalf of the corporation.

My Commission Expires: /s/ Vickie L. Aadland
My Commission Expires March 2, 1997 -----------------------------------
Notary Public

/s/ Georgia Aadland
-----------------------------------
Georgia Aadland, Secretary

STATE OF ARIZONA )
) ss.
County of Maricopa )

The foreoging Certificate of Amendment was acknowledged before me this
4 day of April, 1996, by Georgia Aadland, Secretary of Baywood International,
Inc., a Nevada corporation, on behalf of the corporation.

My Commission Expires: /s/ Vickie L. Aadland
My Commission Expires March 2, 1997 -----------------------------------
Notary Public

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 $5,043,934 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 17,523,115.
<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 quarter. 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 labelling 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 labelling 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.

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.
-8-
<PAGE>
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.
-10-
<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.
-11-
<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 purposes 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.

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

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.

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

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 as a finder's fee for raising
$800,000 for the Company 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- -0- 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.

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 $600 during fiscal year 1996,
in his capacity as a Director of the Company.
-17-
<PAGE>
Director Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Number of
Securities
Annual Retainer Consulting Number of Underlying
Name Fees ($) Meeting Fees ($) Fees/Other Fees ($) Shares (#) Options/SARs (#)
---- -------- ---------------- ------------------- ---------- ----------------

<S> <C> <C> <C> <C> <C>
Harvey Turner -0- -0- 9,600 -0- -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,
Keuhn 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. 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.

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:
-18-
<PAGE>
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 orally 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.

(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.

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

(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 orally that she
has no intention to convert or redeem her preferred shares.

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

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.

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.

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 Arrangement 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
reasonale 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:
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<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
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<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.
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