UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number: 000-49907

LAW ENFORCEMENT ASSOCIATES CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	56-2267438
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2609 Discovery Drive Suite 125, Raleigh, North Carolina	27616
(Address of principal executive offices)	(Zip Code)

(919) 872-6210

(Registrant’s telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨    (Do not check if a smaller  reporting company)	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 latest practicable date.

Class	Outstanding at November 12, 2010
Common Stock, $0.001 par value per share	25,782,436 shares

LAW ENFORCEMENT ASSOCIATES CORPORATION

TABLE OF CONTENTS

	Page Number
Part I – FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations for the Nine Months Ended September  30, 2010 and 2009		5
Condensed Consolidated Statements of Operations for the Three Months Ended September  30, 2010 and 2009		6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2010 and 2009		7
Notes to Condensed Consolidated Financial Statements		8
ITEM  2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20
ITEM 4T. CONTROLS AND PROCEDURES		20
PART II – OTHER INFORMATION		21
ITEM 1. LEGAL PROCEEDINGS		21
ITEM 1A. RISK FACTORS		21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		21
ITEM 4. (RESERVED)		21
ITEM 5. OTHER INFORMATION		21
ITEM 6. EXHIBITS		21
SIGNATURES		22
EXHIBIT INDEX		23

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAW ENFORCEMENT ASSOCIATES CORPORATION

Condensed Consolidated Balance Sheets

	September 30, 2010 (Unaudited)		December 31, 2009 (Audited)
Assets
Current Assets
Cash	$	234,075	$	480,148
Trade accounts receivable (net of allowance for doubtful accounts of $55,000 at September 30, 2010 and December 31, 2009)		786,160		982,505
Refundable income taxes		—		150,000
Inventories		1,581,738		1,505,777
Prepaid expenses		94,826		43,946
Deferred tax asset – current		—		246,368
Total current assets		2,696,799		3,408,744
Property and Equipment – net		108,094		150,971
Other Assets
Intangibles – net		1,546,799		2,324,809
Deferred tax asset, less current portion		—		704,643
Total other assets		1,546,799		3,029,452
Total assets	$	4,351,692	$	6,589,167

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

3

LAW ENFORCEMENT ASSOCIATES CORPORATION

Condensed Consolidated Balance Sheets

	September 30, 2010 (Unaudited)			December 31, 2009 (Audited)
Liabilities and Stockholders’ Equity
Current Liabilities
Trade accounts payable	$	918,073		$	490,646
Accrued expenses:
Accrued salaries, wages and benefits		157,703			116,288
Contract settlement		30,000			100,000
Warranty provision		19,648			50,271
Other accrued expenses		15,077			65,072
Customer deposits		242,096			20,000
Total current liabilities, before shares subject to redemption		1,382,597			842,277
Common stock, subject to redemption, 1,200,000 shares, at redemption value		1,500,000			1,500,000
Total current liabilities		2,882,597			2,342,277
Total liabilities		2,882,597			2,342,277
Stockholders’ Equity
Common stock, $0.001 par value, 50,000,000 authorized, 25,782,436 (including 1,200,000 shares subject to redemption) issued and outstanding at September 30, 2010 and December 31, 2009		25,782			25,782
Treasury stock at cost, 595 shares of common stock		(625	)		(625	)
Paid in capital in excess of par		4,995,595			4,995,595
Retained earnings/(accumulated deficit)		(3,551,657	)		(773,862	)
Total stockholders’ equity		1,469,095			4,246,890
Total liabilities and stockholders’ equity	$	4,351,692		$	6,589,167

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

4

LAW ENFORCEMENT ASSOCIATES CORPORATION

Condensed Consolidated Statements of Operations

For the Nine Months Ended September 30, 2010 and 2009

	September 30, 2010 (Unaudited)			September 30, 2009 (Unaudited)
Net sales	$	4,309,294		$	10,458,950
Cost of sales		3,128,853			7,143,142
Gross profit		1,180,441			3,315,808
Research and development		216,089			239,861
Loss on impairment of long-lived assets		602,497			—
Operating expenses		2,179,222			1,969,723
Total operating expenses		2,997,808			2,209,584
Operating income (loss)		(1,817,367	)		1,106,224
Other income (expense)
Loss on sale of assets		(17,823	)		(8,361	)
Other income		8,042			11,625
Interest income		364			812
Interest expense		—			(145,188	)
Total other income (expense)		(9,417	)		(141,112	)
Net income (loss) before income taxes		(1,826,784	)		965,112
Income tax expense		(951,011	)		(372,045	)
Net income (loss)	$	(2,777,795	)	$	593,067
Weighted average number of common shares subject to redemption		1,200,000			1,200,000
Net income (loss) per share common shares subject to redemption, basic and diluted	$	—		$	0.05
Weighted average number of common shares outstanding, excluding shares subject to redemption		24,582,436			24,582,436
Net loss per common share, excluding shares subject to redemption, basic and diluted	$	(0.11	)	$	0.02

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

5

LAW ENFORCEMENT ASSOCIATES CORPORATION

Condensed Consolidated Statements of Operations

For the Three Months Ended September 30, 2010 and 2009

	September 30, 2010 (Unaudited)			September 30, 2009 (Unaudited)
Net sales	$	1,350,015		$	1,920,551
Cost of sales		969,875			1,288,833
Gross profit		380,140			631,718
Research and development		65,917			63,762
Loss on impairment of long-lived assets		602,497			—
Operating expenses		731,464			723,980
Total operating expenses		1,399,878			787,742
Operating loss		(1,019,738	)		(156,024	)
Other income (expense)
Other income		4,626			1,287
Interest income		15			787
Interest expense		—			(8,524	)
Total other income (expense)		4,641			(6,450	)
Net loss before income taxes		(1,015,097	)		(162,474	)
Income tax (expense) benefit		(1,257,672	)		63,501
Net loss	$	(2,272,769	)	$	(98,973	)
Weighted average number of common shares subject to redemption		1,200,000			1,200,000
Net income (loss) per share common shares subject to redemption, basic and diluted	$	—		$	0.01
Weighted average number of common shares outstanding, excluding shares subject to redemption		24,582,436			24,582,436
Net loss per common share, excluding shares subject to redemption, basic and diluted	$	(0.09	)	$	(0.00	)

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

6

LAW ENFORCEMENT ASSOCIATES CORPORATION

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

	September 30, 2010 (Unaudited)			September 30, 2009 (Unaudited)
Cash flows from operating activities
Net income (loss)	$	(2,777,795	)	$	593,067
Adjustments to reconcile net income to net cash provided (used) by operations:
Depreciation and amortization		211,684			171,012
Loss on impairment of long-lived assets		602,497			—
Put option discount expense		—			59,626
Deferred taxes		951,011			254,545
Loss on sale of assets		17,823			8,361
Change in inventory reserves		(23,402	)		30,537
(Increase) decrease in assets
Trade accounts receivable		196,345			940,457
Refundable income taxes		150,000			(32,500	)
Inventories		(52,559	)		(260,620	)
Prepaid expenses and other assets		(50,880	)		(189,653	)
Increase (decrease) in liabilities
Trade accounts payable		427,427			175,339
Accrued expenses		(109,203	)		(140,484	)
Customer deposits		222,096			(25,583	)
Net cash provided (used) by operating activities		(234,956	)		1,584,104
Cash flows from investing activities
Proceeds from sale of assets		25,000			12,750
Capital expenditures		(36,117	)		(65,495	)
Net cash used by investing activities		(11,117	)		(52,745	)
Cash flows from financing activities
Factor line of credit		—			(1,038,809	)
Net cash used by financing activities		—			(1,038,809	)
Net increase (decrease) in cash		(246,073	)		492,550
Cash at beginning of the period		480,148			254,705
Cash at the end of the period	$	234,075		$	747,255
Supplemental disclosure of cash flow information:
Cash paid for interest expense	$	—		$	111,483
Cash paid for income taxes	$	—		$	150,000

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

7

LAW ENFORCEMENT ASSOCIATES CORPORATION

Notes to Condensed 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 accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2010.

The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2010 and 2009 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of December 31, 2009 is obtained from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010 (the “2009 Annual Report”).

Principles of Consolidation

The accompanying condensed 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 condensed 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 the authoritative guidance under U.S. GAAP. Therefore, no separate segment disclosures have been included in the accompanying notes to the condensed consolidated financial statements.

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 lists which are amortized over 12 to 25 years, depending on the applicable intangible, using the straight line method.

8

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. Based upon management’s assessment, an impairment charge related to the AVS trade name, AVS marketing list, and EDW patents of $602,497 was recorded during the nine months ended September 30, 2010 and is included in operating expenses in the accompanying consolidated statement of operations.

Product liability and warranty claims

The Company’s condensed 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 September 30, 2010 and December 31, 2009, accrued product warranties totaled $19,648 and $50,271, respectively and are reported as warranty provision in the accompanying condensed 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 is 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.

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 nine months ended September 30, 2010 and 2009, advertising costs were $92,475 and $81,847, respectively. All advertising costs are included in operating expenses in the accompanying condensed consolidated statements of operations.

Research and Development

The Company expenses research and development costs as incurred. The Company incurred product development expense of $216,089 and $239,861 for the nine months ended September 30, 2010 and 2009, respectively.

Litigation Costs

The Company accrues the costs of litigation where our obligation is probable and such costs can be reasonably estimated. In instances where costs cannot be reasonably estimated these cost are expensed as incurred.

9

Recently adopted/issued accounting pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements. ASU 2009-13 supersedes certain guidance in FASB ASC 605-25, Revenue Recognition – Multiple-Element Arrangements and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (the relative-selling-price method). ASU 2009-13 eliminates the use of the residual method of allocation in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverable subject to ASU 2009-13. ASU 2009-13 must be adopted no later than the beginning of the first fiscal year beginning on or after June 15, 2010, with early adoption permitted through either prospective application for revenue arrangement entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangement for all periods presented. The Company is evaluating the impact that the adoption of ASU 2009-13 will have on its condensed consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 provides amendments to guidance to FASB ASC 820, Fair Value Measurements. ASU 2010-06 requires certain guidance when a company makes transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). Also, this Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: (1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities and (2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. ASU 2010-06 The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have an effect on the Company’s condensed consolidated financial statements except for the disclosure requirements for reporting fair value.

In April 2010, the FASB issued new U.S. GAAP guidance on defining and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the milestone method. The new guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the adoption of this guidance to have an effect on its condensed consolidated financial statements.

Reclassifications

Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on net income.

10

2. INVENTORIES

Inventories consist of the following at September 30, 2010 and December 31, 2009:

	September 30, 2010		December 31, 2009
Raw Materials	$	644,159	$	607,864
Work-in-process		147,857		39,572
Finished goods		789,722		858,341
	$	1,581,738	$	1,505,777

All inventories are stated at the lower of cost or market. Cost includes materials, labor and production overhead. The cost of inventories is determined by the first-in, first-out (“FIFO”) method. Inventories are reviewed regularly for slow moving and potentially obsolete items using actual inventory turnover and are written down to estimated net realizable value. Reserves for slow moving and obsolete inventory totaled $85,124 and $108,526 as of September 30, 2010 and December 31, 2009, respectively.

3. PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, at September 30, 2010 and December 31, 2009:

	Useful Life	September 30, 2010		December 31, 2009
Office furniture & equipment	5 to 7 years	$	95,850	$	93,172
Leasehold improvements	7 years		21,386		21,386
Vehicles	5 years		60,319		109,724
Machinery & equipment	5 to 7 years		291,420		291,420
			468,975		515,702
Less accumulated depreciation			360,881		364,731
		$	108,094	$	150,971

Depreciation expense for the nine months ended September 30, 2010 and 2009 was $36,171 and $47,812, respectively.

4. INTANGIBLE ASSETS

Intangible assets consist of the following at September 30, 2010 and December 31, 2009:

	Estimated Life	September 30, 2010		December 31, 2009
Trade name	25 years	$	1,400,000	$	1,400,000
Drawings/designs	10 years		411,000		411,000
EDW Patents	15 years		315,830		335,505
AVS Marketing List	12 years		212,995		470,000
AVS Engineered Drawings	15 years		230,000		230,000
AVS Trade Name	15 years		105,410		168,772
			2,675,235		3,015,277
Less accumulated amortization			1,128,436		690,468
	Total intangibles, net	$	1,546,799	$	2,324,809

Amortization expense for the nine months ended September 30, 2010 and 2009 was $175,513 and $123,200, respectively. Impairment expense recognized for the nine months ended September 30, 2010 totaled $602,497.

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Estimated future amortization expense is as follows at September 30, 2010:

Year	Amount
Remainder of 2010	$	36,221
2011		128,609
2012		128,609
2013		128,609
2014		104,635
Future Years		1,020,116
	$	1,546,799

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 in its financial statements as assets held for sale. The patents had been reported at the lower of the carrying value or fair value less cost to sell and the Company ceased amortizing these assets. However, the Company has been unable to sell these patents to date and they no longer met the requirements to be classified as held for sale. As a result, during the 2^nd Quarter of 2010, the Company reclassified these patents as assets held and used and has included them in Intangibles – net, in the accompanying financial statements. Accordingly, the Company recognized amortization expense for these patents in the 2^nd Quarter of 2010 for the amount that would have been recognized while they were classified as held for sale. Amortization expense related to these patents totaled $53,375 for the nine months ended September 30, 2010. Because management has been unable to sell or use the patents, the Company has recorded an impairment provision of $282,130 reducing their carrying value to zero in the 3^rd Quarter of 2010.

5. INCOME TAXES

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. Realization of the deferred income tax assets is dependent on the Company generating sufficient taxable income in future years. During the quarter ended September 30, 2010, the Company has incurred substantial net operating losses and has net operating loss carryforwards from 2005, 2006, and 2007 of approximately $1,400,000. Due to the uncertainty of their ultimate realization, the Company has recorded a 100% valuation allowance against its net deferred tax assets during the nine months ended September 30, 2010. The valuation allowance adjustment is recorded in income tax expense in the accompanying condensed consolidated statement of operations.

The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following at September 30, 2010 and December 31, 2009:

	September 30, 2010			December 31, 2009
Gross deferred tax assets	$	1,736,387		$	1,048,860
Gross deferred tax liabilities		(97,849	)		(97,849	)
Net deferred tax assets		1,638,538			951,011
Valuation Allowance		(1,638,538	)		—
Deferred tax asset, net	$	—		$	951,011

6. REDEEMABLE COMMON STOCK

On or after October 31, 2007, the Company acquired certain assets of Advanced Vehicle Systems, LLC, a Florida limited liability company (“AVS”). The Company believes it purchased all of AVS’ designs, drawings, customer lists and name rights. Barbara Wortley believes that as part of the purchase price, the Company provided her with a put option on 1,200,000 shares which would give Mrs. Wortley the right to sell up to 1,200,000 shares back to the Company for $1.25 per share on August 1, 2009. This obligation is recorded as common stock, subject to redemption of 1,200,000 shares, at redemption value in the Company’s Condensed Consolidated Balance Sheets.

On September 23, 2009 a complaint was filed against the Company in Wake County, North Carolina Superior Court on behalf of Barbara Wortley. The suit alleges a breach of a purported Asset Purchase Agreement dated September 28,

12

2007 by and among Advanced Vehicle Systems, LLC, a Florida limited liability company, Ms. Wortley, and the Company. The suit seeks to enforce a Demand Option under the purported Asset Purchase Agreement for the Company to repurchase from Ms. Wortley up to 1,200,000 shares of the Company’s stock at a price of $1.25 per share. In her complaint, Ms. Wortley seeks $1,500,000, interest at 8% from August 1, 2009 and attorneys’ fees of not less than $227,663.02. The Company denies the validity of Mrs. Wortley’s claim for several reasons including that the Asset Purchase Agreement dated September 28, 2007 is unenforceable because it is missing essential terms. The Company received service of the complaint on September 24, 2009. In the lawsuit, Barbara Wortley’s motion for summary judgment against the Company was heard by the Honorable Donald W. Stephens, Senior Resident Superior Court Judge for Wake County, on February 18, 2010. Among other things, Judge Stephens denied Ms. Wortley’s motion for summary judgment, finding that there were material issues of material fact precluding summary judgment for Ms. Wortley. Ms. Wortley will bear the burden of proof on these material issues of fact in a trial currently calendared for November 29, 2010. The Company has defenses that if found valid will preclude a monetary award to Ms. Wortley. The Company intends to continue to vigorously defend the lawsuit. Due to the circumstances surrounding the lawsuit, management is unable to assess the Company’s exposure to future legal expenses. On August 10, 2010, the Company received notice from JAMS, a mediation and arbitration firm, of the commencement of an arbitration by Barbara Wortley against the Company. Mrs. Wortley’s claim is based upon a 2004 document modified in 2006, and appears nearly identical to her $1,500,000 claim pending in Wake County Superior Court. The Company expects to vigorously defend this claim.

7. STOCK INCENTIVE PLAN

On June 16, 2010, at the Annual Meeting of Shareholders, the shareholders of the Company approved the adoption and implementation of a stock option plan. On November 10, 2010 the Board of Directors approved the 2010 Stock Option Plan. The 2010 Plan authorizes the Board of Directors or the Compensation Committee of the Board of Directors to grant stock options to selected eligible directors, officers and other full-time employees of the Company and its subsidiaries. The maximum number of shares of common stock reserved and made available for sale under the Plan is 500,000. The plan will remain in effect until all shares reserved have been purchased pursuant to options granted under the plan or have otherwise expired or been forfeited; provided that options must be granted within ten years from the date adopted by the Board of Directors. The aggregate fair market value (determined at the time the option is granted) of the shares with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. There have been no grants or awards made under the plan.

8. 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. 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. Employer matches totaled $0 and $28,272 for the nine months ended September 30, 2010 and 2009, respectively.

9. RELATED PARTY TRANSACTIONS

For the nine months ended September 30, 2010 and 2009, the Company’s purchases from Sirchie Acquisition Company, LLC (“Sirchie”) totaled $140,374 and $4,086,698, respectively. At September 30, 2010 and December 31, 2009, the Company had $29,448 and $7,453, respectively, in accounts payable due to Sirchie.

10. 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 nine months ended September 30, 2010 and 2009 was $42,750 and $42,750, respectively.

