LARSON DAVIS INC, 10-Q, 1997-11-17

LARSON DAVIS INC
10-Q, 1997-11-17
MEASURING & CONTROLLING DEVICES, NEC

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

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17020

Larson Davis Incorporated
(Exact name of registrant as specified in its charter)

Nevada 87-0429944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1681 West 820 North
Provo, Utah 84601
(Address of principal executive offices) (Zip Code)

(801) 375-0177
(Registrant's telephone number, including area code)

N/A
(Former name, former address, and former fiscal
year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court.

Yes No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 12, 1997, the Issuer had 11,670,756 shares of its common
stock, par value $0.001 per share, issued and outstanding.

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Larson Davis Incorporated (the "Company") has included the consolidated
balance sheets of the Company and its subsidiaries as of September 30, 1997
(unaudited), and December 31, 1996 (the end of the Company's transition period),
and unaudited consolidated statements of operations for the three and nine
months ended September 30, 1997 and 1996, and unaudited consolidated statements
of cash flows for the nine months ended September 30, 1997 and 1996, together
with unaudited condensed notes thereto. In the opinion of management of the
Company, the financial statements reflect all adjustments, all of which are
normal recurring adjustments, necessary to fairly present the financial
condition, results of operations, and cash flows of the Company for the interim
periods presented. The financial statements included in this report on Form
10-Q should be read in conjunction with the audited financial statements of the
Company and the notes thereto included in the annual report of the Company on
Form 10-KSB for the year ended June 30, 1996, and the report of the Company on
Form 10-K/A for the six month transition period ended December 31, 1996.

LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,340,410 $ 2,696,542
Trade accounts receivable, net of
allowance for doubtful accounts 2,508,158 2,598,582
Inventories 3,888,774 4,096,445
Other current assets 271,855 130,096
-------------- --------------
Total current assets 9,009,197 9,521,665

Property and equipment, net of
accumulated depreciation
and amortization 2,369,445 1,815,455

Assets under capital lease obligations,
net of accumulated amortization 735,595 613,675

Long-term contractual arrangement, net
of accumulated cost recoveries 2,699,472 2,872,014

Intangible assets, net of accumulated
amortization 4,843,174 5,083,712

Note receivable from officer 69,375 -
-------------- --------------
$ 19,726,258 $ 19,906,521
============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<S> <C> <C>
Current liabilities:
Line of credit $ 1,191,073 $ 1,033,018
Accounts payable 558,129 902,926
Accrued liabilities 861,197 764,393
Current maturities of long-term debt 49,025 91,902
Current maturities of capital lease obligations 209,035 159,515
-------------- --------------
Total current liabilities 2,868,459 2,951,754

Long-term debt, less current maturities 729,163 759,709

Capital lease obligations, less current maturities 606,996 523,185
-------------- --------------

Total liabilities 4,204,618 4,234,648
-------------- --------------

Commitments and contingencies - -

Stockholders' equity:
Preferred stock, $0.001 par value; authorized
10,000,000 shares; issued and outstanding
zero shares at September 30, 1997,
and 200,000 shares at December 31, 1996 - 200

Common stock, $0.001 par value; authorized
290,000,000 shares; issued and outstanding
11,655,621 shares at September 30, 1997,
and 10,717,790 shares at December 31, 1996 11,656 10,718

Additional paid-in capital 24,242,081 19,999,375

Accumulated deficit (8,781,865) (4,418,780)

Cumulative foreign currency translation
adjustment 49,768 80,360
-------------- --------------

Total stockholders' equity 15,521,640 15,671,873
-------------- --------------

$ 19,726,258 $ 19,906,521
============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 2,320,405 $ 2,158,714 $ 6,672,750 $ 6,262,049
------------ ------------ ------------ ------------

Costs and operating expenses:
Cost of sales 1,125,664 766,570 3,492,116 3,058,618
Research and development 1,352,602 736,795 3,253,354 2,057,590
Selling, general, and administrative 1,322,051 1,105,392 4,184,575 3,214,471
------------ ------------ ------------ ------------

3,800,317 2,608,757 10,930,045 8,330,679
------------ ------------ ------------ ------------

Operating loss (1,479,912) (450,043) (4,257,295) (2,068,630)
------------ ------------ ------------ ------------

Other income (expense):
Interest income 31,189 29,260 124,002 41,580
Interest expense (73,847) (58,005) (216,284) (312,050)
Other, net (2,968) 7,442 1,492 (58,426)
------------ ------------ ------------ ------------

(45,626) (21,303) (90,790) (328,896)
------------ ------------ ------------ ------------

Loss before income taxes (1,525,538) (471,346) (4,348,085) (2,397,526)

Income tax expense - - - -
------------ ------------ ------------ ------------

Net loss $ (1,525,538) $ (471,346) $ (4,348,085) $ (2,397,526)
============ ============ ============ ============

Loss per common share:
Primary $ (0.13) $ (0.05) $ (0.38) $ (0.26)
Fully diluted (0.13) (0.05) (0.38) (0.26)

Weighted average common and common
equivalent shares:
Primary 11,610,518 10,350,000 11,382,960 9,236,418
Fully diluted 11,610,518 10,350,000 11,382,960 9,236,418

</TABLE>

The accompanying notes are an integral part of these financial statements.

LARSON DAVIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities
Net loss $ (4,348,085) $ (2,397,526)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 364,323 376,357
Amortization 508,923 232,010
Stock issued in payment of compensation 43,698 59,640
Loss (gain) on sale of property and equipment (3,818) 37,604
Changes in assets and liabilities:
Trade accounts receivable 90,424 63,193
Inventories 207,671 (319,468)
Other current assets (141,759) (310,998)
Accounts payable (344,797) (112,954)
Accrued liabilities 96,804 66,339
-------------- --------------
Net cash used in operating activities (3,526,616) (2,305,803)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (941,477) (618,431)
Proceeds from sale of property and equipment 42,679 17,700
Payments for intangible assets (83,019) (399,759)
Collection of loans to officers - 81,000
Proceeds from long-term contractual arrangement 172,542 238,148
-------------- --------------
Net cash used in investing activities (809,275) (681,342)
-------------- --------------
Cash flows from financing activities
Net change in lines of credit 158,055 (926,205)
Proceeds from long-term obligations 25,486 -
Principal payments of long-term debt (98,909) (854,693)
Net proceeds from issuances of common stock and
exercise of options and warrants 4,130,371 7,239,336
Principal payments on capital lease obligations (189,652) (99,173)
Preferred dividends (15,000) (33,750)
-------------- --------------
Net cash provided by financing activities 4,010,351 5,325,515
-------------- --------------
Effect of exchange rates on cash (30,592) 5,521
-------------- --------------
Net increase (decrease) in cash and cash equivalents (356,132) 2,343,891

Cash and cash equivalents at beginning of period 2,696,542 329,244
-------------- --------------
Cash and cash equivalents at end of period $ 2,340,410 $ 2,673,135
============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

LARSON DAVIS INCORPORATED AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(A) Basis of Presentation

The accompanying unaudited consolidated financial statements of LarsonoDavis
Incorporated and Subsidiaries (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnote disclosures required by generally accepted accounting principles
for complete financial statements. These financial statements and footnote
disclosures should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's annual
report on Form 10-KSB for the year ended June 30, 1996, and report on Form 10-
K/A for the six month transition period ended December 31, 1996. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to fairly present the Company's consolidated financial position as of
September 30, 1997, its consolidated results of operations for the three months
ended September 30, 1997 and 1996, and its consolidated results of operations
and cash flows for the nine months ended September 30, 1997 and 1996. The
results of operations for the three months and nine months ended September 30,
1997, may not be indicative of the results that may be expected for the year
ending December 31, 1997.

(B) Earnings (Loss) Per Common Share

Earnings (loss) per common share is computed by dividing net income (loss) by
the weighted average common shares outstanding during the period, including
common equivalent shares (if dilutive). Common equivalent shares include stock
options and warrants. Net income used in this calculation is decreased (net
loss is increased) by the dividends paid to preferred stockholders during the
periods the preferred stock was outstanding.

