Exhibit 10.3

[exhibit103001.jpg] [exhibit103001.jpg]

 

September 5, 2008

 

[Investor Name and Address]

Subject:                Side Letter Agreement to the 12% Subordinated Notes (the
“Notes”) and Common Stock Purchase Warrants (the “Warrants”) issued September 5,
2008, by Baywood International, Inc. to the investors (each an “Investor” and
together, the “Investors”) who purchased “Units”, each Unit comprised of
$100,000 principal amount of the Notes and 117,647 Warrants (the “Offering”).

 

Dear Investor:

This Side Letter Agreement (this “Agreement”) entered into on September 5, 2008,
by and between Baywood International, Inc., a Nevada corporation (the
“Company”), and the Investors who purchased Units described above, will serve to
set forth the terms and conditions of the Offering. Capitalized terms used
herein which are not otherwise defined shall have the same meaning as those
given to them in the Notes and Warrants.

A.

Closing.  Subject to the terms and conditions set forth in this Agreement, at
the Closing the Company shall issue and sell to each Investor, and each Investor
shall, severally and not jointly, purchase from the Company, the Units
representing such Investor’s investment amount (the “Closing”).  The Closing
shall occur at such time as the money from the Offering is released by JP Morgan
Chase Bank, National Association (the “Escrow Agent”), to the Company in
accordance with the Escrow Agreement, dated as of the date hereof, by and
between the Company, Northeast Securities, Inc. and the Escrow Agent.  The
Closing must occur on or prior to September 30, 2008.

B.

Closing Deliveries.  i)  At the Closing, the Company shall deliver or cause to
be delivered to each Investor the following:

(a)

a Note, registered in the name of such Investor, in each such Investor’s
investment amount;

(b)

a Warrant, registered in the name of such Investor, pursuant to which such
Investor shall have the right to acquire the number of shares as set forth in
the Warrant issued to that Investor;

(c)

the legal opinion of counsel to the Company, in agreed form, addressed to the
Investors;

(d)

the Guaranty, dated as of the date of the Closing, executed by O. Lee Tawes III;
and

(e)

the Put Agreement, dated as of the date of the Closing, executed by O. Lee
Tawes, III and the Company (the “Put Agreement”).

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(ii)

At the Closing, each Investor shall deliver or cause to be delivered to the
Company and O. Lee Tawes, III, the Put Agreement, duly executed by such
Investor.

(iii)

Within one Business Day following the date of this Agreement, each Investor
shall cause to be delivered to the Escrow Agent, its investment amount, in
United States dollars and in immediately available funds, by wire transfer to an
account designated in writing by the Company for such purpose in accordance with
the terms of the Escrow Agreement.

C.

Representations and Warranties of the Company.  Any references to “Subsidiaries”
in this Section C refer only to wholly-owned Subsidiaries of the Company.  The
Company hereby makes the following representations and warranties to each
Investor:

(i)

Subsidiaries.  The Company has no wholly-owned direct or indirect Subsidiaries
other than as specified in the SEC Reports.  The Company owns, directly or
indirectly, all of the capital stock of each wholly-owned Subsidiary free and
clear of any and all Liens, and all the issued and outstanding shares of capital
stock of each wholly-owned Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.

(ii)

Organization and Qualification.  The Company and each wholly-owned Subsidiary
are duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
 Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents.  The Company and each Subsidiary are duly
qualified to conduct its respective businesses and are in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary.

(iii)

Authorization; Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Note, the Warrant and this Agreement (collectively, the “Transaction
Documents”) and otherwise to carry out its obligations thereunder.  The
execution and delivery of each of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of the Company and no further
action is required by the Company in connection therewith.  Each Transaction
Document has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof, will constitute the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.

(iv)

No Conflicts.  The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated thereby do not and will not (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect.

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(v)

Filings, Consents and Approvals.  The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) the filing with the Securities and Exchange Commission (the “Commission”) of
one or more Registration Statements (as defined below) in accordance with the
requirements of this Agreement, (ii) filings required by state securities laws,
and (iii) the filing of a Notice of Sale of Securities on Form D with the
Commission under Regulation D of the Securities Act of 1933, as amended (the
“Securities Act”).

