UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly period ended December 31, 2008





OR


o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
file number 001-31747





UNIVERSAL
SECURITY INSTRUMENTS, INC.





(Exact
name of registrant as specified in its charter)





Maryland
            52-0898545(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)11407
      Cronhill Drive, Suites A-DOwings
      Mills, Maryland
            21117(Address
      of principal executive offices)
            (Zip
      Code)Registrant’s
      telephone number, including area code: (410)
      363-3000





7-A
Gwynns Mill Court, Owings Mills, Maryland 21117


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





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





Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  Large
accelerated filer oAccelerated filer oNon-Accelerated Filer
oSmaller 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 o No x





At
February 6, 2008, the number of shares outstanding of the registrant’s common
stock was 2,425,142.













TABLE OF
CONTENTS





PagePart
      I - Financial InformationItem 1.
                                Consolidated
      Financial Statements (unaudited):Consolidated
      Balance Sheets at December 31, 2008 and March 31, 2008
                                3Consolidated
      Statements of Earnings for the Three Months Ended December 31, 2008 and
      2007
                                4Consolidated
      Statements of Earnings for the Nine Months Ended December 31, 2008 and
      2007
                                5Consolidated
      Statements of Cash Flows for the Nine Months Ended December 31, 2008 and
      2007
                                6Notes
      to Consolidated Financial Statements
                                7Item 2.
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                12Item 3.
                                Quantitative
      and Qualitative Disclosure About Market Risk
                                17Item 4.
                                Controls
      and Procedures
                                17Part
      II - Other InformationItem 1.
                                Legal
      Proceedings
                                18Item 2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                19Item 4.
                                Submission
      of Matters to a Vote of Security Holders
                                19Item 5.
                                Other
      Information
                                19Item 6.
                                Exhibits
                                20Signatures
                                21









PART
I - FINANCIAL INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





December 31, 2008
                
                
                March 31, 2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                180,755
                
                
                $
                3,863,784Accounts
      receivable:Trade
      less allowance for doubtful accounts of $95,927 and $15,000 at December
      31, 2008 and March 31, 2008
                
                
                1,044,168
                
                
                
                146,022Recoverable
      taxes and other receivables
                
                
                353,187
                
                
                
                282,083Receivable
      from Hong Kong Joint Venture
                
                
                116,938
                
                
                
                115,6561,514,293
                
                
                
                543,761Amount
      due from factor
                
                
                3,591,315
                
                
                
                5,600,408Inventories,
      net of allowance for obsolete inventory of $204,309 and $40,000 at
      December 31, 2008 and March 31, 2008, respectively
                
                
                9,378,114
                
                
                
                5,357,488Prepaid
      expenses
                
                
                156,947
                
                
                
                206,197Assets
      held in receivership
                
                
                219,402
                
                
                
                2,850,731TOTAL
      CURRENT ASSETS
                
                
                15,040,826
                
                
                
                18,422,369DEFERRED
      TAX ASSET
                
                
                2,200,690
                
                
                
                1,914,136INVESTMENT
      IN HONG KONG JOINT VENTURE
                
                
                10,688,904
                
                
                
                9,986,579PROPERTY
      AND EQUIPMENT – NET
                
                
                130,530
                
                
                
                130,347OTHER
      ASSETS
                
                
                16,252
                
                
                
                15,486TOTAL
      ASSETS
                
                $
                28,077,202
                
                
                $
                30,468,917LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAmount
      due to factor
                
                $
                101,911
                
                
                $
                0Accounts
      payable
                
                
                823,968
                
                
                
                777,342Hong
      Kong Joint Venture accounts payable
                
                
                1,924,668
                
                
                
                1,687,950Accrued
      liabilities:Litigation
      reserve
                
                
                401,592
                
                
                
                401,592Payroll
      and employee benefits
                
                
                324,830
                
                
                
                158,057Commissions
      and other
                
                
                166,998
                
                
                
                105,431Liabilities
      held in receivership
                
                
                219,402
                
                
                
                7,823,450TOTAL
      CURRENT LIABILITIES
                
                
                3,963,369
                
                
                
