Document:

EX-10.2

Exhibit 10.2

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the “Amendment”) is entered into as of December 30,
2008, by and among ALLIED CAPITAL CORPORATION, a corporation organized under the laws of the State
of Maryland (“Borrower”), BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, the
“Administrative Agent”) for the Lenders under the Credit Agreement (hereinafter defined), and the
lenders party hereto (“Consenting Lenders”).

R E C I T A L S

A. Borrower, Administrative Agent, and certain other Agents, and Lenders are parties to that
certain Credit Agreement dated as of April 9, 2008 (as it may be amended, supplemented, or restated
from time to time, the “Credit Agreement”). Unless otherwise indicated herein, all terms used with
their initial letter capitalized are used herein with their meaning as defined in the Credit
Agreement (as amended herein); all Section references are to Sections in the Credit Agreement; and
all Paragraph references are to Paragraphs in this Amendment.

B. Borrower has requested certain amendments to the Credit Agreement.

C. Subject to and upon the following terms and conditions Administrative Agent and Consenting
Lenders are willing to amend the relevant provisions of the Credit Agreement as set forth herein.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, Borrower, Administrative Agent, and the
Consenting Lenders agree, as follows:

PARAGRAPH 1 . AMENDMENTS TO CREDIT AGREEMENT.

1.1 Amendments to Section 1.1 (Definitions).

(a) Section 1.1 of the Credit Agreement is amended to delete the definition of each
of the following terms: (i) “Net Proceeds” and (ii) “Equity Issuance”.

(b) Section 1.1 of the Credit Agreement is further amended by adding the following
definitions to be inserted in the correct alphabetical order in such Section:

“Additional Secured Debt” shall have the meaning set forth in
Section 7.14.

“Additional Senior Secured Obligations” shall have the meaning set
forth in the Intercreditor Agreement.

“Anti-Terrorism Order” means Executive Order No. 13,224 of September
24, 2001, Blocking Property and Prohibiting Transactions with
Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S.
Fed. Reg. 49, 079 (2001), as amended.

“Bank Obligations” shall have the meaning set forth in the
Intercreditor Agreement, expressly including additional Debt
incurred under this Agreement (or any amendment, restatement,
extension, or replacement thereof) in accordance with any commitment
increase provisions thereof.

“Collateral” means the property and collateral described in the
Collateral Documents (together with any other property and
collateral which may now or hereafter secure the Obligations or any
part thereof).

“Collateral Agent” means Bank of America N.A. in its capacity as
collateral agent under the Collateral Documents, together with its
successors and assigns in such capacity.

“Collateral Documents” means, collectively, any security agreement,
including without limitation the Security Agreement, any pledge
agreement, any control agreement, any mortgage or deed of trust
including without limitation the Mortgages, any assignment and
endorsement of insurance, or any other agreement, joinder,
ratification, or document, together with all related financing
statements and stock powers, now or hereafter executed and delivered
in connection with this Agreement to create a Lien on any real or
personal property in favor of Collateral Agent for the benefit of
the Senior Secured Obligations, each in form and substance
satisfactory to Administrative Agent and the Requisite Lenders, as
the same may be amended, supplemented, replaced, modified and
restated from time to time in accordance with the terms of this
Agreement and the Intercreditor Agreement.

“Collateral Effective Date” shall have the meaning set forth in the
First Amendment.

“Consolidated Adjusted Debt” means Consolidated Debt minus
Guaranties (including undrawn letter of credit obligations) included
in Consolidated Debt in an amount which does not exceed the greater
of (x) the obligations from time to time outstanding under
Guaranties (including undrawn letters of credit) given to secure
payment of certain obligations of, or related to, Ciena Capital LLC
in an amount not in excess of $146,000,000 and (y) $50,000,000.

“Consolidated Total Adjusted Assets” means the aggregate Book Value
(without duplication) of assets of Borrower and its Consolidated
Subsidiaries which (i) constitute Collateral, or (ii) which are
owned by a Pledge LLC; provided that for purposes of determining
Consolidated Total Adjusted Assets, the aggregate Book Value of
assets which are owned by all Pledge LLCs shall not exceed 25% of
Consolidated Total Adjusted Assets.

“Equity Interests” means, with respect to any Person, all of
the shares of capital stock of (or other ownership or profit
interests in) such Person, all of the warrants, options or other
rights for the purchase or acquisition from such Person of shares of
capital stock of (or other ownership or profit interests in) such
Person, all of the securities convertible into or exchangeable
for shares of capital stock of (or other ownership or profit
interests in) such Person or warrants, rights or options for the
purchase or acquisition from such Person of such shares (or such
other interests), and all of the other ownership or profit interests
in such Person (including partnership, member or trust interests
therein), whether voting or nonvoting, and whether or not
such shares, warrants, options, rights or other interests are
outstanding on any date of determination.

“Excluded Assets” means (i) assets of Borrower and its Consolidated
Subsidiaries which in accordance with the terms of the documents
which govern such assets and after taking into account the
obligations of Borrower under Section 7.14 of this Agreement are not
permitted or required to be pledged, assigned or otherwise used to
secure the Debt of Borrower or a Consolidated Subsidiary, (ii)
assets of Borrower and its Consolidated Subsidiaries which are owned
by a Pledge LLC, (iii) equipment covered by Capitalized Lease
Obligations permitted pursuant to Section 9.1(d) and collateral
securing Interest Rate Agreements, to the extent such Capitalized
Lease Obligations or Interest Rate Agreements are permitted under
Section 9.1(d), and (iv) such other assets of Borrower or the
Consolidated Subsidiaries as Administrative Agent and the Requisite
Lenders agree in writing shall not constitute Collateral.

“Existing Note Agreements” means (i) the Note Agreement dated as of
May 14, 2003, as amended by that certain First Amendment to Note
Agreement dated as of February 29, 2008, that certain First Omnibus
Waiver and Amendment to the Note Agreements dated as of July 25,
2008, and that certain Second Omnibus Amendment to Note Agreements
dated as of December 30, 2008 (as amended, the “2003 Note
Agreement”) under and pursuant to which the $147,000,000 6.05%
Senior Notes, Series B, due May 14, 2010 (the “2003 Notes”) were
originally issued and sold, (ii) the Note Agreement dated as of
November 15, 2004, as amended by that certain First Amendment to
Note Agreement dated as of February 29, 2008, that certain First
Omnibus Waiver and Amendment to the Note Agreements dated as of July
25, 2008, and that certain Second Omnibus Amendment to Note
Agreements dated as of December 30, 2008 (as amended, the “2004 Note
Agreement”) under and pursuant to which (a) the $252,500,000 5.53%
Senior Notes, Series A, due November 15, 2009 (the “2004 Series A
Notes”) and (b) the $72,500,000 5.99% Senior Notes, Series B, due
November 15, 2011 (the “2004 Series B Notes”, and together with the
2004 Series A Notes, the “2004 Notes”) were originally issued and
sold, (iii) the Note Agreement dated as of October 13, 2005, as
amended by that certain First Amendment to Note Agreement dated as
of February 29, 2008, that certain First Omnibus Waiver and
Amendment to the Note Agreements dated as of July 25, 2008, and that
certain Second Omnibus Amendment to Note Agreements dated as of
December 30, 2008 (as amended, the “2005 Note Agreement”) under and
pursuant to which (a) the $261,000,000 6.15% Senior Notes, Series A,
due October 13, 2010 (the “2005 Series A Notes”) and (b) the
$89,000,000 6.34% Senior Notes, Series B, due October 13, 2012 (the
“2005 Series B Notes”, and together with the 2005 Series A Notes,
the “2005 Notes”) were originally issued and sold, and (iv) the Note
Agreement dated as of June 20, 2008, as amended by that certain
First Omnibus Waiver and Amendment to the Note Agreements dated as
of July 25, 2008, and that certain Second Omnibus Amendment to Note
Agreements dated as of December 30, 2008 (as amended, the “2008 Note
Agreement”) under and pursuant to which (a) the $140,500,000 7.82%
Senior Notes, Series 2008-A, due June 20, 2013 (the “2008 Series A
Notes”) and (b) the $52,500,000 8.14% Senior Notes, Series 2008-B,
due June 20, 2015 (the “2008 Series B Notes”) were originally issued
and sold.