(vi)

Issuance of the Securities.  The Notes and Warrants (the “Securities”) have been
duly authorized and, when issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all liens, charges, encumbrances, security interests, rights of
first refusal or other restrictions of any kind.  The Company has reserved from
its duly authorized capital stock the shares of Common Stock issuable pursuant
to the Notes and the Warrants in order to issue the Conversion Shares and the
Warrant Shares.

(vii)

SEC Reports; Financial Statements.  The Company has filed all reports required
to be filed by it under the Securities Act and the Securities Exchange Act of
1934, as amended (the “Exchange Act”), including pursuant to Section 13(a) or
15(d) thereof, for the twelve months preceding the date hereof (or such shorter
period as the Company was required by law to file such reports) (the foregoing
materials being collectively referred to herein as the “SEC Reports”) on a
timely basis or has timely filed a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such extension.
 As of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.  The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles applied on a consistent basis during the periods involved, except as
may be otherwise specified in such financial statements or the notes thereto,
and fairly present in all material respects the financial position of the
Company and its consolidated Subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject, in
the case of unaudited statements, to normal, immaterial, year-end audit
adjustments.

(viii)

Certain Registration Matters. Assuming the accuracy of the Investors’
representations and warranties set forth below, no registration under the
Securities Act is required for the offer and sale of the Notes and Warrants and
the offer of the Conversion Shares and Warrant Shares by the Company to the
Investors under the Transaction Documents.  The Company is eligible to register
its Common Stock for resale by the Investors under Form S-1 promulgated under
the Securities Act.  

D.

Representations and Warranties of the Investors.  Each Investor hereby, for
itself and for no other Investor, represents and warrants to the Company as
follows:

(i)

Organization; Authority.  Such Investor is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder. The
execution, delivery and performance by such Investor of the transactions
contemplated by this Agreement has been duly authorized by all necessary
corporate or, if such Investor is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such Investor.
 This Agreement has been duly executed by such Investor, and when delivered by
such Investor in accordance with the terms hereof, will constitute the valid and
legally binding obligation of such Investor, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.

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(ii)

Investment Intent.  Such Investor is acquiring the Securities as principal for
its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Investor’s right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws.  Subject to the immediately preceding
sentence, nothing contained herein shall be deemed a representation or warranty
by such Investor to hold the Securities for any period of time.  Such Investor
is acquiring the Securities hereunder in the ordinary course of its business.
Such Investor does not have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.

(iii)

Investor Status.  At the time such Investor was offered the Securities, it was,
and at the date hereof it is, and on each date on which it converts Notes and
exercises Warrants it will be, an “accredited investor” as defined in Rule
501(a) under the Securities Act.  Such Investor is not a registered
broker-dealer under Section 15 of the Exchange Act.

(iv)

General Solicitation.  Such Investor is not purchasing the Securities as a
result of any advertisement, article, notice or other communication regarding
the Securities published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

(v)

Access to Information.  Such Investor acknowledges that it has been afforded (i)
the opportunity to ask such questions as it has deemed necessary of, and to
receive answers from, representatives of the Company concerning the terms and
conditions of the offering of the Securities and the merits and risks of
investing in the Securities; (ii) access to information about the Company and
the Subsidiaries and their respective financial condition, results of
operations, business, properties, management and prospects sufficient to enable
it to evaluate its investment; and (iii) the opportunity to obtain such
additional information that the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment.  Neither such inquiries nor any other
investigation conducted by or on behalf of such Investor or its representatives
or counsel shall modify, amend or affect such Investor’s right to rely on the
truth, accuracy and completeness of the SEC Reports and the Company’s
representations and warranties contained in the Transaction Documents.

The Company acknowledges and agrees that no Investor has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth herein.

E.

Agreements of the Parties.

(i)

Legends.