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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 nine months ended September 30, 2010 and 2009 was $71,250 and $71,250, 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 September 30, 2010:

Remainder of 2010	$	40,104
2011		160,415
2012		153,782
2013		8,632
Total minimum payments required	$	362,933

Litigation

The Company was a defendant in a lawsuit, filed by the licensor of a certain trademark for products that the Company sells. The licensor filed an action in Massachusetts Superior Court on October 13, 2009, seeking $150,000 for breach of the trademark licensing agreement. Management interpreted the agreement’s expiration date as of April 30, 2009; however, the licensor has disputed the date and believes the agreement expires on April 30, 2010, and as such, they would be entitled to additional minimum guaranteed royalties of $150,000. The two parties agreed to a settlement of $100,000 during the first quarter of 2010. The initial payment was $20,000 and the balance of $80,000 to be paid in equal monthly installments over the next 8 months during 2010. At September 30, 2010, the Company’s remaining liability under this agreement was $30,000.

On September 23, 2009 a complaint was filed against the Company in Wake County, North Carolina Superior Court on behalf of Barbara Wortley. The suit alleges a breach of a purported Asset Purchase Agreement dated September 28, 2007 by and among Advanced Vehicle Systems, LLC, a Florida limited liability company, Ms. Wortley, and the Company. The suit seeks to enforce a Demand Option under the purported Asset Purchase Agreement for the Company to repurchase from Ms. Wortley up to 1,200,000 shares of the Company’s stock at a price of $1.25 per share. In her complaint, Ms. Wortley seeks $1,500,000, interest at 8% from August 1, 2009 and attorneys’ fees of not less than $227,663.02. The Company denies the validity of Mrs. Wortley’s claim for several reasons including that the Asset Purchase Agreement dated September 28, 2007 is unenforceable because it is missing essential terms. The Company received service of the complaint on September 24, 2009. In the lawsuit, Barbara Wortley’s motion for summary judgment against the Company was heard by the Honorable Donald W. Stephens, Senior Resident Superior Court Judge for Wake County, on February 18, 2010. Among other things, Judge Stephens denied Ms. Wortley’s motion for summary judgment, finding that there were material issues of material fact precluding summary judgment for Ms. Wortley. Ms. Wortley will bear the burden of proof on these material issues of fact in a trial currently calendared for November 29, 2010. The Company has defenses that if found valid will preclude a monetary award to Ms. Wortley. The Company intends to continue to vigorously defend the lawsuit. Due to the circumstances surrounding the lawsuit, management is unable to assess the Company’s exposure to future legal expenses. On August 10, 2010, the Company received notice from JAMS of the commencement of an arbitration by Barbara Wortley against the Company. Mrs. Wortley’s claim is based upon a 2004 document modified in 2006, and appears nearly identical to her $1,500,000 claim pending in Wake County Superior Court. The Company expects to vigorously defend this claim.

On or about January 8, 2010, Paul H. Feldman and Martin L. Perry filed separate actions in the United States District Court for the Eastern District of North Carolina against Law Enforcement Associates Corporation (the “Company”), Anthony Rand, James J. Lindsay, Joseph A. Jordan and John H. Carrington (the “Lawsuits”). Mr. Feldman formerly served as President, CEO, CFO and Treasurer of the Company until August 27, 2009, at which time he was removed by the Company’s Board of Directors. Mr. Perry previously served as the Company’s Director of Sales until his departure from the Company on September 23, 2009. Mr. Feldman and Mr. Perry also previously served as directors until the end of their terms on December 3, 2009. The departures of Mr. Feldman and Mr. Perry from the Company were previously disclosed in the Company’s Form 8-K’s filed with the Commission on August 31, 2009 and

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September 28, 2009, respectively. Anthony Rand, James Lindsay and Joseph Jordan are currently serving as Directors of the Company and served in such capacity at the time of the actions complained of in the Lawsuits. Mr. Carrington was a shareholder of the Company and served as a director of the Company until April 18, 2005.

In the Lawsuits, Mr. Feldman and Mr. Perry allege violations by the defendants of the federal Americans with Disabilities Act, and civil conspiracy and wrongful termination in violation of public policy under North Carolina common law. Mr. Perry’s Lawsuit also alleges violation of the North Carolina Wage and Hour Act and breach of contract under North Carolina common law. Both seek: (i) reinstatement, or full front pay, stock options and benefits; (ii) economic damages for lost compensation and damages to their careers, reputation and earning capacities; (iii) compensatory damages, punitive damages, costs and attorney’s fees; and (iv) other relief. Both Feldman and Perry allege that they were wrongfully terminated by the Company. The factual allegations are substantially similar to those contained in complaint letters filed with the U.S. Department of Labor by Mr. Feldman on or about November 17, 2009 (which was previously disclosed in the Company’s Form 8-K filed with the Commission on December 1, 2009), and by Mr. Perry on or about December 11, 2009 (which was previously reported in the Company’s Form 8-K which was filed with the Commission on December 15, 2009). These two lawsuits were consolidated into one action, Paul Briggs was added as an additional party and the Sarbanes Oxley claims made in the November 17, 2009 and December 1, 2009 letters to the U.S. Department of Labor were added to the case in 2010. The Company has also recently filed a motion to dismiss all of Mr. Feldman’s claims and all of Mr. Perry’s claims other than his wage and hour claim.

The Company does not believe the allegations made by Mr. Feldman and Mr. Perry in the Lawsuit have any merit. On December 3, 2009, the Board of the Company appointed a special committee of disinterested directors to investigate the allegations underlying the Department of Labor complaint. On December 17, 2009, legal counsel for the special committee completed her investigation and delivered her report. The report concluded that the claims made by Mr. Feldman and Mr. Perry were unsubstantiated. The Company intends to vigorously defend against the Lawsuit. Due to the circumstances surrounding the lawsuit, management is unable to assess the Company’s exposure to future legal expenses.

11. 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. At times, cash balances may exceed Federal Deposit Insurance Corporation (“FDIC”) insurable limits.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

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.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued

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expenses, common shares subject to redemption. All instruments are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

During the nine months ended September 30, 2010, management determined that certain intangible assets were impaired based on Level 3 inputs because their carrying value of $768,624 exceeded future net undiscounted cash flows expected to be generated from the utilization of these assets. As a result, a fair value adjustment in the amount of $602,497 was recorded as a loss on impairment resulting in a net book value for the impaired assets of $166,127 at September 30, 2010.

13. CONTINUING OPERATIONS

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended September 30, 2010, the Company incurred a net loss of $2,777,795 and had used $234,956 of cash flow for operations and does not have sufficient financial resources to meet the put option that Mrs. Wortley alleges became due on August 1, 2009. The ability of the Company to continue as a going concern is dependent upon resolution of the Company’s litigation matters and on its ability to successfully carry out its business plan under its new management. In addition, the Company has limited financial resources and a working capital deficit of $185,798. Therefore, the Company may not have sufficient resources to continue operating.

The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to accomplish these business objectives.

On September 23, 2009 a complaint was filed against the Company in Wake County, North Carolina Superior Court on behalf of Barbara Wortley. The suit alleges a breach of a purported Asset Purchase Agreement dated September 28, 2007 by and among Advanced Vehicle Systems, LLC, a Florida limited liability company, Ms. Wortley, and the Company. The suit seeks to enforce a Demand Option under the purported Asset Purchase Agreement for the Company to repurchase from Ms. Wortley up to 1,200,000 shares of the Company’s stock at a price of $1.25 per share. In her complaint, Ms. Wortley seeks $1,500,000, interest at 8% from August 1, 2009 and attorneys’ fees of not less than $227,663.02. The Company denies the validity of Mrs. Wortley’s claim for several reasons including that the Asset Purchase Agreement dated September 28, 2007 is unenforceable because it is missing essential terms. The Company received service of the complaint on September 24, 2009. In the lawsuit, Barbara Wortley’s motion for summary judgment against the Company was heard by the Honorable Donald W. Stephens, Senior Resident Superior Court Judge for Wake County, on February 18, 2010. Among other things, Judge Stephens denied Ms. Wortley’s motion for summary judgment, finding that there were material issues of material fact precluding summary judgment for Ms. Wortley. Ms. Wortley will bear the burden of proof on these material issues of fact in a trial currently calendared for November 29, 2010. The Company has defenses that if found valid will preclude a monetary award to Ms. Wortley. However, if the Company is unsuccessful in its attempts in its defenses or is unable 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 condensed 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

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

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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 as well as the ability of the Company to successfully carry out its business objectives under the Company’s new leadership. 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 condensed 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, 2009. 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 September 30, 2010 Compared to Three Months Ended September 30, 2009.

Revenues

Revenues for the three months ended September 30, 2010, were $1,350,015 as compared to $1,920,551 for the three months ended September 30, 2009, which represents a decrease of $570,536. The decrease in revenue as compared to the same period last year resulted from a decrease of approximately $505,000 in orders entered during the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. During the three months ended September 30, 2009, the Company recognized revenues of approximately $200,000 from a nonrecurring order under its GSA contract, approximately $53,000 from attending an event that it did not attend in 2010, and approximately $161,000 from its vehicle division.

Gross Profit

Gross profit for the three months ended September 30, 2010 was $380,140 as compared to $631,718 for the three months ended September 30, 2009, a decrease of $251,578. As a percentage of net sales, our gross margin was 28.2% for the quarter as compared to 32.9% in the same period last year. Gross margin percentage decreased as compared to the same period last year mainly due to the Company’s relatively fixed nature of its labor and overhead costs in conjunction with its reduced sales volumes in the 3^rd quarter of 2010. However, management has taken steps to reduce these costs by laying off certain personnel and reducing other costs. Furthermore, the Company increased its reserve for finished goods inventory by approximately $10,400 during the three months ended September 30, 2010. Late in the first quarter of the year, the Company updated its product pricing resulting in an increase in gross profit from 25.7% as reported in the first quarter of 2010.