                10,953,822Long-term
      liability  – other
                
                
                95,324
                
                
                
                91,160COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value per share; authorized 20,000,000 shares; issued and
      outstanding 2,443,292 shares at December 31, 2008 and 2,487,867 shares at
      March 31, 2008
                
                
                24,448
                
                
                
                24,879Additional
      paid-in capital
                
                
                13,316,830
                
                
                
                13,453,378Retained
      earnings
                
                
                10,677,231
                
                
                
                5,890,023Other
      comprehensive income
                
                
                -
                
                
                
                55,655TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                24,018,509
                
                
                
                19,423,935TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                
                $
                28,077,202
                
                
                $
                30,468,917





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




3




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





Three Months Ended December 31,2008
                
                
                2007Net
      sales
                
                $
                5,595,049
                
                
                $
                7,776,986Cost
      of goods sold – acquired from Joint Venture
                
                
                4,222,264
                
                
                
                4,762,666Cost
      of goods sold – other
                
                
                35,000
                
                
                
                803,224GROSS
      PROFIT
                
                
                1,337,785
                
                
                
                2,211,096Research
      and development expense
                
                
                107,632
                
                
                
                94,144Selling,
      general and administrative expense
                
                
                1,177,776
                
                
                
                1,569,765Operating
      income
                
                
                52,377
                
                
                
                547,187Other
      income (expense):Interest
      income
                
                
                -
                
                
                
                18,370Interest
      expense
                
                
                (6,967
                )
                
                
                -INCOME
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                45,410
                
                
                
                565.557Equity
      in earnings of Joint Venture
                
                
                458,745
                
                
                
                688,017Income
      from continuing operations before income taxes
                
                
                504,155
                
                
                
                1,253,574Provision
      for income tax expense
                
                
                211,642
                
                
                
                87,757INCOME
      FROM CONTINUING OPERATIONS
                
                
                292,513
                
                
                
                1,165,817Discontinued
      operations:Loss
      from operations of the discontinued Canadian subsidiary
                
                
                -
                
                
                
                (2,744,256
                )Income
      tax expense – discontinued operations
                
                
                -
                
                
                
                57,350Loss
      from discontinued operations
                
                
                -
                
                
                
                (2,801,606
                )NET
      INCOME (LOSS)
                
                $
                292,513
                
                
                $
                (1,635,789
                )Income
      (loss) per share:Basic
      – from continuing operations
                
                $
                0.12
                
                
                $
                .47Basic
      – from discontinued operations
                
                $
                0.00
                
                
                $
                (1.13
                )Basic
      – net income (loss)
                
                $
                0.12
                
                
                $
                (0.66
                )Diluted
      – from continuing operations
                
                $
                0.12
                
                
                $
                0.47Diluted
      – from discontinued operations
                
                $
                0.00
                
                
                $
                (1.13
                )Diluted
      – net income (loss)
                
                $
                0.12
                
                
                $
                (0.66
                )Shares
      used in computing net income per share:Basic
                
                
                2,467,028
                
                
                
                2,489,132Diluted
                
                
                2,467,028
                
                
                
                2,489,132





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




4




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





Nine Months Ended December 312008
                
                
                2007Net
      sales
                
                $
                20,169,229
                
                
                $
                27,152,181Cost
      of goods sold - acquired from Joint Venture
                
                
                15,322,425
                
                
                
                15,209,299Cost
      of goods – other
                
                
                40,680
                
                
                
                5,067,583GROSS
      PROFIT
                
                
                4,806,124
                
                
                
                6,875,299Research
      and development expense
                
                
                279,050
                
                
                
                254,811Selling,
      general and administrative expense
                
                
                4,071,000
                
                
                
                4,645,371Operating
      income
                
                
                456,074
                
                
                
                1,975,117Other
      income (expense):Interest
      income
                
                
                41,876
                
                
                
                18,370Interest
      expense
                
                
                (33,267
                )
                
                
                (70,861
                )INCOME
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                464,683
                
                
                