Certificates evidencing Conversion Shares and Warrant Shares shall not contain
any legend: (a) following a sale or transfer of such Conversion Shares or
Warrant Shares pursuant to an effective registration statement (including a
Registration Statement), or (ii) following a sale or transfer of such Conversion
Shares or Warrant Shares pursuant to Rule 144 (assuming the transferee is not an
affiliate of the Company), or (iii) while such Conversion Shares or Warrant
Shares are eligible for sale without volume limitations pursuant to Rule 144.
 “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

(ii)

Furnishing of Information.  As long as any Investor owns the Securities but, in
any event for no more than five years following the date of this Agreement, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act.  As long as any
Investor owns Securities, but, in any event for no more than five years
following the date of this Agreement, if the Company is not required to file
reports pursuant to such laws, it will prepare and furnish to the Investors and
make publicly available in accordance with Rule 144 such information as is
required for the Investors to sell the Conversion Shares and Warrant Shares
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell the Conversion Shares
and Warrant Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.

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(iii)

Subsequent Registrations.  Other than pursuant to this Agreement, prior to the
first to occur of (a) the effective date of a registration statement resulting
in all Registrable Securities (as defined below) being registered for resale
pursuant to one or more effective registration statement(s) or (b) such time as
all Registrable Securities may be sold by the Investors without volume
restrictions pursuant to Rule 144, the Company may not file any registration
statement (other than on Form S-8)  with the Commission with respect to any
securities of the Company.

(iv)

Securities Laws Disclosure; Publicity.  Within four Trading Days following the
consummation of the Offering (the “Closing Date”), the Company shall issue a
press release disclosing the transactions contemplated hereby and the Closing.
 Within four Trading Days following the execution of this Agreement the Company
will file a press release and a Current Report on Form 8-K disclosing the
material terms of the Transaction Documents (and attach as exhibits thereto the
Transaction Documents), and within four Trading Days following the Closing Date,
the Company will file an additional Current Report on Form 8-K to disclose the
Closing.  The Company, in its discretion, can combine any such Form 8-Ks.  In
addition, the Company will make such other filings and notices in the manner and
time required by the Commission and the Trading Market on which the Common Stock
is listed.  Notwithstanding the foregoing, the Company shall not publicly
disclose the name of any Investor, or include the name of any Investor in any
filing with the Commission (other than a registration statement and any exhibits
to filings made in respect of this transaction in accordance with periodic
filing requirements under the Exchange Act) or any regulatory agency or Trading
Market, without the prior written consent of such Investor, except to the extent
such disclosure is required by law or Trading Market regulations.

(v)

Indemnification of Investors.  The Company will indemnify and hold the Investors
and their directors, officers, shareholders, partners, employees and agents
(each, an “Investor Party”) harmless from any and all losses, liabilities,
obligations, claims, contingencies, damages, costs and expenses, including all
judgments, amounts paid in settlements, court costs and reasonable attorneys’
fees and costs of investigation (collectively, “Losses”) that any such Investor
Party may suffer or incur as a result of or relating to (i) any
misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document or (ii)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement (or any additional registration statements), any
prospectus contained therein, or any amendment or supplement thereto, or are
caused by the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading.  In addition to the indemnity contained herein, the Company will
reimburse each Investor Party for its reasonable legal and other expenses
(including the cost of any investigation, preparation and travel in connection
therewith) incurred in connection therewith, as such expenses are incurred.  

(vi)

Listing of Securities.  As long as any Investor owns the Securities, the Company
agrees, (i) if the Company applies to have the Common Stock traded on any other
Trading Market, it will include in such application the Conversion Shares and
Warrant Shares, and will take such other action as is necessary or desirable to
cause the Conversion Shares and Warrant Shares to be listed on such other
Trading Market as promptly as possible, and (ii) it will take all action
reasonably necessary to continue the listing and trading of its Common Stock on
a Trading Market and will comply in all material respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of the Trading
Market.

F.

Registration.

