logo
                
                Form
      10K
                
                LAW
      ENFORCEMENT ASSOCIATES CORPORATION
                
                Filed:
      March 23, 2009 (period: December 31, 2008)




















Table
      of Contents
                        
                        LAW
      ENFORCEMENT ASSOCIATES CORPORATION
                      
                      
                      PART
      IItem 1.
                    Business
                    3Item 1A.
                    Risk Factors
                    11Item 1B.
                    Unresolved Staff Comments
                    15Item 2.
                    Properties
                    15Item 3.
                    Legal Proceedings
                    15Item 4.
                    Submission of Matters to a Vote of Security
      Holders
                    15PART
      IIItem 5.
                    Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity
      Securities
                    16Item 6.
                    Selected Consolidated Financial Data
                    16Item 7.
                    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                    17Item 7A.
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    19Item 8.
                    Financial Statements and Supplemental
    Data
                    19Item 9.
                    Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                    19Item 9A.
                    Controls and Procedures
                    19Item 9B.
                    Other Information
                    19PART
      IIIItem 10.
                    Directors, Executive Officers and Corporate
      Governance
                    20Item 11.
                    Executive Compensation
                    23Item 12.
                    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                    24Item 13.
                    Certain Relationships and Related
      Transactions
                    25Item 14.
                    Principal Accountant Fees and Services
                    25PART
      IVItem 15.
                    Exhibits and Financial Statement
    Schedules
                    26SIGNATURES
                    26EX-31.1 (EXHIBIT 31.1)EX-32.1 (EXHIBIT 32.1)

















UNITED
STATES SECURITIES AND


EXCHANGE
COMMISSION


Washington,
D.C. 20549





FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
Fiscal Year Ended December 31, 2008


Commission
File No. 000-49907





Law
Enforcement Associates Corporation


(Name of
Small Business Issuer in Its Charter)




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







2609
Discovery Dr Suite 125, Raleigh, North Carolina 27616


(Address
of principal executive offices) (Zip Code)





(919)
872-6210


(Issuer's
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Exchange Act:


None.




Securities
registered pursuant to Section 12(g) of the Exchange Act:





Common
Stock, $.001 Par Value Per Share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]





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 90 days: Yes [X] No [ ]





Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained  herein,  and
will not be contained,  to the best of
registrant's  knowledge,  in definitive proxy or
information  statements incorporated  by
reference  in Part III of this Form 10-K or any  amendment
to this Form 10-K. [ ]





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]





The
aggregate  market value of the voting
and  non-voting  common equity held by non-affiliates of Law
Enforcement  Associates  Corporation computed by reference
to the price at which the common  equity was sold,  or the
average bid and asked price of such common equity,  as of a specified
date within the past 60 days was $3,771,991 as of February
26,  2009  based on the average bid and asked price of $0.32
per share as of that date.





There
were 25,782,436 shares of common stock, $.001 par value, outstanding as of March
16, 2009.







1







NOTE
CONCERNING FORWARD-LOOKING STATEMENTS






2





PART
I





Item 1.
Business.










Our
products are marketed under brand names such as Audio Intelligence Devices
(AID), Birddog Global Positioning Tracking System, Under Vehicle
Inspection   System, and under a licensing agreement with Smith
and Wesson Corp, the SWIFT Under Vehicle Surveillance System.  We sell
our manufactured   products primarily to law enforcement agencies
through company employed sales people located throughout the United States and
at our home office in Raleigh, North Carolina as well as through our web site
located at www.leacorp.com.





We
believe there are significant  opportunities  to grow
our  manufacturing business through the acquisition and development of
new product lines, expansion into
new  territories  and  further  development  of
sales  to  specialized  law
enforcement,  government  and military  agencies.
In 2009 LEA will continue to leverage sales utilizing Smith &Wesson branded
products, introducing new core-line products, leverage strong distribution
network industry relationships with companies approaching LEA and through our
web based storefront. LEA also feels that we can further obtain sales growth
through our more experienced sales team. In addition, we believe that consistent
demand for our premium products will continue because our products are critical
to the safety and effectiveness of our customers.





On
October 16, 2007, we completed the acquisition of certain assets of Advanced
Vehicle Systems, LLC (“AVS”), a Florida Limited Liability Company. The assets
were purchased pursuant to an Asset Purchase Agreement and we purchased all of
AVS’ designs, drawings, name and intellectual property rights.  As a
result of this asset acquisition, the Company has expanded into the surveillance
vehicle business.








3














Industry
Overview/Market Opportunity


We
participate in the law enforcement and global security products industries
through the manufacture of surveillance and intelligence gathering security
products marketed to military, law enforcement, security and corrections
personnel. Our surveillance equipment is primarity marketed to law enforcement
agencies for undercover poliece work. Our  under vehicle inspection system
("UVIS"), which can be marketed to a variety of military, law enforcement,
security and corrections personnel, is primarily marketed and sold to the U.S.
Federal Government to secure its facilities such as military bases, government
complexes and high visibility areas in order to prevent
terrorist  attacks.  Increasingly, law enforcement agencies
have recognized the need for our products and services to assist them in
surveillance operations in order to protect their communities from the risks
associated with terrorism, physical attacks, threats of violence, white-collar
crime, fraud and other criminal operations or enterprises.





Growth
Strategy





Management
plans to address continued growth by offering an array of additional security
and surveillance risk management products. We believe that the introduction of
these new products will increase both our sales and our customer base. In
addition, the Company will continue to sell other manufacturers’ security
related products that the Company feels will be complimentary to our existing
product offering.





Our sales
force consists of 9 company employees who are each responsible for a
geographical area of the United States as well as the Federal Government.
Management handles International sales.  Management feels that our
relatively new sales force is better focused and is essential in the planned
offering of additional products that LEA will manufacture and market in 2009.
Our sales force will continue to capitalize on the Company’s historical exposure
to law enforcement agencies. Our relationships with law enforcement agencies are
a key element when introducing new products to market.






4








Expand
Distribution Network and Product Offerings.





In 2009,
we expect to continue to enhance our distribution network by expanding our range
of branded law enforcement equipment by investing in the development of new
products which complement our existing ones. In the last quarter of 2007, we
furthered this goal with the acquisition of certain assets of the AVS vehicle
division. Law Enforcement Associates Corporation also is the master and sole
distributor of the DV-Cop/CELL in North America. Product details and sales
information are available at: http://www.dv-cop.com.




We
manufacture and distribute a complete line of audio surveillance equipment
including radio frequency transmitters, receivers, and speakers for use in
surveillance and intelligence gathering operations by law enforcement agencies.
In addition, we have an array of video surveillance products ranging from
disguised miniature cameras to video transmission and recording systems. We also
manufacture and distribute the Birddog Global Positioning tracking system and
the Under Vehicle Inspection System.  Each of our products may be
manufactured to our clients' specifications.  The following is a
summary of the surveillance products that we manufacture and sell:





GRAFFITI
CAM – The Graffiti Cam is a surveillance solution that covertly and proactively
notifies law enforcement of graffiti crimes in progress. When the video
recording unit is activated via graffiti-related motion, it sends real-time text
alerts of the event to designated mobile phones, as well as JPEG images of the
event to designated e-mail addresses, enabling law enforcement to dispatch
resources and catch taggers in the act. Video footage of the event can also be
used as evidence against offenders.





UVIS -
UVIS (Under Vehicle Inspection System) is used to view the underside of vehicles
entering and exiting secure areas or facilities for explosives and
contraband.  UVIS provides a clear,  high
contrast,  real-time  video  inspection of
the  undercarriage  of cars,  vans and
trucks  at  entry  points  in half the
time of the  standard  inspection  mirror search.
In a government field test performed by the U.S. military, the UVIS was compared
to standard inspection mirror searches.  The results of the government
field test  indicated that the UVIS, as compared to
standard  mirror  inspection searches, had a higher
percentage of target acquisitions,  which is the locating
and  preventing  of  explosives  and
other types of  contraband  from entering a protected
facility.




SURVEILLANCE
VEHICLES – The Company’s mobile specialty vehicles are professionally engineered
as completely integrated mobile systems, which include:





·
            Unique
      environmental control systems for long, safe operation in all
      climates.


·
            Advanced
      technology for evidence collection and
  documentation.


·
            Latest
      audio and video surveillance
technology.


·
            Strong,
      welded-aluminum interior
architecture.







5










LEA
BIRDDOG GLOBAL POSITIONING TRACKING SYSTEM(TM) utilizes global positioning
system technology in order to provide law enforcement personnel the
ability to conduct discrete vehicle tracking and monitoring.  The
global positioning system is integrated with a cellular modem and records
longitude and latitude data points
anywhere in the United States.  A law
enforcement
professional, after affixing the Birddog to a vehicle, can contact the
Birddog Global Positioning System via the
internet and track its movements in real time or download the data
points at predetermined intervals. The Bird Dog Global Positioning
readings are saved along with time and date, which can then be superimposed onto
mapping software running a personal computer.  The software will
provide a "track” of where and when a target vehicle has been. The Birddog
Global Positioning is limited in that an agent will not be able to track a
target vehicle when the vehicle is outside of a cellular phone coverage
area.  However, all data is saved and can be retrieved once the target
vehicle re-enters a cellular phone coverage area.  This device can be
mounted covertly on a target vehicle and measures a compact size of 3"x4"
x1.5".




SYNTHESIZED
AUDIO INTELLIGENCE SYSTEM is a comprehensive surveillance
system, which includes microphone, transmitter and receiver that
are manufactured to industry standards.  It allows for
the transmitting and receiving of voice data for a certain
distance depending on the RF output power level. This product includes
an FM receiver, a rugged under panel design, a LCD
battery tester, a 9-volt battery tester, an audio line
output to a voice recorder and a voice scrambler. The Synthesized Audio
Intelligence System
allows  law  enforcement  agencies  to
engage  in  various  types
of  undercover operations  whereby
all  conversations  engaged in by
the  undercover  agent are transmitted and
recorded.





GROUND
HOG
COVERT  UNATTENDED  VIDEO  SURVEILLANCE  SYSTEM
is  specifically designed for
unattended  covert  outdoor  surveillance  of
targets  ranging from marijuana fields and drug labs to suspected
larceny and in a variety of applications.  The Ground Hog utilizes a
camouflaged pinhole camera in a weatherproof housing to view the
targeted area. Images from the camera are recorded on the system's DVR. The
monitor station is also camouflaged and housed in a weather resistant
enclosure. The Ground Hog also utilizes a standby mode whereby its infrared,
wireless motion detector automatically switches the Ground
Hog from standby to active when movement occurs within
the target area.  The Ground Hog also comes with a
wireless video option and/or a text messaging alert option.






6














LEA 6300
SERIES/AID 9400 SERIES - these include a variety of repeaters.  A
repeater is a device designed to work together with each of
our transmitters to increase the distance that voice data may be
monitored.  Our standard transmitter allows for monitoring
generally within a limited range.  However, a transmitter that is
combined with a repeater will be able to monitor voice data generally over
an extended range.  With the designs and other assets included in
the AID asset purchase, the repeater systems have been expanded to be
synthesized. This synthesized design will enable LEA/AID to reduce
manufacturing time for its repeater products.  Our repeaters come in
various designs.





LEA 7000
SERIES/AID 9000 SERIES - these include a variety of transmitters
and accessories.  A transmitter is a device that
is hidden on an undercover agent or operative, which allows the law
enforcement agency to monitor audio data. Each of these transmitters come
with various features including different designs and transmits RF power
levels.  The  transmitters  are  available
in various  disguised
formats  which  enables  them to
be used  in  various  law  enforcement
operations.  With the designs and other assets included in the AID
asset purchase, the transmitters are completely synthesized.
This synthesized design will enable LEA/AID to
reduce manufacturing time for its transmitter products. Our
transmitters come in various designs.





VIDEO
TRANSMISSION SYSTEMS - These transmission systems provide both audio and video
surveillance capabilities. We have a variety of disguised
transmitters.  Each of these items includes a black and/or white and
color camera, a video transmitter, an audio transmitter and a directional
antenna. The transmission systems can also come in a transmitter/receiver
combination.





DISGUISED ANTENNAS –
Disguised antennas are compatible with all of
our receivers and repeaters.  The antennas are sold in
various disguises.





DIGITAL NOISE FILTER -
This item can be used to cancel up to 95% of background
noise to increase the quality of sound recordings.







7





Customers





The
primary end users of our products are federal, state and local law enforcement
agencies, state corrections facilities, U.S. and allied military forces, and
select private security personnel.  Furthermore, the UVIS, one of our
leading products, may be sold both within the United States and
abroad.





We reach
our customers through a distribution strategy that utilizes approximately 9
sales representatives that are employed by the Company who are responsible for
certain geographic areas within the United States, sales to the federal
government and international sales. Additionally the Company uses direct
mailings, catalogs and trade shows as well as our web site on the internet
located at www.leacorp.com.





Marketing





We
market  and  distribute  our  products  directly  to
the  U.S. military,  law
enforcement   agencies,   security  and  corrections   personnel  through  sales
representatives.  The Company also markets its products through our
web site located at www.leacorp.com, direct mailings, catalogs and
trade shows. Management believes that direct sales to end users should allow us
to more efficiently and effectively meet customer needs by providing products
which can be tailored to each customer's individual requirements at an
economical price.





Product
Manufacturing and Raw Materials





Final
assembly of all our products is completed at our facility located in
Raleigh, North Carolina. The manufacturing process is
a procedure whereby our manufacturing employees assemble each of the
products utilizing raw materials and various other components. This process
includes a sub-assembly procedure for general items and a final assembly
procedure for each specific product. We currently employ approximately 20
employees in the manufacturing sector.





The raw
materials used in manufacturing our products include various items
ranging from screws, adhesive, circuit boards and enclosures.  These
materials are available from
a multitude of suppliers throughout the
United States.  We purchase these raw materials directly from the
manufacturers and believe that we enjoy a mutually
rewarding relationship with these companies.  However,
if necessary, we believe that we could readily
find replacement manufacturers.  We are aware of
multiple suppliers for these materials and do not anticipate a
significant impact if we were to lose any suppliers that we currently
utilize.






8














Competition





Law
Enforcement Associates Corporation is the only U.S. owned manufacturer of
electronic surveillance equipment. The market for our surveillance products is
not highly competitive.  The market for
surveillance  products is basically  comprised of one
competitor with
each  of  us  having  an  equal  market  share.  Our
prime competitor is DTC Communications, Inc. (a foreign
owned company). No company in the surveillance products market is dominant
with  respect  to any
one  specific  area nor does
any  company  have more brand
recognition,  greater financial resources or any other advantage which
may allow them to compete more  effectively.  We believe we
compete by providing superior
design, engineering and production expertise in
our line of surveillance products.  The principal
competitive factors for all of our products are quality of engineering and
design, reputation in the industry, production capability and capacity, price
and ability to meet delivery schedules.  There are now several
companies who manufacture and sell a variation of the Under Vehicle Inspection
System (UVIS).  However, we feel that we have a superior product which
was designed in conjunction with the United
States government.  We also compete with companies that sell
standard inspection search mirrors, which are used
in searching the underside of
vehicles.  Although the mirrors are less costly than the
UVIS, we believe that the UVIS is more effective in detecting explosives
and other contraband.





Patents
and Trademarks





Other
than the patents described above, we do not hold any other patents relating to
any of our other products or related technologies. We have trademark protection
for the names "LEA, AID, Audio Intelligence Devices, Blood Hound Global
Positioning Tracking System(TM), AIDVision, AIDVison 911, and Birddog.” The
Company will continue to trademark all new product offerings.






9





Governmental
Regulation





We are
subject to U.S. Department of Commerce and U.S. State
Department licensing requirements with respect to the sale of
certain products in foreign countries.  However, the UVIS is
not restricted by the U.S.  Department of Commerce and may be freely
exported to non-embargoed countries.  We have sold the UVIS to
countries outside of the United States and intend to continue doing
so.





We are
also obligated to comply with a variety of federal, state and local
regulations, both domestically and
abroad, governing certain aspects of our operations and the workplace
including regulations relating to workplace safety, fair labor standards, taxes,
product safety and discrimination. Additionally, as a Federal
Government contractor, we are subject to
rules, regulation and approvals applicable to government
contractors.





We are
also regulated by the U.S. Department of Commerce and the
U.S. Department of Justice under the Omnibus Crime Control and Safe Streets
Act of 1968, as amended (the "Omnibus Act"), due to the sales
of listening and surveillance devices.  The Omnibus Act
prohibits the manufacture, possession, sale and advertisement of
devices that would be useful for the purpose of the
surreptitious interception of wire, oral or
electronic communications.  However, the Omnibus Act also
provides that it is not illegal for a party to manufacture,  sell or
advertise a surreptitious listening  device if that party is under
contract to  manufacture  and sell such device with the
United States, a state or a political  subdivision thereof, which is
authorized to use such device.





Environmental
Matters





We are
subject to federal, state, and local laws and regulations governing the
protection of the environment, including those regulating discharges to the
air and water, the management of wastes, and the control of
noise and odors. Like all companies, we are subject to potentially significant
fines or penalties if we fail to comply with environmental
requirements.  We do not expect material capital expenditures for
environmental controls during 2009. However, environmental requirements are
complex, change frequently, and could become more stringent in the future.
These requirements may change in a manner that will require material
capital or operating expenditures or will otherwise have a material adverse
effect on us in the future.





Employees





As of
March 23, 2009 we had a total of 33 employees, of which 9 were employed
within sales, 2 in marketing, approximately 20 were employed in the
manufacturing area, and 2 were administrative personnel. None of our
employees are represented by a labor union.  We believe that
our relations with employees are good.






10





Item 1A.
Risk Factors.







Risks
Relating to Our Common Stock







Our
common stock, which is listed on the Over-the-Counter Bulletin Board, has from
time-to-time experienced significant price and volume fluctuations. These
fluctuations are likely to continue in the future, and you may not be able to
resell your shares of common stock at or above the purchase price paid by
you.





The
market price of our common stock may change significantly in response to various
factors and events beyond our control, including the following:




·
            a
      shortfall in operating revenue or net income from that expected by
      securities analysts and investors;




·
            changes
      in securities analysts' estimates of our financial performance or the
      financial performance of our competitors or companies in our industry
      generally;




·
            general
      conditions in our customers' industries;
and




·
            general
      conditions in the securities
markets.




Future sales of our common stock may depress our stock
price.




Sales of
a substantial number of shares of our common stock in the public market or
otherwise, either by us, a member of management or a major stockholder, or the
perception that these sales could occur, could depress the market price of our
common stock and impair our ability to raise capital through the sale of
additional equity securities.




We do not expect
to pay any dividends in the foreseeable
future.




We do not
anticipate paying any cash dividends to holders of our common stock in the
foreseeable future. Consequently, investors must rely on sales of their common
stock after price appreciation, which may never occur, as the only way to
realize any future gains on their investment. Investors seeking cash dividends
should not purchase our common stock.




Operating
losses




The
Company experienced a substantial operating loss during 2007 and has a
cumulative retained deficit.  Although the Company was profitable in
2008, the Company may incur additional losses and continuing negative operating
cash flows from operations in the future, and may never achieve sustained
profitability.  Its success will depend in large part upon its ability
to generate sufficient revenue to achieve profitability, and to maintain
existing customer relationships and to develop new products.  As of
December 31, 2008 and 2007, the Company had an accumulated deficit of $901,094
and $972,947, respectively. In addition, the Company experienced negative cash
flows from operations for the period ended December 31, 2008 and 2007 of
$882,141 and $260,494, respectively.





Uncertainty
of Future Financial Result




The
Company's quarterly revenues and operating results have historically fluctuated
depending on the timing of customer demands.  Accordingly, the
Company’s operating results in a particular period maybe difficult to predict
and may not meet the expectations of securities analysts or investors and may
result in a significant decline in the Company’s share price.  Factors
which may cause the Company’s financial results to fluctuate significantly from
quarter to quarter include: the fact that each individual order or contract can
represent substantial revenue; the size, timing and shipment of individual
orders; changes in pricing by the Company or its competitors; discount levels;
foreign currency exchange rates; the mix of products sold; the timing of the
announcement, introduction and delivery of new product enhancements by the
Company and its competitors; and, general economic conditions.  As a
result of the foregoing factors, a quarter-to-quarter comparison of the
Company’s results of operations is not necessarily meaningful.  The
results of one quarter should not be relied upon by investors as an indication
of the Company’s future performance.










11











Limited Financial Resources and Need
for Additional Financing




The
Company has limited financial resources and may require additional equity or
debt financing in the future for operating and growth purposes.  In
addition, the Company has outstanding 1.200,000 shares of redeemable common
stock, which becomes exercisable at a price of $1.25 per share on August 1,
2009.  There can be no assurance that the Company will be able to
obtain on satisfactory terms, or at all, the additional financing required to
fund this obligation and also compete successfully.  Failure to obtain
such financing could result in the delay or abandonment of some or all of the
Company’s business plans.




We
will continue to incur significant costs as a result of being a public
company.




As a
public company, we have incurred and will continue to incur significant legal,
accounting and other expenses that we would not incur as a private company. The
Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 regulate
corporate governance practices of public companies. Compliance with these public
company requirements has increased our costs and we expect that it will continue
to increase our costs and make some activities more time consuming. For example,
we are considering creating a new internal Disclosures and Controls Committee
and adopting new internal controls and disclosure controls and procedures. In
addition, we will continue to incur additional expenses associated with our SEC
reporting requirements. A number of those requirements will require us to carry
out activities we have not done previously. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our Annual
Report our assessment of the effectiveness of our internal control over
financial reporting and our audited financial statement as of the end of each
fiscal year. Furthermore, our independent registered public accounting firm,
Frost, PLLC, (“Frost”), will be required to report on whether it believes we
maintained, in all material respects, effective internal control over financial
reporting as of the end of the year. Our continued compliance with Section 404
will require that we incur substantial expenses and expend significant
management time on compliance related issues. In future years, if we fail to
timely complete this assessment, or if Frost cannot timely attest, there may be
a loss of public confidence in our internal controls, the market price of our
stock could decline and we could be subject to regulatory sanctions or
investigations by the Securities and Exchange Commission or other regulatory
authorities, which would require additional financial and management resources.
In addition, any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our operating
results or cause us to fail to timely meet our regulatory reporting
obligations.




We are dependent
on our principal executive officer and the loss of his service could adversely
affect us.




We are
dependent to a significant extent upon the efforts of our principal executive
officer, Paul Feldman, Chief Executive Officer. The loss of the services of our
principal executive officer could have a material adverse effect upon our
business, financial condition and results of operations. Our continued growth is
also dependent upon our ability to attract and retain additional skilled
management personnel.




We are controlled
by one shareholder, who may determine the outcome of all
elections.




Approximately
51% of our outstanding common stock is beneficially owned or controlled by the
Raymond James Financial, Inc.  As a result, this shareholder is able
to determine the outcome of elections of our directors and thereby control the
management of our business.




The industry in
which we operate is cyclical, and downturns in our industry may adversely affect
our operating
results.




Historically,
a substantial portion of our revenue has been derived from the sale of our
products to the U.S. military, law enforcement agencies, and security and
corrections personnel. The core industries in which our products are used are,
to varying degrees, cyclical and have historically experienced severe downturns.
Although we are currently in an upturn of demand for our products, a downturn in
our industry could occur at any time. Deterioration in any of the cyclical
industries we serve would harm our business and operating results because our
customers would not likely have the resources necessary to purchase our
products.










12










Our international
sales operations are subject to uncertainties that could harm our
business.




We
believe that revenue from the sale of our products outside the United States
will continue to account for a significant portion of our total revenue for the
foreseeable future. Our international sales operations are subject to numerous
risks, including:




·
            difficulty
      enforcing agreements through some foreign legal
  systems;




·
            general
      economic and political conditions in the countries where we sell our
      products may have an adverse effect on our sales in those
      countries;




·
            foreign
      governments may adopt regulations or take other actions that could
      directly or indirectly harm our business and growth strategy;
      and




·
            it
      may be difficult to enforce intellectual property rights in some foreign
      countries.




The
occurrence of any one of the above risks could harm our business and results of
operations.




If we fail to
introduce enhancements to our existing products or to keep abreast of
technological changes in our markets, our business and results of operations
could be adversely affected.




Although
technologies in our products are well established, we believe our future success
depends in part on our ability to enhance our existing products and develop new
products in order to continue to meet customer demands. Our failure to introduce
new or enhanced products on a timely and cost-competitive basis, or the
development of processes that make our existing technologies or products
obsolete could harm our business and results of operations.




Our business is
not highly competitive. But if we are unable to successfully implement ourbusiness
strategy, we risk losing market share to current and future
competitors.




Some of
our present and potential competitors may have substantially greater financial,
marketing, technical or manufacturing resources. Our competitors may also be
able to respond more quickly to new technologies or processes and changes in
customer demands. They may also be able to devote greater resources to the
development, promotion and sale of their products than we can. In addition, our
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties that increase
their ability to address the needs of our customers. If we cannot compete
successfully against current or future competitors, our business will be
harmed.




If we are unable
to make necessary capital investments or respond to pricing pressures, our
business may be harmed.




In order
to remain competitive, we need to invest continuously in research and
development, manufacturing, customer service and support, and marketing. From
time to time we also have to adjust the prices of our products to remain
competitive. We may not have available sufficient financial or other resources
to continue to make investments necessary to maintain our competitive
position.







13






If third parties
infringe our intellectual property or if we were to infringe the intellectual
property of third parties, we may expend significant resources enforcing or
defending our rights or suffer competitive injury.




Our
success depends in part on our proprietary technology. We rely on a combination
of patent, copyright, trademark, trade secret laws and confidentiality
provisions to establish and protect our proprietary rights. If we fail to
successfully enforce our intellectual property rights, our competitive position
could suffer. We may also be required to spend significant resources to monitor
and police our intellectual property rights. Similarly, if we were to infringe
on the intellectual property rights of others, our competitive position could
suffer. Furthermore, other companies may develop technologies that are similar
or superior to our technologies, duplicate or reverse engineer our technologies
or design around our patents.




In some
instances, litigation may be necessary to enforce our intellectual property
rights and protect our proprietary information, or to defend against claims by
third parties that our products infringe their intellectual property rights. Any
litigation or claims brought by or against us, whether with or without merit,
could result in substantial costs to us and divert the attention of our
management, which could harm our business and results of operations. In
addition, any intellectual property litigation or claims against us could result
in the loss or compromise of our intellectual property and proprietary rights,
subject us to significant liabilities, require us to seek licenses on
unfavorable terms, prevent us from manufacturing or selling certain products or
require us to redesign certain products, any of which could harm our business
and results of operations.




A decrease in
supply or increase in cost of the materials used in our products could harm our
profitability.




Any
restrictions on the supply or the increase in the cost of the materials used by
us in manufacturing our products could significantly reduce our profit margins
which could harm our results of operations. Any efforts we may engage in to
mitigate restrictions on the supply or price increases of materials by entering
into long-term purchase agreements, by implementing productivity improvements or
by passing cost increases on to our customers may not be successful. Our
profitability depends largely on the price and continuity of supply of the
materials used in the manufacture of our products, which in many instances are
supplied by a limited number of sources.




Despite current
indebtedness levels, we may still be able to incur substantially more debt.




We may be
able to incur substantial additional indebtedness in the future. The terms of
the current agreements governing our indebtedness do not fully prohibit us from
doing so. If new debt is added, the related risks that we face could
intensify.




Our ownership
changes for U.S. federal income tax purposes will cause utilization of
our pre-change tax loss carryforwards and other tax attributes to be
substantially delayed, which could increase income tax expense and decrease
available cash in future years.




The
change in our ownership on January 15, 2008 triggered an “ownership change” for
U.S. federal income tax purposes. As a consequence of the ownership change, the
timing of our utilization of pre-change U.S. tax loss carryforwards and other
tax attributes will be limited in the future. The amount of the annual
limitation is expected to be approximately $660,000. The limitation has the
potential to increase tax expense and increase the amounts payable for income
taxes in future years and thereby limit the amount of cash available to service
our indebtedness and for use in our operations.










14











Potential Defects
in Products




The
Company’s products are highly complex and, from time to time, may contain design
defects that are difficult to detect and correct.  Errors, failures or
faults may be found in the Company’s products after shipment to
customers.  If errors are discovered, the Company may not be able to
correct such errors in a timely manner or at all.  The occurrence of
errors and product failures could result in damage to the Company’s reputation,
lost revenue, and the loss of, or delay in achieving, market acceptance of the
Company’s products, and correcting such errors and failures in the Company’s
products could require significant expenditures by the Company.  The
sale and support of such products may entail the risk of claims based on damage
to such equipment.  In addition, the failure of the Company’s products
to perform to customer expectations could give rise to claims.  The
Company’s insurance may not cover or its coverage may be insufficient to cover
any such claims successfully asserted against the Company.





Item 1B. Unresolved Staff Comments.





None.





Item 2.
Properties.





On
December 15, 2007, the Company entered into a lease with Zabarsky Investments
Ltd. L.P. We lease approximately 6,000 square feet of space in Raleigh, North
Carolina for our surveillance vehicle division and training room at
approximately $4,750 per month. The lease term is 60 months.





Effective
March 2008, the Company moved its headquarters from its Youngsville, North
Carolina facility and entered into another lease with Zabarsky Investments Ltd.
L.P. We lease an additional 10,000 square feet of space for our new Raleigh,
North Carolina headquarters at approximately $7,900 per month. The lease term is
60 months. Management believes the move from Youngsville to Raleigh was
necessary in order to accommodate the surveillance vehicle division and to
improve operational efficiencies. In total, the Company has approximately 16,000
square feet of leased space from Zabarsky Investments Ltd. L.P.





Item 3.
Legal Proceedings.





From  time  to  time,  we
may be
a  party  to  litigation  or  other  legal
proceedings  that we would  consider to be a part of the
ordinary  course of our business.  We
are  not  currently
involved  in  legal  proceedings  that  could
reasonably  be  expected  to have
a  material  adverse  effect on
our  business, prospects,  financial condition or results of
operations. We may become involved in material legal proceedings in the
future.





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





Not
applicable.








15











PART II





Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.




PRICE RANGE
OF COMMON EQUITY





Our
common stock is currently traded on the OTCBB, under the symbol
"LAWE.OB"




High
                
                
                Low2007
                
                $
                
                
                $First
      Quarter
                
                
                1.05
                
                
                
                0.77Second
      Quarter
                
                
                0.84
                
                
                
                0.50Third
      Quarter
                
                
                1.30
                
                
                
                0.55Fourth
      Quarter
                
                
                1.28
                
                
                
                0.502008First
      Quarter
                
                
                0.69
                
                
                
                0.50Second
      Quarter
                
                
                0.58
                
                
                
                0.26Third
      Quarter
                
                
                0.32
                
                
                
                0.16Fourth
      Quarter
                
                
                0.30
                
                
                
                0.12




The per
share  closing  sales price of the common stock as reported
by the OTCBB on March 20, 2009, (the date of the last reported sale) was
$0.24.





The
Company has never paid any cash dividends on shares of its common
stock.





Item 6. Selected Financial Data.





Not
applicable.













16








Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





The
statements contained herein are not purely historical statements, but
rather include what we believe
are forward-looking statements.  These include
statements  about
our  expectations,  beliefs,  intentions or
strategies for the future, which are indicated by words or phrases such as
"anticipate,"  "expect,"
"intend,"  "plan,"  "will," "we believe,"  "the
company  believes",  "management believes" and similar words
or phrases. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and
assumptions, including factors set forth in the following discussion and in
the discussions under ”Business." Our actual results could
differ materially from results anticipated in
these forward-looking statements.  All forward-looking
statements included in this document are based on information available to us on
the date hereof, and we assume no obligation to update any
such forward-looking statements.





The
following discussion and analysis provides information which the Company’s
management believes to be relevant to an assessment and understanding of the
Company’s results of operations and financial condition. This discussion should
be read together with the Company’s financial statements and the notes to
financial statements, which are included in this report.





Results
of Operations - Year Ended December 31, 2008 Compared
to Year Ended December 31, 2007




Revenues





Revenues
for the year ended December 31, 2008, were $9,246,170 as compared to $6,666,479
for the year ended December 31, 2007, which represents an increase of $2,579,691
(38.7%). The Company recognized two significant orders that represented
approximately $2.1 million of the revenue increase. In the 3rd quarter
of 2008, an order shipped for our UVIS systems representing approximately
$714,000 of revenue. In the 4th quarter
of 2008, the Company recognized approximately $1.4 million on an order for the
U.S. Census Bureau. Another factor contributing to our revenue increase is
increased demand for our Birddog GPS Surveillance System and Graffiti Cam
System. The Company also began recognizing sales related to its newly acquired
surveillance vehicle division. The large increase in revenues was partially
offset by a reduction of approximately $38,000 in repair service
income.





Costs of
Goods Sold





Cost of
goods sold increased by $1,511,486 (32.3%) to $6,193,180 for 2008 as compared to
$4,681,694 for 2007. As a percentage of net sales, cost of goods sold decreased
by 3.2% to 67.0% of net sales in 2008 compared to 70.2% of net sales in 2007.
The increase in cost of goods sold is mainly due to the increase in revenues as
compared to 2007.





Gross
Margin





Gross
margin increased $1,068,205 to $3,052,990 for 2008 as compared to $1,984,785 for
2007. As a percentage of net sales, gross margin increased to 33.0% in 2008 from
29.8% in 2007. The majority of the increase in gross margin is a direct result
of the increase in revenues.







17





Operating
Expenses





During
2008, management implemented cost reduction measures, which resulted in a
significant decrease in operating expenses. The decrease was partially offset by
the Company relocating its operations to Raleigh, North Carolina. Management
intends to continue focusing its efforts on cost saving opportunities in
2009.





For the
year ended December 31, 2008, operating expenses, including research and
development ($81,327) were $2,809,598 as compared to $3,634,132 in 2007, a
decrease of $824,534 or 22.7%. As a percentage of net sales, operating expenses
represented 30.4% of net sales in 2008 compared to 54.5% of net sales in
2007. The decrease is attributable to a decrease in accounting and legal
fees ($183,738), consulting fees ($34,053), research and development ($146,268),
non-cash impairment charges ($118,290) related to our Stun Pistol patents,
postage ($83,386), and sales promotions ($70,860). During 2008, the Company did
not issue stock compensation, which resulted in an additional decrease in
operating expenses of $108,890 as compared to the prior year.





Net Other
Income (Expense)





For the
year ended December 31, 2008, net other expenses were $171,220 as compared to
net other income of $10,343 for the year ended December 31, 2007. The Company
recognized a loss on the sale of assets of approximately $44,000 when it sold
aging test equipment to a third party during the 2nd quarter of 2008. The
Company also incurred non-cash interest expense of approximately $102,000
related to the interest accretion of the AVS put option. Factoring fees of
approximately $26,000 were incurred during the 4th quarter
related to financing the $1.4 million U.S. Census Bureau order.





Net
Income and Earnings Per Share





Net
income for the year ended December 31, 2008 was $71,853 as compared to a net
loss of $1,009,746 for the year ended December 31, 2007, which represented a net
increase of $1,081,599. Net income per weighted average share was $0.00 for the
year ended 2008, as compared to a net loss of ($0.04) per weighted average share
for 2007.





Liquidity
and Capital Resources





At
December 31, 2008, the Company had working capital of $2,059,511 as compared
with $1,949,261 at December 31, 2007, an increase of $110,250. At the end
of 2008, the Company had a cash balance of $254,705 and no long term
debt.  The Company’s prior line of credit with a bank matured in 2008
and the balance was paid in full prior to year-end. During the 4th
quarter, the Company entered into a factoring agreement with a bank in order to
finance a significant order with the U.S. Census Bureau. The obligation to the
bank is expected to be satisfied in the 1st quarter
of 2009.





Management
believes the Company will be able to finance its operations and any capital
expenditures incurred in 2009 with its cash on hand and cash flows from
operations. However, 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. Currently, the Company does not have sufficient cash and/or
financing available to fund this obligation. And there is no assurance that the
Company will be able to obtain additional financing or capital on acceptable
terms, if at all. In such an event, this may have a materially adverse effect on
the business, operating results and financial condition.  Management
may attempt to obtain funding through the use of various types of
short term loans or other working capital financing arrangements from
banks or financial institutions.





As the
Company generally obtains  all  of
its  funding  from  operations,  a  decrease  in  revenue  could
negatively  impact short and long
term  liquidity.  A change in the current political climate
or a decrease in military spending could result in substantially decreased sales
of the UVIS. A decrease in sales in the UVIS could have a material impact
on the Company’s revenue and net income and would affect long and short term
liquidity.





Research
and Development





In fiscal
2008, we incurred expenses of $81,327 on research and development. The majority
of these funds were spent on research and development related to the final
developmental stage of the Graffiti Cam and the new Groundhog products. We do
not have any other current plans to make material expenditures for research and
development activities. However, we will engage in any research and development
project that is feasible and can be accomplished on an economical basis and in
accordance with our liquidity.





Inflation





Management
believes that the impact of inflation on our operations since our inception has
not been material.









18








Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.





Item 8.
Financial Statements and Supplemental Data.





The
response to this item is set forth at the end of this report.





Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.





Effective May 27, 2008, the Company’s Board of
Directors dismissed Baum & Company as our independent registered public
accounting firm and retained the accounting firm of Frost, PLLC (“Frost”),
as our new independent registered public accounting firm. The primary reason for
the change is that Frost has offices that are located in Raleigh Durham, North
Carolina and the Company believes that it will be better served having
a local auditor.





Item 9A.
Controls and Procedures.





Evaluation
of disclosure controls and procedures




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).




Based on
this evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were not effective as of
December 31, 2008.  In their evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that there is a deficiency in our disclosure
controls and procedures relating to our failure to maintain a sufficient number
of personnel to support our consolidation and financial reporting processes for
the periodic reports required under the Exchange Act.  Management is
currently developing a plan for the Company’s disclosure controls and procedures
that we hope will allow them to be effective prior to the end of the second
quarter of 2009.




Management’s
Annual Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act.




Management
conducted a preliminary evaluation of the effectiveness of internal control over
financial reporting as of December 31, 2008.  Management determined, based
on the preliminary evaluation, that the Company’s internal control over
financial reporting did not satisfy the criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”).  Factors such as those described in the
preceding paragraphs, including  material adjustments communicated to
us by our auditor for the year ended December 31, 2008, led to management’s
conclusion that the Company’s internal control over financial reporting did not
meet the criteria established by COSO.




Management
has concluded that, due to the deficiencies identified above under “Evaluation
of disclosure controls and procedures” and due to the failure to meet the COSO
criteria, as of December 31, 2008 our internal control over financial
reporting was not effective.




Changes
in Internal Control over Financial Reporting




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated whether any change in our internal control over
financial reporting occurred during the fourth quarter of fiscal 2008. Based on
that evaluation, management concluded that our internal controls over financial
reporting were subject to the events and influences described above in this Item
9A under the heading “Evaluation of disclosure controls and
procedures”.




This
annual report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Additionally, management’s report was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.





Item 9B. Other Information.





None.




19








PART
III





Item 10. Directors, Executive Officers and Corporate
Governance.





The
Company’s executive officers, directors and
key employees and their ages and positions as of December 31, 2008, are as
follows:




Name
                      
                      Age
                      
                      PositionPaul
      Feldman
                      
                      52
                      
                      Director,
      President, Chief Executive OfficerAnthony
      Rand
                      
                      69
                      
                      Director,
      Chairman of the BoardMartin
      Perry
                      
                      48
                      
                      Director,
      VP of SalesGeneral
      James Lindsay
                      
                      76
                      
                      DirectorJoseph
      Jordan
                      
                      61
                      
                      DirectorPaul
      Briggs
                      
                      38
                      
                      Chief
      Financial OfficerMark
      White
                      
                      50
                      
                      VP
      of
Operations




The
following is a brief description of each officer, director and control
person:





Paul
Feldman has served as our President and CEO since August 2001.
Mr.  Feldman was appointed as a director in May 2003.  Mr.
Feldman has served as the President of Law
Enforcement Associates, Inc.  ("LEAI"), our wholly
owned
subsidiary, since 1993.  Mr.  Feldman initially joined LEAI
as the Eastern Regional Sales Manager in 1989.  From 1989 to
1993,  Mr.  Feldman served as the Vice President of Sales
for LEAI. Mr. Feldman received a Bachelor of Science from Duke University
in 1978.




Anthony
Rand has served as a director of the Company since May 2003.  Mr. Rand
has been the Senate majority leader for the North Carolina Senate since 1995.
Senator Rand earned a B.A. in Political Science from the University of North
Carolina, Chapel Hill in 1961 and a J.D. from the University of North Carolina
Law School 1964.  Senator  Rand also is
a  consultant  to Sonorex  Inc. and the President
of Rand & Gregory, P.A. Senator Rand also serves on numerous boards and
commissions  such as
the  Board  of  Directors  and  Treasurer,  General  Alumni
Association of the University of North Carolina.





Martin Perry
has served as a director of the Company since May 2003.  Mr.
Perry   graduated from Brigham Young   University   in
1985 with a degree in Communications and
played basketball for the Cougars.  From 1994 thru 2000, Mr.
Perry was involved in Equipment Distributors, Raleigh, North Carolina, which
works exclusively with the law enforcement community. Currently, Mr. Perry
serves as VP of Sales for the Company.





General James
J. Lindsay has served as a director of the Company since
August 2004.  General Lindsay retired from the Armed
Services on July 1, 1990. Currently, General Lindsay is president of the
Airborne and Special Operations Museum Foundation, and a Senior Observer
with the Army's Battle Command Training
Program.  Additionally, General Lindsey is a member of the
United States Army Ranger Hall of Fame and
Officer Candidate School Hall of Fame, US Army Science Board and
Special Operations Advisory Group to the Secretary of Defense. He was also
the 1996 recipient of the Infantry's Doughboy Award, and the 1998 recipient of
the United States Special Operations Command Bull Simon Award.





Joseph A.
Jordan has served as director of the Company since December 2004.  Mr.
Jordan received a B.S. in Accounting from Villanova University in 1969 and
was the former managing partner of Kopensky & Company,
CPAs.  He is currently a partner in the accounting firm of Jordan
& Delaney LLP and is currently a member of the American Institute of
Certified Public Accountants.







20








Paul
Briggs was appointed Chief Financial Officer and Principal Accounting Officer
effective May 5, 2008.  Mr. Briggs holds a Master of Science degree in
Accounting from East Carolina University in May 1999. From September
1999 to April 2002, he was employed by Arthur Andersen LLP as a senior auditor
in their Greensboro, North Carolina office. From May 2002 to June 2003, Mr.
Briggs was a senior internal auditor for VF Corporation in
Greensboro, North Carolina and from June 2003 through April 2007, he was
the controller of Ikex, Inc., and Ikex LLC/Hanes Companies located in Middlesex,
North Carolina.  From November 2007 through January 2008, Mr. Briggs
was employed as the operations manager of Jarco Supply in Youngsville, North
Carolina. Mr. Briggs joined the Company as a controller in January 2008 and
currently serves as the Chief Financial Officer and Principal Accounting
Officer.





Mark
White joined the Company in June, 2004, with the acquisition of assets related
to the Audio Intelligence Devices (“AID”) surveillance business.  Mr.
White has served as our Sr. VP of Technical Operations since January, 2006.
Prior to joining the Company, Mr. White served as Sr. VP of Technical Operations
for AID.  Mr. White joined AID in May, 1995 as Operations
Manager.  From 1997 to 2000, Mr. White served as Vice President of
Manufacturing for AID.  From 2000 until joining the Company, Mr. White
served as Sr. VP of Technical Operations for AID. Prior to joining AID, Mr.
White served in a variety of management and engineering positions with
Westinghouse Electric Corporation and Dahlstrom Manufacturing Company. Mr. White
received a B.S. Electrical Engineering from the University of Pittsburgh in
1984.





Directors
serve until the next annual meeting of stockholders or until their successors
are elected and qualified.  Officers serve at the discretion of the
Board of Directors. Directors are paid an annual director’s fee of $4,000. No
meeting fees or committee membership fees are paid. Non-employee directors are
also entitled to reimbursement for reasonable expenses incurred in attending any
such meetings.







21










Audit
Committee





The Board
of Directors has an Audit Committee, which is comprised of Anthony Rand, Joseph
Jordan, and James Lindsay. The Board of Directors previously had examined the
composition of the Audit Committee in light of the listing standards of the
American Stock Exchange and the regulations under the Exchange Act applicable to
audit committees. Based upon this examination, the Board of Directors has
determined that each of the Audit Committee members is an “independent” director
within the meaning of such listing standards in the Exchange Act and the rules
and regulations thereunder. Mr. Jordan qualifies as an “audit committee
financial expert” as that term is defined in applicable regulations set forth by
the Securities and Exchange Commission. The Audit Committee met on three
occasions during 2008 in order to review and discuss the Company’s financial
statements with the Company’s auditors and management.





During
the 4th quarter
of 2008, the Company voluntarily removed itself from the American Stock
Exchange. As a result, the formal audit committee requirement no longer applies
to the Company. However, the Board of Directors will continue to review the
financial statements each quarter.





Compensation
Committee





On
January 24, 2006,
the Company established a Compensation committee.
Currently, Mr. Perry and General Lindsay are members of that
committee.





Code of
Ethics





The Company has adopted its
Code of Ethics and Business Conduct for Officers, Directors
and Employees that applies to all of the officers, directors and employees of
the Company.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires the Company's executive officers
and  directors  and persons who own more than 10% of
a  registered  class of the
Company's  equity  securities  to
file  reports of their  ownership  thereof and
changes in that ownership with the  Securities and
Exchange  Commission  ("SEC") and the
National  Association of
Securities  Dealers,  Inc. Executive  officers,
directors and greater than 10%  stockholders  are required
by SEC regulations to furnish the Company with copies of all such reports they
file.





Based  solely  upon
a review of Forms 3, 4 and 5, and  amendments  thereto,
furnished to the Company  during  fiscal year
2008,  the Company is not aware of
any  director,  officer  or  beneficial  owner
of more than ten  percent  of the Company's Common Stock
that, during fiscal year 2008, failed to file on a timely basis reports required
by Section 16(a) of the Securities Exchange Act of 1934.







22








Item 11. Executive Compensation.





The
following table summarizes all compensation paid by the Company with
respect to the year ended December 31, 2008, to the three highest
paid executives.








SUMMARY
COMPENSATION TABLE







Name
      and Principal Position
                              
                              Year
                              
                              Salary
                              
                              Bonus
                              
                              Stock
      Awards
                              
                              Option
      Awards
                              
                              Non-Equity
      Incentive Plan Compensation
                              
                              All
      Other Compensation
                              
                              TotalPaul
      Feldman, President
                              
                              2008
                              
                              175,000
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              14,591
                              
                              189,5912007
                              
                              175,000
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              175,000Martin
      Perry, VP of Sales
                              
                              2008
                              
                              141,829
                              
                              3,500
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              145,3292007
                              
                              131,256
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              131,256Paul
      Briggs, CFO
                              
                              2008
                              
                              107,613
                              
                              3,500
                              
                              0
                              
                              0
                              
                              0
                              
                              0
                              
                              111,1132007
                              
                              N/A
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              N/A












23







Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.





The
following  table sets forth
certain  information  as of March 31, 2009, with respect to
the number of shares of each class of voting stock  beneficially owned
by (i)  those  persons  known to us to be
the  owners  of more  than  five percent
of any such class of our voting stock, (ii) each of our directors of and (iii)
all of our directors and executive  officers as a
group.  Unless otherwise indicated, each of the listed persons
has sole voting and investment power with respect to the shares beneficially
owned by such shareholder.








Name
      and Address of Beneficial Owner
                  
                  Amount
      of
                  
                  
                  Percentage
      ofBeneficial
                  
                  
                  BeneficialOwnership
                  
                  
                  OwnershipPaul
      Feldman (1) (3)*
                  
                  
                  525,725
                  
                  
                  
                  2.04
                  %Anthony
      Rand (1)*
                  
                  
                  125,334
                  
                  
                  
                  0.49
                  %Martin
      L. Perry (1)*
                  
                  
                  131,294
                  
                  
                  
                  0.51
                  %James
      J. Lindsay (1) *
                  
                  
                  52,975
                  
                  
                  
                  0.21
                  %Joseph
      Jordan (1) *
                  
                  
                  1,000
                  
                  
                  
                  0.00
                  %Raymond
      James Financial, Inc. (2)
                  
                  
                  13,149,334
                  
                  
                  
                  51.00
                  %Paul
      Briggs (3) *
                  
                  
                  8,000
                  
                  
                  
                  0.03
                  %Mark
      White (3) *
                  
                  
                  1,300
                  
                  
                  
                  0.00
                  %All
      Directors & Executive Officers as a Group (7 persons)
                  
                  
                  845,628
                  
                  
                  
                  3.28
                  %





*      c/o
Law Enforcement  Associates  Corporation,  2609
Discovery Dr, Suite 125, Raleigh,  North
Carolina 27616





(1)
                    Director
      of our company.(2)
                    The
      shares are directly owned by Sirchie Acquisition Corp., of which Raymond
      James Financial, Inc. owns 80%; the remaining 20% of Sirchie Acquisition
      Corp. is owned by John H. Carrington.(3)
                    Officer
      of our company.





















24








Item 13. Certain Relationships and Related
Transactions.





See Note
12 below in NOTES TO CONSOLIDATED FINANCIAL STATEMENTS section.





Item 14. Principal Accountant Fees and Services.





Audit
Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the
years ended December 31, 2008 and 2007, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q and Form
10-QSB during the fiscal years were approximately $61,133 and $58,750
respectively.





Audit
Related Fees.  For the years ended December 31, 2008 and 2007, the
Company incurred fees to auditors of
$0 and $0 for audit related fees,
respectively.





All Other
Fees.  Tax fees of $12,129 were billed by our auditors for
services rendered to the Company.





The Board
of Directors has considered whether the provision of non-audit services is
compatible with maintaining the principal accountant's
independence.









25






PART IV





Item 15. Exhibits and Financial Statement
Schedules.





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 CORPORATIONBy:
                /s/ Paul
      FeldmanPaul
      Feldman, President and Chief Executive OfficerDated:
      March 23, 2009







In accordance with
the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
and on the dates indicated.




Signature
            
            Title
            
            Date/s/
      Paul Feldman
            
            President,
      Director and Chief Executive Officer
            
            March
      23, 2009Paul
      Feldman/s/
      Paul Briggs
            
            Chief
      Financial Officer
            
            March
      23, 2009Paul
      Briggs/s/
      Martin L. Perry
            
            Director
            
            March
      23, 2009Martin
      Perry/s/
      James Lindsey
            
            Director
            
            March
      23, 2009James
      Lindsey/s/
      Anthony Rand
            
            Director
            
            March
      23, 2009Anthony
      Rand/s/ Joseph
      Jordan
            
            Director
            
            March
      23, 2009Joseph
      Jordan






26













Report of Independent
Registered Public Accounting Firm











Board of
Directors and Stockholders


Law
Enforcement Associates Corporation


Raleigh,
North Carolina








We have
audited the accompanying consolidated balance sheet of Law Enforcement
Associates Corporation as of December 31, 2008, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the year ended
December 31, 2008.  Law Enforcement Associates Corporation’s
management is responsible for these consolidated financial
statements.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.  The
consolidated financial statements of Law Enforcement Associates Corporation as
of December 31, 2007, were audited by other auditors whose report dated April
18, 2008, expressed an unqualified opinion on those statements.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Corporation is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control over
financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.  We believe our audit provides a reasonable basis for
our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Law Enforcement
Associates Corporation as of December 31, 2008, and the consolidated results of
its operations and its cash flows for the year ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 14 to the consolidated
financial statements, the Company has an 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. There is no assurance that the Company will be able to obtain
additional financing or capital on acceptable terms, if at all. If the Company
is unsuccessful in its attempts, management may be required to liquidate
available assets, restructure the Company or in the extreme event, cease
operations.  These conditions raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.











/s/Frost,
PLLC





Certified
Public Accountants








Little
Rock, Arkansas


March 19,
2009
















F-1













BAUM & COMPANY,
P.A.


Certified
Public Accountants


605
Lincoln Rd – Suite 210


Miami
Beach, Florida  33139








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders of


Law
Enforcement Associates Corporation








We have
audited the accompanying consolidated balance sheet of Law Enforcement
Associates Corporation as of December 31, 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the year ended
December 31, 2007.  Law Enforcement Associates Corporation’s
management is responsible for these consolidated financial
statements.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Corporation is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control over
financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.  We believe our audit provides a reasonable basis for
our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Law Enforcement
Associates Corporation as of December 31, 2007, and the consolidated results of
its operations and its cash flows for the year ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.





/s/ Baum
& Company, PA


Miami
Beach, Florida


April 18,
2008
















F-2













LAW
ENFORCEMENT ASSOCIATES CORPORATION


Consolidated
Balance Sheets


December
31, 2008 and December 31, 2007





2008
                
                
                2007AssetsCurrent
      assets:Cash
                
                $
                254,705
                
                
                $
                325,244Trade
      accounts receivable (net of allowance for doubtfulaccounts
      of $30,000 and $33,205 at December 31, 2008and
      2007, respectively)
                
                
                2,011,293
                
                
                
                713,067Inventories
                
                
                1,368,049
                
                
                
                1,256,346Prepaid
      expenses
                
                
                45,629
                
                
                
                38,187Deferred
      tax asset-current
                
                
                244,741
                
                
                
                769,338Total
      current assets
                
                
                3,924,417
                
                
                
                3,102,182Property
      and equipment, net
                
                
                170,027
                
                
                
                257,025Other
      assets:Intangibles,
      net
                
                
                2,174,564
                
                
                
                2,338,831Assets
      held for sale
                
                
                335,505
                
                
                
                544,711Deferred
      tax asset less current portion
                
                
                820,425
                
                
                
                296,147Total
      other assets
                
                
                3,330,494
                
                
                
                3,179,689Total
      assets
                
                $
                7,424,938
                
                
                $
                6,538,896




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









F-3












LAW
ENFORCEMENT ASSOCIATES CORPORATION


Consolidated
Balance Sheets (Continued)


December
31, 2008 and December 31, 2007






2008
                
                
                2007Liabilities
      and Stockholders' EquityCurrent
      liabilities:Trade
      accounts payable
                
                $
                331,451
                
                
                $
                593,515Line
      of credit
                
                
                1,038,809
                
                
                
                200,000Accrued
      expenses:Compensation
      and payroll taxes
                
                
                126,695
                
                
                
                120,304Profit
      sharing plan
                
                
                76,769
                
                
                
                61,796Warranty
      provision
                
                
                58,809
                
                
                
                59,911Other
      accrued expenses
                
                
                97,205
                
                
                
                70,322Deferred
      expenses
                
                
                104,628
                
                
                
                22,540Customer
      deposits
                
                
                30,540
                
                
                
                24,533Total
      current liabilities
                
                
                1,864,906
                
                
                
                1,152,921Total
      liabilities
                
                
                1,864,906
                
                
                
                1,152,921Commitments
      and contingenciesCommon
      stock, subject to possible redemption
                
                
                1,440,374
                
                
                
                1,338,1701,200,000
      shares, at redemption valueStockholders'
      equity:Common
      stock, $0.001 par value, 50,000,000 authorized,25,782,436 (including
      1,200,000 shares subject to redemption) issued andoutstanding
      at December 31, 2008, and at December 31, 2007
                
                
                25,782
                
                
                
                25,782Treasury
      stock at cost, 595 shares of common stock held bythe
      Company
                
                
                (625)
                
                
                
                (625)Paid
      in capital in excess of par
                
                
                4,995,595
                
                
                
                4,995,595Retained
      earnings/(accumulated deficit)
                
                
                (901,094)
                
                
                
                (972,947)Total
      stockholders' equity
                
                
                4,119,658
                
                
                
                4,047,805Total
      liabilities and stockholders' equity
                
                $
                7,424,938
                
                
                $
                6,538,896






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







F-4









LAW
ENFORCEMENT ASSOCIATES CORPORATION


Consolidated
Statement of Operations


For the
Years Ended December 31, 2008 and 2007




2008
                
                
                2007Net
      sales
                
                $
                9,246,170
                
                
                $
                6,666,479Cost
      of sales
                
                
                6,193,180
                
                
                
                4,681,694Gross
      profit
                
                
                3,052,990
                
                
                
                1,984,785Research
      and development
                
                
                81,327
                
                
                
                227,595Operating
      expenses
                
                
                2,728,271
                
                
                
                3,406,537Total
      operating expenses
                
                
                2,809,598
                
                
                
                3,634,132Net
      income (loss) before other income (expense) andincome
      taxes
                
                
                243,392
                
                
                
                (1,649,347)Other
      income (expense):Loss
      on sale of assets
                
                
                (43,666)
                
                
                
                0Other
      income
                
                
                14,234
                
                
                
                1,431Interest
      income
                
                
                1,507
                
                
                
                11,029Interest
      expense
                
                
                (143,295)
                
                
                
                (2,117)Total
      other income (expense)
                
                
                (171,220)
                
                
                
                10,343Net
      income (loss) before income taxes
                
                
                72,172
                
                
                
                (1,639,004)Income
      tax (expense) benefit
                
                
                (319)
                
                
                
                629,258Net
      income (loss)
                
                $
                71,853
                
                
                $
                (1,009,746)Net
      income (loss) per weighted average share, basic and
diluted
                
                $
                0.00
                
                
                $
                (0.04)Weighted
      average number of shares, basic and diluted
                
                
                25,782,436
                
                
                
                25,423,365




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










F-5















LAW
ENFORCEMENT ASSOCIATES CORPORATION


Consolidated
Statement of Stockholders' Equity


December
31, 2008





Paid
      in Capital
                  
                  
                  Retained
      Earnings/ Capital
                  
                  
                  TotalNumber
      of
                  
                  
                  Common
                  
                  
                  Treasury
                  
                  
                  in
      Excess
                  
                  
                  (accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Stock
                  
                  
                  Stock
                  
                  
                  of
      Par
                  
                  
                  deficit)
                  
                  
                  EquityDecember
      31, 2006
                  
                  
                  25,252,436
                  
                  
                  
                  25,252
                  
                  
                  $
                  (625)
                  
                  
                  $
                  5,314,112
                  
                  
                  $
                  58,091
                  
                  
                  $
                  5,396,830Common
      stock issued for services
                  
                  
                  130,000
                  
                  
                  
                  130
                  
                  
                  
                  -
                  
                  
                  
                  84,110
                  
                  
                  
                  -
                  
                  
                  
                  84,240Common
      stock issued for AVS assets
                  
                  
                  375,000
                  
                  
                  
                  375
                  
                  
                  
                  -
                  
                  
                  
                  369,375
                  
                  
                  
                  -
                  
                  
                  
                  369,750Common
      stock issued to settle lawsuit
                  
                  
                  25,000
                  
                  
                  
                  25
                  
                  
                  
                  -
                  
                  
                  
                  24,625
                  
                  
                  
                  -
                  
                  
                  
                  24,650Common
      stock reclassified from redeemable common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  (796,627)
                  
                  
                  
                  
                  
                  
                  
                  (796,627)Change
      in redemption value of redeemablecommon
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  (21,292)
                  
                  
                  
                  (21,292)Net
      loss - year ended Dec. 31 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,009,746)
                  
                  
                  
                  (1,009,746)December
      31, 2007
                  
                  
                  25,782,436
                  
                  
                  
                  25,782
                  
                  
                  $
                  (625)
                  
                  
                  $
                  4,995,595
                  
                  
                  $
                  (972,947)
                  
                  
                  $
                  4,047,805Net
      income - year ended Dec. 31 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  71,853
                  
                  
                  $
                  71,853December
      31, 2008
                  
                  
                  25,782,436
                  
                  
                  
                  25,782
                  
                  
                  $
                  (625)
                  
                  
                  $
                  4,995,595
                  
                  
                  $
                  (901,094)
                  
                  
                  $
                  4,119,658









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






F-6








LAW
ENFORCEMENT ASSOCIATES CORPORATION


Consolidated
Statement of Cash Flows


Years
Ended December 31, 2008 and 2007




2008
                
                
                2007Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                71,853
                
                
                $
                (1,009,746)Adjustments
      to reconcile net income (loss) to net cash usedby
      operations:Depreciation
      and amortization
                
                
                294,012
                
                
                
                257,802Impairment
      charge of EDW patents
                
                
                150,000
                
                
                
                268,290Write-off
      patents-in-process
                
                
                -
                
                
                
                80,079Put
      option discount expense
                
                
                102,204
                
                
                
                -Deferred
      taxes
                
                
                319
                
                
                
                (629,258)Loss
      on sale of assets
                
                
                43,666
                
                
                
                -Change
      in allowance for doubtful accounts
                
                
                (3,205)
                
                
                
                13,205Change
      in inventory reserves
                
                
                (104,131)
                
                
                
                199,864Common
      stock issued for services and lawsuit
                
                
                0
                
                
                
                108,890(Increase)
      decrease in assets:Trade
      accounts receivable
                
                
                (1,295,021)
                
                
                
                258,724Inventories
                
                
                (7,572)
                
                
                
                (214,652)Refundable
      income taxes
                
                
                0
                
                
                
                62,264Prepaid
      insurance and other assets
                
                
                (7,442)
                
                
                
                (17,682)Increase
      (decrease) in liabilities:Trade
      accounts payable
                
                
                (262,064)
                
                
                
                215,962Accrued
      expenses
                
                
                129,233
                
                
                
                157,320Customer
      deposits
                
                
                6,007
                
                
                
                (11,556)Net
      cash used in operating activities
                
                
                (882,141)
                
                
                
                (260,494)Cash
      flows from investing activities:Payments
      for deferred charges
                
                
                -
                
                
                
                413Proceeds
      from sale of property and equipment
                
                
                6,000
                
                
                
                -Capital
      expenditures
                
                
                (33,207)
                
                
                
                (26,799)Net
      cash used in investing activities
                
                
                (27,207)
                
                
                
                (26,386)Cash
      flows financing activities:Factor
      line of credit
                
                
                1,038,809
                
                
                
                0Net
      proceeds (repayments) under line of credit agreement
                
                
                (200,000)
                
                
                
                200,000Payments
      on long-term debt
                
                
                0
                
                
                
                (40,000)Net
      cash provided by financing activities
                
                
                838,809
                
                
                
                160,000Net
      decrease in cash
                
                
                (70,539)
                
                
                
                (126,880)Cash
      at beginning of the year
                
                
                325,244
                
                
                
                452,124Cash
      at end of the year
                
                $
                254,705
                
                
                $
                325,244Supplemental
      disclosure of cash flow information:Cash
      paid for interest expense
                
                $
                15,170
                
                
                $
                2,117Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -155,000
      shares of common stock issued for services and lawsuit
                
                $
                0
                
                
                $
                108,890





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









F-7








NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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 and vehicle inspection equipment. Products are
used by law enforcement agencies, the military, security and correctional
organizations.





Principles
of Consolidation





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





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 December 31, 2008
and 2007.





Fair
Value of Financial Instruments





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





Trade
Accounts Receivable





Trade
accounts receivable are carried at their estimated collectible amount. Trade
credit is generally extended on a short-term basis; 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.










F-8







1.
            SIGNIFICANT
      ACCOUNTING POLICIES (Continued)





Property
and Equipment





Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations 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.  Based upon management’s assessment an impairment
charge related to certain patents of $150,000 and $268,290 was recorded during
the years ended December 31, 2008 and 2007 and is included in operating expenses
in the accompanying consolidated statement of operations.





Intangible
assets





Finite-lived
intangible assets consist of patents and purchased
intangibles.  Patent cost include 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
consisting 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.





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.










F-9








1.
            SIGNIFICANT
      ACCOUNTING POLICIES (Continued)





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 December 31, 2008
and 2007, accrued product warranties totaled $58,809 and $59,911, respectively
and are reported as warranty provision in the accompanying consolidated balance
sheet.





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 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 December 31,
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 years
ended December 31, 2008 and 2007, advertising costs were $76,240 and $82,312,
respectively. All advertising costs are included in operating expenses in the
accompanying consolidated statement of operations.





Research
and Development





The
Company expenses research and development costs as incurred. The Company
incurred product development expense of $81,327 and $227,595 for the years ended
December 31, 2008 and 2007, respectively.





Use of
Estimates





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





Reclassifications





Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or retained earnings.








F-10







1.
            SIGNIFICANT
      ACCOUNTING POLICIES (Continued)





New
accounting pronouncements





The
Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements.”  This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(“GAAP”), and expands disclosures about fair value measurements.  The
implementation of this pronouncement did not have an impact on the consolidated
financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS
No.115.”  This statement provides companies an option to measure, at
specified election dates, many financial instruments and certain other items at
fair value that are not currently measured at fair value.   A
company that adopts SFAS No. 159 will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date.  This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities.  SFAS No. 159 became effective January 1,
2008 and the Company has elected not to measure any financial instruments or
certain other items at fair value.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
(“ARB”) No. 51.”  The objective of SFAS No. 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary.  This
statement applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations.  SFAS No. 160 amends
ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  It also amends certain of ARB No. 51’s consolidation
procedures for consistency with the requirements of SFAS No. 141
(R).  This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Earlier adoption is prohibited.  The effective date
of this statement is the same as that of the related SFAS No.
141R.  This statement shall be applied prospectively as of the
beginning of the fiscal year in which this statement is initially applied,
except for the presentation and disclosure requirements.  The adoption
of SFAS No. 160 is not expected to have a material impact on the Company’s
consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133.”  This statement
changes the disclosure requirements for derivative instruments and hedging
activities.  SFAS No. 161 requires enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows.  This statement is effective for consolidated financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.  The Company has not yet determined the effect that the
application of SFAS No. 161 will have on the disclosures to the consolidated
financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the “GAAP
hierarchy”).  The hierarchical guidance provided by SFAS No. 162 did
not have a significant impact on the Company’s consolidated financial
statements.










F-11







2.
            INVENTORIES





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




2008
                  
                  
                  2007Raw
      Materials
                  
                  $
                  615,866
                  
                  
                  $
                  625,247Work-in-process
                  
                  
                  64,253
                  
                  
                  
                  90,098Finished
      goods
                  
                  
                  687,930
                  
                  
                  
                  541,001$
                  1,368,049
                  
                  
                  $
                  1,256,346





Reserves
for slow moving and obsolete inventory on a FIFO basis totaled $95,733 and
$199,864 as of December 31, 2008 and 2007, respectively.





3.
            PROPERTY
      AND EQUIPMENT





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




Useful
      Life
                  
                  2008
                  
                  
                  2007Office
      furniture & equipment
                  5
      to 7 years
                  
                  $
                  98,347
                  
                  
                  $
                  107,624Leasehold
      improvements
                  7
      years
                  
                  
                  14,218
                  
                  
                  
                  5,139Vehicles
                  5
      years
                  
                  
                  101,127
                  
                  
                  
                  101,129Machinery
      & equipment
                  5
      to 7 years
                  
                  
                  291,420
                  
                  
                  
                  459,031505,112
                  
                  
                  
                  672,923Less
      accumulated depreciation
                  
                  
                  
                  335,085
                  
                  
                  
                  415,898$
                  170,027
                  
                  
                  $
                  257,025




Depreciation
expense for the years ended December 31, 2008 and 2007 was $70,540 and $78,959,
respectively.





4.
            INTANGIBLE
      ASSETS





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




Estimated
      Life
                    
                    
                    2008
                    
                    
                    
                    2007Trade
      name
                    25
      years
                    
                    
                    1,400,000
                    
                    
                    
                    1,400,000Drawings/designs
                    10
      years
                    
                    
                    411,000
                    
                    
                    
                    411,000AVS
      Marketing List
                    12
      years
                    
                    
                    470,000
                    
                    
                    
                    470,000AVS
      Engineered Drawings
                    15
      years
                    
                    
                    230,000
                    
                    
                    
                    230,000AVS
      Trade Name
                    15
      years
                    
                    
                    190,000
                    
                    
                    
                    190,0002,701,000
                    
                    
                    
                    2,701,000Less
      accumulated amortization
                    
                    
                    
                    526,436
                    
                    
                    
                    362,169Total
      intangibles, net
                    
                    $
                    2,174,564
                    
                    
                    $
                    2,338,831





Amortization
expense for the years ended December 31, 2008 and 2007 was $223,472 and
$178,843, respectively. Estimated future amortization expense is as follows at
December 31, 2008:




Year
                  
                  Amount2009
                  
                  $
                  164,2672010
                  
                  
                  164,2672011
                  
                  
                  164,2672012
                  
                  
                  164,2672013
                  
                  
                  164,267Future
      Years
                  
                  
                  1,353,229$
                  2,174,564










F-12







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.
            LINE
      OF CREDIT AND NOTE PAYABLE





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 $1,038,809 at
December 31, 2008. The Company recognized factoring fees of $25,921 for the year
ended December 31, 2008.





The
Company had a $750,000 line of credit with a bank, which incurred interest at
LIBOR plus 3%.  Substantially all the assets of the Company were
pledged to secure the line. The line required maintenance of a minimum net worth
of $3.5 million and matured in June 2008. At December 31, 2007 the Company had
$200,000 outstanding on the line of credit. During 2008, the Company paid the
outstanding balance and terminated the agreement with the bank.





In
September 2004, the Company issued a $340,000 note payable as part of the AID
asset purchase. The note required 34 monthly payments of $10,000 and had a
deferred interest rate of 5%. The note balance as of December 31, 2006 was
$40,000 and was paid in full during the year ended December 31,
2007.







F-13







7.
            INCOME
      TAXES





The tax
effects of temporary differences and carry-forwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following at December 31, 2008 and 2007:





2008
                  
                  
                  2007Deferred
      tax assets:Inventory
                  
                  $
                  86,766
                  
                  
                  $
                  36,646Allowance
      for doubtful accounts
                  
                  
                  11,566
                  
                  
                  
                  12,273Accrued
      wages
                  
                  
                  8,074
                  
                  
                  
                  1,416Warranty
      provision
                  
                  
                  22,673
                  
                  
                  
                  22,144Intangible
      assets
                  
                  
                  450,724
                  
                  
                  
                  386,680Federal
      net operating loss of $1,543,991,Expiring
      beginning in 2026
                  
                  
                  524,957
                  
                  
                  
                  632,749State
      net economic loss of $1,182,838,Expiring
      beginning in 2019
                  
                  
                  53,866
                  
                  
                  
                  64,1101,158,626
                  
                  
                  
                  1,156,018Deferred
      tax (liabilities):Property
      and equipment
                  
                  
                  (27,490)
                  
                  
                  
                  (41,086)Trade
      name (AID)
                  
                  
                  (65,970)
                  
                  
                  
                  (49,447)(93,460)
                  
                  
                  
                  (90,533)Deferred
      tax asset (liability), net
                  
                  $
                  1,065,166
                  
                  
                  $
                  1,065,485




Deferred
taxes have been classified on the consolidated balance sheet as
follows:




2008
                  
                  
                  2007Current
      assets
                  
                  $
                  244,741
                  
                  
                  $
                  769,338Non-current
      assets
                  
                  
                  820,425
                  
                  
                  
                  296,147$
                  1,065,166
                  
                  
                  $
                  1,065,485





The
expense (benefit) of income taxes consists of the following at December 31, 2008
and 2007:




2008
                  
                  
                  2007Current:Federal
                  
                  $
                  -
                  
                  
                  $
                  -State
                  
                  
                  -
                  
                  
                  
                  -Deferred
                  
                  
                  319
                  
                  
                  
                  (629,258)Total
                  
                  $
                  319
                  
                  
                  $
                  (629,258)




A
reconciliation of the statutory federal income tax rate and effective rate is as
follows at December 31:





2008
                  
                  
                  2007Statutory
      federal income tax rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %State
      income tax – net of federal benefit
                  
                  
                  3
                  %
                  
                  
                  3
                  %Other
                  
                  
                  (37)
                  %
                  
                  
                  1
                  %Effective
      tax rate
                  
                  
                  0
                  %
                  
                  
                  38
                  %




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.










F-14






8.
            STOCKHOLDERS’
      EQUITY TRANSACTIONS





On May 3,
2007, the Company issued 130,000 shares of restricted common stock valued at
$84,240 to an entity for services.





On
October 16, 2007, the Company completed the acquisition of 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. The purchase price for the assets acquired was 375,000
shares of the Company’s restricted common stock plus the cost of the usable
inventory. In addition, 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.  In addition, the Company issued an additional 25,000 shares of
its common stock to settle a lawsuit which the Wortley’s had filed against the
Company. Subsequently in January 2008, the Company purchased for cash
approximately $129,000 in usable inventory.





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. The
Plan provides for a discretionary employer match of up to 6% of the employees’
compensation. Employer discretionary matches totaled $76,769 and $61,796 for the
years ended December 31, 2008 and 2007, respectively. Management made the
decision not to match employee contributions during 2007. 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 made no
profit sharing contributions for the years ended December 31, 2008 and 2007,
respectively.





10.      RELATED
PARTY TRANSACTIONS





For the
year ended December 31, 2008 and 2007, the Company paid $1,038,957 and $343,568,
respectively, to Sirchie for purchases and received $2,045 from Sirchie for
sales. At December 31, 2008 and 2007, the Company had $2,462 and $1,847,
respectively, in accounts payable due to Sirchie. During 2007, the Company
entered into an agreement to pay consulting fees to a major stockholder of both
Sirchie and the Company. Such fees were $5,000 for the year ended December 31,
2007. This agreement was terminated in 2007.





The
Company formerly leased its office and manufacturing facility from Sirchie
Finger Print Laboratories, Inc.  Rent expense incurred under this
lease for the years ended December 31, 2008 and 2007 was $32,237 and $177,950,
respectively. This lease was terminated in 2008.













F-15








11.
            COMMITMENTS
      AND CONTINGENCIES





Lease
Commitments





The
Company leased its office and manufacturing facility from Sirchie Finger Print
Laboratories, Inc. (Sirchie).  Rent expense incurred under this lease
for the years ended December 31, 2008 and 2007 was $32,237 and $177,950,
respectively. The above lease was terminated by the Company in
2008.





On
December 15, 2007, the Company entered into a lease with Zabarsky Investments
Ltd. L.P. The Company currently leases approximately 6,000 square feet of space
for its surveillance vehicle division at approximately $4,750 per month. The
lease term is 60 months. Rent expense incurred under this lease for the year
ended December 31, 2008 was $57,000.





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
new Raleigh, North Carolina headquarters at approximately $7,900 per month. The
lease term is 60 months. Rent expense incurred under this lease for the year
ended December 31, 2008 was $87,083.





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 December 31, 2008:




Year
      ending December 31:2009
                  
                  $
                  160,4152010
                  
                  
                  160,4152011
                  
                  
                  160,4152012
                  
                  
                  153,7822013
                  
                  
                  8,631Later
      years
                  
                  
                  0Total
      minimum payments required
                  
                  $
                  643,658




Royalty
Commitments





In August
2006, the Company obtained a license to use certain marks of a licensor in
connection with products that the Company sells. The agreement is set to expire
on April 30, 2009 and calls for royalties based on the number of products sold.
The agreement further specifies that the Company is obligated to pay the
licensor minimum guaranteed royalties as follows at December 31,
2008:




2009
                  
                  
                  26,667Total
                  
                  $
                  26,667





Royalty
expense for the year ended December 31, 2008 and 2007 was $119,112 and $26,612,
respectively.










F-16







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 (see Note 8).
Additionally, the Company shall pay this entity a monthly fee of $5,000 until
the agreement is terminated. For the twelve months ended December 31, 2008 and
2007, the Company incurred $36,965 and $40,000 in consulting fees from this
entity, respectively.




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 is for one year commencing on August 1, 2007. The Company will pay a
monthly fee of $20,000 plus out-of-pocket costs until the agreement is
terminated. The agreement can be terminated by either party with 90 days advance
notice to the other party. For the twelve months ended December 31, 2008 and
2007, the Company incurred $74,741 and $103,760 in consulting fees from this
entity, respectively. 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.





The
Company places its cash in high credit quality financial institutions. At
December 31, 2008 and 2007 and at various times during the years, the Company
had $59,656 and $317,468, respectively, on deposit in excess of the Federal
Deposit Insurance Corporation insured limits.





For the
years ended December 31, 2008 and 2007, sales to one customer accounted for 15%
and 10% of total sales, respectively.





For the
year ended December 31, 2008, accounts receivable related to one customer
accounted for 71% of total accounts receivable, respectively.













F-17






13.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
carrying amounts of cash, accounts receivable, and accounts payable approximates
fair value due to the short-term maturities of these assets and liabilities. At
December 31, 2008, the carrying value of the Company’s factored line of credit
was deemed to approximate fair value given the relative short-term nature and
given applicable fair value considerations of the underlying collateral and
instrument with similar credit terms and quality.





The
Company has adopted SFAS No. 157, as amended by FASB Staff Position (“FSP”) SFAS
No. 157-2, which provides a framework for measuring fair value under GAAP. As
defined in SFAS No. 157, fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The Company utilizes
market data or assumptions that the Company believes market participants would
use in pricing the asset or liability, including assumptions about risk and the
risks inherent in the inputs to the valuation technique.





This
standard is now the single source in GAAP for the definition of fair value,
except for the fair value of leased property as defined in SFAS No. 13. SFAS No.
157 establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from independent
sources (observable inputs) and (2) an entity’s own assumptions about market
participant assumptions developed based on the best information available in the
circumstances (unobservable inputs).  The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3).  The three
levels of the fair value hierarchy under SFAS No. 157 are described
below:





·
            Level 1 Inputs –
      Unadjusted quoted prices in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date.


·
            Level 2 Inputs – Inputs
      other than quoted prices included in Level 1 Inputs that are observable
      for the asset or liability, either directly or
      indirectly.  These might include quoted prices for similar
      assets or liabilities in active markets, quoted prices for identical or
      similar assets or liabilities in markets that are not active, inputs other
      than quoted prices that are observable for the asset or liability (such as
      interest rates, volatilities, prepayment speeds, credit risks, etc.) or
      inputs that are derived principally from or corroborated by market data by
      correlation or other means.


·
            Level 3 Inputs –
      Unobservable inputs for determining the fair values of assets or
      liabilities that reflect an entity’s own assumptions about the assumptions
      that market participants would use in pricing the assets or
      liabilities.





In
instances in which multiple levels of inputs are used to measure fair value,
hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety.  The Company’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.





Fair Value Measurements as of December 31,
      2008Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalAssetsPatents
      held for sale
                      
                      $
                      -
                      
                      
                      $
                      335,505
                      
                      
                      $
                      -
                      
                      
                      $
                      335,505


The
Company primarily applies the market approach for recurring fair value
measurements and endeavors to utilize the best available information.
Accordingly, the Company utilizes valuation techniques that maximize the use of
observable inputs, such as forward rates, interest rates, the Company’s credit
risk and counterparties’ credit risks, and minimize the use of unobservable
inputs. The Company is able to classify fair value balances based on the
observability of those inputs.  Commodity derivatives, foreign
currency forward exchange contracts, and cross-currency interest rate swaps are
classified as Level 2 fair value based upon pricing models using market-based
inputs. Model inputs can be verified and valuation techniques do not involve
significant management judgment.





FSP SFAS
157-2, issued in February 2008, delayed until January 1, 2009 the effective date
of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are
measured on a nonrecurring basis. The Company’s nonfinancial assets consist
principally of property, plant and equipment, goodwill, and other intangible
assets associated with acquired businesses. For these assets, measurement at
fair value in periods subsequent to their initial recognition will be applicable
if one or more of these assets are determined to be impaired. When and if
recognition of these assets at their fair value is necessary, such measurements
would be determined utilizing principally Level 3 Inputs.







F-18





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. There is no assurance
that the Company will be able to obtain additional financing or capital on
acceptable terms, if at all. If the Company is unsuccessful in its attempts,
management may be required to liquidate available assets, restructure the
company or in the extreme event, cease operations. These consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.