                1,922,626Equity
      in earnings of Joint Venture
                
                
                1,351,707
                
                
                
                1,878,733Income
      from continuing operations before income taxes
                
                
                1,816,390
                
                
                
                3,801,359Provision
      for income tax expense
                
                
                410,437
                
                
                
                625,633INCOME
      FROM CONTINUING OPERATIONS
                
                
                1,405,953
                
                
                
                3,175,726Discontinued
      operations:Income
      (loss) from operations of the discontinued Canadian
    subsidiary
                
                
                2,415,382
                
                
                
                (3,645,023
                )Income
      tax expense (benefit) expense – discontinued operations
                
                
                (965,872
                )
                
                
                57,350Income
      (loss) from discontinued operations
                
                
                3,381,254
                
                
                
                (3,702,373
                )NET
      INCOME (LOSS)
                
                $
                4,787,207
                
                
                $
                (526,647
                )Income
      (loss) per share:Basic
      – from continuing operations
                
                $
                0.57
                
                
                $
                1.28Basic
      – from discontinued operations
                
                $
                1.36
                
                
                $
                (1.49
                )Basic
      – net income (loss)
                
                $
                1.93
                
                
                $
                (0.21
                )Diluted
      – from continuing operations
                
                $
                0.57
                
                
                $
                1.26Diluted
      – from discontinued operations
                
                $
                1.36
                
                
                $
                (1.47
                )Diluted
      – net income (loss)
                
                $
                1.93
                
                
                $
                (0.21
                )Shares
      used in computing net income per share:Basic
                
                
                2,480,330
                
                
                
                2,481,802Diluted
                
                
                2,480,330
                
                
                
                2,523,316





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




5




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended December,2008
                  
                  
                  2007OPERATING
      ACTIVITIESNet
      income (loss)
                  
                  $
                  4,787,208
                  
                  
                  $
                  (526,647
                  )Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Operations
      of discontinued subsidiary
                  
                  
                  (3,428,897
                  )
                  
                  
                  1,219,658Depreciation
      and amortization
                  
                  
                  33,936
                  
                  
                  
                  31,239Earnings
      of the Joint Venture
                  
                  
                  (1,351,707
                  )
                  
                  
                  (1,878,733
                  )Changes
      in operating assets and liabilities:Decrease
      in accounts receivable and amounts due from factor
                  
                  
                  1,038,561
                  
                  
                  
                  2,184,654(Increase)
      decrease in inventories and prepaid expenses
                  
                  
                  (3,971,376
                  )
                  
                  
                  3,433,900Increase
      (decrease) in accounts payable and accrued expenses
                  
                  
                  511,684
                  
                  
                  
                  (1,463,529
                  )(Increase)
      decrease in deferred taxes and other assets
                  
                  
                  (290,076
                  )
                  
                  
                  122,004NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                  
                  
                  (2,670,667
                  )
                  
                  
                  3,122,546INVESTING
      ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  (34,119
                  )
                  
                  
                  (23,801
                  )Activity
      of discontinued operation
                  
                  
                  2,590,722
                  
                  
                  
                  (1,906,796
                  )Dividends
      received from Joint Venture
                  
                  
                  649,383
                  
                  
                  
                  323,716NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
                  
                  
                  3,205,986
                  
                  
                  
                  (1,606,881
                  )FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                  
                  
                  (136,979
                  )
                  
                  
                  -Tax
      benefit from exercise of stock options
                  
                  
                  -
                  
                  
                  
                  92,926Borrowing
      from (payments to) bank
                  
                  
                  101,911
                  
                  
                  
                  (2,254,966
                  )Activities
      of discontinued subsidiary
                  
                  
                  (4,187,444
                  )
                  
                  
                  4,786,885Proceeds
      from issuance of common stock from exercise of employee stock
      options
                  
                  
                  -
                  
                  
                  
                  140,729Other
      long-term obligations
                  
                  
                  4,164
                  
                  
                  
                  86,000NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  (4,218,348
                  )
                  
                  
                  2,851,574Impact
      of foreign currency on cash
                  
                  
                  -
                  
                  
                  