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 establishes new standards for computing and presenting
earnings per share (EPS). SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. Upon adoption of SFAS No. 128,
restatement of all prior period EPS data will be required. SFAS No. 128
replaces the presentation of primary and fully diluted EPS with a presentation
of basic and diluted EPS, respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common shareholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS
reflects potential dilution and is calculated similarly to fully diluted EPS
under current accounting standards. Under SFAS No. 128, basic and diluted loss
per share for the Company for the three months and the nine months ended
September 30, 1997 and 1996, would have been the same as primary and fully
diluted loss per share presented in the accompanying financial statements.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, with
reclassification of financial statements for earlier periods provided for
comparative purposes required. The effect of adopting SFAS No. 130 on the
financial statements of the Company is not expected to be material.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
No. 131). SFAS No. 131 establishes standards for reporting information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 131 will not have an effect on the Company's financial
position or results of operations, but may result in disclosures not previously
required.

(D) Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Raw materials $ 1,598,845 $ 1,276,413
Work in process 773,932 1,398,229
Finished goods 1,515,997 1,421,803
------------- -------------
$ 3,888,774 $ 4,096,445
============= =============
</TABLE>

(E) Stock Warrants

In conjunction with a private placement in May 1995, the Company issued warrants
to acquire additional common stock of the Company to a group of investors.
Since that time, the Company has issued additional warrants to this group as the
previously outstanding warrants were exercised. As of December 31, 1996,
warrants to purchase 2,100,167 shares of common stock at $6.25 per share were
outstanding.

In January 1997, the board of directors approved a reduction in the exercise
price, from $6.25 to $5.30 per share, of certain of these warrants related to
1,715,832 shares of common stock. In consideration of this reduction, the
holders of the warrants agreed to the early exercise of the warrants which were
otherwise permitted to be exercised until November 1, 1998. The holders agreed
to exercise 767,810 shares on or before January 31, 1997, which exercise
occurred and resulted in gross proceeds to the Company of $4,069,393. This
initial issuance was priced at $6.25 per share and resulted in the issuance of
651,103 shares, with 116,707 shares held in reserve, because the reduced pricing
was contingent upon the timely exercise of the warrants related to all 1,715,832
shares.

The agreement relating to the exercise of the remaining 948,022 warrants was
amended on November 14, 1997. The exercise price remained at $5.30 per share
or an aggregate of $5,024,517 to be paid in ten equal installments commencing
November 15, 1997, and continuing on the day that is five weeks subsequent to
the preceding payment until the full amount is paid. On receipt of each
payment, the Company agreed to issue a certificate representing the stock
then being acquired, calculated at an exercise price of $5.30 per share, and
issue a replacement warrant covering the same number of shares. Additionally,
on receipt of the first payment, the Company agreed to deliver certificates
representing the 116,707 shares held in reserve and to issue replacement
warrants for the 767,810 shares, exercised in January 1997, referred to in
the previous paragraph. Replacement warrants will have an exercise price
of $8.75 per share and are exercisable at any time through April 16, 2003.
In the event that a warrant holder fails to make one or more payments when
due, that portion of the outstanding warrants that was then due would
thereafter have an exercise price of $6.25 per share and the holder would
not be entitled to a replacement warrant, if and when the outstanding
warrant is exercised.

(F) Technical Information and Patent License Agreements

Effective July 1, 1997, the Company entered into a Technical Information
Agreement and a Patent License Agreement with Lucent Technologies, Inc. (the
"Agreements"). Under the Agreements, the Company was granted certain rights to
technologies related to the manufacture of particle analysis systems and related
rights to market such systems. Using the technology acquired under the
Agreements, coupled with other technology already owned or licensed, the Company
intends to manufacture and market a particle analyzing mass spectrometer.

Under the Agreements, the Company made an initial payment of $200,000 for the
rights granted thereunder. Additionally, the Company is obligated to pay
royalties ranging from 5% to 8% of the market value of items sold pursuant to
the Agreements, subject to a minimum annual royalty starting at $250,000 for the
year ended June 30, 1999 and increasing to $600,000 for the year ended June 30,
2003. The Agreements have an initial term of six years, although the Company
may effectively extend the Agreements thereafter by continuing to pay the
percentage royalties, subject to a minimum annual royalty of $600,000.

(G) Subsequent Event

Effective November 14, 1997, the board of directors appointed Andrew Bebbington
as the new chief executive officer and as a member of the board of directors.
The Company and Mr. Bebbington entered into a letter agreement that provides
for, among other things, a base salary of $250,000 per year, bonuses based
on the achievement of performance targets (including a guaranteed bonus of
$100,000 for the initial year), and an option to acquire up to a maximum of
1,000,000 shares of common stock that will vest over the next three years.

In connection with the appointment of Mr. Bebbington as chief executive
officer, the board accepted the resignation of three executives: the
former chief executive officer and chairman of the board of directors,
as well as two other members of the executive management group who had
served on the board of directors. In conjunction with their resignation,
these former executives entered into termination agreements which provide
for, among other things, the issuance of an aggregate of 200,000 shares of
common stock, the surrender of options to acquire an aggregate of 1,425,000
shares of common stock at prices ranging from $4.25 to $7.00 per share,
and three months of severance pay.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT CHANGES IN THE COMPANY

The Company has, over the course of the last three years, acquired
the rights to a number of technologies and has dedicated significant time,
effort, and expense to a research and development effort to create products
designed for the scientific instrumentation industry. The Company has
recently conducted an extensive search for a chief executive officer to
lead it into the next stage of its development, the finalization of products,
establishing standardized manufacturing, and market penetration for existing
and developing products. This search lead to the appointment of Andrew
Bebbington as the new chief executive officer and a member of the board of
directors on November 14, 1997.

Mr. Bebbington was most recently the president of Neslab Instruments,
a subsidiary of Thermo Electron Corporation. He was a founder of Life
Sciences International PLC ("LSI"), a London Stock Exchange listed company
that was acquired by Thermal Electron Corporation earlier this year. The
board of directors of the Company believes that Mr. Bebbington's background
and experience in the funding, expansion, and ultimate sale of LSI makes
him an ideal candidate to serve as the principal executive of the Company.

Since 1987, Mr. Bebbington has been engaged in the development of LSI.
He was one of the original team of three who organized a successful buy-in to
LSI in that year and was actively involved in its growth to $300,000,000 in
revenues in 1997, first as the business development director from 1987 to
1991, the president of LSI North America Services from 1993 until immediately
prior to joining the Company, and the chief executive officer of Neslab
Instruments, Inc., from 1991 to immediately prior to joining the Company.
While he served as business development director, Mr. Bebbington acquired
and integrated nine companies with an aggregate acquisition price of
$200,000,000. Prior to his involvement with LSI, Mr. Bebbington was
employed in various positions with KPMG Peat Marwick from 1981 to 1987,
culminating in his position as manager of the Mergers and Acquisitions
Department. Mr. Bebbington received his Bsc in Economics from the London
School of Economics, in 1984.

In connection with the appointment of Mr. Bebbington, Brian G. Larson,
a co-founder of the Company and the former chief executive officer, resigned.
In addition, Larry J. Davis, a co-founder of the Company and the
vice-president of product development, and Dan J. Johnson, a vice-president
and long-time employee of the Company also resigned. Mr. Larson and
Mr. Johnson have agreed to provide consulting services to the Company during
a 60 day period to assist in the transition. It is anticipated that the
Company will seek to enter into a more long-term consulting agreement with
Mr. Davis to obtain his services as a scientist and engineer in connection
with the ongoing development of the Company's technologies. Each of the
former executives also resigned their position on the board of directors of
the Company.

The Company entered into comprehensive agreements with each of the
former executive officers pursuant to which they will be issued an aggregate
of 200,000 shares of common stock in exchange for the surrender of options to
acquire an aggregate of 1,425,000 shares and all of their rights under their
employment agreements. Each of them will receive three months of severance
pay.

