- Quarterly Report (10-Q)

Form 10Q

LAW ENFORCEMENT ASSOCIATES CORP - AID

Filed: November 6, 2008 (period: September 30, 2008)

Quarterly report filed by small businesses

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2008

Commission File No. 000-49907

Law Enforcement Associates Corporation

(Name of Small Business Issuer in Its Charter)

Nevada	56-2267438
(State of other jurisdiction of Incorporation or Organization)	(Employer Identification Number)

2609 Discovery Drive Suite 125, Raleigh, North Carolina 27616

(Address of principal executive offices) (Zip Code)

(919) 872-6210

(Issuer's Telephone Number, Including Area Code)

Check whether the Issuer: (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 30 days:

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-12 of the Exchange Act (Check one)

Large Accelerated filer Accelerated filer Non-accelerated filer Smaller Reporting Company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the period covered by this report: 25,782,433 Shares of Common Stock (no par value).

PART I: FINANCIAL INFORMATION

Item 1 -	Financial Statements

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk

Item 4T -	Controls and Procedures

PART II: OTHER INFORMATION

Item 1 -	Legal Proceedings

Item 2 -	Changes in Securities

Item 3 -	Defaults Upon Senior Securities

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

Item 5 -	Other Information

Item 6 -	Exhibits

NOTE CONCERNING FORWARD-LOOKING STATEMENTS

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Balance Sheets

	September 30,		December 31,
	2008		2007
Assets	(Unaudited)		(Audited)
Current assets:
Cash	$	23,364	$	325,244
Trade accounts receivable (net of allowance for doubtful
accounts of $30,000 and $33,205 at September 30, 2008
and December 31, 2007, respectively)		1,518,980		713,067
Inventories		1,417,098		1,256,346
Prepaid expenses		62,713		38,187
Deferred tax asset-current		199,454		769,338

Total current assets		3,221,609		3,102,182

Property and equipment, net		183,795		257,025

Other assets:
Intangibles, net		2,563,594		2,883,542
Deferred tax asset less current portion		889,367		296,147
Total other assets		3,452,961		3,179,689


Total assets	$	6,858,365	$	6,538,896

The accompanying notes are an integral part of the consolidated financial statements.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Balance Sheets

	September 30,			December 31,
	2008			2007
Liabilities and Stockholders' Equity	(Unaudited)			(Audited)
Current liabilities:
Trade accounts payable	$	890,178		$	570,975
Line of credit		175,000			200,000
Accrued expenses		374,758			357,413
Customer deposits		7,744			24,533
Total current liabilities		1,447,680			1,152,921

Total liabilities		1,447,680			1,152,921

Commitments and Contingencies

Common stock, subject to possible redemption
1,200,000 shares, at redemption value		1,414,823			1,338,170

Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 authorized,
25,782,433 issued and outstanding at September 30, 2008
and December 31, 2007		25,782			25,782
Treasury stock at cost, 595 shares of common stock held by
the Company		(625	)		(625	)
Paid in capital in excess of par		4,995,595			4,995,595
Retained earnings/(accumulated deficit)		(1,024,890	)		(972,947	)
Total stockholders' equity		3,995,862			4,047,805

Total liabilities and stockholders' equity	$	6,858,365		$	6,538,896

The accompanying notes are an integral part of the consolidated financial statements.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Operations and Retained Earnings

for the Nine Months Ended September 30, 2008 and 2007

	2008			2007
	(Unaudited)			(Unaudited)

Net sales	$	6,225,583		$	5,091,554

Cost of sales		3,950,503			3,216,104

Gross profit		2,275,080			1,875,450

Research and development		52,401			72,716
Operating expenses		2,177,579			2,194,807

Total operating expenses		2,229,980			2,267,523

Operating income (loss)		45,100			(392,073	)

Other income (expense):
Loss on sale of assets		(43,666	)		0
Other income		11,935			0
Interest income		1,439			6,372
Interest expense		(13,434	)		0
Interest accretion		(76,653	)		0

Total other income (expense)		(120,379	)		6,372

Net loss before income taxes		(75,279	)		(385,701	)

Income tax provision (benefit)		(23,336	)		(159,492	)

Net loss	$	(51,943	)	$	(226,209	)

Earnings per weighted average share, basic and diluted	$	0.00		$	(0.01	)