                  (329,300
                  )(DECREASE)
      INCREASE IN CASH
                  
                  
                  (3,683,029
                  )
                  
                  
                  4,037,939Cash
      at beginning of period
                  
                  
                  3,863,784
                  
                  
                  
                  240,545CASH
      AT END OF PERIOD
                  
                  $
                  180,755
                  
                  
                  $
                  4,278,484Supplemental
      information:Interest paid
                  
                  $
                  33,267
                  
                  
                  $
                  298,226Income taxes
                  
                  $
                  -
                  
                  
                  $
                  200,000





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




6




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Statement
of Management





The
consolidated financial statements include the accounts of Universal Security
Instruments, Inc. (USI or the Company) and its majority owned
subsidiaries.  Significant inter-company accounts and transactions
have been eliminated in consolidation. In the opinion of the Company’s
management, the interim consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted.  The interim
consolidated financial statements should be read in conjunction with the
Company’s March 31, 2008 audited financial statements filed with the Securities
and Exchange Commission on Form 10-K.  The interim operating results
are not necessarily indicative of the operating results for the full fiscal
year.





Discontinued
Operations





In
October 2006, the Company formed 2113824 Ontario, Inc., an Ontario corporation,
as a wholly-owned subsidiary of the Company for the purpose of acquiring a
two-thirds interest in two Canadian corporations, International Conduits, Ltd.
(Icon) and Intube, Inc. (Intube).  Icon and Intube are based in
Toronto, Canada and manufacture and distribute electrical mechanical tubing
(EMT) steel conduit.  Icon also sold home safety products, primarily
purchased from the Company, in the Canadian market.  The primary
purpose of the Icon and Intube acquisition was to expand our product offerings
to include EMT steel conduit, and to provide this product and service to the
commercial construction market.  On April 2, 2007, Icon and Intube
were merged under the laws of Ontario to form one corporation.





In
September 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to
provide a term loan and a line of credit facility.  These loans were
secured by all of the assets of Icon and by the corporate guarantees of the
Company and our USI Electric subsidiary, as further explained
below.





As a
result of continuing losses at Icon, management undertook an evaluation of the
goodwill from our acquisition of Icon to determine whether the value of the
goodwill has been impaired in accordance with FAS No. 142, “Goodwill and Other Intangible
Assets”.  Based on that evaluation, management determined that
the value of the goodwill from our acquisition of Icon was impaired, and
recognized an impairment charge of US$1,926,696 for the goodwill as of December
31, 2007.  The impairment was recorded in discontinued operations in
the consolidated statements of operations for the year ended March 31,
2008.





At the
time of the investment in Icon, management projected that the established U.S.
sales network would allow us to increase sales of EMT to U.S.
customers.  Despite the Company’s efforts, Icon suffered continuing
losses, and the Company was not successful in increasing Icon’s sales in the
face of competition and a weakening U.S. dollar.  On January 29, 2008,
Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and
secured lender, that Icon was in default under the terms of the Credit Agreement
dated September 22, 2007 between Icon and CIT Canada and demanding immediate
payment of all of Icon’s obligations to CIT Canada under the Credit
Agreement.  On February 11, 2008, the assets of Icon were placed under
the direction of a court appointed receiver and the operations of Icon were
suspended.  As a result of the February 11, 2008 court appointed
receivership of Icon’s assets, we no longer controlled Icon as of that
date.  In accordance with Statement of Financial Accounting Standards
No. 94, the financial statements of Icon are not consolidated with the
financial statements of the Company.  Accordingly, the accounts and
operations of Icon in our consolidated financial statements are presented as
assets and liabilities held in receivership and as the results of discontinued
operations.





The
production machinery and equipment of Icon were recorded at their appraised net
realizable value of US$831,555 as of March 31, 2008.  During the
quarter ended June 30, 2008, the Company revised its estimate based on
communications with the auctioneer and appraisers and adjusted the carrying
value to approximately $1,020,000, resulting in a write-up of approximately
US$190,000 during the quarter ended June 30, 2008.  On July 16, 2008,
the receiver in possession of Icon’s assets held a public auction to liquidate
production machinery and equipment held for sale.  Auction proceeds,
net of auction fees, amounted to US$1,033,652.