The Company and Mr. Bebbington entered into a letter agreement
setting forth the principal terms of his employment. The parties will enter
into a definitive three-year employment agreement as quickly as practicable
that will provide for a base salary of $250,000 per year with bonuses based
on performance targets to be established by the board of directors and
Mr. Bebbington. Mr. Bebbington bonus for the initial year in the amount of
$100,000 will be fixed. Mr. Bebbington will also receive an option to acquire
up to a maximum of 1,000,000 shares that will vest over the next three years.
One-half of such option will vest as certain dates are reached and the other
half will vest based on the Company meeting performance standards established
on an annual basis.

OVERVIEW

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes contained herein and in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the audited consolidated financial statements
included in the Company's report on Form 10-KSB for the year ended June 30,
1996, and on Form 10-K/A for the six-month transition period ended December 31,
1996.

This report and other information made publicly available by the Company
from time to time may contain certain forward looking statements and other
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made concerning information
then currently available to management. Such statements reflect the views of
management of the Company at the time they are made and are not intended to be
accurate descriptions of the future. The discussion of the future business
prospects of the Company is subject to a number of risks and assumptions,
including the completion of commercial products within projected time frames,
the market acceptance of products to be developed, the ability of the Company to
successfully address technical and manufacturing problems in producing new
products, the ability of the Company to enter into strategic alliances, joint
ventures, or other collaborative arrangements with established industry
partners, the success of the marketing efforts of the Company and the entities
with which it has marketing agreements, the ability of the Company to
successfully protect and defend its intellectual rights, and the ability of the
Company to obtain the necessary financing to successfully complete its goals.
Should one or more of these or other risks materialize or if the underlying
assumptions of management prove incorrect, actual results of the Company may
vary materially from those described in the forward looking statements. The
Company does not intend to update these forward looking statements, except as
may occur in the regular course of its periodic reporting obligations.

Over the course of the last three years, the Company has acquired the
rights to a number of technologies from Brigham Young University ("BYU"), either
directly from BYU or indirectly through its acquisition of Sensar Corporation.
These technologies have placed the Company in a position to develop a number of
sophisticated analytical instruments in addition to its historical acoustical
and vibration business. The Company has also recently entered into a license
agreement with Lucent Technologies, Inc. (formerly Bell Labs), in which it
acquired the sole rights to technology developed by Lucent. The Company
believes that it will be able to develop a range of instruments based on the
patented technology acquired by it that will be technically superior to those
currently being offered, that will be on the cutting edge of certain emerging
markets, or that will address needs in certain industries in a more cost
efficient manner.

In order to accomplish its goals, the Company initiated a research and
development plan designed to convert the underlying technologies into commercial
products. The Company currently has one commercial product based on these
acquisitions available, its time of flight mass spectrometer ("TOF 2000"). In
addition, the Company continues to introduce acoustic and vibration products and
has made significant advances toward additional products. However, there have
been unanticipated delays in finalization of certain of these products. The
Company does not currently expect to introduce its Model 824 and Jaguar
products, both of which were originally scheduled for the first quarter of 1997,
until late 1997 or early 1998. The Company does not anticipate that there will
be a significant impact on its revenues until after these and other products the
Company is working on have been introduced and have established market
acceptance. While management of the Company continues to believe that it can
develop a range of superior products designed to meet the needs of significant
markets, the products currently being developed by the Company are designed for
sophisticated applications, and there can be no assurance that the Company will
be successful in its development efforts or that alternative technologies may
not be developed by some other entity that provide a more advantageous solution
to the needs of the various industries targeted by the Company. If the Company
is unable to successfully develop the targeted products or the development of
such products continues to be delayed, the Company's ability to obtain the
necessary financing to continue its research and development program may be
adversely affected.

The Company is presently unable to fund its increased research,
development, and other activities from operations and has sought and obtained
equity financing, primarily from private placements to a small number of private
investors, in order to meet these costs. This capital has been and is currently
being used for various purposes, including increased research and development
activities, and general operations. It is anticipated the Company will continue
to experience operating losses until new products are brought to market and
begin to generate significantly large enough sales to substantially increase the
Company's revenue. While the Company currently has adequate resources to
continue its development plans through the end of the fiscal year, it will
continue to be reliant on obtaining outside financing to fund its operations in
1998. There can be no assurance as to the Company's ability to obtain such
financing on terms favorable to it, or on the timing of significant sales, or as
to the success of the products that may ultimately permit the Company to meet
its obligations from operations. If the products currently under development
prove unsuccessful, the Company may not be able to recover its associated
research and development costs, which could have a significant material, adverse
impact on the business and activities of the Company.

RESULTS OF OPERATIONS

Comparison of Three Months ended September 30, 1997 and 1996

Net Sales

Net sales for the three months ended September 30, 1997 and 1996, were
$2,320,405 and $2,158,714, respectively. This represents an overall increase of
$161,691, or 7.5%, for 1997 as compared to 1996. The overall increase is the
net difference between a decrease in sales of approximately $183,000 in the
acoustical and vibration product families and an increase of approximately
$345,000 in revenue from the Sensar chemical analysis products. Sales of
acoustical and vibration products for the three months ended September 30, 1997,
reflect decreases from last year primarily due to the delayed introduction of
certain new products. The increase in the chemical analysis products is due to
an increase in the number of units sold.

Cost of Sales

Cost of sales for the three months ended September 30, 1997 were
$1,125,664, or 48.5% of net sales, compared to $766,570, or 35.5% of net sales
for the three months ended September 30, 1996. The increase in cost of sales is
due to a variety of factors, including the absorption of higher fixed
manufacturing expenses and personnel costs on lower acoustic and vibration sales
in 1997.

Selling, General, and Administrative

Selling, general, and administrative expenses increased to $1,322,051, or
57.0% of net sales, for the three months ended September 30, 1997, compared to
$1,105,392, or 51.2% of net sales, for the three months ended September 30,
1996. The increase in selling, general, and administrative expenses is
principally due to increased costs incurred by the Company as a result of an
expanded infrastructure put in place in anticipation of the Company's potential
growth as new products are commercialized. As product demand is achieved for
products currently in development, selling, general, and administrative expenses
as a percentage of net sales should decline, although no assurance can be made
that the Company will be successful in achieving such reduction. The Company
does not currently anticipate that revenues will increase significantly during
the remainder of 1997.

Research and Development

For the three months ended September 30, 1997, research and development
costs were $1,352,602, or 58.3% of net sales, compared to $736,795, or 34.1% of
net sales, for the three months ended September 30, 1996. The increase in the
amount of research and development over the prior period, as well as over
historical levels, is due to the Company's continuing commitment to the research
and development of new products from technologies acquired in recent years. The
increased expenses principally relate to the employment of additional scientists
and engineers with pertinent experience and education in chemistry, electrical
engineering, software development, and manufacturing production. The increased
costs also include higher expenses associated with materials and supplies used
in the prototype development process and consultation with outside experts. It
is anticipated that research and development costs will continue to exceed
historical levels as a percentage of net sales at least until the development of
new products is completed and significant sales levels of the new products are
achieved.

Comparison of Nine Months ended September 30, 1997 and 1996

Net Sales

Net sales for the nine months ended September 30, 1997 and 1996, were
$6,672,750 and $6,262,049, respectively. This represents an overall increase of
$410,701, or 6.6%, for 1997 as compared to 1996. The overall increase is the
net difference between a decrease in sales of approximately $304,000 in the
acoustical and vibration product families and an increase of approximately
$715,000 in revenue from the chemical analysis products. Sales of acoustical
and vibration products for the nine months ended September 30, 1997, reflect
decreases from last year primarily due to the delayed introduction of certain
new products. The Company originally anticipated that these new acoustical
products would be available at the beginning of 1997. The introduction of the
Company's Model 814 and DSP 80 Series products have only recently begun shipping
and the introduction of the Model 824 and associated options have been delayed
and are currently targeted for the fourth quarter of 1997. In the interim,
sales of the Company's prior products declined. Management expects that these
recent introductions and the introduction later this year, will cause acoustical
and vibration products sales to return to and exceed historical levels, although
no assurance can be made that such expectation will be realized.