(i)

Within 90 calendar days following the Closing Date, the Company shall cause a
registration statement on Form S-3 (or Form S-1 or such other Form appropriate
for such purpose) (the “Registration Statement”) to be filed with the Commission
under the Securities Act, for an offering to be made on a continuous basis
pursuant to Rule 415 of the Securities Act with respect to (i) the Company’s
Common Stock issued or issuable upon conversion of the Notes (the “Conversion
Shares”) and (ii) the Company’s Common Stock issued or issuable upon exercise of
the Warrants (the “Warrant Shares”) in each case to be issued to or on behalf of
the Investors on the Closing Date (together, the “Registrable Securities”).  The
Company shall cause such Registration Statement to be declared effective by the
Commission as soon as possible, but in any event, no later than 180 calendar
days following the Closing Date, and shall use its reasonable best efforts to
keep the Registration Statement continuously effective for the Effectiveness
Period (as defined below).  By 5:00 p.m. (New York City time) on the Business
Day

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immediately following the effective date of such Registration Statement (or any
additional registration statement), the Company shall file with the Commission
in accordance with Rule 424 under the Securities Act the final prospectus to be
used in connection with sales pursuant to such Registration Statement (or any
additional registration statement), whether or not such filing is technically
required under such Rule.  For purposes of this Agreement, “registration
statement” refers to any registration statement (including the Registration
Statement) covering the Registrable Securities or listing the Investors as a
“Selling Stockholder.”

(ii)

Notwithstanding anything to the contrary contained in this Agreement, if the
staff of the Commission (the “Staff”), or the Commission, seeks to characterize
any offering pursuant to a registration statement filed in accordance with this
Agreement as constituting a primary offering of securities by or on behalf of
the Company, or in any other manner, such that the Staff or the Commission does
not permit such registration statement (including the Registration Statement) to
become effective and used for resales in a continuous at the market offering
pursuant to Rule 415 under the Securities Act by the Investors (or as otherwise
may be acceptable to each Investor) without being named therein as
“underwriters” (a “Resale Registration Statement”), and the Company has used its
best efforts to contest such determination and in such regard uses its
reasonable best efforts to cause the Commission to permit the affected Investors
or their respective counsel to participate in Commission conversations on such
issues with the Company and the Company timely conveys relevant information
concerning such issues with the affected Investors and their respective counsel,
then the Company shall have the right to reduce the number of Registrable
Securities to be included in such registration statement by all Investors, to
the extent that the Staff or the Commission shall permit such registration
statement to become effective as a Resale Registration Statement.  In making
such reduction, subject to the last sentence of this Section (F)(ii), the
Company shall reduce the number of Registrable Securities (first as to any
Conversion Shares and second as to any Warrant Shares) to be included by all
Investors on a pro rata basis (based upon the number of Registrable Securities
otherwise required to be included for each Investor), unless the inclusion of
Registrable Securities by a particular Investor or a particular type of
Investors is the cause of the refusal by the Staff or the Commission to allow
such registration statement to become effective as a Resale Registration
Statement, in which event the Registrable Securities held by such Investor or
type of Investors shall be the only Registrable Securities subject to reduction
(and if by a set of Investors on a pro rata basis with respect to such Investors
or on such other basis as would result in the exclusion of the least number of
shares by all such Investors).  In addition, if the Staff or the Commission
requires any Investor seeking to sell under a Registration Statement filed
pursuant to this Agreement to be identified as an “underwriter” in order to
permit such Registration Statement to become effective, and such Investor does
not consent to being so named as an underwriter in such Registration Statement,
then, in each such case, the Company shall be entitled, following good faith
discussions with the Staff and/or the Commission and the affected Investor, to
reduce the total number of Registrable Securities to be registered on behalf of
such Investor, until such time as the Staff or the Commission does not require
such identification. Notwithstanding the foregoing, any reduction pursuant to
this Section (F)(ii) shall first be applied pro-rata to (i) any securities not
issued or issuable pursuant to the Notes or Warrants and (ii) any securities
issued or issuable to any placement agent in connection with the Offering.