Weighted average number of shares, basic and diluted		25,782,433			25,324,338

The accompanying notes are an integral part of the consolidated financial statements.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Operations and Retained Earnings

for the Three Months Ended September 30, 2008 and 2007


	2008			2007
	(Unaudited)			(Unaudited)

Net sales	$	2,397,224		$	1,314,518

Cost of sales		1,450,593			918,067

Gross profit		946,631			396,451

Research and development		12,509			32,096
Operating expenses		771,035			805,432

Total operating expenses		783,544			837,528


Operating income (loss)		163,087			(441,077	)

Other income (expense):
Loss on sale of assets		0			0
Other income		5,329			0
Interest income		119			6,038
Interest expense		(2,491	)		0
Interest accretion		(25,551	)		0

Total other income (expense)		(22,594	)		6,038

Net income (loss) before provision for income taxes		140,493			(435,039	)

Provision for income taxes (benefit)		44,092			(168,811	)

Net income (loss)	$	96,401		$	(266,228	)

Earnings per weighted average share, basic and diluted	$	0.00		$	(0.01	)

Weighted average number of shares, basic and diluted		25,782,433			25,382,433

The accompanying notes are an integral part of the consolidated financial statements.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Cash Flows

for the Nine Months Ended September 30, 2008 and 2007

	2008			2007
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income (loss)	$	(51,943	)	$	(226,209	)
Adjustments to reconcile net income to net cash provided (used)
by operations:
Depreciation and amortization		374,280			182,470
Put option discount expense		76,653			0
Deferred taxes		(23,336	)		(159,492	)
Loss on sale of assets		43,666			0
Change in allowance for doubtful accounts		(3,205	)		0
Change in inventory reserves		(33,349	)		0
Common stock issued for services		0			84,240
(Increase) decrease in assets:
Trade accounts receivable		(802,708	)		347,094
Inventories		(127,403	)		(260,259	)
Refundable income taxes		0			62,264
Prepaid insurance and other assets		(24,526	)		(27,100	)
Increase (decrease) in liabilities:
Trade accounts payable and accrued expenses		336,548			57,835
Customer deposits		(16,789	)		14,517
Net cash provided (used) by operating activities		(252,112	)		75,360

Cash flows from investing activities:
Payments for deferred charges		0			413
Proceeds from sale of property and equipment		6,000			0
Capital expenditures		(30,768	)		(26,799	)
Net cash provided (used) in investing activities		(24,768	)		(26,386	)

Cash flows financing activities:
Net payments under line of credit agreement		(25,000	)		0
Payments on long-term debt		0			(40,000	)
Net cash provided (used) in financing activities		(25,000	)		(40,000	)
Net increase (decrease) in cash		(301,880	)		8,974
Cash at beginning of the period		325,244			452,124
Cash at end of the period	$	23,364		$	461,098

Supplemental disclosure of cash flow information:
Cash paid for interest expense	$	13,434		$	957
Cash paid for income taxes	$	1,855			0

The accompanying notes are an integral part of the consolidated financial statements.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared by Law Enforcement Associates Corporation (the “Company”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although management of the Company believes the disclosures contained herein are adequate to make the information presented not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10KSB for the fiscal year ended December 31, 2007.

Management believes the accompanying consolidated financial statements contain all adjustments, consisting of only normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly its financial position as of September 30, 2008 and 2007. These consolidated financial statements are not necessarily indicative of results to be expected for the full year.

Organization and Operations

Law Enforcement Associates Corporation (originally Academy Resources, Inc.) was formed on December 3, 2001 when the Company acquired all the outstanding stock of Law Enforcement Associates, Inc., a New Jersey company, incorporated in 1972, doing business in North Carolina.

The operations of the Company consist of manufacturing and providing surveillance and intelligence gathering products and vehicle inspection equipment. Products are used by law enforcement agencies, the military, security and correctional organizations.

Principles of Consolidation

The consolidated financial statements include the accounts of Law Enforcement Associates Corporation and its wholly-owned subsidiaries Law Enforcement Associates, Inc. and Law Enforcement Associates Holding Company, Inc. All intercompany transactions have been eliminated in consolidation. The consolidated statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America. Management of the Company has determined that the Company’s operations are comprised of one reportable segment as that term is defined in SFAS No.131. Therefore, no separate segment disclosures have been included in the accompanying notes to the consolidated financial statements.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, accounts receivable and accounts payable. Due to the short-term nature of these instruments, the fair value of these instruments approximates their recorded value.