Operating Expenses

Operating Expenses incurred for the three months ended September 30, 2010 were $1,399,878 as compared to $787,742 for the three months ended September 30, 2009, an increase of $612,136. As a percentage of net sales, operating expenses were 103.7% for the quarter as compared to 41.0% in the same period last year. Operating expenses were negatively impacted during the 3^rd quarter due to the impairment charge of $282,130 on the EDW patents to zero, the impairment charge of $63,362 on the AVS trade name, and the impairment charge of $257,005 on the AVS marketing list. The impairment charges were recorded based on the triggering events and changes in circumstances indicating that the carrying amounts of these assets may not be recoverable. The recoverability of these assets was measured by a comparison of the carrying amount to the future net cash flows expected to be generated by the assets and the impairment recognized was the excess of the carrying amount over the fair value of the assets as of September 30, 2010. Also negatively impacting operating expenses during the 3^rd quarter was the recognition of approximately $23,000 in nonrecurring industrial funding fees payable to the General Service Administration for the Company’s GSA contract.

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Income and Earnings (loss) Per Share

The Company’s net loss for the three months ended September 30, 2010 was ($2,272,769) compared to a net loss of ($98,973) for the three months ended September 30, 2009, for a change of ($2,173,796). Net income (loss) per weighted average share was ($0.09) for the three months ended September 30, 2010, as compared to ($0.00) for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009.

Revenues

Revenues for the nine months ended September 30, 2010, were $4,309,294 as compared to $10,458,950 for the nine months ended September 30, 2009, which represents a decrease of $6,149,656. The decrease in revenue as compared to the same period last year resulted from the Company shipping the $5.7 million nonrecurring order from the U.S. Census Bureau during the first nine months of 2009. Additionally, during the first nine months of 2009, the Company completed significant orders for its AVS division representing approximately $581,000 in revenue. During the nine months ended September 30, 2010, the Company’s AVS division completed upgrades and retrofits totaling approximately $150,000. Excluding the nonrecurring U.S. Census Bureau order, sales orders entered for the nine months ended September 30, 2010 were approximately $360,000 more than the same period in 2009.

Gross Profit

Gross profit for the nine months ended September 30, 2010 was $1,180,441 as compared to $3,315,808 for the nine months ended September 30, 2009, a decrease of $2,135,367. As a percentage of net sales, our gross margin was 27.4% for the nine months as compared to 31.7% in the same period last year. Gross margin percentage decreased as compared to the same period last year mainly due to the Company’s relatively fixed nature of its labor and overhead costs in conjunction with its reduced sales volumes in the first nine months of 2010. However, management has taken steps to decrease these costs by reducing Company personnel and other costs. Furthermore, the Company has increased its reserve for finished goods inventory throughout the first nine months of the year by approximately $23,000, net of approximately $46,000 in obsolete inventory being sold.

Operating Expenses

Operating Expenses incurred for the nine months ended September 30, 2010 were $2,997,808 as compared to $2,209,584 for the nine months ended September 30, 2009, an increase of $788,224. As a percentage of net sales, operating expenses were 69.6% for the nine months as compared to 21.1% in the same period last year. Operating expenses were negatively impacted during the first nine months due to impairment charges totaling $602,497 on intangible assets along with significant increases in professional fees, travel expenses, and director fees as compared to the same period last year.

Professional fees increased by approximately $211,000 as compared to the same period last year. The majority of the increase related to legal fees associated with the Wortley and Feldman & Perry lawsuits. Management expects that most of these legal fees are nonrecurring. Travel related expenses increased by approximately $12,000 during the nine months ended September 30, 2010 as compared to the same period last year. These expenses have increased as sales personnel have been encouraged to expand their territories and attend an increased number of tradeshows and conventions. Director fees have increased by approximately $44,000 during the nine months ended September 30, 2010 as compared to the same period last year.

Income and Earnings (loss) Per Share

The Company’s net loss for the nine months ended September 30, 2010 was ($2,777,795) compared to net income of $593,067 for the nine months ended September 30, 2009, for a change of $3,370,862. Net income (loss) per weighted average share was ($0.11) for the nine months ended September 30, 2010, as compared to $0.02 for the nine months ended September 30, 2009.

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Liquidity and Capital Resources

For the nine months ended September 30, 2010, the Company had a negative cash flow from operating activities of $234,956 compared to a positive cash flow from operating activities of $1,584,104 for the same period in 2009. This represents a decrease of $1,819,060 in cash flow from operations, of which, $2,777,795 is attributable to the net loss offset by the noncash impairment charge of $602,497 and valuation allowance of $951,011 recorded during the nine months ended September 30, 2010. At September 30 2010, the Company had negative working capital of ($185,798) as compared with positive working capital of $1,066,467 at December 31, 2009, a decrease of $1,252,265. The decrease in working capital primarily relates to the loss incurred during the nine months ended September 30, 2010, net of noncash impairment and income tax valuation allowance. Other negative factors impacting the change in cash flow include increases in inventory balances, prepaid expenses and other assets, and a decrease in accrued expenses. Positive factors impacting the change in cash flow include decreases in accounts receivable and refundable income taxes and increases in accounts payable and customer deposits.

On June 26, 2009, the Company received notice of demand pursuant to paragraph 12 of the Asset Purchase Agreement dated September 28, 2007, between the Company, 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. The Company’s position is that Mrs. Wortley’s claim is not valid. 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. On September 23, 2009, a complaint was filed against the Company in Wake County, North Carolina Superior Court on behalf of Barbara Wortley. In the lawsuit, Barbara Wortley’s motion for summary judgment against the Company was heard by the Honorable Donald W. Stephens, Senior Resident Superior Court Judge for Wake County, on February 18, 2010. Among other things, Judge Stephens denied Ms. Wortley’s motion for summary judgment, finding that there were material issues of material fact precluding summary judgment for Ms. Wortley. Ms. Wortley will bear the burden of proof on these material issues of fact in a trial currently calendared for November 29, 2010. The Company has defenses that if found valid will preclude a monetary award to Ms. Wortley. The Company intends to continue to vigorously defend the lawsuit. On August 10, 2010, the Company received notice from JAMS of the commencement of an arbitration by Barbara Wortley against the Company. Mrs. Wortley’s claim is based upon a 2004 document modified in 2006, and appears nearly identical to her $1,500,000 claim pending in Wake County Superior Court. The Company expects to vigorously defend this claim.

Our future capital requirements and the adequacy of available funds will depend on many factors and are contingent upon the resolution of the Company’s litigation matters, the put option demand, as disclosed above, and the ability of the Company to successfully carry out its business plan under its new management. If the Company is unsuccessful in any of the matters, our working capital and other sources of funds may not be sufficient to fund our operations and we may be required to seek alternative sources of funding. There is no assurance that we will be able to obtain financing on acceptable terms, or at all, especially in light of the ongoing turmoil in the financial markets and our operating performance. Under these conditions, our ability to continue as a going concern is uncertain.

As we generally obtain all of our funding from operations, a continued decrease in revenue could negatively impact our short and long term liquidity. A change in the current political situation or a decrease in government spending could result in decreased sales of some of our products.

Research and Development

In the nine months ended September 30, 2010, the Company incurred expenses of $216,089 on research and development as compared to $239,861 in the nine months ended September 30, 2009. The decrease in research and development expenses in the first nine months of 2010 relates primarily to the Company incurring significant expenses in developing digital audio technology in 2009. The Company has continued to incur research and development expenses in 2010 in order to expand its offerings and implement new technology into some of its other products.

Inflation

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

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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 condensed 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 condensed consolidated financial statements included in this Form 10-Q. Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010 (the “2009 Annual Report”) for additional significant accounting policies.

Impact of Recently Effective Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4T. 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 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 furnish 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 September 30, 2010, 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 not effective, because certain deficiencies involving internal controls constituted a material weakness as more fully detailed in Item 9A(T) of the Company’s December 31, 2009 Form 10-K. The material weakness identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.

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

The Company was a defendant in a lawsuit, filed by the licensor of a certain agreement for products that the Company sells. The licensor filed an action in Massachusetts Superior Court on October 13, 2009, seeking $150,000 for breach of the trademark licensing agreement. Management interpreted the agreement’s expiration date as of April 30, 2009; however, the licensor has disputed the date and believes the agreement expires on April 30, 2010, and as such, they would be entitled to additional minimum guaranteed royalties of $150,000. The two parties agreed to a settlement of $100,000 during the first quarter of 2010. The initial payment was $20,000 and the balance of $80,000 to be paid in equal monthly installments over the next 8 months during 2010. At September 30, 2010, the Company’s remaining liability under this agreement was $30,000.

There have been no material developments in the Company’s other ongoing litigation matters previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2009 and discussed above at Note 10 of the Notes to Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS

Smaller reporting companies are not required to provide the information required by this item.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description
*31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
*31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
*32	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

* Filed herewith.

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SIGNATURES

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

	LAW ENFORCEMENT ASSOCIATES CORPORATION
Dated: November 12, 2010	By:	/s/    Paul Briggs
		Paul Briggs President and Chief Executive Officer
Dated: November 12, 2010	By:	/s/    Paul Briggs
		Paul Briggs Chief Financial Officer and Principal Accounting Officer

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EXHIBIT INDEX

Exhibit Number	Description
*31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
*31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
*32	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

* Filed herewith.

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