(iii)

In the event of any reduction in Registrable Securities to be included in a
registration statement (including the Registration Statement) pursuant to this
paragraph, an affected Investor shall have the right, solely following such time
as the Company is able to effect the registration of any such Registrable
Securities in accordance with any restrictions which were imposed on it by the
Commission, upon delivery of a written request to the Company signed by such
Investor, to require the Company to file an additional registration statement(s)
on Form S-3 (or Form S-1 or such other Form appropriate for such purpose) with
the Commission under the Securities Act for an offering to be made on a
continuous basis pursuant to Rule 415 of the Securities Act within 90 calendar
days after the Company’s receipt of any such request (the “Additional Filing
Date”) for resale by such Investor, in a manner reasonably acceptable to such
Investor, of any Registrable Securities which are not then covered by an
existing and effective registration statement (including the Registration
Statement) and the Company shall, following such request, use its reasonable
best efforts to cause such additional registration statement(s) to be declared
effective under the Securities Act as soon as possible but, in any event, no
later than 60 calendar days following the applicable Additional Filing Date (the
“Additional Outside Date”), and kept continuously effective for two years after
the effective date of any such registration statement (in each such case, the
“Additional Effectiveness Period”) (it being understood that the demand right
under this sentence may be exercised by a Investor multiple times and with
respect to limited amounts of Registrable Securities to the extent limitations
are required in order to permit the resale thereof by such Investor pursuant to
a Resale Registration Statement as contemplated above); and

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the Company shall otherwise use its reasonable best efforts to satisfy the
registration rights set forth in this Agreement as promptly as practicable.  No
Investor will be entitled to require the Company to file a registration
statement during any time period that the Investor can sell its Registrable
Securities pursuant to Rule 144 without volume restrictions, in each case as
determined by the counsel to the Company pursuant to a written opinion letter to
such effect, addressed and acceptable to the Company's transfer agent and the
affected Investors.

(iv)

The Company shall (i) prepare and file with the Commission such amendments,
including post-effective amendments, to such Registration Statement (or any
additional registration statement) and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement (or any
additional registration statement) continuously effective as to the applicable
Registrable Securities for its Effectiveness Period; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible to any comments received from the
Commission with respect to the Registration Statement (or any additional
registration statement) or any amendment thereto; and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange Act
with respect to the Registration Statement (and any additional registration
statement) and the disposition of all Registrable Securities covered by the
Registration Statement (and any additional registration statement).

(v)

The Company shall notify the Investor as promptly as reasonably possible with
respect to the Registration Statement (and any additional registration
statement) or any post-effective amendment thereto, when the same has become
effective; (a) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement (and any additional registration
statement) covering any or all of the Registrable Securities or the initiation
of any proceedings for that purpose; (b) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any proceeding for such
purpose; and (c) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement (and any
additional registration statement) ineligible for inclusion therein or any
statement made in the Registration Statement (and any additional registration
statement) or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement (and any additional
registration statement), Prospectus or other documents so that, in the case of
the Registration Statement (and any additional registration statement) or the
Prospectus, as the case may be, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.  Upon the occurrence of any event
contemplated by clause (c), as promptly as reasonably possible, prepare a
supplement or amendment, including a post-effective amendment, to the affected
Registration Statement (and any additional registration statement) or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, no Registration Statement (and any additional
registration statement) nor any Prospectus will contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.  

(vi)

The Company make available to the Investor, at the Company’s expense, such
number of copies of the Registration Statement (and any additional registration
statement) and each amendment and supplement thereto, preliminary prospectus,
final prospectus and such other documents as the Investor may reasonably request
in writing in order to facilitate the public offering of their shares of Common
Stock.

(vii)

The Company shall promptly, at the Company’s expense, use its reasonable best
efforts to register or qualify any shares of Common Stock covered by the
Registration Statement (and any additional registration statement) under such
state securities or blue sky laws of such jurisdictions as the Investor may
reasonably request, except that the Company shall not for any purpose be
required to execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction where it is not so
qualified.

(viii)

All registration-related fees and expenses incident to the performance of or
compliance with this Agreement incurred by the Company shall be borne by the
Company whether or not any Registrable Securities are sold pursuant to a
registration statement (including the Registration Statement).  