“Existing Notes” means the notes issued by Borrower pursuant to the
Existing Note Agreements.

“First Amendment” means that certain First Amendment to this
Agreement dated as of December 30, 2008, among Borrower and the
Lenders party thereto.

“Guaranty” means any Contingent Obligation, other than Contingent
Obligations arising under Interest Rate Agreements.

“Mortgage” means any mortgage, deed of trust, deed to secure, or
similar instrument under which a Lien may be granted against real
property, duly executed by Borrower or one of the Consolidated
Subsidiaries covering the Real Property, appropriately conformed to
the particular requirements of each applicable jurisdiction where
such Real Property is located and in form and substance reasonably
satisfactory to Administrative Agent and the Requisite Lenders.

“Note Obligations” shall have the meaning set forth in the
Intercreditor Agreement.

“Noteholders” means, collectively, each holder of an Existing Note.

“Outstanding Public Debt” means the Indenture by and between
Borrower and The Bank of New York, dated as of June 16, 2006, as
supplemented by (x) the First Supplemental Indenture by and between
Borrower and The Bank of New York, dated as of July 25, 2006,
pursuant to which Borrower has issued its $400,000,000 6.625% Notes
due July 15, 2011, (y) the Second Supplemental Indenture by and
between Borrower and The Bank of New York, dated as of December 8,
2006, pursuant to which Borrower has issued its $250,000,000 6.0%
Notes due April 1, 2012, and (z) the Third Supplemental Indenture by
and between Borrower and The Bank of New York, dated as of March 28,
2007, pursuant to which Borrower has issued its $230,000,000 6.875%
Notes due April 15, 2047.

“Pledge LLC” means one or more Wholly Owned Consolidated
Subsidiaries, each of which (i) has title to personal property which
would constitute Collateral but for limitations in the documents
which govern such personal property, or has title to real property,
(ii) has no Debt outstanding other than (x) Debt owing to Borrower,
which has been evidenced by a promissory note and the holder
thereof has pledged the same to the Collateral Agent pursuant to the
Collateral Documents, and (y) Guaranties of the Senior Secured
Obligations, and (iii) has had all of its voting stock pledged to
the Collateral Agent as Collateral.

“Real Property” means the real property owned or leased by Borrower
or any Consolidated Subsidiary and located in the United States.

“Securities Act” means the Securities Act of 1933, as amended from
time to time or any successor legislation.

“Secured Party” means each holder of a Senior Secured Obligation.

“Security Agreement” means the Security Agreement to be executed by
Borrower and the Consolidated Subsidiaries in favor of the
Collateral Agent for the benefit of the Secured Parties, the form
and substance of which is acceptable to Administrative Agent and the
Requisite Lenders, as such agreement may be amended, restated,
joined, supplemented, or otherwise modified from time to time in
accordance with the terms thereof.

“Senior Secured Obligations” means (i) the Bank Obligations; (ii)
the Note Obligations, and (iii) the Additional Senior Secured
Obligations.

“Uniform Commercial Code” means the Uniform Commercial Code as
adopted in the applicable jurisdiction from time to time.

(c) Section 1.1 of the Credit Agreement is further amended by amending and restating
the following definitions in their entirety, as follows:

“Intercreditor Agreement” means the Intercreditor and Collateral
Agency Agreement to be executed among Lenders, the Collateral Agent,
and the Noteholders and consented and agreed to by Borrower and the
Consolidated Subsidiaries, the form and substance of which is
acceptable to Administrative Agent and the Requisite Lenders, as the
same may be amended, modified, restated, supplemented or replaced
from time to time in accordance with the terms thereof.

“Loan Documents” means (a) this Agreement, the Notes, any Subsidiary
Bank Guaranty, LCs, LC Agreements, the Intercreditor Agreement, and
the Collateral Documents, (b) all agreements, documents, or
instruments in favor of Administrative Agent, LC Issuer, or Lenders
ever delivered pursuant to this Agreement or otherwise delivered in
connection with all or any part of the Obligations on and after the
Effective Date, and (c) any and all future renewals, extensions,
restatements, reaffirmations, amendments of, or supplements to, all
or any part of the foregoing.

“Priority Debt” means (without duplication) (i) all Debt of Borrower
and its Consolidated Subsidiaries secured by a Lien, (ii) all
liabilities of Borrower and its Consolidated Subsidiaries under
Interest Rate Agreements entered into for the purpose of hedging
interest rate risk with respect to Debt, if and only if such
liabilities are secured by a Lien, (iii) all unsecured Debt of
Consolidated Subsidiaries, and (iv) all unsecured liabilities of
Consolidated Subsidiaries under Interest Rate Agreements entered
into for the purpose of hedging interest rate risk with respect to
Debt (excluding in each case, any Debt or liability owing to
Borrower or another Consolidated Subsidiary).

“Secured Debt” means, without duplication, (i) the Debt outstanding
from time to time pursuant to this Agreement (as the same may be
amended, restated, extended, or replaced from time to time in
accordance with its terms and the Intercreditor Agreement),
including, without limitation, additional Debt incurred thereunder
in accordance with any commitment increase provisions thereof, (ii)
the outstanding Existing Notes, (iii) any “Additional Notes” (as
such term is defined in the 2008 Note Agreement) issued pursuant to
the 2008 Note Agreement, and (iv) any Additional Secured Debt
incurred in accordance with Section 7.14(d), all of which shall be
secured equally and ratably by the Collateral pursuant to the terms
of the Intercreditor Agreement, and all of which shall be determined
on a consolidated basis in accordance with GAAP.

“Senior Note Agreements” means the Existing Note Agreements and the
Outstanding Public Debt and any replacements or renewals thereof.

(d) The definition of “Permitted Liens” is modified by amending and restating clause
(e) thereof, as follows:

“(e) Liens of or resulting from any judgment or award, the time for
the appeal or petition for rehearing of which shall not have
expired, or in respect of which Borrower or a Consolidated
Subsidiary shall at any time in good faith be prosecuting an appeal
or proceeding for a review and in respect of which a stay of
execution pending such appeal or proceeding for review shall have
been secured.”

1.2 Amendment to Section 2.5 (Rates and Payment of Interest on Loans).

(a) Clause (A) of Section 2.5(a)(i) is amended by deleting the existing provision
and substituting therefor the following:

“(A) the sum of the Base Rate (as in effect from time to time) plus
1.00% and”.

(b) Clause (A) of Section 2.5(a)(ii) is amended by substituting “3.00%” for the
reference to “2.00%” therein.

1.3 Amendment to Section 3.8 (Fees). Clause (i) of the second sentence of Section
3.8(d) is amended by substituting “3.00%” for the reference to “2.00%” therein.

1.4 Amendment to Section 7.11 (Status of RIC and BDC). Section 7.11 is amended and
restated in its entirety as follows:

“7.11 Conduct of Business. At all times maintain its status as a
RIC under the Internal Revenue Code, and as a “business development company”
under the Investment Company Act. Borrower will not and will not permit any
Consolidated Subsidiary to (a) become a Person described or designated in
the Specially Designated Nationals and Blocked Persons List of the Office of
Foreign Assets Control or in Section 1 of the Anti Terrorism Order or (b)
knowingly engage in any dealings or transactions with any such Person.”

1.5 Amendment to Section 7 (Affirmative Covenants). Section 7 is amended by adding a
new Section 7.14 after Section 7.13, as follows:

“7.14 Collateral Matters. Comply, and shall cause each Consolidated
Subsidiary to comply, with the requirements of Paragraph 2 of the First
Amendment (including the obligation to secure the Obligations and the other
Senior Secured Obligations on or prior to the Collateral Effective Date).
In addition, from and after the Collateral Effective Date, Borrower hereby
agrees as follows:

(a) Collateral Documents. Borrower will, and will cause each
Consolidated Subsidiary to, (i) comply with and perform each of the terms,
conditions, and covenants set forth in the Collateral Documents, and (ii)
cause the representations and warranties set forth in the Collateral
Documents to be true and correct as provided in the Collateral Documents.

(b) Additional Collateral. If at any time Borrower or any
Consolidated Subsidiary shall grant to any one or more of the Collateral
Agent or a holder of any Senior Secured Obligation additional credit support
(including a Subsidiary Senior Note Guaranty or any other Guaranty) or
collateral of any kind as additional security to secure the Senior Secured
Obligations, then Borrower shall, or shall cause such Consolidated
Subsidiary to, (i) grant to the Collateral Agent for the benefit of the
Secured Parties the same credit support or collateral so that this Agreement
shall at all times be secured on an equal and ratable basis with the other
Senior Secured Obligations, and (ii) deliver an opinion of counsel to the
effect that such additional credit support and the Collateral Documents
relating to any such Collateral have been duly authorized, executed and
delivered by Borrower or such Consolidated Subsidiary, as applicable,
constitute the legal, valid and binding obligations of Borrower or such
Consolidated Subsidiary, as applicable, are enforceable against Borrower or
such Consolidated Subsidiary in accordance with the terms thereof, and
covering such other matters as Administrative Agent or the Requisite Lenders
may reasonably request. In addition, any such credit support and new
Collateral shall at all times be subject to and governed by the terms of the
Intercreditor Agreement.

(c) Additional Consolidated Subsidiaries. Within ten days
after the time that any Person becomes a Consolidated Subsidiary (other than
a Pledge LLC) as a result of the creation of such Consolidated Subsidiary, a
merger, or other consolidation permitted by Section 9.5 of this Agreement or
otherwise, (i) such Consolidated Subsidiary shall become a party to the
Security Agreement and shall pledge a valid and perfected first priority
Lien and security interest in all of its real and personal property (other
than real and personal property which constitute Excluded Assets), whether
tangible or intangible, pursuant to a joinder agreement in form and
substance satisfactory to Administrative Agent, (ii) 100% of such
Consolidated Subsidiary’s Equity Interests (65% in the case of any
Consolidated Subsidiary organized under the laws of any jurisdiction outside
of the United States of America) shall be pledged under the Collateral
Documents, and (iii) the Lenders shall receive such board resolutions,
officer’s certificates, corporate and other documents, and opinions of
counsel as Administrative Agent shall reasonably request in connection with
the actions described in clauses (i) and (ii) above.

(d) Additional Secured Debt. Borrower and its Consolidated
Subsidiaries may incur additional Debt secured by the Collateral (the
“Additional Secured Debt”); provided, that (i) no financial covenants or
events of default applicable to such Additional Secured Debt shall be more
restrictive than the financial covenants and Events of Default set forth in
Sections 9 and 10, respectively, (ii) at the time of such incurrence of
Additional Secured Debt and after giving effect thereto, no Default or Event
of Default shall have occurred and be continuing, and (iii) such Additional
Secured Debt shall be subject to the terms of the Intercreditor Agreement.
Notwithstanding the foregoing, the Outstanding Public Debt shall not at any
time have the benefit of or be secured by the Collateral.

(e) Additional Undertakings. Borrower will use commercially
reasonable efforts to obtain the consent or approval of all third parties
required to permit the Borrower and its Consolidated Subsidiaries to subject
all of their assets to the Lien of the Collateral Documents. In determining
whether to obtain any such consent or approval, Borrower may take into
account the cost or charges imposed by third parties (on either Borrower or
any entity in which Borrower or a Consolidated Subsidiary has an investment)
to grant any such consent or approval. In addition, Borrower shall not be
obligated to obtain consents or approvals in respect of assets which in the
reasonable judgment of Borrower cannot be pledged, or as to which the
consent to pledge cannot be sought, without substantially impairing the
value of the asset or the ability of Borrower or a Consolidated Subsidiary
to manage the asset in the ordinary course of its business. Without
limiting the obligation of Borrower set forth above, to the extent any
personal property of Borrower or a Consolidated Subsidiary cannot be pledged
as Collateral on account of contractual limitations applicable to such
property but may be transferred to a Pledge LLC, such personal property
shall be transferred to a Pledge LLC. Borrower shall use commercially
reasonable efforts to ensure that the documents which govern investments
made subsequent to the date of the First Amendment do not restrict the
ability of Borrower to subject any such investment to the Lien of the
Collateral Documents; provided that, so long as it has used such efforts,
Borrower will not be precluded from making an investment as to which the
governing documents contain such a restriction.

1.6 Amendment to Section 8.4 (Other Information). Section 8.4 is hereby amended by
(i) deleting “and” at the end of the existing clause (n); (ii) deleting “.” at the end of clause
(o) and substituting “; and” therefor, and (iii) inserting the following as new clause (p) after
clause (o):

“(p) Concurrently with the delivery to the Noteholders (or any holders of
Additional Secured Debt), Borrower shall deliver to each Lender (i) copies
of all financial and other information and certificates (including
compliance certificates) and reports delivered to such Noteholders (or any
holders of Additional Secured Debt) pursuant to the Existing Note Agreements
or any document evidencing Senior Secured Obligations or with respect to the
Collateral, (ii) not less than five days prior to the execution thereof, a
summary of the material terms of any proposed amendment to the Existing Note
Agreements or any document evidencing Senior Secured Obligations, and
(iii) promptly following execution thereof, one copy of such amendment
referred to in the preceding clause (ii).”

1.7 Addition of Section 8.5 (Collateral Report). A new Section 8.5 shall be added
immediately following Section 8.4, as follows:

“8.5 Collateral Report. Concurrently with the delivery of the
financial statements required to be delivered pursuant to Sections 8.1 and
8.2, Borrower shall deliver a schedule which lists by type and Book Value
(i) all of the assets of Borrower and its Consolidated Subsidiaries, (ii)
all of the assets of Borrower and its Consolidated Subsidiaries which are
subject to the Lien of the Collateral Documents, (iii) all of the assets
which are owned by a Pledge LLC, and (iv) all of the assets which are
neither subject to the Lien of the Collateral Documents nor owned by any
Pledge LLC.

1.8 Amendments to Section 9.1 (Financial Covenants).

(a) Section 9.1(b) is amended in its entirety as follows:

“(b) Minimum Consolidated Shareholders’ Equity.
Consolidated Shareholders’ Equity to be less than the greater of (i)
$1,500,000,000 and (ii) 85% of all Consolidated Adjusted Debt.”

(b) Section 9.1(c) is amended in its entirety as follows:

“(c) Ratio of Adjusted EBIT to Interest Expense. The ratio
of Adjusted EBIT to Interest Expense of Borrower and its
Consolidated Subsidiaries, determined on a consolidated basis as of
the last day of each fiscal quarter for the period of four
successive fiscal quarters ended on such day, to be less than (i)
1.4 to 1.0 for the fiscal quarter ending December 31, 2008 and each
fiscal quarter thereafter to and including the fiscal quarter ending
December 31, 2009, (ii) 1.6 to 1.0 for the fiscal quarter ending
March 31, 2010 and each fiscal quarter thereafter to and including
the fiscal quarter ending December 31, 2010 and (iii) 1.7 to 1.0
for the fiscal quarter ending March 31, 2011 and each fiscal quarter
thereafter.”

(c) Section 9.1(d) is amended in its entirety as follows:

“(d) Priority Debt. Any Priority Debt to be outstanding,
other than: (i) Senior Secured Obligations, (ii) Capitalized Lease
Obligations for equipment used in the ordinary course of business of
Borrower and its Consolidated Subsidiaries in an aggregate principal
amount not in excess of $5,000,000, (iii) Interest Rate Agreements
(which may be collateralized) of Borrower and/or its Consolidated
Subsidiaries entered into in the ordinary course of business of
Borrower and its Consolidated Subsidiaries and (iv) Debt of a
Consolidated Subsidiary owing to Borrower or another Consolidated
Subsidiary, so long as such Debt is evidenced by a promissory note
which is pledged to the Collateral Agent in accordance with and
pursuant to the Collateral Documents.”

(d) A new Section 9.1(f) is added as follows:

“(f) Consolidated Total Adjusted Assets to Secured Debt
Ratio. From and after the Collateral Effective Date, (i) on the
last day of each quarterly period and (ii) at the time of incurrence
of any Secured Debt, the ratio of Consolidated Total Adjusted Assets
(measured, in the case of clause (ii), on a pro forma basis using
asset values as of the most recent fiscal quarter for which
financial statements have been delivered pursuant to Sections 8.1 or
8.2 hereof) to Secured Debt to be less than 2.25 to 1.00.”

1.9 Amendment to Section 9.3 (Liens; Agreements Regarding Liens; Other Matters).
Section 9.3(a) is amended by adding a new clause (iv) as follows:

“(iv) Liens created under, or expressly permitted by, the Collateral
Documents, including the Liens securing this Agreement and the other Senior
Secured Obligations, so long as this Agreement shall at all times be equally
and ratably secured thereby and the Intercreditor Agreement shall be in full
force and effect.”

1.10 Amendment to Section 9.4 (Distributions to Shareholders). Section 9.4 is amended
and restated in its entirety as follows: 

“9.4. Restricted Payments. Except as hereinafter provided:

(a) Declare or pay any dividends, either in cash or property, on
any shares of its capital stock of any class (except dividends or other
distributions payable solely in shares of capital stock of Borrower);

(b) Directly or indirectly, or through any Subsidiary, purchase, redeem
or retire any shares of its capital stock of any class or any warrants,
rights or options to purchase or acquire any shares of its capital stock
(other than in exchange for or out of the net cash proceeds to Borrower from
the substantially concurrent issue or sale of other shares of capital stock
of Borrower or warrants, rights or options to purchase or acquire any shares
of its capital stock); or

(c) Make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock;

(such declarations or payments of dividends, purchases, redemptions, or
retirements of capital stock and warrants, rights, or options and all such
other payments or distributions being herein collectively called “Restricted
Payments”), if after giving effect thereto: (i) in the case of clause (a) or
(c) of this Section 9.4, an Event of Default described in Section 10.1(a) or
(b) shall exist, and in the case of clause (b) of this Section 9.4, any
Default or Event of Default shall exist; (ii) in the case of clauses (a) or
(c) of this Section, if as a result of the occurrence of any Event of
Default (other than that described in Section 10.1(a) or (b)), the
Obligations shall have been accelerated under Section 10.2(a); or (iii)
Borrower would not be in compliance with the limitations of Section 9.1(a),
(d), (e), or (f). In addition to the forgoing limitations, prior to
December 31, 2010, Borrower shall not (x) pay any dividend in excess of
$0.20 per share per fiscal quarter (or such greater amount as shall be
required for Borrower to maintain its status as a RIC) or (y) purchase,
redeem, or retire any shares of its capital stock of any class or any
warrants, rights, or options to purchase or acquire any shares of its
capital stock for an aggregate consideration in excess of $60,000,000.”

1.11 Amendment to Section 9.5 (Merger, Consolidation and Sale of Assets).

(a) The proviso in Section 9.5(a) is amended and restated to read as follows:

“provided, however, that, so long as no Default or Event of Default
is or would be in existence (except to the extent otherwise
expressly set forth in the Intercreditor Agreement), at the time of
such event or immediately after giving effect thereto.”

(b) Clause (G) of Section 9.5(a) is amended by adding the parenthetical “(which
shall not include securitizations)” after the first reference to “ordinary course of
business” therein.

1.12 Amendment to Section 9.11 (Payment of Obligation). Section 9.11 is amended by:
(i) deleting the word “or” at the end of clause (a); (ii) deleting the “.” at the end of clause (b)
and substituting “; or” in lieu thereof; and (iii) adding the following new clause (c) to the end
thereof:

“(c) directly or indirectly prepay, redeem, purchase, tender, or acquire any
series of Outstanding Public Debt prior to the stated maturity date of such
series.”

1.13 Amendment to Section 10.1 (Events of Default). Subsection (c)(i) to Section 10.1
is amended by adding “7.14,” after the reference to “7.12” and before the reference to “8.4(i)”.

1.14 Amendment to Section 12.2 (Expenses). Subsection (a) to Section 12.2 is amended
by adding the following after the end of the last sentence:

“Without limiting the foregoing, Borrower agrees to pay all reasonable fees
of Collateral Agent in connection with the preparation, execution, and
delivery of the Intercreditor Agreement and the Collateral Documents and the
transactions contemplated thereby, including, but not limited to, reasonable
attorneys’ fees of counsel to Collateral Agent and to pay to the Collateral
Agent from time to time all reasonable fees and expenses and such
indemnities and other amounts as shall be required to be paid by Borrower
to the Collateral Agent in accordance with the terms of the Intercreditor
Agreement and the Collateral Documents. Borrower shall also pay (A) the
reasonable attorneys’ fees and expenses of counsel to Administrative Agent
in connection with the negotiation and review of the Collateral Documents
and the Intercreditor Agreement, including, in each case, any amendments
thereto, and (B) the reasonable attorneys fees and out-of-pocket expenses
incurred by Collateral Agent with respect to any workout or restructuring
relating to the Collateral Documents.”

1.15 Amendment to Section 12.5 (Amendments, Etc.). Section 12.5 is amended by: (i)
deleting the word “or” at the end of clause (f); (ii) adding an “or” at the end of clause (g); and
(iii) adding the following new clause (h) to the end thereof:

“(h) release all or substantially all of the Collateral in any transaction
or series of related transactions, without the written consent of each
Lender.”

PARAGRAPH 2. COLLATERAL. In consideration of the execution and delivery of this
Amendment and the modification of certain covenants in the Credit Agreement at the request of and
for the benefit of Borrower and as a material inducement to the execution of this Amendment,
Borrower hereby agrees on or prior to January 30, 2009 (such date as it may be extended with the
approval of Requisite Lenders being hereinafter referred to as the “Collateral Effective Date”), to
secure full and complete payment by Borrower of all amounts due with respect to the Loan Documents.
On or prior to the Collateral Effective Date, Borrower shall execute and deliver, or cause to be
executed and delivered, the Collateral Documents described below covering the Collateral, as
follows:

2.1 Security Agreement. Borrower will, and will cause each Consolidated Subsidiary to,
grant to the Collateral Agent, for the benefit of the Secured Parties, a valid and perfected first
priority security interest in all of its personal property (other than personal property which
constitutes Excluded Assets), whether tangible or intangible (including, without limitation, all
cash, portfolio investments, marketable securities, accounts, chattel paper, instruments,
documents, books, records, inventory, machinery, equipment, trademarks, patents, copyrights, other
intellectual property, payment intangibles, other general intangibles, commercial tort claims,
Equity Interests in its Consolidated Subsidiaries, other investment property, and other personal
property described in the Security Agreement, whether now owned or hereafter acquired, and all
products and cash and noncash proceeds thereof), with perfection, in the case of any instruments,
investment property, or letters of credit being effected by the Collateral Agent, or its agent or
designee obtaining control of such instruments, investment property, or letters of credit, in
addition to filing a Uniform Commercial Code financing statement with respect to such instruments,
investment property, or letters of credit, all pursuant to the Security Agreement and the other
Collateral Documents, which shall each be in form and substance reasonably satisfactory to
Administrative Agent and the Requisite Lenders.

2.2 Insurance. Borrower will, and will cause each Consolidated Subsidiary to deliver
to the Collateral Agent certificates of insurance and endorsements to insurance policies naming the
Collateral Agent as loss payee/mortgagee and/or additional insured, as applicable, with respect to
all Collateral and as may be required by the Collateral Documents.

2.3 Intercreditor Agreement. Borrower will, and will cause each Consolidated
Subsidiary, to deliver to the Collateral Agent counterparts of the Intercreditor Agreement in form
and substance satisfactory to Administrative Agent and the Requisite Lenders, executed by Lenders,
each of the other Secured Parties, and Collateral Agent.

2.4 Mortgages. Borrower will, and will cause each Consolidated Subsidiary to, grant
to Collateral Agent, for the benefit of the Secured Parties, a valid and perfected first Lien in
all of its Real Property (other than Real Property which constitutes Excluded Assets) pursuant to
the Mortgages and other Collateral Documents related to the Mortgages and the Real Property,
including leasehold mortgagee title commitments, and surveys, together with payment of all related
Taxes and fees, all of which shall be in form and substance reasonably satisfactory to
Administrative Agent and the Requisite Lenders.

2.5 Officer’s Certificates. Borrower will deliver certificates of officers of
Borrower, regarding resolutions or other action, incumbency certificates and/or other certificates
in form and substance reasonably satisfactory to the Administrative Agent and Requisite Lenders,
which establish the identity and verify the authority and capacity of each officer executing the
Collateral Documents.

2.6 Opinions. Borrower shall cause (i) special counsel to Borrower to deliver to
Administrative Agent and Lenders an opinion of counsel (which shall be in customary form) with
respect to the Collateral Documents executed and delivered on or prior to the date of such opinion
and (ii) to the extent applicable, counsel from each jurisdiction in which Borrower or any
Consolidated Subsidiary has Collateral to deliver to the Administrative Agent and Lenders an
opinion of counsel (which shall be in customary form) with respect to the valid perfection of
Administrative Agent’s and Lenders’ security interests in such Collateral in the applicable
jurisdiction, and each such opinion shall be reasonably satisfactory to the Administrative Agent
and the Requisite Lenders.

2.7 Requested Information. Borrower will, and will cause each Consolidated Subsidiary
to execute and deliver and cause to be executed and delivered such further documents and
instruments as the Administrative Agent and the Requisite Lenders reasonably deem necessary or
desirable to evidence and perfect their Liens in the Collateral as set forth in the Collateral
Documents.

PARAGRAPH 3. FIRST AMENDMENT EFFECTIVE DATE. This Amendment shall be binding upon
the Administrative Agent, Borrower, and the Lenders on the last day upon which (a) counterparts of
this Amendment shall have been executed and delivered to Administrative Agent by Borrower,
Administrative Agent, and Requisite Lenders, or when Administrative Agent shall have received,
telecopied, telexed, or other evidence satisfactory to it that all such parties have executed and
are delivering to Administrative Agent counterparts thereof, at which time this Amendment shall be
deemed effective as of December 30, 2008 (the “First Amendment Effective Date”); (b) Borrower shall
have delivered to Administrative Agent copies (certified by the Secretary or Assistant Secretary of
Borrower) of all corporate action taken by Borrower to authorize the execution, delivery, and
performance of this Amendment; (c) Borrower’s counsel shall have delivered a favorable legal
opinion regarding the enforceability of this Amendment and such other matters incident to the
transactions contemplated hereby as Administrative Agent may request; (d) Borrower and the
requisite Noteholders shall have approved the Second Omnibus Amendment to the Note Agreements and
shall have executed and delivered the Second Omnibus Amendment to the Note Agreements, which shall
be in all respects in form and substance satisfactory to Administrative Agent and Requisite
Lenders; (e) Borrower shall have paid to each Consenting Lender (by payment to Administrative Agent
for the account of each Consenting Lender) an Amendment Fee in an amount equal to 0.50% of such
Consenting Lender’s Commitment on the First Amendment Effective Date; (f) Borrower shall have paid
the reasonable fees, expenses, and disbursements of Haynes and Boone, LLP which are reflected in
statements of such counsel rendered on or prior to the date of this Amendment; and (g) Borrower
shall have delivered such other documents or certifications as Administrative Agent may reasonably
request. Notwithstanding the foregoing provisions, for purposes of determining compliance with the
conditions specified in this Paragraph 3, each Lender that has signed this Amendment shall be
deemed to have consented to, approved or accepted or to be satisfied with, each document or other
matter required thereunder to be consented to or approved by or acceptable or satisfactory to a
Lender unless Administrative Agent shall have received notice from such Lender prior to the
proposed First Amendment Effective Date specifying its objection thereto.

PARAGRAPH 4. REPRESENTATIONS AND WARRANTIES. As a material inducement to the
Consenting Lenders and Administrative Agent to execute and deliver this Amendment, Borrower hereby
represents and warrants to the Lenders and Administrative Agent (with the knowledge and intent that
such parties are relying upon the same in entering into this Amendment) the following: (a) the
representations and warranties in the Credit Agreement and in all other Loan Documents are true and
correct on the date hereof in all material respects, as though made on the date hereof, except to
the extent that such representations and warranties expressly relate solely to an earlier date (in
which case such representations and warranties shall have been true and accurate as of such earlier
date); (b) upon the effectiveness of this Amendment and the Second Omnibus Amendment to the Note
Agreements, each dated as of December 30, 2008, no Default or Event of Default exists under the
Loan Documents; (c) Borrower has the right and power, and has taken all necessary action to,
authorize it to execute, deliver, and perform this Amendment in accordance with its terms; (d) this
Amendment has been duly executed and delivered by the duly authorized officers of Borrower, and
this Amendment and the other Loan Documents, as amended by this Amendment, each constitute the
legal, valid, and binding obligation of Borrower, enforceable against it in accordance with its
terms; (e) the execution, delivery and performance of this Amendment in accordance with its terms
do not and will not, by the passage of time, the giving of notice, or otherwise: (i) require any
Governmental Approval, other than such as have been obtained and are in full force and effect, or
violate any Applicable Law (including all Environmental Laws) relating to Borrower or any
Subsidiary; (ii) conflict with, result in a breach of, or constitute a default under the articles
of incorporation or the bylaws of Borrower or the organizational documents of any Subsidiary, or
any indenture, agreement, or other instrument to which Borrower or any Subsidiary is a party or by
which it or any of its respective properties may be bound; or (iii) result in or require the
creation or imposition of any Lien upon or with respect to any property now owned or hereafter
acquired by Borrower or any Subsidiary (other than Liens created by the Collateral Documents); and
(f) Borrower has not paid any fee or other consideration or remuneration to any Lender, in its
capacity as such, or to any Noteholder, in its capacity as such, in connection with the execution
and delivery of this Amendment or the Second Omnibus Amendment to the Note Agreements, except (i) a
fee equal to 50 basis points of the principal amount of the Notes held by each Noteholder and (ii)
the fee referenced in Paragraph 3(e) of this Amendment.

PARAGRAPH 5. MISCELLANEOUS.

5.1 Effect on Loan Documents. The Credit Agreement and all related Loan Documents
shall remain unchanged and in full force and effect, except as provided in this Amendment, and are
hereby ratified and confirmed. On and after the First Amendment Effective Date, all references to
the “Credit Agreement” or the “Agreement” shall be to the Credit Agreement as herein amended. The
execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided
herein, operate as a waiver of any rights of the Lenders under the Credit Agreement or any Loan
Documents, nor constitute a waiver under the Credit Agreement or any other provision of the Loan
Documents.

5.2 Reference to Miscellaneous Provisions. This Amendment and the other documents
delivered pursuant to this Amendment are part of the Loan Documents referred to in the Credit
Agreement, and the provisions relating to Loan Documents set forth in Section 12 of the Credit
Agreement are incorporated herein by reference the same as if set forth herein verbatim.

5.3 Costs and Expenses. Borrower agrees to pay promptly the reasonable fees and
expenses of counsel to Administrative Agent for services rendered in connection with the
preparation, negotiation, reproduction, execution, and delivery of this Amendment.

5.4 Counterparts. This Amendment may be executed in a number of identical
counterparts, each of which shall be deemed an original for all purposes, and all of which
constitute, collectively, one agreement; but, in making proof of this Amendment, it shall not be
necessary to produce or account for more than one such counterpart. It is not necessary that all
parties execute the same counterpart so long as identical counterparts are executed by Borrower,
Administrative Agent, and Requisite Lenders.

5.5 Entirety. this written agreement represents the final agreement among the
parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral
agreement of the parties. There are no unwritten oral agreements among the parties.

5.6 Parties. This Amendment binds and inures to Borrower, Administrative Agent, the
Consenting Lenders, the other Lenders, and their respective successors and assigns.

5.7 Release. In order to induce the Consenting Lenders to enter into this Amendment,
Borrower and its Consolidated Subsidiaries acknowledge and agree that: (a) neither Borrower nor
any of its Consolidated Subsidiaries has any claim or cause of action against Administrative Agent
or any of the Lenders (or any of their respective directors, trustees, officers, employees, or
agents) relating to or arising out of this Amendment and the grant of Collateral provided for
herein or the Credit Agreement; (b) neither Borrower nor any of its Consolidated Subsidiaries has
any offset right, counterclaim, or defense of any kind against any of their respective obligations,
indebtedness, or liabilities to Administrative Agent or any of the Lenders; and (c) Administrative
Agent and each Lender have heretofore properly performed and satisfied in a timely manner all of
their respective obligations to Borrower and its Consolidated Subsidiaries under the Credit
Agreement. Borrower and its Consolidated Subsidiaries wish to eliminate any possibility that any
past conditions, acts, omissions, events, circumstances, or matters would impair or otherwise
adversely affect any rights, interests, contracts, or remedies of Administrative Agent or any
Lender under this Amendment, the Credit Agreement, the Collateral Documents, and the other Loan
Documents, whether known or unknown, as applicable; and therefore, Borrower, for itself, and each
of its Consolidated Subsidiaries) unconditionally releases, waives, and forever discharges (x) any
and all liabilities, obligations, duties, promises, or indebtedness of any kind of Administrative
Agent or any Lender to Borrower or any of its Consolidated Subsidiaries arising on or prior to the
date hereof in connection with this Amendment, the Credit Agreement, the other Loan Documents, or
the grant of Collateral provided herein, except the obligations to be performed by Administrative
Agent and Lenders on or after the date hereof as expressly stated in this Amendment, the Credit
Agreement, the Collateral Documents, and the other Loan Documents, as such obligations may be
modified pursuant to the terms of this Amendment, the Credit Agreement, the Collateral Documents,
or the other Loan Documents, and (y) all claims, offsets, causes of action, suits, or defenses of
any kind whatsoever (if any), whether arising at law or in equity, whether known or unknown, which
Borrower or its Consolidated Subsidiaries might otherwise have against Administrative Agent or any
Lender or any of the respective directors, trustees, officers, employees or agents of
Administrative Agent or any Lender arising on or prior to the date hereof in connection with the
Credit Agreement, this Amendment, the other Loan Documents, or the grant of Collateral provided
herein, in either case (x) or (y), whether known or unknown, on account of any past or presently
existing condition, act, omission, event, contract, liability, obligation, indebtedness, claim,
cause of action, defense, circumstance, or matter of any kind. Neither Administrative Agent nor
any Lender shall be liable with respect to, and Borrower and each Consolidated Subsidiary hereby
waives, releases, and agrees not to sue for any special, indirect, or consequential damages
relating to this Amendment, or the Credit Agreement, or Collateral Documents, or arising out of its
activities in connection herewith or therewith (whether before, on or after the date hereof).

IN WITNESS WHEREOF, the parties hereto have executed this Amendment in multiple counterparts
as of the respective dates indicated on each signature page hereof, but effective as of the First
Amendment Effective Date.

Remainder of this page intentionally blank.

Signature page to follow.

1

Signature Page to that certain First Amendment to Credit Agreement dated as of the date
first stated above, amending that certain Credit Agreement dated as of April 9, 2008, as amended
and modified to date.

ALLIED CAPITAL CORPORATION, as Borrower

	 	 	 
	By:

	 	/s/ Penni F. Roll
	
 
	 	 
	
 
	 	Penni F. Roll, Chief Financial Officer

	 	 	BANK OF AMERICA, N.A., as Administrative Agent and as a Lender

	 	 	 
	By:

	 	/s/ Stefanie J. Brown
	
 
	 	 
	
 
	 	Stefanie J. Brown, Vice President

BANK LEUMI USA, as a Lender

	 	 	 
	By:

	 	/s/ John Koenigsberg
	
 
	 	 
	
 
	 	John Koenigsberg, Senior Vice President
	By:

	 	/s/ Iris Steinhardt
	
 
	 	 
	
 
	 	Iris Steinhardt, Vice President

BRANCH BANKING AND TRUST COMPANY, as a Lender

	 	 	 
	By:

	 	/s/ Cory Boyte
	
 
	 	 
	
 
	 	Cory Boyte, Senior Vice President

CHEVY CHASE BANK, F.S.B., as a Lender

	 	 	 
	By:

	 	/s/ Richard L. Amador
	
 
	 	 
	
 
	 	Richard L. Amador, Group Vice President

CITIBANK N.A., as a Lender

By: /s/ Anthony V. Pantina

Anthony V. Pantina, Director

DEUTSCHE BANK AG NEW YORK BRANCH, as a Lender

	 	 	 
	By:

	 	/s/ Melissa Curry
	
 
	 	 
	
 
	 	Melissa Curry, Vice President
	By:

	 	/s/ Michael Campites
	
 
	 	 
	
 
	 	Michael Campites, Vice President

FIRSTRUST BANK, as a Lender

	 	 	 
	By:

	 	/s/ John Hollingsworth
	
 
	 	 
	
 
	 	John Hollingsworth, Senior Vice President

ING CAPITAL LLC, as a Lender

	 	 	 
	By:

	 	/s/ Kunduck Moon
	
 
	 	 
	
 
	 	Kunduck Moon, Managing Director

MANUFACTURERS AND TRADERS TRUST COMPANY, as a Lender

	 	 	 
	By:

	 	/s/ Beth A. Hughes
	
 
	 	 
	
 
	 	Beth A. Hughes, Assistant Vice President

MERRILL LYNCH BANK USA, as a Lender

By: /s/ Preston Jackson

Preston Jackson, President

MORGAN STANLEY BANK, as a Lender

	 	 	 
	By:

	 	/s/ Melissa James
	
 
	 	 
	
 
	 	Melissa James, Authorized Signatory

PNC BANK, NATIONAL ASSOCIATION, as a Lender

	 	 	 
	By:

	 	/s/ Crissola K. Talsania
	
 
	 	 
	
 
	 	Crissola K. Talsania, Vice President

SUNTRUST BANK, as a Lender

	 	 	 
	By:

	 	/s/ Robert S. Ashcom
	
 
	 	 
	
 
	 	Robert S. Ashcom, Director

TD BANKNORTH, N.A., as a Lender

	 	 	 
	By:

	 	/s/ John Mercier
	
 
	 	 
	
 
	 	John Mercier, Senior Vice President

UNION BANK OF CALIFORNIA, N.A., as a Lender

	 	 	 
	By:

	 	/s/ Peter Thompson
	
 
	 	 
	
 
	 	Peter Thompson, Vice President

2Ethan Frome

Exhibit 4.26

THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW.  THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.  ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THAT CERTAIN LOAN AGREEMENT ATTACHED HERETO (INDIVIDUALLY AND COLLECTIVELY REFERRED TO HEREIN AS THE “NOTE”), EXECUTED BY BAYWOOD INTERNATIONAL, INC., A NEVADA CORPORATION (THE “COMPANY”), AS MAKER, IN FAVOR OF THE LENDER (AS THE SAME MAY BE AMENDED AND RESTATED FROM TIME TO TIME).  NO TRANSFER OF THESE SECURITIES WILL BE VALID OR EFFECTIVE UNTIL THE CONDITIONS OF THE NOTE AND THE TERMS OF THIS WARRANT HAVE BEEN FULFILLED. COPIES OF THE NOTE MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.

BAYWOOD INTERNATIONAL, INC.

COMMON STOCK PURCHASE WARRANT

		
	No. W - 151

	Issuance Date:  February 4, 2008

1.

Warrant

1.1

Grant of Warrant.  Baywood International, Inc., a Nevada corporation (the “Company”), hereby certifies that, for good and valuable consideration, the receipt of which is hereby acknowledged, the purchaser of this Warrant, O. Lee Tawes, III, (“Holder”), is entitled, subject to the terms set forth below and the terms and conditions of the Note attached hereto executed by the Company in favor of the Holder, to purchase at the Exercise Price (as defined in Section 1.2), from the Company at any time or from time to time during the Exercise Period (as defined in Section 9), Fifty Thousand (50,000) unregistered shares of the Company’s fully paid and non-assessable common stock, par value $0.001 per share (the “Common Stock”).  Holder acknowledges that the number of common shares described in the preceding sentence is the total of all common shares that the Holder is entitled to acquire under the Note attached hereto.

1.2

Exercise Price.  Holder shall pay a per share purchase price of $.80 for each share of the Company’s Common Stock purchased under this Warrant (such price per share is referred to herein as the “Exercise Price”).

1.3

Adjustments for Issuance of Common Stock and Amount of Outstanding Common Stock.  If there shall occur any stock split, stock dividend, reverse stock split, or other subdivision of the Company’s Common Stock (“Stock Event”), for which the Company receives no new value, then the number of shares of Common Stock to be received by the Holder of this Warrant shall be appropriately adjusted (upward or downward) so that the proportion of (a) the number of shares issuable hereunder, plus the number of shares of Warrant Stock (as defined below) held by the Holder of this 

1

Warrant, to (b) the total number of shares of the Company (on a fully diluted basis) prior to such Stock Event is equal to the proportion of (x) the number of shares issuable hereunder, plus the number of shares of Warrant Stock held by the Holder of this Warrant after such Stock Event to (y) the total number of shares of the Company (on a fully diluted basis) after such Stock Event.  No adjustment to the Exercise Price shall be made in connection with any adjustment of the number of shares of Common Stock receivable upon exercise of this Warrant, except that the Exercise Price shall be proportionally decreased or increased upon the occurrence of any stock split, stock dividend, reverse stock split or other subdivision of the Common Stock so that the aggregate Exercise Price payable if the Warrant was exercised in full shall be the same both before and after the Stock Event; provided, however, that in no event will the Exercise Price be less than the par value of the Common Stock.  The provisions of this Section 1.3 shall not apply if the Company issues its Common Stock or other securities for new consideration or if it repurchases its own shares.  For purposes of this Section 1.3, “Warrant Stock” means shares of Common Stock issued to the Holder upon the partial exercise of this Warrant.

2.

Exercise of Warrant.

2.1

Exercise.  This Warrant may be exercised, prior to its expiration pursuant to Section 2.3, by the Holder hereof at any time or from time to time during the Exercise Period (as defined in Section 9), by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, by certified or official bank check payable to the order of the Company or by wire transfer to its account, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then being exercised by the Exercise Price.  In the event the Warrant is not exercised in full, the Company, at its expense, will forthwith issue and deliver to, or upon the order of, the Holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, having in the aggregate in Section 1.1 thereof the number of shares of Common Stock equal (subject to any adjustment provided for herein) to the number of such shares called for in Section 1.1 of this Warrant minus the number of such shares (subject to any adjustment provided for herein) for which this Warrant shall have been exercised.  Upon exercise of this Warrant in accordance with this Section 2.1, the Holder shall be, and shall be deemed to be, for all purposes, a holder of record of the number of shares of Common Stock for which this Warrant has been exercised, notwithstanding any delay or failure of the Company to issue stock certificates as provided in Section 3 hereof.  Immediately upon exercise, the Holder shall have the right to vote on all matters on which holders of Common Stock have a right to vote, shall be deemed a record holder for the purposes of voting, dividends or any other distributions, and shall have all other rights of a stockholder of record under the laws of the State of Nevada.  Upon any exercise of this Warrant, in whole or in part, the Holder shall pay the aggregate Exercise Price with respect to the shares of Common Stock for which this Warrant is then being exercised (collectively, the “Exercise Shares”) by payment of cash in the form referred to in the first sentence of this Section 2.1.

2.2

Class of Stock Receivable Upon Exercise.  If at the time of exercise the Company has more than one class of Common Stock outstanding, the shares of Common Stock receivable upon exercise of this Warrant shall be the shares of Common Stock designated herein upon such exercise by the Holder.  If at any time the Common Stock to which this Warrant is applicable is converted into any other class of stock (“Other Securities”), this Warrant shall continue in force and effect and shall be applicable with respect to such Other Securities.

2.3

Termination.  This Warrant shall terminate upon the earlier to occur of (a) the exercise in full, or (b) at 5:00 p.m. (Phoenix Time) on February 4, 2013.

2

3.

Delivery of Stock Certificates on Exercise.

3.1

Delivery.  As soon as practicable after the exercise of this Warrant in full or in part, and in any event within seven business days thereafter, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities (as defined in Section 2.2)) to which such Holder shall be entitled on such exercise, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise.

3.2

Legend.  The Company may cause the following legend to be set forth on each certificate representing shares of Common Stock acquired under this Warrant or any other security issued or issuable upon the exercise of this Warrant, unless counsel for the Company is of the opinion as to any such certificate that such legend is unnecessary:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR APPLICABLE STATE LAW AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS REGISTERED UNDER THE ACT AND STATE LAW, OR, UNLESS IN THE OPINION OF COUNSEL, IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THE SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.

3.3

Fractional Shares.  In the event that the exercise of this Warrant, in whole  or in part, results in the issuance of any fractional share of Common Stock, then in such event the Holder shall be entitled to cash equal to the fair market value of such fractional share as determined in good faith by the Company’s Board of Directors.

4.

Continuation of Terms.  Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) of the Company, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger, or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant.

5.

No Impairment; No Preemptive Rights.  The Company will not, by amendment of its Articles of Incorporation (or similar documents) or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrant.  Nothing in this Warrant shall grant (or be construed to grant) Holder any preemptive or other preferential rights with respect to the issuance of any class of the Company debt or equity securities.

6.

Notices.  In the event of:

3

(a)

any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or any consolidation or merger of the Company with or into any other Person; or

(b)

any voluntary or involuntary dissolution, liquidation or winding-up of the Company;

then, and in each such event, the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is anticipated to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up.  Such notice shall be mailed at least 15 days prior to the date specified in such notice on which any such record or other action is to be taken.

7.

Reservation of Stock Issuable on Exercise of Warrant.  The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, a number of shares of Common Stock equal to the total number of shares of Common Stock from time to time issuable upon exercise of this Warrant, and, from time to time, will take all steps necessary to amend its Articles of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant, which is not reflected on its corporate register and which is not in compliance with federal and state securities laws.

8.

Registered Form.  This Warrant shall be in registered form only in accordance with the Note.  The Company shall treat the person reflected on its corporate register as the Holder of the Warrant.  The Company shall not be obligated to recognize any transfer of this Warrant which is not reflected in its corporate register and which is not in compliance with federal and state securities laws.

9.

Definitions.  As used herein the following terms, unless the context otherwise requires, have the following respective meanings:

(a)

The term “Common Stock” includes (i) the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), (ii) any other capital stock of any class or classes (however designated) of the Company, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and (iii) any other securities into which or for which any of the securities described in clauses (i) or (ii) above have been converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.

(b)

The term “Exercise Period” shall mean the period beginning on the date of issuance and ending at 5:00 p.m. on February 4, 2013.

(c)

The term “Warrant Stock” means shares of Common Stock issued to the holder upon the exercise of this Warrant.

(d)

The term “Other Securities” shall have the meaning stated in Section 2.2.

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10.

Warrant Agent.  The Company may, by written notice to the holder of this Warrant, appoint an agent having an office in Phoenix, Arizona for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 2 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

11.

Promissory Note.  This Warrant is issued pursuant to the terms and conditions of the aforementioned Note and shall be subject to all terms and conditions thereof pertaining to the Company’s issuance of Warrants.

12.

Accredited Investor.  The Holder of this Warrant is an “Accredited Investor” as such term is defined in the Securities Act of 1933 and any regulation issued thereunder.  By accepting this Warrant, the Holder represents and warrants to the Company that he is an Accredited Investor, as defined above.

13.

Remedies.  The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.

14.

Benefit.  This Warrant shall be binding upon, and inure solely to the benefit of the Company and Holder and no other person shall acquire or have any right under or by virtue of this Warrant.

15.

Registration Rights.  Subject to the limitations of this Section, the Company agrees to register shares of Warrant Stock, upon the request of Holder, if the Company files a registration statement under the Securities Act of 1933 (“the Act”), which relates to a current offering of the Company’s Common Stock (except a registration statement filed in connection with an offering of the Company’s equity securities to its employees pursuant to any employee benefit or stock option plan or any dividend reinvestment plan maintained or pursuant to a merger agreement or agreement to acquire the assets of another entity or similar transaction) so as to permit the public sale of the Warrant Stock by the Holder in compliance with the Act.  The Company shall give written notice (the “Registration Notice”) to Holder of its intention to file a registration statement under the Act relating to an offering of its Common Stock not less than sixty (60) days prior to the filing of such registration statement with the Securities and Exchange Commission (“SEC”).  The Holder may request that the Company include all or a portion of his Warrant Stock in such registration statement, only if such request is made not later than thirty (30) days prior to the date specified in the Registration Notice as the date on which the Company intends to file its registration statement with the SEC.  Neither the Company’s delivery of the Registration Notice nor the delivery of a request by Holder for registration of Warrant Stock shall obligate the Company to file a registration statement and, notwithstanding the filing of a registration statement, the Company may at any time prior to the effective date determine not to offer the securities described in the registration statement, and may withdraw the registration statement without liability to any Holder of Warrant Stock.  In that event, the Company shall pay all expenses of the registration statement incurred through the date it is withdrawn.  The Company shall pay the entire cost of any Registration Statement covering Warrant Stock, including, without limitation, attorneys’ fees, accounting fees, filing fees and printing costs, but excluding any underwriter’s discount.  The Holder shall be solely responsible for any underwriter discount on Warrant Stock sold by the Holder.  Any Warrant Stock included in a registration statement filed by the Company shall be subject to underwriter cutbacks and any other limitations an underwriter, in its discretion, may impose on the inclusion of such Warrant Stock in the registration statement.

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16.

Notices.  All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, or sent by overnight courier (or sent in the form of a telecopy) at the following addresses:

If to Company:

Baywood International, Inc.

14950 North 83rd Place, Suite 1

Scottsdale, Arizona  85260

Attn:  Mr. Neil Reithinger, President & C.E.O.

Facsimile:  (480)483-2168

If to Holder:

O. Lee Tawes, III

125 Davids Hill Road

Bedford Hills, NY 10507

Facsimile:  (____) __________

17.

Severability.  In case any provision of this Warrant shall be invalid, illegal or unenforceable, or partially invalid, illegal or unenforceable, the provision shall be enforced to the extent, if any, that it may legally be enforced and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

18.

Integration.  This Warrant and any term hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.  The parties waive any common law right to orally modify this Warrant.

19.

Choice of Law.  This Warrant shall be governed by and construed in accordance with the domestic substantive laws (and not the conflict of law rules) of the State of Nevada.

20.

Headings.  The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof.

IN WITNESS WHEREOF, the Company has caused this Common Stock Purchase Warrant to be executed by its duly authorized officer and attested by its Secretary.

Dated as of 4th February, 2008

					
	         

	Baywood International, Inc., a Nevada corporation

	 
	 
	  

	 
	 
	 

	 
	By:  

	/s/ Neil Reithinger

	 
	 
	Neil Reithinger

President & C.E.O.

	Attest:

	 
	 

	 
	 
	 

	 
	 
	 
	 

	/s/ Karl Rullich

	,Secretary

	 
	 

6

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