Trade Accounts Receivable

Trade accounts receivable are carried at their estimated collectible amount. Trade credit is generally extended on a short-term basis; thus, trade receivables do not bear interest. The Company reports trade accounts receivable net of an allowance for doubtful accounts equal to the estimated losses to be incurred. Estimated losses are based on actual collection experience and management’s evaluation of the current status of existing trade receivables.

Inventories

Inventories are stated at the lower of cost or market on the first-in, first-out basis. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. Costs associated with shipping and handling of inventory are included in inventory cost and charged to cost of sales when inventory is shipped.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective periods. Depreciation is computed over the estimated useful lives of the related assets using the straight-line methods for financial statement purposes.

Revenue Recognition

The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collection is reasonably assured. All of the Company’s sales are final and customers do not have a right to return the product. Most customers are charged shipping fees, which are recorded as a component of net sales. Training revenue is recorded as the service is provided.

Income Taxes

Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 (“FIN No. 48”), on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. The Company reviewed its tax positions and determined that no adjustment was needed upon adoption of FIN No. 48.

The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expense.

Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing the Company’s consolidated net income (loss) by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. There are no common stock equivalents for the Company at September 30, 2008.

Product Warranty

The Company provides a provision for estimated warranty repairs. The accrued warranty provision was $52,496 and $59,911 at September 30, 2008 and December 31, 2007, respectively.

Advertising

The Company expenses the production costs of advertising as incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits within the calendar year. During the nine months ended September 30, 2008 and 2007, advertising costs were $82,025 and $67,334, respectively. All advertising costs are included in operating expenses in the accompanying consolidated statements of operations.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research and Development

The Company expenses research and development costs as incurred. The Company incurred product development expense of $52,401 and $72,716 for the nine months ended September 30, 2008 and 2007, respectively.

Use of Estimates

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

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities and requires additional disclosure about the use of fair value measures, the information used to measure fair value, and the effect fair value measurements have on earnings. SFAS 157 does not require any new fair value measurements. SFAS 157 for financial assets and financial liabilities is effective for the Company beginning January 1, 2008. On January 1, 2009, the beginning of the next fiscal year, the standard will also apply to non-financial assets and non-financial liabilities of the Company. The adoption of SFAS 157 for financial assets and financial liabilities did not have a material impact on the Company’s consolidated financial statements. FASB Staff Position SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Management is evaluating the impact that SFAS 157 will have on its non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 effective January 1, 2008, did not have a material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No., 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to FASB Statements No. 115 (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for the Company beginning January 1, 2008. The adoption of SFAS 159 did not have a material effect on the Company’s consolidated financial statements as management did not elect the fair value measurement option under the provisions of SFAS 159 for any of the Company’s financial assets or liabilities.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statements No.141 (revised 2007), “Business Combinations” (“FAS 141(R)”) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of FAS 141 (R) and FAS 160 are effective for the fiscal year beginning after December 15, 2008. The Company believes that the impact of these items upon adoption will not be material to its consolidated financial statements.

In April 2008, the FASB issued Staff Position FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). The FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under other accounting principles generally accepted in the United States of America. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. Certain disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

2. INVENTORIES

Inventories consist of the following at September 30, 2008 and December 31, 2007:

	September 30,		December 31,
	2008		2007
Raw Materials	$	624,828	$	625,247
Work-in-process		139,542		90,098
Finished goods		652,728		541,001
	$	1,417,098	$	1,256,346

The provision for excess, obsolete or slow-moving was $166,515 and $199,865 at September 30, 2008 and December 31, 2007, respectively.

3. PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, at September 30, 2008 and December 31, 2007:

		September 30,			December 31,
	Useful Life	2008			2007
Office furniture & equipment	5 to 7 years		$	95,905	$	107,623
Leasehold improvements	7 years			14,218		5,139
Vehicles	3 to 5 years			101,129		101,129
Machinery & equipment	5 to 7 years			291,420		459,032
				502,672		672,922
Less accumulated depreciation				318,877		415,898
			$	183,795	$	257,025

Depreciation expense for the nine months ended September 30, 2008 and 2007 was $54,332 and $59,067, respectively.

4. INCOME TAXES

In accordance with SFAS 109, deferred income taxes and benefits are provided for the results of operations of the Company for the tax effects of temporary differences and carry-forwards that give rise to significant portion of deferred tax assets and liabilities.

On January 15, 2008, Raymond James Financial, Inc. through its subsidiary, Sirchie Acquisition Company, LLC, acquired 51% interest (13,149,334 shares) in Law Enforcement Associates from Sirchie Finger Print Laboratories, Inc. and John Carrington. Based on the change in ownership, the Company’s net operating loss carry forward may be subject to certain limitations in any one year. Therefore, these net operating loss carryforwards have been classified as long-term in the consolidated balance sheet at September 30, 2008.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

4. INCOME TAXES (Continued)

Current tax expense (benefit) is the only component present in the provision for income taxes in the accompanying statement of operations. A reconciliation of the statutory federal income tax rate and effective rate is as follows at September 30:

	2008			2007

Statutory federal income tax rate		34	%		34	%
State income tax - net of federal benefit		1	%		3	%
Other		(4	%)		4	%
Effective tax rate		31	%		41	%

The Company is no longer subject to U.S. Federal and State examinations by tax authorities for years before 2004.

5. LEASE COMMITMENTS

Facility

The Company formally leased its office and manufacturing facility from Sirchie Finger Print Laboratories, Inc. Rent expense incurred under this lease for the nine months ended September 30, 2008 and 2007 was $32,237 and $129,750, respectively. This lease was terminated during the 1 st quarter of 2008.

On December 15, 2007, the Company entered into a lease with Zabarsky Investments Ltd. L.P. The Company currently leases approximately 6,000 square feet of space for our recently acquired van division at approximately $4,750 per month. The lease term is 60 months. Rent expense incurred under this lease for the nine months ended September 30, 2008 was $42,750.

Effective March 2008, the Company moved its headquarters from the Youngsville facility and entered into a lease with Zabarsky Investments Ltd. L.P. The Company currently leases approximately 10,000 square feet of space for our new Raleigh, North Carolina headquarters at approximately $7,900 per month. The lease term is 60 months. Rent expense incurred under this lease for the nine months ended September 30, 2008 was $63,333.

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 2008:

Remainder of 2008	$	40,104
2009		160,415
2010		160,415
2011		160,415
2012		153,782
Later years		8,631
Total minimum payments required	$	683,762

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

6. CONCENTRATION OF RISK

At December 31, 2007 and various times during 2008 and 2007, the Company maintained deposits in excess of Federal Deposit Insurance Corporation insured limits.

For the nine months ended September 30, 2008 and 2007, sales to one customer accounted for 11% and 13% of total sales, respectively. Another customer accounted for 12% of total sales for the nine months ended September 30, 2008. For the nine months ended September 30, 2008, one customer accounted for 46% of total accounts receivable.

7. INTANGIBLE ASSETS

Patent costs include the acquired costs of obtaining patents. Costs for patents are capitalized and amortized over the estimated useful life of the patents, usually 15 years, using the straight-line method. In the event a patent is superseded, the unamortized cost will be written off immediately. Trade names, marketing list, and drawings/designs are tested at least annually for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company has determined that no impairment exists on the trade name, marketing list, and drawings/designs based on the undiscounted future cash flows generated by these assets.

During the 3 rd Quarter of 2008, the Company recognized a non-cash charge of $150,000 on our patents related to the stun pistol. This decision was based upon an analysis of recoverability and the fact that the patents have provided no income to date.