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(ix)

The Company may include shares of Common Stock other than the Registrable
Securities on a registration statement (including the Registration Statement) as
long as the total number of shares of Common Stock (including the Registrable
Securities) to be registered in the aggregate on such registration statement
does not then exceed 33% of the Company’s public float (the Company shall
provide written evidence thereof to the Investors). The Company may not include
any other shares of Common Stock on a registration statement (including the
Registration Statement) until all of the Registrable Securities have been so
included or the Investor has agreed in writing to have its Registrable
Securities excluded from such registration statement (including the Registration
Statement).  

(x)

The Investor agrees to furnish to the Company a completed Questionnaire
containing information reasonably necessary for the Company to prepare the
Registration Statement (a “Selling Holder Questionnaire”).  Not less than four
Trading Days prior to the filing of the Registration Statement (or any
additional registration statement) or any related Prospectus or any amendment or
supplement thereto, the Company shall furnish to each Investor copies of the
“Selling Stockholders” section of such document, the “Plan of Distribution” and
any risk factor contained in such document that addresses specifically this
transaction or the Selling Stockholders, as proposed to be filed which documents
will be subject to the review of such Investor.  The Company shall not file the
Registration Statement (and any additional registration statement), any
Prospectus or any amendments or supplements thereto in which the “Selling
Stockholder” section thereof materially differs from the disclosure received
from the Investor in its Selling Holder Questionnaire (as amended or
supplemented).  The Company may reasonably request updates to the Selling Holder
Questionnaire and the Investor agrees to promptly respond to such request for an
update.  The Company will not name the Investor as an “underwriter” in any
registration statement without the Investor’s prior written consent.  

(xi)

If for any reason or for no reason whatsoever, either (a) the Registration
Statement is not filed on or prior to 90 calendar days following the Closing
Date or any additional registration statement is not filed on or prior to the
Additional Filing Date, in each case covering the Registrable Securities
required under this Agreement to be included therein (if the Company files a
Registration Statement (or additional registration statement) without affording
the Investors the opportunity to review and comment on the same as required
herein, the Company shall not be deemed to have satisfied this clause (a)), or
(b) a Registration Statement is not declared effective by the Commission within
180 calendar days of the Closing Date, or any additional registration statement
is not declared effective by the Commission on or prior to the Additional
Outside Date or if by the Business Day immediately following the date the
Commission declares the Registration Statement or any additional registration
statement effective, the Company shall not have filed a “final” prospectus for
the Registration Statement (or any additional registration statement) with the
Commission under Rule 424(b) in accordance with the terms hereof (whether or not
such a prospectus is technically required by such Rule) or (c) after the
effective date of a Registration Statement or any additional registration
statement, without regard for the reason thereunder or efforts therefore, such
Registration Statement (or additional registration statement) ceases for any
reason to remain continuously effective as to all Registrable Securities
included in such Registration Statement or additional registration statement, or
the Investors are otherwise not permitted to utilize the Prospectus therein to
resell such Registrable Securities, for more than an aggregate of 30 Trading
Days (which need not be consecutive calendar days) during any 12-month period
within the Effectiveness Period (any such failure or breach being referred to as
an “Event”, and for purposes of clauses (a) or (b) the date on which such Event
occurs, or for purposes of clause (iii) the date which such 30 Trading
Day-period is exceeded, being referred to as "Event Date")), then, in addition
to any other rights the Investors may have hereunder or under applicable law, on
each such Event Date and on each monthly anniversary of each such Event Date (if
the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company shall pay to each Investor an amount in
cash, as partial liquidated damages and not as a penalty, equal to 0.5% of the
aggregate purchase price paid by such Investor for the Unit(s); provided that
the aggregate payments pursuant to this Section to any Investor do not exceed
2.0% of the aggregate purchase price paid by such Investor for the Unit(s).  The
parties agree that the Company shall not be liable for liquidated damages under
this Agreement with respect to any Warrants or Warrant Shares.   No Investor
will be entitled to liquidated damages during any time period that the Investor
could have sold its Registrable Securities pursuant to Rule 144 without volume
restrictions, in each case as determined by the counsel to the Company pursuant
to a written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent and the affected Investors.  The partial liquidated
damages pursuant to the terms hereof shall apply on a daily pro-rata basis for
any portion of a month prior to the cure of an Event (except in the case of the
first Event Date), and shall cease to accrue (unless earlier cured) upon the
expiration of the Effectiveness Period.