7


On
September 22, 2008, Icon’s obligations were settled in the receivership action
by order of the Ontario Superior Court.  After complete liquidation of
the assets of Icon, the receiver held CAD$2,419,831
(US$2,314,326).  Of this amount, CAD$2,150,000 (US$2,056,260) was
distributed to CIT Canada in partial settlement of Icon’s secured obligations to
CIT Canada.  The remaining cash as of September 22, 2008 of
CAD$260,009 (US$258,066) is held by the receiver for other
obligations.  As a result of the settlement of Icon’s obligations, a
gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended
September 30, 2008.  Approximately US$3,000,000 of the gain related to
extinguishment of liabilities due to unsecured creditors.  The company
applied guidance in FAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,and
determined that a legal release of the liabilities had been achieved to allow
recognition of the gain on extinguishment of liabilities.  This gain
was partially offset in consolidation by the US$1,481,003 after-tax effect loss
recognized by the Company in settlement of its guarantee of Icon’s secured debt
and other losses attributable to the Icon discontinued operations to arrive at
the gain from discontinued operations of $3,381,254 reported for the nine months
ended December 31, 2008.





At
December 31, 2008, the assets of Icon held by the receiver consisted of cash of
US$219,402, and its liabilities include post-receivership accounts payable of
US$72,806 and a pre-receivership trade account payable of approximately
US$146,596.  The pre-receivership trade account payable is subject to
settlement in accordance with a “claim process” administrated by the
receiver.  To the extent any portion of the pre-receivership account
payable is ultimately disallowed, that portion will increase the gain from
discontinued operations.





The major
classes of assets and liabilities held in receivership reported as discontinued
operations included in the accompanying consolidated balance sheets shown
below.





December 31, 2008
                        
                        
                        March 31, 2008AssetsCash
                        
                        $
                        219,402
                        
                        
                        $
                        823,550Trade
      receivables, net
                        
                        
                        0
                        
                        
                        
                        371,793Inventories
                        
                        
                        0
                        
                        
                        
                        817,022Property,
      plant and equipment – net
                        
                        
                        0
                        
                        
                        
                        831,555Other
      assets
                        
                        
                        0
                        
                        
                        
                        6,811Assets
      of discontinued operations
                        
                        $
                        219,402
                        
                        
                        $
                        2,850,731LiabilitiesAccounts
      payable, trade and other
                        
                        $
                        219,402
                        
                        
                        $
                        3,344,624Notes
      payable – bank
                        
                        
                        0
                        
                        
                        
                        4,478,826Liabilities
      of discontinued operations
                        
                        $
                        219,402
                        
                        
                        $
                        7,823,450





In the
accompanying consolidated financial statements, the results of Icon for the
three and nine months ended December 31, 2008 have been restated and are
presented as the results of discontinued operations, and certain other prior
year amounts have been reclassified in order to conform with the current year’s
presentation.





Income
Taxes





A
provision for federal and state income taxes on continuing operations of
$410,437 and $625,633 has been provided for the nine month periods ended
December 31, 2008 and 2007, respectively.  For income tax purposes,
this provision is reduced by a $0 and $44,076 benefit derived from deductions
associated with the exercise of employee stock options for the nine month
periods ended December 31, 2008 and 2007, respectively.  Under FAS
123, the tax benefit of this deduction has been treated as a credit to
additional paid in capital and will not require a cash payment for income
taxes.  As discussed above, the Company guaranteed certain
indebtedness of its Canadian subsidiary which has since been placed in
receivership.  The Company settled its guarantee of the indebtedness
for approximately $2,150,000 and recognized a $965,872 income tax benefit on the
portion of the guaranteed indebtedness which related to U.S.
operations.  The benefit is presented in the discontinued operations
section of the accompanying consolidated statements of earnings and as a
deferred tax asset on the accompanying consolidated balance
sheet.  For the three month periods ended December 31, 2008 and 2007,
federal and state income taxes from continuing operations are $211,642 and
$87,757, respectively.  The Company has net operating loss carryover
and foreign tax credits sufficient to offset current tax expenses.