Intangible assets consist of the following at September 30, 2008 and December 31, 2007:

		September 30,		December 31,
	Estimated Life	2008		2007
Patents	15 years	$	597,960	$	747,961
Trade name	25 years		1,400,000		1,400,000
Drawings/designs	10 years		411,000		411,000
AVS Marketing List	12 years		470,000		470,000
AVS Engineered Drawings	15 years		230,000		230,000
AVS Trade Name	15 years		190,000		190,000
			3,298,960		3,448,961
Less accumulated amortization			735,366		565,419
Total intangibles, net		$	2,563,594	$	2,883,542

Amortization expense for the nine months ended September 30, 2008 and 2007 was $169,948 and $123,403, respectively. Estimated future amortization expense is as follows at September 30, 2008:

Year	Amount
Remainder of 2008	$	53,524
2009		214,097
2010		214,097
2011		214,097
2012		214,097
Future Years		1,653,682
	$	2,563,594

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

8. LINE OF CREDIT

The Company had a $750,000 line of credit with a bank, which bears interest at LIBOR (2.46% and 4.60% at June 30, 2008 and December 31, 2007, respectively) plus 3%. Substantially all the assets of the Company are pledged to secure the line. The line required maintenance of a minimum net worth of $3.5 million. At September 30, 2008 and December 31, 2007, the Company had $175,000 and $200,000, respectively outstanding on the line of credit.

The Company’s existing line of credit matured in May 2008. The Company is currently in negotiations with other financial institutions to secure another line of credit. No assurance can be given that we will be able to obtain financing on acceptable terms, if at all. As we generally obtain all of our funding from operations, a decrease in revenue could negatively impact our short and long term liquidity. A change in the current political situation or a decrease in military spending could result in decreased sales of some of our products.

9. PROFIT SHARING PLAN

The Company has a 401(k) Profit Sharing Plan (the “Plan”) to provide retirement benefits for its eligible employees. Eligible employees may contribute up to the maximum annual amount as set periodically by the Internal Revenue Service. The Plan provides for a discretionary employer match of up to 6% of the employees’ compensation. The Company recognized expense of $59,871 and $48,116 for employer discretionary matches for the nine months ended September 30, 2008 and 2007, respectively. Additionally, the Plan provides for a discretionary profit sharing contribution. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. The Company did not accrue a profit sharing contribution for the nine months ended September 30, 2008 and 2007.

10. ROYALTY COMMITMENTS

In August 2006, the Company obtained a license to use certain marks of a licensor in connection with products that the Company sells. The agreement is set to expire on April 30, 2010 and calls for royalties based on the number of products sold. The agreement further specifies that the Company be obligated to pay the licensor minimum guaranteed royalties as follows at September 30, 2008:

Year	Amount
Remainder of 2008	$	20,000
2009		126,667
2010		50,000
Total	$	196,667

Royalty expense for the nine months ended September 30, 2008 was $33,000.

11. REDEEMABLE COMMON STOCK

On October 16, 2007, the Company acquired certain assets of Advanced Vehicle Systems, LLC, a Florida Limited Liability Company (“AVS”). The Company purchased all of AVS' designs, drawings, name and intellectual property rights. As part of the purchase price, the Company provided the seller a put option on 1,200,000 shares. This put option gives the seller the right to sell up to 1,200,000 shares back to the Company for $1.25 per share on August 1, 2009.

The Company accounts for redeemable common stock in accordance with Emerging Issue Task Force D-98 “Classification and Measurement of Redeemable Securities.” Securities that are redeemable for cash or other assets are classified outside of permanent equity if they are redeemable at the option of the holder. The Company accretes changes in the redemption value over the period from the date of issuance using the interest method.

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

12. CONSULTING AGREEMENTS

On May 3, 2007, the Company entered into an agreement with an entity to act as the placement agent and financial advisor to the Company. This entity identifies prospective purchasers of debt and/or equity securities to be issued by the Company and prospective companies to be purchased or acquired by the Company either by debt and/or equity securities or by assets acquired by the Company. Pursuant to the terms of the agreement, the entity will be compensated for successful security placements and services rendered in connection with acquisitions by the Company upon the closing of each sale of securities by the Company. This entity shall act as the Company’s exclusive placement agent and exclusive financial advisor for a period of 120 days beginning on the effective date of the agreement. Thereafter, the entity shall act as the Company’s non-exclusive placement agent and non-exclusive financial advisor until terminated by either party upon 10 days notice to the other party.

Upon execution of this agreement the Company issued 130,000 shares of restricted common stock for the entity’s due diligence and advisory efforts. Additionally, the Company shall pay this entity a monthly fee of $5,000 until the agreement is terminated. For the nine months ended September 30, 2008, the Company incurred $37,412 in consulting fees. The Company terminated this agreement during the 2 nd quarter of 2008.