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(xii)

The Company will use reasonable best efforts to cause the Registration Statement
to become effective and to remain continuously effective until the earlier of
(1) two years following the filing date of the Registration Statement; (2) such
time as all of the Registrable Securities covered by the Registration Statement
have been sold by the Investors; or (3) the date on which all of the Registrable
Securities may be sold pursuant to Rule 144 without volume restrictions, in each
case as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Company's transfer agent
and the affected Investors (the “Effectiveness Period”).

G.

Miscellaneous.

(i)

Fees and Expenses.  Each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of the Transaction Documents.  The Company shall pay all stamp and
other taxes and duties levied in connection with the issuance of the Securities.

(ii)

Entire Agreement.  The Transaction Documents, together with the Exhibits and
Schedules thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules.

(iii)

Notices.  Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given
and effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile (provided the sender receives a
machine-generated confirmation of successful transmission) or via e-mail at the
facsimile number or e-mail address specified in this Section prior to 6:30 p.m.
(New York City time) on a Trading Day, (b) the next Trading Day after the date
of transmission, if such notice or communication is delivered via facsimile or
via e-mail at the facsimile number or e-mail address specified in this Section
on a day that is not a Trading Day or later than 6:30 p.m. (New York City time)
on any Trading Day, (c) the Trading Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given.  The address
for such notices and communications shall be as follows:

If to the Company:

Baywood International, Inc.

Attn: Chief Executive Officer

14950 North 83rd Place, Suite 1

Scottsdale, Arizona 85260

Facsimile:

With a copy to:

Trombly Business Law

Attn: Amy Trombly

Facsimile: (617) 243-0066

If to an Investor:

To the address set forth under such Investor’s name on the signature pages
hereof;

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

(iv)

Amendments; Waivers; No Additional Consideration.  No provision of this
Agreement may be waived or amended except in a written instrument signed by the
Company and the Investors.  No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.  No consideration shall be offered or
paid to any Investor to amend or consent to a waiver or modification of any
provision of any Transaction Document unless the same consideration is also
offered to all Investors who then hold Securities.  Without the written consent
or the affirmative vote of each Investor affected thereby, an amendment or
waiver under this Section may not waive or amend any

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Transaction Document the effect of which would be to permit the Company to (1)
name any Investor as an underwriter in a Registration Statement (or any
additional registration statement) without such Investor’s specific written
consent thereto, or (2) not include any Registrable Securities of an Investor in
a Registration Statement (or any additional registration statement) due to their
refusal to be named as an underwriter therein.

(v)

Termination.  This Agreement may be terminated prior to Closing:

(a)

by written agreement of the Investors and the Company, a copy of which shall be
provided to the Escrow Agent; and

(b)

by the Company or an Investor (as to itself but no other Investor) upon written
notice to the other and to the Escrow Agent, if the Closing shall not have taken
place by 6:30 p.m. Eastern Time on September 30, 2008; provided, that the right
to terminate this Agreement under this Section shall not be available to any
Person whose failure to comply with its obligations under this Agreement has
been the cause of or resulted in the failure of the Closing to occur on or
before such time.

In the event of a termination pursuant to this Section, the Company shall
promptly notify all non-terminating Investors. Upon a termination in accordance
with this Section, the Company (other than any indemnification obligations) and
the terminating Investor(s) shall not have any further obligation or liability
(including as arising from such termination) to the other and no Investor will
have any liability to any other Investor under the Transaction Documents as a
result therefrom.

(vi)

Construction.  The headings herein are for convenience only, do not constitute a
part of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof.  The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.  This Agreement shall be
construed as if drafted jointly by the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement or any of the Transaction Documents.