Sales of the Company's chemical analysis instruments have been increasing,
resulting in approximately $1,587,000 in revenues in the nine months ended
September 30, 1997. The Company currently markets its TOF 2000 to the semi-
conductor industry through SAES Getters S.p.A. ("SAES"). Under the terms of the
marketing agreement, SAES is obligated to sell a minimum of nine units in 1997
in order to maintain its exclusive rights, a target that it is not anticipated
to meet this year. Sales of the TOF 2000 through SAES have historically been
hampered by the parties' inability to mutually agree on acceptable performance
standards for the instrumentation. However, the most recent instruments shipped
by the Company to SAES customers were subject to extensive testing under the
supervision of SAES and others prior to shipment, and the Company believes that
many of the open specification issues have been resolved.

Cost of Sales

Cost of sales for the nine months ended September 30, 1997, were
$3,492,116, or 52.3% of net sales, compared to $3,058,618, or 48.8% of net sales
for the nine months ended September 30, 1996. The relatively small increase in
cost of sales is due to a variety of factors, including the absorption of higher
fixed manufacturing expenses and personnel costs on lower acoustic and vibration
sales in 1997.

Selling, General, and Administrative

Selling, general, and administrative expenses increased to $4,184,575, or
62.7% of net sales, for the nine months ended September 30, 1997, compared to
$3,214,471, or 51.3% of net sales, for the nine months ended September 30, 1996.
The increase in the dollar amount of selling, general, and administrative
expenses was due to several factors, including increased costs associated with
the pursuit of strategic marketing and research alliances; costs associated with
the implementation of a new electronic data processing system; costs associated
with holding the stockholders' meeting, including the preparation of the annual
report and proxies; and increased costs associated with other corporate and
marketing activities. The increase is also due to the Company incurring costs,
including the cost of hiring additional employees, necessary to establish the
infrastructure to support its potential growth as new products are
commercialized. As product demand is achieved for products currently in
development, selling, general, and administrative expenses as a percentage of
net sales should decline in the future to be more consistent with historical
levels, although no assurance can be made that the Company will be successful in
accomplishing such reduction.

Research and Development

For the nine months ended September 30, 1997, research and development
costs were $3,253,354, or 48.8% of net sales, compared to $2,057,590, or 32.9%
of net sales, for the nine months ended September 30, 1996. As described above,
the increase in the amount of research and development expenses over the prior
period, as well as over historical levels, is due to the Company's continuing
commitment to the research and development of new products from technologies
acquired in recent years. The increased expenses principally relate to the
employment of additional scientists and engineers, and costs associated with
materials and supplies used in the prototype development process and
consultation with outside experts. It is anticipated that research and
development costs will continue to exceed historical levels as a percentage of
net sales at least until the development of new products is completed and
significant sales levels of the new products are achieved.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, the Company had total current assets of $9,009,197,
including cash and cash equivalents of $2,340,410. The Company also had total
current liabilities of $2,868,459, resulting in working capital of $6,140,738
and a working capital ratio of 3.14 to 1. At September 30, 1997, the Company
had drawn $1,191,073 on its line of credit. The maximum limit on this line of
credit is $3,000,000, although the actual amount that the Company can borrow is
adjusted from time to time based on the amount of eligible accounts receivable
and inventories that secure the line of credit. The line of credit contains
certain covenants including, but not limited to, provisions that the Company
maintain certain levels of net worth, achieve certain results of operations,
meet specified financial ratios, and restrict the amount of capital
expenditures. At times, the Company has been in violation of certain of these
covenants, the most significant of which relate to the maintenance of net worth
and the achievement of certain results of operations. The lender has waived all
past violations and in August 1997, the loan covenants were amended, including
those related to net worth and results of operations. At September 30, 1997,
the Company was in compliance with all of the covenants. The Company expects
this line of credit to continue to be available to it, although it could be
canceled at any time that the Company is out of compliance.

The Company has significant long-term assets, including intangible assets
totaling $4,843,174 related to product technology acquisition costs, license
rights, software development costs, and goodwill, as well as a long-term
contractual arrangement with a carrying value of $2,699,472. The intangible
assets are being amortized over estimated useful lives ranging from five to
fifteen years. The long-term contractual arrangement is being accounted for on
the cost-recovery method. On an ongoing basis, management reviews the valuation
and amortization period of these assets to determine possible impairment or
changes in useful lives. Although management believes its estimates used of
useful lives and future cash flows associated with the long-term assets are
reasonable, there is no assurance that actual future results will not differ
from current expectations. In the event of such a change in expectation, the
carrying value or amortization period of the long-term asset would be adjusted,
which would affect the Company's results of operations in the period in which
such adjustment occurred.

The Company's primary source of cash for the nine months ended September
30, 1997, was the issuance of common stock, principally resulting from the
exercise of stock warrants. The Company has relied on the sale of common stock
as a method to fund increases in working capital, operational losses, purchases
of property and equipment, and research and development efforts. During the
nine months ended September 30, 1997, net proceeds from the issuance of common
stock were $4,130,371. There are currently issued and outstanding warrants with
respect to 1,449,064 shares of common stock. If all of these warrants were
exercised, the Company would receive additional gross proceeds of $7,426,610.
On the satisfaction of certain conditions, the Company has agreed to issue
additional warrants to acquire up to an aggregate of 1,715,832 shares of common
stock at an exercise price of $6.75 per share. There is no obligation on the
part of the holders of these rights to exercise them, and the exercise will
largely depend on the price of the Company's common stock in the public trading
market, as to which no assurance can be given.

The Company's primary uses of cash for the nine months ended September 30,
1997, were funds used in operations of $3,526,616 and the purchase of property
and equipment of $941,477. Management expects that in the short-term, the
primary uses of cash will continue to be operations and the purchase of property
and equipment due to the continued research and development activities.
Additionally, the Company has recently entered into a Technical Information
Agreement and Patent License Agreement requiring the payment of royalties and
fees over the next six years. Under these Agreements, the Company made an
initial payment of $200,000 in August 1997 for the rights granted thereunder.
Additionally, the Company is obligated to pay royalties equal to a percentage of
the market value of items sold pursuant to the Agreements, subject to a minimum
annual royalty ranging from $250,000 for the year ended June 30, 1999 to
$600,000 for the year ended June 30, 2003. The Agreements have an initial term
of six years, although the Company may effectively extend the Agreements
thereafter by continuing to pay the percentage royalties, subject to a minimum
annual royalty of $600,000.

Management believes that existing cash balances and borrowings available
under the line of credit will be adequate to meet the Company's estimated cash
requirements through the end of 1997. The Company intends to continue to fund
its short-term operating and capital requirements through equity financing,
principally through the exercise of stock warrants. As newly developed products
are commercialized and product demand is achieved, management believes that its
long-term operating and capital requirements will be funded principally through
cash generated from operations, supplemented as necessary from equity or long-
term debt financing.

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

The following exhibits are included as part of this report:
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document
------- --------- -----------------
<S> <C> <C>

1 (10) Form of Termination Agreement between and among
Larson Davis Incorporated and Brian G. Larson
dated November 14, 1997

2 (10) Form of Termination Agreement between and among
Larson Davis Incorporated and Larry J. Davis
dated November 14, 1997

3 (10) Form of Termination Agreement between and among
Larson Davis Incorporated and Dan J. Johnson
dated November 14,1997

4 (10) Form of Third Amendment to Agreement to Issue Warrants
to Congregation Ahavas Tzdokah Z'Chesed
dated November 14, 1997

5 (10) Form of Third Amendment to Agreement to Issue Warrants
to Ezer Mzion Organization
dated November 14, 1997

6 (10) Form of Third Amendment to Agreement to Issue Warrants
to Laura Huberfeld and Naomi Bodner
dated November 14, 1997

7 (10) Form of Third Amendment to Agreement to Issue Warrants
to Connie Lerner
dated November 14, 1997

8 (10) Letter of Agreement between LarsonoDavis Incorporated
and Andrew Bebbington

9 (27) Financial Data Schedule

</TABLE>

REPORTS ON FORM 8-K

During the quarter ended September 30, 1997, the Company did not file a
report on Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

LARSON DAVIS INCORPORATED

Dated: November 14, 1997 By /s/ Brian G. Larson
Brian G. Larson, President
(Duly Authorized Officer)

Dated: November 14, 1997 By /s/ Craig E. Allen
Craig E. Allen
(Principal Financial and
Accounting Officer)

TERMINATION AGREEMENT

THIS TERMINATION AGREEMENT (this "Agreement") is entered into this 14th day
of November, 1997, between and among LARSON DAVIS INCORPORATED, a Nevada
corporation (hereinafter referred to as the "Company"), and BRIAN G. LARSON, an
individual, on the following:

Premises

A. Brian G. Larson in an original founder of the Company and has served
as the Chief Executive Officer and Chairman of the Board of the Company since
its inception.

B. The Company and Brian G. Larson are parties to an Executive Employment
Agreement dated January 3, 1996.

C. The Company and Brian G. Larson have agreed that Mr. Larson will
resign as an executive officer and director of the Company, based on the terms
and conditions set forth in this Agreement.

Agreement

NOW, THEREFORE, based upon the foregoing premises, which are incorporated
herein by reference, and for and in consideration of the mutual promises and
covenants hereinafter set forth, it is hereby agreed as follows:

1. Brian G. Larson hereby resigns, effective as of the acceptance of such
resignation by the board of directors of the Company and the filing of the
quarterly report of the Company on Form 10-Q for the quarter ended September 30,
1997 (the "Effective Date"), as an officer and director of the Company and all
subsidiaries of the Company.

2. The Company agrees that on the Effective Date, it will pay Mr. Larson
all amounts then earned, plus an amount equal to three months of his current
salary and compensation for any unused vacation he may have, up to a maximum of
three weeks, calculated at his current salary rate. The Company shall also
transfer the automobile and notebook computer system currently used by Mr.
Larson and owned by the Company to Mr. Larson, subject only to the assumption by
Mr. Larson of the obligation of the Company associated with such automobile.
Mr. Larson shall also be entitled to a new, fully-featured Model 2900 sound
analyzer, with accessories, for his own personal use.

3. Mr. Larson agrees to remain available, in person and by telephone, to
consult with and assist new management of the Company concerning the business of
the Company during a 60 day transition period and thereafter as may be necessary
on a limited basis from time to time.

4. The Company agrees to award to Mr. Larson 190,000 shares of registered
common stock under the terms of its 1997 Employee Stock Option and Award Plan
reduced by an amount equal to $10,000 divided by the closing price of the common
stock of the Company as reported by Nasdaq on the date immediately preceding the
date of this Agreement. Such reduction shall be in complete satisfaction of the
obligation of Mr. Larson to the Company for a recent advance of $10,000. Such
shares shall not vest, and Mr. Larson shall not have the right to transfer or
hypothecate such shares, until the expiration of the 60 day transition period as
provided in the foregoing paragraph.

5. Mr. Larson agrees that the performance by the Company of the terms of
this Agreement shall be in full and complete satisfaction of all of his rights
and claims under the terms of the Executive Employment Agreement dated January
3, 1996 (the "Employment Agreement"). In addition, at the time of and in
exchange for, the issuance of the shares set forth in paragraph 4, Mr. Larson
shall deliver for cancellation the option held by him under the terms of the
Employment Agreement for 300,000 shares that was granted January 3, 1996, with
an exercise price of $4.25 per share and the option for 200,000 shares held by
him under the terms of the 1996 Director Stock Option Plan that was granted May
9, 1996, with an exercise price of $7.00 per share. The Company and Mr. Larson
mutually agree that the option held by Mr. Larson under the terms of the 1991
Director Stock Option Plan granted on June 30, 1995, to acquire 30,000 shares of
common stock, at an exercise price of $3.64375 per share shall remain in effect
and be governed by the current provisions of such option, including the right to
exercise such option at any time on the terms set forth therein.

6. Mr. Larson agrees that for a period of one year subsequent to the
Effective Date he will not establish or run any business that is directly
competitive with the business of the Company nor approach the customers of the
Company on behalf of any product that is competitive with the products of the
Company.

7. Each party hereto, for itself or himself and its respective officers,
directors, personal representatives, successors, assigns, and the affiliates of
all or any of the foregoing, hereby releases, discharges, and acquits each other
party, his or its officers, directors, agents, employees, attorneys,
accountants, personal representatives, successors, or assigns, or any affiliate
of all or any of the foregoing, from and against any and all losses, costs, or
damages, arising from, under, or in connection with the Employment Agreement,
any other written or oral agreement between the parties, any other business
relationship existing between them prior to the date hereof, and any claim,
demand, action, or cause of action of any kind or nature, whether known or
unknown, which the parties now have or claim to have, or any time heretofore
have claimed to have, or which may hereafter accrue, arising from, out of, or in
any way connected with all prior agreements, arrangements, or transactions
between the parties.

8. To the fullest extent permitted by applicable law, the Company agrees
to indemnify and hold harmless Mr. Larson on the same basis as other officers
and directors of the Company from and against any and all loss, cost and expense
incurred by Mr. Larson in connection with or arising from Mr. Larson being made
a party to a proceeding because Mr. Larson was an officer and/or director of the
Company. The Company agrees to maintain its officer and director insurance
currently in existence as of the date of this Agreement in full force and effect
for a minimum of three years from the Effective Date and to take all steps
necessary to assure that Mr. Larson remains covered by such insurance policy as
a former officer and director of the Company.

9. In order to more fully consummate the intent of the parties
represented hereby, each shall execute, acknowledge, and deliver to the other
such further instruments and documents as may be required to evidence the
termination of the agreements contemplated hereby and to consummate the terms
hereof.

10. It is the intent of the parties hereto to finally resolve all issues
that exist between them. In furtherance of that intent, the parties agree not
to disparage or impugn the business, business practices, or integrity of the
other parties hereto subsequent to the date of this Agreement.

11. The parties shall issue a press release in form and substance mutually
agreeable to both parties announcing the resignation of Mr. Larson and the
appointment of new management of the Company.

12. In the event of a breach of this Agreement, the breaching party shall
pay all costs and expenses of the other party, including reasonable attorneys'
fees, arising out of such breach.

13. This Agreement represents the entire agreement between the parties
relating to the subject matter hereof, and no other courses of dealing,
understandings, agreements, representations, or warranties, written or oral,
except as set forth herein, shall be of any force or effect. No amendment or
modification hereof shall be effective until and unless the same shall have been
set forth in writing and signed by the parties hereto.

DATED as of the date first above written.

LARSON DAVIS INCORPORATED

By
William E. Hosker, Director

Brian G. Larson

TERMINATION AGREEMENT

Premises

A. Larry J. Davis in an original founder of the Company and has served as
an executive officer and member of the board of directors of the Company since
its inception.

B. The Company and Larry J. Davis are parties to an Executive Employment
Agreement dated January 3, 1996.

C. The Company and Larry J. Davis have agreed that Mr. Davis will resign
as an executive officer and director of the Company, based on the terms and
conditions set forth in this Agreement.

Agreement

1. Larry J. Davis hereby resigns, effective as of the acceptance of such
resignation by the board of directors of the Company (the "Effective Date"), as
an officer and director of the Company and all subsidiaries of the Company.

2. The Company agrees that on the Effective Date, it will pay Mr. Davis
all amounts then earned, plus an amount equal to three months of his current
salary and compensation for any unused vacation he may have, up to a maximum of
three weeks, calculated at his current salary rate. The Company shall also
transfer the automobile currently used by Mr. Davis and owned by the Company to
Mr. Davis, subject only to the assumption by Mr. Davis of the obligation of the
Company associated with such automobile.

3. Mr. Davis agrees that the performance by the Company of the terms of
this Agreement shall be in full and complete satisfaction of all of his rights
and claims under the terms of the Executive Employment Agreement dated January
3, 1996 (the "Employment Agreement"). In addition, based on the performance by
the Company of this Agreement, Mr. Davis agrees to waive any and all rights he
may have in connection with the option held by him under the terms of the
Employment Agreement for 300,000 shares that was granted January 3, 1996, with
an exercise price of $4.25 per share and the option for 200,000 shares held by
him under the terms of the 1996 Director Stock Option Plan that was granted May
9, 1996, with an exercise price of $7.00 per share. The Company and Mr. Davis
mutually agree that the options held by Mr. Davis under the terms of the 1987
Employee Stock Option Plan to acquire 130,000 shares of common stock at $2.26875
per share and the 1991 Director Stock Option Plan to acquire 90,000 shares of
common stock, at exercise prices ranging from $3.30 to $3.85 per share shall
remain in effect and be governed by the current provisions of such option,
including the right to exercise such options at any time on the terms set forth
therein.

4. Mr. Davis agrees that for a period of one year subsequent to the
Effective Date he will not establish or run any business that is directly
competitive with the business of the Company nor approach the customers of the
Company on behalf of any product that is competitive with the products of the
Company.

5. Each party hereto, for itself or himself and its respective officers,
directors, personal representatives, successors, assigns, and the affiliates of
all or any of the foregoing, hereby releases, discharges, and acquits each other
party, his or its officers, directors, agents, employees, attorneys,
accountants, personal representatives, successors, or assigns, or any affiliate
of all or any of the foregoing, from and against any and all losses, costs, or
damages, arising from, under, or in connection with the Employment Agreement,
any other written or oral agreement between the parties, any other business
relationship existing between them prior to the date hereof, and any claim,
demand, action, or cause of action of any kind or nature, whether known or
unknown, which the parties now have or claim to have, or any time heretofore
have claimed to have, or which may hereafter accrue, arising from, out of, or in
any way connected with all prior agreements, arrangements, or transactions
between the parties.

6. Notwithstanding any other provision of this Agreement, in the event of
a breach of this Agreement by either party, this Agreement shall be null and
void and the parties shall have all of the rights under the terms of all
agreements between the parties existing immediately prior to the date of this
Agreement.

7. To the fullest extent permitted by applicable law, the Company agrees
to indemnify and hold harmless Mr. Davis on the same basis as other officers and
directors of the Company from and against any and all loss, cost and expense
incurred by Mr. Davis in connection with or arising from Mr. Davis being made a
party to a proceeding because Mr. Davis was an officer and/or director of the
Company. The Company agrees to maintain its officer and director insurance
currently in existence as of the date of this Agreement in full force and effect
for a minimum of three years from the Effective Date and to take all steps
necessary to assure that Mr. Davis remains covered by such insurance policy as a
former officer and director of the Company.

8. It is the intent of the parties hereto to finally resolve all issues
that exist between them. In furtherance of that intent, the parties agree not
to disparage or impugn the business, business practices, or integrity of the
other parties hereto subsequent to the date of this Agreement.

9. The parties shall issue a press release in form and substance mutually
agreeable to both parties announcing the resignation of Mr. Davis and the
appointment of new management of the Company.

10. In the event of a breach of this Agreement, the breaching party shall
pay all costs and expenses of the other party, including reasonable attorneys'
fees, arising out of such breach.

11. This Agreement represents the entire agreement between the parties
relating to the subject matter hereof, and no other courses of dealing,
understandings, agreements, representations, or warranties, written or oral,
except as set forth herein, shall be of any force or effect. No amendment or
modification hereof shall be effective until and unless the same shall have been
set forth in writing and signed by the parties hereto.

DATED as of the date first above written.

LARSON DAVIS INCORPORATED

By
William E. Hosker, Director

Larry J. Davis

TERMINATION AGREEMENT

Premises

A. Dan J. Johnson has served as a executive officer and member of the
board of directors of the Company since 1987.

B. The Company and Dan J. Johnson are parties to an Executive Employment
Agreement dated January 3, 1996.

C. The Company and Dan J. Johnson have agreed that Mr. Johnson will
resign as an executive officer and director of the Company, based on the terms
and conditions set forth in this Agreement.

Agreement

1. Dan J. Johnson hereby resigns, effective as of the acceptance of such
resignation by the board of directors of the Company (the "Effective Date"), as
an officer and director of the Company and all subsidiaries of the Company.

2. The Company agrees that on the Effective Date, it will pay Mr. Johnson
all amounts then earned, plus an amount equal to three months of his current
salary and compensation for any unused vacation he may have, up to a maximum of
three weeks, calculated at his current salary rate. The Company shall also
transfer the automobile currently used by Mr. Johnson and owned by the Company
to Mr. Johnson, subject only to the assumption by Mr. Johnson of the obligation
of the Company associated with such automobile.

3. Mr. Johnson agrees to remain available, in person and by telephone, to
consult with and assist new management of the Company concerning the business of
the Company during a 60 day transition period and thereafter as may be necessary
on a limited basis from time to time.

4. The Company agrees to award to Mr. Johnson 10,000 shares of registered
common stock under the terms of its 1997 Employee Stock Option and Award Plan.
Such shares shall not vest, and Mr. Johnson shall not have the right to transfer
or hypothecate such shares, until the expiration of the 60 day transition period
as provided in the foregoing paragraph.

5. Mr. Johnson agrees that the performance by the Company of the terms of
this Agreement shall be in full and complete satisfaction of all of his rights
and claims under the terms of the Executive Employment Agreement dated January
3, 1996 (the "Employment Agreement"). In addition, at the time of and in
exchange for, the issuance of the shares set forth in paragraph 4, Mr. Johnson
shall deliver for cancellation the option held by him under the terms of the
Employment Agreement for 225,000 shares that was granted January 3, 1996, with
an exercise price of $4.25 per share and the option for 200,000 shares held by
him under the terms of the 1996 Director Stock Option Plan that was granted May
9, 1996, with an exercise price of $7.00 per share. The Company and Mr. Johnson
mutually agree that the options held by Mr. Johnson under the terms of the 1987
Employee Stock Option Plan to acquire 156,365 shares of common stock at an
exercise price of $2.0625 per share and the 1991 Director Stock Option Plan to
acquire 90,000 shares of common stock, at exercise prices ranging from $3.00 to
$3.50 per share shall remain in effect and be governed by the current provisions
of such option, including the right to exercise such options at any time on the
terms set forth therein.

6. Mr. Johnson agrees that for a period of one year subsequent to the
Effective Date he will not establish or run any business that is directly
competitive with the business of the Company nor approach the customers of the
Company on behalf of any product that is competitive with the products of the
Company.

8. To the fullest extent permitted by applicable law, the Company agrees
to indemnify and hold harmless Mr. Johnson on the same basis as other officers
and directors of the Company from and against any and all loss, cost and expense
incurred by Mr. Johnson in connection with or arising from Mr. Johnson being
made a party to a proceeding because Mr. Johnson was an officer and/or director
of the Company. The Company agrees to maintain its officer and director
insurance currently in existence as of the date of this Agreement in full force
and effect for a minimum of three years from the Effective Date and to take all
steps necessary to assure that Mr. Johnson remains covered by such insurance
policy as a former officer and director of the Company.

11. The parties shall issue a press release in form and substance mutually
agreeable to both parties announcing the resignation of Mr. Johnson and the
appointment of new management of the Company.

12. In the event of a breach of this Agreement, the breaching party shall
pay all costs and expenses of the other party, including reasonable attorneys'
fees, arising out of such breach.

DATED as of the date first above written.

LARSON DAVIS INCORPORATED

By
William E. Hosker, Director

Dan J. Johnson

THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS

THIS THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS (this "Amendment") is
entered into as of November 14, 1997, by and among LARSON DAVIS INCORPORATED, a
Nevada corporation (the "Company"), and CONGREGATION AHAVAS TZDOKAH Z'CHESED
("Holder"), based on the following premises.

Premises

A. The parties entered into an Agreement to Issue Warrants dated January
9, 1997, as amended April 16, 1997, and June 5, 1997 (the "Agreement"), pursuant
to which the Company agreed, subject to certain conditions, to issue warrants to
purchase shares of stock of the Company.

B. The parties wish to amend the terms of the Agreement as set forth in
this Amendment and to confirm all the others terms and provisions of the
Agreement.

Agreement

NOW, THEREFORE, based on the foregoing premises, which are incorporated
herein by this reference, and for and in consideration of the mutual covenants
and agreements herein set forth and the mutual benefit to the parties to be
derived therefrom, it is hereby agreed as follows:

1. Exercise of Outstanding Warrants. Paragraph 1.2 of the Agreement is
modified to read in its entirety as follows:

1.2 Exercise of Outstanding Warrants. Holder delivered to the
Company $877,998 on or before January 31, 1997, as payment of the
exercise price of a portion of the Outstanding Warrants (the "Earlier
Exercise"). Holder further agrees to deliver an additional
$1,084,104.40 to the Company in ten equal payments commencing November
15, 1997, and continuing on the day that is five weeks subsequent to
the preceding payment until the full amount is paid. On receipt of
each payment, the Company shall issue a certificate representing the
stock then being acquired, calculated at an exercise price of $5.30
per share, and a replacement warrant covering the same number of
shares and having the terms set forth in paragraph 1.4 of this
Agreement. On receipt of the first payment, the Company agrees to
deliver certificates representing all shares previously held in
reserve by the Company in connection with the Earlier Exercise to
Holder and replacement warrants having the terms set forth in
paragraph 1.4 for the number of shares acquired in connection with the
Earlier Exercise.

2. Failure to Make Payments. Paragraph 1.3 of the Agreement is hereby
amended to read in its entirety as follows:

1.3 Failure to Make Payments. In the event that Holder fails to
make one or more payments when due, that portion of the Outstanding
Warrants held by them that was then due to be exercised shall
thereafter have an exercise price of $6.25 per share and Holder shall
not be entitled to a replacement warrant, if and when exercised.

3. Issuance of Additional Warrants. Paragraph 1.4 of the Agreement is
modified to read in its entirety as follows:

1.4 Issuance of Additional Warrants. On timely exercise of the
Outstanding Warrants on each of the dates specified in this Agreement,
the Company agrees to issue new warrants to Holder to acquire the same
number of shares of Common Stock then acquired, such new warrants to
have an exercise price of $8.75 per share of Common Stock (the "$8.75
Warrants"). The $8.75 Warrants shall be exercisable at any time after
August 1, 1997, and prior to the close of business on April 16, 2003.
The $8.75 Warrants shall be in the form attached hereto as Exhibit "A"
and incorporated herein by this reference.

All subsequent references in the Agreement to the "$10.75 Warrants" shall be
deemed to be references to the "8.75 Warrants."

4. Ratification of the Agreement. Except as specifically provided in
paragraphs 1 through 3 of this Amendment, the parties hereby specifically
ratify, confirm, and adopt as binding and enforceable, all of the terms and
conditions of the Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.

The Company:

Larson Davis Incorporated

By
Andrew Bebbington, President

Holder:

CONGREGATION AHAVAS TZDOKAH
Z'CHESED

By
Address: 3814-A 15th Avenue
Brooklyn, New York 11218

THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS

THIS THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS (this "Amendment") is
entered into as of November 14, 1997, by and among LARSON DAVIS INCORPORATED, a
Nevada corporation (the "Company"), and EZER MZION ORGANIZATION ("Holder"),
based on the following premises.

Premises

B. The parties wish to amend the terms of the Agreement as set forth in
this Amendment and to confirm all the others terms and provisions of the
Agreement.

Agreement

1. Exercise of Outstanding Warrants. Paragraph 1.2 of the Agreement is
modified to read in its entirety as follows:

2. Failure to Make Payments. Paragraph 1.3 of the Agreement is hereby
amended to read in its entirety as follows:

3. Issuance of Additional Warrants. Paragraph 1.4 of the Agreement is
modified to read in its entirety as follows:

All subsequent references in the Agreement to the "$10.75 Warrants" shall be
deemed to be references to the "8.75 Warrants."

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.

The Company:

Larson Davis Incorporated

By
Andrew Bebbington, President

Holder:

EZER MZION ORGANIZATION

By
Address: 16 Eshel Avraham Street
Beni- Brak, Israel

THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS

THIS THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS (this "Amendment") is
entered into as of November 14, 1997, by and among LARSON DAVIS INCORPORATED, a
Nevada corporation (the "Company"), and LAURA HUBERFELD ("Huberfeld") and NAOMI
BODNER ("Bodner"), based on the following premises.

Premises

B. The parties wish to amend the terms of the Agreement as set forth in
this Amendment and to confirm all the others terms and provisions of the
Agreement.

Agreement

1. Exercise of Outstanding Warrants. Paragraph 1.2 of the Agreement is
modified to read in its entirety as follows:

1.2 Exercise of Outstanding Warrants. Huberfeld and Bodner each
delivered to the Company $712,002 (an aggregate of $1,424,004) on or
before January 31, 1997, as payment of the exercise price of a portion
of the Outstanding Warrants (the "Earlier Exercise"). Huberfeld and
Bodner further agree to deliver an additional $879,100.40 each (an
aggregate of $1,758,200.80) to the Company in ten equal payments
commencing November 15, 1997, and continuing on the day that is five
weeks subsequent to the preceding payment until the full amount is
paid. On receipt of each payment, the Company shall issue a
certificate representing the stock then being acquired, calculated at
an exercise price of $5.30 per share, and a replacement warrant
covering the same number of shares and having the terms set forth in
paragraph 1.4 of this Agreement. On receipt of the first payment, the
Company agrees to deliver certificates representing all shares
previously held in reserve by the Company in connection with the
Earlier Exercise to Huberfeld and Bodner and replacement warrants
having the terms set forth in paragraph 1.4 for the number of shares
acquired in connection with the Earlier Exercise.

2. Failure to Make Payments. Paragraph 1.3 of the Agreement is hereby
amended to read in its entirety as follows:

1.3 Failure to Make Payments. In the event that either
Huberfeld or Bodner fails to make one or more payments when due, that
portion of the Outstanding Warrants held by them that was then due to
be exercised shallthereafter have an exercise price of $6.25 per share
and the holder shall not be entitled to a replacement warrant, if and
when exercised.

3. Issuance of Additional Warrants. Paragraph 1.4 of the Agreement is
modified to read in its entirety as follows:

1.4 Issuance of Additional Warrants. On timely exercise of the
Outstanding Warrants on each of the dates specified in this Agreement,
the Company agrees to issue new warrants to Huberfeld and Bodner to
acquire the same number of shares of Common Stock then acquired, such
new warrants to have an exercise price of $8.75 per share of Common
Stock (the "$8.75 Warrants"). The $8.75 Warrants shall be exercisable
at any time after August 1, 1997, and prior to the close of business
on April 16, 2003. The $8.75 Warrants shall be in the form attached
hereto as Exhibit "A" and incorporated herein by this reference.

All subsequent references in the Agreement to the "$10.75 Warrants" shall be
deemed to be references to the "8.75 Warrants."

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.

The Company:

Larson Davis Incorporated

By
Andrew Bebbington, President

Huberfeld:

Laura Huberfeld
Address: 152 West 57th Street
New York, New York 10019

Bodner:

Naomi Bodner
Address: 152 West 57th Street
New York, New York 10019

THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS

THIS THIRD AMENDMENT TO AGREEMENT TO ISSUE WARRANTS (this "Amendment") is
entered into as of November 14, 1997, by and among LARSON DAVIS INCORPORATED, a
Nevada corporation (the "Company"), and CONNIE LERNER ("Holder"), based on the
following premises.

Premises

B. The parties wish to amend the terms of the Agreement as set forth in
this Amendment and to confirm all the others terms and provisions of the
Agreement.

Agreement

1. Exercise of Outstanding Warrants. Paragraph 1.2 of the Agreement is
modified to read in its entirety as follows:

1.2 Exercise of Outstanding Warrants. Holder delivered to the
Company $889,393 on or before January 31, 1997, as payment of the
exercise price of a portion of the Outstanding Warrants (the "Earlier
Exercise"). Holder further agrees to deliver an additional $1,098,107
to the Company in ten equal payments commencing November 15, 1997, and
continuing on the day that is five weeks subsequent to the preceding
payment until the full amount is paid. On receipt of each payment,
the Company shall issue a certificate representing the stock then
being acquired, calculated at an exercise price of $5.30 per share,
and a replacement warrant covering the same number of shares and
having the terms set forth in paragraph 1.4 of this Agreement. On
receipt of the first payment, the Company agrees to deliver
certificates representing all shares previously held in reserve by the
Company in connection with the Earlier Exercise to Holder and
replacement warrants having the terms set forth in paragraph 1.4 for
the number of shares acquired in connection with the Earlier Exercise.

2. Failure to Make Payments. Paragraph 1.3 of the Agreement is hereby
amended to read in its entirety as follows:

3. Issuance of Additional Warrants. Paragraph 1.4 of the Agreement is
modified to read in its entirety as follows:

All subsequent references in the Agreement to the "$10.75 Warrants" shall be
deemed to be references to the "8.75 Warrants."

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.

The Company:

Larson Davis Incorporated

By
Andrew Bebbington, President

Holder:

Connie Lerner
Address: 152 West 57th Street
New York, New York 10019

LARSON DAVIS INCORPORATED
1681 WEST 820 NORTH
PROVO, UTAH 84601

November 14, 1997

CONFIDENTIAL

Mr. Andrew Bebbington
22 Hunter's Run
Rye, New Hampshire 03870

Re: Letter of Agreement

Dear Andrew:

On behalf of the Board of Directors, it is with great pleasure that I offer
you the positions of President and Chief Executive Officer of Larson Davis
Incorporated ("LDII" or the "Company") and Member of the Board of Directors,
effective November 17, 1997. The following details the terms of our offer:

LDII will enter into a definitive employment agreement with you (the
"Definitive Employment Agreement") initially covering the period November 17,
1997, through December 31, 2000, and guarantee the base salary provisions of the
Definitive Employment Agreement to be entered into should at any time during the
contract period (i) there be a change of control at LDII and you leave the
Company within 60 days thereof; or (ii) should you be fired without cause.
After the initial term, the Definitive Employment Agreement will automatically
be renewed for subsequent one-year periods until such time as action is taken to
terminate it. At the Company's 1998 annual meeting, the Company will nominate
you for re-election by the Shareholders to the Board of Directors. If during
the final year of the Definitive Employment Agreement (including any extensions)
there is either (i) a change of control and you leave the Company within 60 days
thereof; or (ii) you are fired without cause, the cash portion of your parachute
shall equal one full year's base salary. In addition to the foregoing, in the
event that there is a change of control of the Company and you leave within 60
days thereof, all of the options that would vest with the passage of time during
the initial three-year period or your employment and one-half of the options
that are subject to performance standards over the same period shall immediately
vest and be exercisable. In the event that the current holders of outstanding
warrants fail to provide the Company with a minimum of $500,000, every five
weeks, beginning in November 1997, and to continue thereafter for ten payments,
or an aggregate of $5,000,000 over the 50 week period, you will have the right
to terminate your contract and receive one year's base salary, plus
reimbursement for actual reasonable expenses incurred to relocate your
residence. Until the Definitive Employment Agreement is executed by LDII and
yourself, this Letter of Agreement, once executed, shall serve in the interim as
your employment agreement.

LDII will provide you a first-year cash compensation package of $350,000
beginning January 1, 1998, comprised of a base salary of $250,000, payable in 24
equal bi-monthly payments and a guaranteed cash bonus of $100,000, payable in
four equal quarterly payments of $25,000 at the end of each calendar quarter
starting with the first quarter of 1998 employment. Employment during calendar
year 1997 shall be prorated, based on $250,000 per annum.

Your second- and third-year base salary will be $250,000 per annum, plus a
cash performance bonus of up to 50% of that amount, payable in lump sums
respectively on the first Monday in March 1999 and March 2000. The second- and
third-year cash performance incentive awards will be determined by the Board of
Directors; the performance targets will be set by the Board at least 30 days
prior to the year for which the cash performance incentives apply.

In addition to the cash compensation discussed above, LDII will provide you
with an equity package consisting of 1,000,000 options. These shall be granted
in their entirety at the lower of the common stock price of LDII at (i) the
close of market the day prior to the press release announcing your joining the
Company as CEO; (ii) the close of market the day prior to the execution of this
Letter of Agreement; or (iii) the close of business on the day of the press
release. All options shall be exercisable for a period equal to the shorter of
(i) five years from the date of vesting; or (ii) 90 days from the termination of
your employment with the Company. If any of the 500,000 options that vest on
the date of execution of the Definitive Employment Agreement and that potential
vest as of December 31, 1998, are exercised at a time at which the trading price
of the common stock is less than $7.50, the exercise price of the option for the
shares then acquired shall be changed to an amount equal to the greater of (i)
80% of the trading price; or (ii) $3.60 per share. Fifty percent of any stock
acquired at a discounted exercise price shall be subject to a limitation so that
not more than 100,000 of such shares can be sold in any 90 day period. Of the
1,000,000 options, except for those vesting immediately upon signing the
Definitive Employment Agreement, two-thirds will be performance based and one-
third will be time based and shall vest as follows: 250,000 shall vest upon
signing a Definitive Employment Agreement, and up to 250,000 each shall vest on
December 31, 1998, December 31, 1999, and December 31, 2000, subject
respectively to your continued employment with the Company through December 31,
1998, December 31, 1999, and December 31, 2000. Performance targets for earning
of performance-based options will be based on commercially reasonable standards
and at the mutual agreement of you and the Board of Directors on an annual
basis. Any performance-based options that do not vest in the designated year
and any options that have not vested at the time of the termination of your
employment shall be null and void.

LDII will pay all necessary and reasonable relocation expenses for up to
three months from the date of hire, and pay for all living expenses for
temporary living quarters and travel thereto for the same period. LDII shall
"gross-up" the relocation reimbursement to compensate for the actual tax effect
of such reimbursement. If your current permanent home is offered for sale in a
timely manner through a broker acceptable to LDII and said home is not sold
within six months, LDII shall purchase it at the median valuation given by three
valuation advisors selected by you and LDII in a manner to be specified in the
Definitive Employment Agreement.

LDII's fringe benefits include medical insurance, participation in the
Company's 401(k) plan, and normal holidays as well as three weeks of paid
vacation time per year. The specific terms of these benefits (such as precisely
what days are recognized as holidays, the degree of employee participation in
payment for medical benefits) are dictated by Company policy.

The Definitive Employment Agreement will also set forth such additional
terms as are customary and usual under the circumstances such as the exclusivity
of your services to the Company, limitations on your right to compete with the
Company, and similar matters.

Of course, your services to the Company will be at the pleasure of the
Company's Board of Directors. The Board has reviewed and approved this Letter
of Agreement. The Board will also review and approve the Definitive Employment
Agreement referred to herein and any future employment/compensation packages.

Again, it is a great pleasure to have the opportunity to invite you to join
and lead the LDII team as the Company's Chief Executive Officer. If these terms
are acceptable, please sign and return one copy of this letter.

Cordially,

Member, Board of Directors

TERMS AGREED TO AND ACCEPTED
this 14th day of November, 1997

Andrew Bebbington

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AS OF SEPTEMBER 30, 1997, AND STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,340,410
<SECURITIES> 0
<RECEIVABLES> 2,508,158
<ALLOWANCES> 37,867
<INVENTORY> 3,888,774
<CURRENT-ASSETS> 9,009,197
<PP&E> 4,829,610
<DEPRECIATION> 2,460,165
<TOTAL-ASSETS> 19,726,258
<CURRENT-LIABILITIES> 2,868,459
<BONDS> 0
<COMMON> 11,656
0
0
<OTHER-SE> 15,509,984
<TOTAL-LIABILITY-AND-EQUITY> 19,726,258
<SALES> 6,672,750
<TOTAL-REVENUES> 6,672,750
<CGS> 3,492,116
<TOTAL-COSTS> 3,492,116
<OTHER-EXPENSES> 7,437,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216,284
<INCOME-PRETAX> (4,348,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,348,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,348,085)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)

</TABLE>