In July 2007, the Company entered into an agreement with an entity to act as its public relations firm in an effort to market the new Graffiti Cam. The term of the agreement is for one year commencing on August 1, 2007. The Company will pay a monthly fee of $20,000 plus out-of-pocket costs until the agreement is terminated. The agreement can be terminated by either party with 90 days advance notice to the other party. For the nine months ended September 30, 2008, the Company recognized $69,573 in consulting fees. The Company terminated this agreement during the 1 st quarter of 2008.

13. COMMITMENTS AND CONTINGENCIES

On September 12, 2008, the Company received a letter from the American Stock Exchange informing the Company that it is not in compliance with Section 1003(a)(ii) of the American Stock Exchange’s Company Guide because the Company does not have stockholders’ equity of $4,000,000 and has sustained losses from continuing operations and net losses in three of its four most recent fiscal years. In addition, the American Stock Exchange is requesting that the Company reverse split its common stock. The Company was given until October 13, 2008 to submit a plan advising the AMEX of what action(s) it has taken or will take that will bring it into compliance with the continued listing standards identified in the letter.

The Company’s Board of Directors has determined that it is no longer in the Company’s best interest to maintain its listing on the American Stock Exchange, and gave notice to the Exchange of that decision on November 5, 2008. One of the major factors in the decision was the Board’s rejection of the Exchange’s request to implement a reverse split of LEA’s common stock. The Board did not believe that a reverse split at this time would be beneficial to the Company’s stockholders.

14. LIQUIDITY AND CAPITAL RESOURCES

The Company’s existing line of credit matured in May 2008 with an outstanding balance of $175,000 and the Company has been unsuccessful in refinancing this obligation, obtaining new financing or raising additional capital. In addition, the Company has outstanding 1,200,000 shares of redeemable common stock, which becomes exercisable for $1.25 per share on August 1, 2009. There is no assurance that the Company will be able to obtain additional financing or capital on acceptable terms, if at all. If the Company is unsuccessful in its attempts, management may be required to liquidate available assets, restructure the company or in the extreme event, cease operations. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

The following Management Discussion and Analysis of Financial Condition is qualified by reference to and should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes thereto as set forth in this document. We include the following cautionary statement in this Form 10-Q for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performances and underlying assumptions and other statements, which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be achieved or accomplished.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.

Revenues

Revenues for the three months ended September 30, 2008, were $2,397,224 as compared to $1,314,518 for the three months ended September 30, 2007, which represents an increase of $1,082,706 (82.4%). The majority of the increase is due to the recognition of a significant order during the 3 rd quarter as well as the Company continuing to recognize revenue from the surveillance vehicle division.

Gross Profit

Gross profit for the three months ended September 30, 2008 was $946,631 as compared to $396,451 for the three months ended September 30, 2007, an increase of $550,180. As a percentage of net sales, our gross margin was 39.5% for the quarter as compared to 30.2% in the same period last year. Management expected the increase in gross margin during the 3 rd quarter as we continued to ship surveillance vehicle orders and obtained better efficiencies related to the surveillance vehicle division.

Operating Expenses

Operating Expenses incurred for the three months ended September 30, 2008 were $783,544 as compared to $837,528 for the three months ended September 30, 2007, a decrease of $53,984 (6.4%). The decrease is mainly due to a significant reduction in consulting, accounting and legal fees during the 3 rd quarter. The Company terminated two consulting agreements. This decrease was partially offset by an increase in amortization expense as compared to the same period last year and a non-cash charge of $150,000 on our patents related to the stun pistol. The increase in amortization is due to acquired intangible assets during the 4 th quarter of 2007. As a percentage of revenue, total operating expenses (including research and development expenses) was 32.7% compared to 63.7% for the comparative period.

Income and Earnings Per Share

Our net income for the three months ended September 30, 2008 was $96,401 compared to a net loss of ($266,228) for the three months ended September 30, 2007, an increase of $362,629. This increase in net income is attributable to the factors outlined above; despite incurring non-cash interest expense of approximately $25,000 related to the interest accretion of the AVS put option and the non-cash charge of $150,000 on our patents related to the stun pistol. Net income (loss) per weighted average share was $0.00 for the three months ended September 30, 2008, as compared to ($0.01) for the three months ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007.