(vii)

Successors and Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns.  The Company
may not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Investors. Any Investor may assign any or all of
its rights under this Agreement to any Person to whom such Investor assigns or
transfers any Securities, provided such transferee agrees in writing to be
bound, with respect to the transferred Securities, by the provisions hereof that
apply to the “Investors.”

(viii)

No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the
parties hereto and their respective successors and permitted assigns and is not
for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth herein (as to each Investor Party).

(ix)

Governing Law.  All questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflicts of law thereof.  Each party agrees that
all Proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective Affiliates, employees
or agents) shall be commenced exclusively in the New York Courts.  Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the New York
Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of the any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any Proceeding, any claim that
it is not personally subject to the jurisdiction of any such New York Court, or
that such Proceeding has been commenced in an improper or inconvenient forum.
 Each party hereto hereby irrevocably waives personal service of process and
consents to process being served in any such Proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
 Each party hereto hereby irrevocably

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waives, to the fullest extent permitted by applicable law, any and all right to
trial by jury in any legal proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby.  If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
for its reasonable attorneys’ fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such Proceeding.  For purposes
hereof, “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

(x)

Survival.  The representations, warranties, agreements and covenants contained
herein shall survive the Closing and the delivery of the Securities.

(xi)

Execution.  This Agreement may be executed in two or more counterparts, all of
which when taken together shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart.  In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

(xii)

Severability.  If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Agreement shall not in any way be affected or
impaired thereby and the parties will attempt to agree upon a valid and
enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

(xiii)

Rescission and Withdrawal Right.  Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Investor exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Investor may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

(xiv)

Remedies.  In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Investors and the
Company will be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for
specific performance of any such obligation the defense that a remedy at law
would be adequate.

(xv)

Payment Set Aside.  To the extent that the Company makes a payment or payments
to any Investor pursuant to any Transaction Document or an Investor enforces or
exercises its rights thereunder, and such payment or payments or the proceeds of
such enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

(xvi)

Independent Nature of Investors’ Obligations and Rights.  The obligations of
each Investor under any Transaction Document are several and not joint with the
obligations of any other Investor, and no Investor shall be responsible in any
way for the performance of the obligations of any other Investor under any
Transaction Document.  The decision of each Investor to purchase Securities
pursuant to the Transaction Documents has been made by such Investor
independently of any other Investor.  Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions

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contemplated by the Transaction Documents.  Each Investor acknowledges that no
other Investor has acted as agent for such Investor in connection with making
its investment hereunder and that no Investor will be acting as agent of such
Investor in connection with monitoring its investment in the Securities or
enforcing its rights under the Transaction Documents.  Each Investor shall be
entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Investor to
be joined as an additional party in any proceeding for such purpose.  The
Company acknowledges that each of the Investors has been provided with the same
Transaction Documents for the purpose of closing a transaction with multiple
Investors and not because it was required or requested to do so by any Investor.

(xvii)

Limitation of Liability.  Notwithstanding anything herein to the contrary, the
Company acknowledges and agrees that the liability of an Investor arising
directly or indirectly, under any Transaction Document of any and every nature
whatsoever shall be satisfied solely out of the assets of such Investor, and
that no trustee, officer, other investment vehicle or any other Affiliate of
such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of
such Investor.

[Remainder of this page intentionally left blank; signature page to follow]

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Agreed and Accepted on September 5, 2008:

Very truly yours,

 

Agreed to and Accepted by:

Baywood International, Inc.

 

Investor

 

 

 

 

 

 

 

 

Name:  Neil Reithinger

 

Name: _________________________

Chief Executive Officer

 

(Please print name below signature)

 

 

 

 

 

 

 

 

INVESTMENT AMOUNT: $________________

 

 

 

 

 

ADDRESS FOR NOTICE

 

 

 

 

 

c/o:

 

 

 

 

 

 

 

Street:

 

 

 

 

 

 

 

City/State/Zip:

 

 

 

 

 

 

 

Attention:

 

 

 

 

 

 

 

Tel:

 

 

 

 

 

 

 

Fax:

 

 

 

 

 

 

 

E-mail: