Form 10Q

LAW ENFORCEMENT ASSOCIATES CORP – LAWE.OB

Filed: August 12, 2009 (period: June 30, 2009)

Quarterly report filed by Smaller Reporting Company

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 June 30, 2009

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

As of August 10, 2009, there were 25,782,436 shares outstanding of the registrant’s Common Stock, no par value per share.

1

PART I: FINANCIAL INFORMATION
Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4	Controls and Procedures	22
PART II: OTHER INFORMATION
Item 1	Legal Proceedings	23
Item 1A	Risk Factors	23
Item 2	Unregistered Sales of Equity Securities and the Use of Proceeds	23
Item 3	Defaults Upon Senior Securities	23
Item 4	Submission of Matters to a Vote of Security Holders	23
Item 5	Other Information	23
Item 6	Exhibits	23
SIGNATURES		24
INDEX TO EXHIBITS

2

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Balance Sheets

	June 30,		December 31,
	2009		2008
Assets	(Unaudited)		(Audited)
Current assets:
Cash	$	734,550	$	254,705
Trade accounts receivable (net of allowance for doubtful
accounts of $30,000 and $30,000 at June 30, 2009
and December 31, 2008, respectively)		1,876,973		2,011,293
Accounts receivable - other		49,253		0
Inventories		1,529,329		1,368,049
Prepaid expenses		49,837		45,629
Deferred tax asset-current		304,326		244,741
Total current assets		4,544,268		3,924,417
Property and equipment, net		158,620		170,027
Other assets:
Intangibles, net		2,092,431		2,174,564
Assets held for sale		335,505		335,505
Deferred tax asset less current portion		565,995		820,425
Total other assets		2,993,931		3,330,494
Total assets	$	7,696,819	$	7,424,938

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

3

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Balance Sheets

	June 30,			December 31,
	2009			2008
Liabilities and Stockholders' Equity	(Unaudited)			(Audited)
Current liabilities:
Trade accounts payable	$	362,926		$	331,451
Line of credit		439,450			1,038,809
Accrued expenses:
Income taxes		240,702			0
Compensation and payroll taxes		139,961			126,695
Profit sharing plan		29,994			76,769
Warranty provision		54,865			58,809
Other accrued expenses		65,392			97,205
Deferred expenses		56,336			104,628
Customer deposits		4,019			30,540
Total current liabilities, before shares subject to redemption		1,393,645			1,864,906
Common stock, subject to possible redemption
1,200,000 shares, at redemption value		1,491,476			0
Total current liabilities		2,885,121			1,864,906
Total liabilities		2,885,121			1,864,906
Commitments and Contingencies
Common stock, subject to possible redemption
1,200,000 shares, at redemption value		0			1,440,374
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 authorized,
25,782,436 issued and outstanding at June 30, 2009
and December 31, 2008		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)		(209,054	)		(901,094	)
Total stockholders' equity		4,811,698			4,119,658
Total liabilities and stockholders' equity	$	7,696,819		$	7,424,938

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

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LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Operations

for the Six Months Ended June 30, 2009 and 2008

	2009			2008
	(Unaudited)			(Unaudited)
Net sales	$	8,538,399		$	3,828,359
Cost of sales		5,854,309			2,499,910
Gross profit		2,684,090			1,328,449
Research and development		176,099			39,892
Operating expenses		1,245,743			1,406,544
Total operating expenses		1,421,842			1,446,436
Net income (loss) before other income (expense) and
income taxes		1,262,248			(117,987	)
Other income (expense)
Loss on sale of assets		(8,361	)		(43,666	)
Other income		10,338			6,606
Interest income		25			1,320
Interest expense		(136,664	)		(62,045	)
Total other income (expense)		(134,662	)		(97,785	)
Net income (loss) before income taxes		1,127,586			(215,772	)
Income tax (expense) benefit		(435,546	)		67,428
Net income (loss)	$	692,040		$	(148,344	)
Net income (loss) per weighted average share, basic and diluted	$	0.03		$	(0.01	)
Weighted average number of shares, basic and diluted		25,782,436			25,782,436

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

5

LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Operations

for the Three Months Ended June 30, 2009 and 2008

	2009			2008
	(Unaudited)			(Unaudited)
Net sales	$	6,786,665		$	1,848,700
Cost of sales		4,568,594			1,327,259
Gross profit		2,218,071			521,441
Research and development		138,199			30,688
Operating expenses		683,538			662,238
Total operating expenses		821,737			692,926
Net income (loss) before other income (expense) and
income taxes		1,396,334			(171,485	)
Other income (expense)
Loss on sale of assets		(8,361	)		(43,666	)
Other income		7,504			0
Interest income		25			308
Interest expense		(111,113	)		(30,919	)
Total other income (expense)		(111,945	)		(74,277	)
Net income (loss) before income taxes		1,284,389			(245,762	)
Income tax (expense) benefit		(495,131	)		78,824
Net income (loss)	$	789,258		$	(166,938	)
Net income (loss) per weighted average share, basic and diluted	$	0.03		$	(0.01	)
Weighted average number of shares, basic and diluted		25,782,436			25,782,436

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

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LAW ENFORCEMENT ASSOCIATES CORPORATION

Consolidated Statements of Cash Flows

for the Six Months Ended June 30, 2009 and 2008

	2009			2008
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	692,040		$	(148,344	)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operations:
Depreciation and amortization		114,660			151,503
Put option discount expense		51,102			51,102
Deferred taxes		194,845			(67,428	)
Loss on sale of assets		8,361			43,666
Change in allowance for doubtful accounts		0			(13,205	)
Change in inventory reserves		9,234			(64,437	)
(Increase) decrease in assets:
Trade accounts receivable		134,320			13,583
Accounts receivable - other		(49,253	)		0
Inventories		(170,514	)		(180,027	)
Prepaid expenses and other assets		(4,208	)		(29,114	)
Increase (decrease) in liabilities:
Trade accounts payable		31,475			2,918
Accrued expenses		123,144			(51,931	)
Customer deposits		(26,521	)		16,279
Net cash provided (used) in operating activities		1,108,685			(275,435	)
Cash flows from investing activities:
Proceeds from sale of property and equipment		12,750			6,000
Capital expenditures		(42,231	)		(30,768	)
Net cash used in investing activities		(29,481	)		(24,768	)
Cash flows from financing activities:
Net factor line of credit repayments		(599,359	)		0
Net payments under line of credit agreement		0			(25,000	)
Net cash used by financing activities		(599,359	)		(25,000	)
Net increase (decrease) in cash		479,845			(325,203	)
Cash at beginning of the period		254,705			325,244
Cash at end of the period	$	734,550		$	41
Supplemental disclosure of cash flow information:
Cash paid for interest expense	$	111,483		$	10,943
Cash paid for income taxes	$	0		$	0

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

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LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Consolidated Financial Statements

(unaudited)

1.  SIGNIFICANT ACCOUNTING POLICIES 

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

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 10K for the fiscal year ended December 31, 2008.

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 June 30, 2009 and 2008. These consolidated financial statements are not necessarily indicative of results to be expected for the full year.

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.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid cash investments with an original maturity of three months or less to be cash equivalents.  There were no cash equivalents as of June 30, 2009 and December 31, 2008.

Fair Value of Financial Instruments

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

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1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Trade Accounts Receivable

Trade accounts receivable are carried at their estimated collectible amount. Trade credit is generally extended on a short-term basis; therefore, trade receivables do not bear interest. The Company reviews customer accounts on a periodic basis and records a reserve for specific amounts that management feels may not be collected. Amounts will be written off at the point when collection attempts on the accounts have been exhausted. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance.  Past due status is determined based upon contractual terms. While management believes the Company’s processes effectively address its exposure to doubtful accounts, changes in economic, industry or specific customer conditions may require adjustment to the allowance recorded by the Company.

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.

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 in the period of disposal. Depreciation is computed over the estimated useful lives of the related assets using the straight-line methods for financial statement purposes.

Assets Held for Sale

An asset or business is classified as held for sale when (i) management commits to a plan to sell and it is actively marketed; (ii) it is available for immediate sale and the sale is expected to be completed within one year; and (iii) it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. In isolated instances, assets held for sale may exceed one year due to events or circumstances beyond the Company’s control. Upon being classified as held for sale, the recoverability of the carrying value must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill and other assets are assessed. After the valuation process is completed, the assets held for sale are reported at the lower of the carrying value or fair value less cost to sell and the assets are no longer depreciated or amortized.

Long-lived assets

The Company reviews the carrying value of long-lived assets for impairment whenever certain triggering events or changes in circumstances indicate that the carrying amounts of any asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the excess of the carrying amount over the fair value of the assets.

Intangible assets

Finite-lived intangible assets consist of patents and purchased intangibles. Patent cost includes the acquired cost of obtaining patents and are amortized over the estimated useful of the patents, usually 15 years, using the straight line method.  Purchased intangibles consist of trade name, drawings and designs, and marketing list which are amortized over 12 to 25 years, depending on the applicable intangible, using the straight line method.

9

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Leases

The Company’s leases are evaluated at inception or at any subsequent material modification and, depending on the lease terms, are classified as either capital or operating leases, as appropriate under SFAS No. 13 “Accounting for Leases”. For operating leases that contain built-in pre-determined rent escalations, rent holidays, or rent concessions, rent expense is recognized on a straight-line basis over the life of the lease.

Product liability and warranty claims

The Company’s consolidated financial statements include accruals for potential product liability and warranty claims based on the Company’s claim experience. Such costs are accrued at the time revenue is recognized. At June 30, 2009 and December 31, 2008, accrued product warranties totaled $54,865 and $58,809, respectively and are reported as warranty provision in the accompanying consolidated balance sheets.

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’s policy with respect to evaluating uncertain tax positions based upon whether management believes it is more likely than not to be sustained upon review by the taxing authorities, then the Company shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The tax positions must meet the more-likely-than-not recognition threshold with consideration given to the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances and information at the reporting date.  The Company will reflect only the portion of the tax benefit that will be sustained upon resolution of the position and applicable interest on the portion of the tax benefit not recognized.

Net Income (Loss) Per Share

Basic earnings per share is computed by dividing the Company’s consolidated net income 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 June 30, 2009 and 2008.

Advertising

The Company expenses the 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 six months ended June 30, 2009 and 2008, advertising costs were $32,162 and $47,263, respectively. All advertising costs are included in operating expenses in the accompanying consolidated statements of operations.

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1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research and Development

The Company expenses research and development costs as incurred. The Company incurred product development expense of $176,099 and $39,892 for the six months ended June 30, 2009 and 2008, 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 adopted/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 was effective for the Company beginning January 1, 2008. On January 1, 2009, the standard applies to non-financial assets and non-financial liabilities of the Company. The adoption of SFAS 157 for non-financial assets and non-financial liabilities did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS 160”). SFAS 160 amends ARB No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of SFAS 160 did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations.” SFAS No. 141 (R) establishes principals and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141 (R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141 (R) is effective for business combinations consummated in periods beginning on or after December 15, 2008. Any future acquisitions undertaken by the Company will be impacted by the adoption of this standard.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). The standard requires entities to consider their own historical experience in renewing or extending similar arrangements when developing assumptions regarding the useful lives of intangible assets and also mandates certain related disclosure requirements. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of FSP 142-3 did not have an effect on the Company’s consolidated financial statements.

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1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

We adopted Financial Accounting Standards No. 165, Subsequent Event (“FAS 165”), in the second quarter of 2009. FAS 165 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See “Principles of Consolidation and Basis of Presentation” included in Note 1- The Company and Summary of Significant Accounting Policies for the related disclosure. The adoption of FAS 165 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend SFAS No. 107, Disclosures about Fair Value Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 also amend APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP No. SFAS 107-1 and APB 28-1 did not have an effect on the Company’s consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standard Codification and the Hierarchy of the Generally Accepted Accounting Principles-a replacement of SFAS No. 162 (“SFAS 168”), to become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We do not believe the adoption of SFAS 168 will have a material impact on our consolidated financial statements.

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2.         INVENTORIES

Inventories consist of the following at June 30, 2009 and December 31, 2008:

	June 30,		December 31,
	2009		2008
Raw Materials	$	596,126	$	615,866
Work-in-process		143,114		64,253
Finished goods		790,089		687,930
	$	1,529,329	$	1,368,049

Reserves for slow moving and obsolete inventory on a FIFO basis totaled $104,966 and $95,733 as of June 30, 2009 and December 31, 2008, respectively.

3.         PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, at June 30, 2009 and December 31, 2008:

		June 30,		December 31,
	Useful Life	2009		2008
Office furniture & equipment	5 to 7 years	$	98,347	$	98,347
Leasehold improvements	7 years		21,386		14,218
Vehicles	5 years		86,459		101,127
Machinery & equipment	5 to 7 years		291,420		291,420
			497,612		505,112
Less accumulated depreciation			338,992		335,085
		$	158,620	$	170,027

Depreciation expense for the six months ended June 30, 2009 and 2008 was $32,527 and $38,205, respectively.

4.         INTANGIBLE ASSETS

Intangible assets consist of the following at June 30, 2009 and December 31, 2008:

			June 30,		December 31,
	Estimated Life		2009		2008
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
			2,701,000		2,701,000
Less accumulated amortization			608,569		526,436
	Total intangibles, net	$	2,092,431	$	2,174,564

Amortization expense for the six months ended June 30, 2009 and 2008 was $82,133 and $113,298, respectively. Estimated future amortization expense is as follows at June 30, 2009:

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4.         INTANGIBLE ASSETS (Continued)

Year	Amount
Remainder of 2009	$	82,134
2010		164,267
2011		164,267
2012		164,267
2013		164,267
Future Years		1,353,229
	$	2,092,431

5.         ASSETS HELD FOR SALE

During the 4th Quarter of 2008, the Board of Directors approved the sale of the Company’s EDW patents to a third party. As a result, the Company reclassified these patents on its financial statements as assets held for sale. The patents have been reported at the lower of the carrying value or fair value less cost to sell and the Company has ceased amortizing these assets.

6.         FACTOR LINE OF CREDIT

The Company entered into a factoring agreement on November 12, 2008, which provides for the factoring of certain trade accounts receivable. The agreement requires factoring fees ranging from 1.5% to 15.0% of the accounts receivable factored depending on the timing and amounts repurchased by the Company. The Company is not subject to an annual minimum fee and the agreement can be terminated by either party upon 30 days prior written notice. Advances are collateralized by the Company’s accounts receivable. The outstanding balance was $439,450 and $1,038,809 as of June 30, 2009 and December 31, 2008, respectively. The Company recognized $85,562 in factoring fees for the six months ended June 30, 2009.

7.         INCOME TAXES

Deferred 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 June 30:

	2009			2008
Statutory federal income tax rate		34	%		34	%
State income tax – net of federal benefit		4	%		1	%
Other		1	%		(4	%)
Effective tax rate		39	%		31	%

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 Corporation 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.

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8.         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.

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. During the 1st quarter, the Company elected the Safe Harbor provision which guarantees an employer match of 3% for all eligible employees for the current year. Employer matches totaled $28,002 and $41,176 for the six months ended June 30, 2009 and 2008, respectively. Additionally, the Plan provides for a discretionary profit sharing contribution. Such contributions to the Plan are allocated among eligible participants in direct proportion of their salaries to the combined salaries of all participants. The Company did not accrue a discretionary profit sharing contribution for the six months ended June 30, 2009 and 2008.

10.       RELATED PARTY TRANSACTIONS

For the six months ended June 30, 2009, the Company incurred $3,799,530 to Sirchie Finger Print Laboratories, Inc. (“Sirchie”) for purchases. At June 30, 2009 and 2008, the Company had $4,028 and $5,207, respectively, in accounts payable due to Sirchie.

The Company formerly leased its office and manufacturing facility from Sirchie.  Rent expense incurred under this lease for the six months ended June 30, 2008 was $32,237. This lease was terminated in 2008.

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11.      COMMITMENTS AND CONTINGENCIES

Lease Commitments

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 its surveillance vehicle division at approximately $4,750 per month. The lease term is 60 months. Rent expense incurred under this lease for the six months ended June 30, 2009 and 2008 was $28,500 and $28,500, respectively.

Effective March 2008, the Company moved its headquarters from the Youngsville, North Carolina facility and entered into a lease with Zabarsky Investments Ltd. L.P. The Company currently leases approximately 10,000 square feet of space for its Raleigh, North Carolina headquarters at approximately $7,900 per month. The lease term is 60 months. Rent expense incurred under this lease for the six months ended June 30, 2009 and 2008 was $47,500 and $39,583, respectively.

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 June 30, 2009:

Remainder of 2009	$	80,208
2010		160,415
2011		160,415
2012		153,782
2013		8,631
Total minimum payments required	$	563,451

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 expired on April 30, 2009 and called for royalties based on the number of products sold. The agreement further specified that the Company would be obligated to pay the licensor minimum guaranteed royalties; however, the Company satisfied its future royalty requirements during the 4th quarter of 2008.

Royalty expense for the six months ended June 30, 2009 and 2008 was $0 and $13,000, respectively.

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Consulting Agreements

On May 3, 2007, the Company entered into an agreement with an entity to act as a placement agent and financial advisor to the Company. This entity’s objective is to identify 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 to be acquired by the Company. Pursuant to the terms of the agreement, the entity is 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 acted 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 has acted as the Company’s non-exclusive placement agent and non-exclusive financial advisor and will continue 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 was terminated. For the six months ended June 30, 2008, the Company incurred $37,412 in consulting fees from this entity. The Company terminated the above agreement during 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 was 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. For the six months ended June 30, 2008, the Company incurred $69,573 in consulting fees from this entity. The Company terminated this agreement in 2008.

12.       CONCENTRATION OF RISK

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade receivables with a variety of customers and cash with financial institutions.  The Company generally does not require collateral from its customers.  Such credit risk is considered by management to be limited due to the Company’s customer base and its customers’ financial resources.

For the six months ended June 30, 2009 and 2008, sales to one customer accounted for 67% and 17% of total sales, respectively.

For the six months ended June 30, 2009, accounts receivable related to one customer accounted for 60% of total accounts receivable.

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13.       FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 157, which was adopted January 1, 2008, became effective for non-financial assets and non-financial liabilities on January 1, 2009, SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Valuations derived from valuation techniques in which one or more significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available. The Company considers relevant and observable market prices in its valuations where possible.

The fair value measurements for the Company’s assets and liabilities accounted for at fair value June 30, 2009 are presented in the following table:

		Fair Value Measurements at Reporting Date Using
		Quoted prices in Active Markets for Identical Assets (Liabilities) Inputs	Significant Observable Inputs	Significant Unobservable Inputs
	June 30, 2009
		Level 1	Level 2	Level 3
Assets
Patents held for sale	$335,505	—	$335,505	—

14.       LIQUIDITY AND CAPITAL RESOURCES

The Company has outstanding 1,200,000 shares of redeemable common stock, which becomes exercisable for $1.25 per share on August 1, 2009, which would require the Company to repurchase these shares for $1,500,000. On June 26, 2009, the Company received notice of demand pursuant to paragraph 12 of the Asset Purchase Agreement dated September 28, 2007, between Advanced Vehicle Systems, LLC, and Mrs. Barbara Wortley to purchase 1,200,000 shares of the common stock of the Company on or before August 1, 2009 at a price of $1.25 per share. In response to the demand, management of the Company met with certain personnel in an attempt to reach a compromise and settlement on the matter; however the Company’s offer was not accepted and the holder made certain demands that if not met could result in potential litigation. As of the date hereof, the Company failed to reach an agreement regarding the outstanding redeemable common stock and as such, is in default of its obligation. The Company will continue to negotiate with the holder to try and reach acceptable terms to both parties and avoid litigation. The ultimate outcome at this time cannot reasonably be determined.

If the Company is unsuccessful in its attempts to renegotiate the terms of this put option, 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.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, and earnings are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations, and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words, although some forward-looking statements are expressed differently.

All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future.  You should be aware that although the forward-looking statements included herein represent management’s current judgment and expectations, our actual results may differ materially from those projected, stated, or implied in these forward-looking statements as a result of many factors, including, but not limited to the limited financial resources to Company and our ability to fund or renegotiate the put option that became due on August 1, 2009, the ultimate resolution of the recent downturn in the worldwide economy, the economic stimulus package and its ongoing impact on our business and the business of our customers and suppliers, in addition to the other risks and uncertainties described in more detail in “Risk Factors” in Part I, Item 1A of the Company’s 2008 annual report on Form 10-K. Forward-looking statements speak only as of the date they are made.  We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur except as required by the federal securities laws, and you are urged to review and consider disclosures that we make in the reports that we file with the Securities and Exchange Commission, or the SEC, that discuss other factors relevant to our business.

The following discussion is designed to provide a better understanding of our unaudited financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008.

Revenues

Revenues for the three months ended June 30, 2009, were $6,786,665 as compared to $1,848,700 for the three months ended June 30, 2008, which represents an increase of $4,937,965. As expected, the Company recognized the balance of the Census Bureau order during the 2nd quarter. With the exception of the Census Bureau order, quarterly revenue was in line with the same period last year. Management does expect an increase in order activity during the second half of the year, due to anticipated funding that may become available to some of the Company’s customers.

Gross Profit

Gross profit for the three months ended June 30, 2009 was $2,218,071 as compared to $521,441 for the three months ended June 30, 2008, an increase of $1,696,630. As a percentage of net sales, our gross margin was 32.7% for the quarter as compared to 28.2% in the same period last year. Gross margin for the quarter exceeded our original expectations due to the Company taking advantage of purchase discounts related to the Census Bureau order.

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Operating Expenses

Operating Expenses incurred for the three months ended June 30, 2009 were $821,737 as compared to $692,926 for the three months ended June 30, 2008, an increase of $128,811. As a percentage of net sales, operating expenses were 12.1% for the quarter as compared to 37.5% in the same period last year. The increase resulted from an increase in research and development efforts during the 2nd quarter. The Company continues to work on new technology and product offerings that management expects to result in an increase in research and development costs through the 3rd quarter.

Income and Earnings Per Share

The Company’s net income for the three months ended June 30, 2009 was $789,258 compared to a net loss of ($166,938) for the three months ended June 30, 2008, an increase of $956,196. Net income (loss) per weighted average share was $0.03 for the three months ended June 30, 2009, as compared to ($0.01) for the three months ended June 30, 2008.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008.

Revenues

Revenues for the six months ended June 30, 2009, were $8,538,399 as compared to $3,828,359 for the six months ended June 30, 2008, which represents an increase of $4,710,040. The significant increase resulted from the recognition of the Census Bureau order.

Gross Profit

Gross profit for the six months ended June 30, 2009 was $2,684,090 as compared to $1,328,449 for the six months ended June 30, 2008, an increase of $1,355,641. As a percentage of net sales, our gross margin was 31.4% for the six months ended June 30, 2009, as compared to 34.7% in the same period last year.

Operating Expenses

Operating Expenses incurred for the six months ended June 30, 2009 were $1,421,842 as compared to $1,446,436 for the six months ended June 30, 2008, a decrease of $24,594. As a percentage of net sales, operating expenses were 16.7% as compared to 37.8% in the same period last year. The decrease in operating expenses is due to significant reductions in consulting fees and rent expense. These decreases were partially offset by increases in research and development efforts during the 1st and 2nd quarters. Management expects to continue its research and development efforts during the 3rd quarter.

Income and Earnings Per Share

The Company’s net income for the six months ended June 30, 2009 was $692,040 compared to a net loss of ($148,344) for the six months ended June 30, 2008, an increase of $840,384. Net income (loss) per weighted average share was $0.03 for the six months ended June 30, 2009, as compared to ($0.01) for the six months ended June 30, 2008.

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Liquidity and Capital Resources

At June 30, 2009, working capital was $1,659,147 as compared with $2,059,511 at December 31, 2008, a decrease of $400,364. For the six months ended June 30, 2009, the Company generated $1,108,685 of cash flow from operating activities compared to negative cash flow of $275,435 for the same period in 2008. Also during the six months ended June 30, 2009, the Company used $599,359 for repayment of its factor line of credit.

The Company has outstanding 1,200,000 shares of redeemable common stock, which becomes exercisable for $1.25 per share on August 1, 2009, which would require the Company to repurchase these shares for $1,500,000. On June 26, 2009, the Company received notice of demand pursuant to paragraph 12 of the Asset Purchase Agreement dated September 28, 2007, between Advanced Vehicle Systems, LLC, and Mrs. Barbara Wortley to purchase 1,200,000 shares of the common stock of the Company on or before August 1, 2009 at a price of $1.25 per share. In response to the demand, management of the Company met with certain personnel in an attempt to reach a compromise and settlement on the matter; however its offer was not accepted and the holder made certain demands that if not met could result in potential litigation. As of the date hereof, the Company failed to reach an agreement regarding the outstanding redeemable common stock and as such, is in default of its obligation. The Company will continue to negotiate with the holder to try and reach acceptable terms to both parties and avoid litigation. The ultimate outcome at this time cannot reasonably be determined.

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 six months ended June 30, 2009, the Company incurred expenses of $176,099 on research and development as compared to $39,892 in the six months ended June 30, 2008.

Inflation

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

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its Note 1 to the consolidated financial statements included in this Form 10-Q.

Impact of Recently Effective Accounting Pronouncements

(For information regarding the impact of recently effective accounting pronouncements, refer to Note 1 to the consolidated financial statements.)

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

As of June 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded the Company’s disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II:OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in Item 1A of Part I in the Company’s 2008 annual report on Form 10-K.

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

None.

ITEM 6. EXHIBITS

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

Exhibits
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1	Certification of Chief Executive Officer 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 Chief Financial Officer 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

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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: August 12, 2009	By:	/s/ Paul Feldman
		Paul Feldman President and Chief Executive Officer
Dated: August 12, 2009	By:	/s/ Paul Briggs
		Paul Briggs Chief Financial Officer and  Principal Accounting Officer

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