Revenues

Revenues for the nine months ended September 30, 2008, were $6,225,583 as compared to $5,091,554 for the nine months ended September 30, 2007, which represents an increase of $1,134,029 (22.3%). The majority of the increase is due to the recognition of a significant order during the 3 rd quarter as well as the Company continuing to recognize revenue from the surveillance vehicle division.

Gross Profit

Gross profit for the nine months ended September 30, 2008 was $2,275,080 as compared to $1,875,450 for the nine months ended September 30, 2007, an increase of $399,630 (21.3%). As a percentage of net sales, our gross margin was 36.5% for the nine months ended September 30, 2008 as compared to 36.8% in the same period last year.

Operating Expenses

Operating Expenses incurred for the nine months ended September 30, 2008 were $2,229,980 as compared to $2,267,523 for the nine months ended September 30, 2007, a decrease of $37,543 (1.7%). The decrease is mainly due to a significant reduction in accounting and legal fees. The Company also has not incurred stock compensation charges during 2008. These decreases were partially offset by relocation expenses incurred during the 1 st quarter, increased marketing efforts related to the introduction of the Graffiti Cam System, and a non-cash charge of $150,000 on our stun pistol patents during the 3 rd quarter. As a percentage of revenue, total operating expenses (including research and development expenses) was 35.8% compared to 44.5% for the comparative period.

Income and Earnings Per Share

Our net loss for the nine months ended September 30, 2008 was ($51,943) compared to a net loss of ($226,209) for the nine months ended September 30, 2007, a decrease of $174,266. This decrease in net loss is attributable to the Company’s performance during the 3 rd quarter. Net income (loss) per weighted average share was ($0.00) for the nine months ended September 30, 2008, as compared to ($0.01) for the nine months ended September 30, 2007.

Liquidity and Capital Resources

At September 30, 2008, working capital was $1,773,929 as compared with $1,949,261 at December 31, 2007, a decrease of $175,332. During the 2 nd quarter, the Company reclassified the majority of our deferred tax asset to a non-current asset. This decrease was partially offset due to a significant increase in accounts receivable as of the end of the 3 rd quarter. The Company’s $750,000 line of credit with Wachovia Bank matured in May 2008. As of September 30, 2008, the Company had an outstanding balance of $175,000. The Company is currently negotiating with other financial institutions to secure a line of credit.

In August 2009, the put option becomes exercisable and the Company is currently developing a plan to fund this with additional capital or borrowed funds. However, there is no assurance the Company will be successful in these attempts and may not be able to fund the put if it is exercised.

If we need to obtain capital, no assurance can be given that we will be able to obtain this capital on acceptable terms, if at all. In such an event, this may have a materially adverse effect on our business, operating results and financial condition. If the need arises, we may attempt to obtain funding through the use of various types of short term funding, loans or working capital financing arrangements from banks or financial institutions. As we generally obtain all of our funding from operations, a decrease in revenue could negatively impact our short and long term liquidity. A change in the current political situation or a decrease in military spending could result in decreased sales of some of our products.

Research and Development

In the nine months ended September 30, 2008, the Company incurred expenses of $52,401 on research and development as compared to $72,716 in the nine months ended September 30, 2007.

Inflation

We believe that the impact of inflation on our operations since our inception has not been material.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer (the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for our company and our subsidiary. Such officers have concluded (based upon an evaluation of these controls and procedures as of the end of the period covered by this report) that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officers have also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of this evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.

Our management, including the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our annual report on Form 10-KSB for fiscal year 2007 for additional information concerning these and other uncertainties that could negatively impact the Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K attached:

	Exhibits

	31.1	Certification of Paul Feldman Pursuant to Rule 13a-14(a)/15d-14(a)
	31.2	Certification of Paul Briggs Pursuant to Rule 13a-14(a)/15d-14(a)
	32.1	Certification of Paul Feldman Pursuant to Rule 13a-14(b) or Rule 15d-14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

32.2

Certification of Paul Briggs Pursuant to Rule 13a-14(b) or Rule 15d-14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Law Enforcement Associates Corporation

Dated: November 6, 2008	By:	/s/ Paul Feldman
		Paul Feldman
		President and Chief Executive Officer

		/s/ Paul Briggs
		Paul Briggs
		Chief Financial Officer and Principal Accounting Officer

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