On April
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN
48 prescribes a recognition threshold that a tax position is required to meet
before recognition in the financial statements and provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition issues.




8


In
connection with the adoption of FIN 48, the Company recorded an initial
liability of approximately $86,000 for income taxes, interest and penalties
related to unrecognized tax benefits.  Simultaneously, the Company
recorded a reduction to retained earnings.  With the adoption of FIN
48, the Company has chosen to treat interest and penalties related to uncertain
tax liabilities as income tax expense.  As of December 31, 2008, this
liability with imputed interest is $95,324.





Joint
Venture





The
Company and its co-venturer, a Hong Kong corporation, each owns a 50% interest
in a Hong Kong joint venture, Eyston Company Limited (the “Joint Venture”), that
has manufacturing facilities in the People’s Republic of China, for the
manufacturing of security products.  The following represents
summarized balance sheet and income statement information of the Joint Venture
as of and for the nine months ended December 31, 2008 and 2007:





2008
                    
                    
                    2007Net
      sales
                    
                    $
                    29,270,914
                    
                    
                    $
                    23,722,803Gross
      profit
                    
                    
                    7,925,541
                    
                    
                    
                    6,078,838Net
      income
                    
                    
                    3,592,801
                    
                    
                    
                    2,991,477Total
      current assets
                    
                    
                    17,594,219
                    
                    
                    
                    15,962,261Total
      assets
                    
                    
                    28,312,610
                    
                    
                    
                    25,793,201Total
      current liabilities
                    
                    
                    5,900,157
                    
                    
                    
                    5,803,207





During
the nine months ended December 31, 2008 and 2007, respectively, the Company
purchased $18,787,069 and $15,157,285 of products from the Joint
Venture.  For the quarters ended December 31, 2008 and 2007, the
Company adjusted its equity in earnings of the Joint Venture to respectively
reflect a reduction of $471,840 and an increase of $127,900 for inter-company
profit in inventory as required by US GAAP.





Net
Income Per Common Share





Basic
earnings per common share is computed based on the weighted average number of
common shares outstanding during the periods presented.  Diluted
earnings per common share is computed based on the weighted average number of
common shares outstanding plus the effect of stock options and other potentially
dilutive common stock equivalents.  The dilutive effect of stock
options and other potentially dilutive common stock equivalents is determined
using the treasury stock method based on the Company’s average stock
price.





A
reconciliation of the weighted average shares of common stock utilized in the
computation of basic and diluted earnings per share for the three month period
ended December 31, 2008 and 2007 is as follows:





Three Months Ended
                    December 31,
                  
                  
                  Nine Months Ended
                    December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Weighted
      average number of common shares outstanding for basic EPS
                  
                  
                  2,467,028
                  
                  
                  
                  2,489,132
                  
                  
                  
                  2,480,330
                  
                  
                  
                  2,481,802Shares
      issued upon the assumed exercise of outstanding stock
    options
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  41,514Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                  
                  
                  2,467,028
                  
                  
                  
                  2,489,132
                  
                  
                  
                  2,480,330
                  
                  
                  
                  2,523,316





Total
outstanding options to purchase 72,422 shares of common stock as of December 31,
2008 are not included in the above calculations as the effect would be
anti-dilutive.





Stock
Based Compensation





As of
December 31, 2008, under the terms of the Company’s Non-Qualified Stock Option
Plan, as amended, 877,777 shares of our common stock are reserved for the
granting of stock options, of which 857,546 have been issued, leaving 20,231
available for issuance.





Adoption of SFAS No. 123R.In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004),Share-Based Payment, which
requires compensation costs related to share-based payment transactions to be
recognized in financial statements. SFAS No. 123R eliminates the intrinsic
value method of accounting available under Accounting Principles Board (APB)
Opinion No. 25,Accounting for Stock Issued to
Employees, which generally resulted in no compensation expense being
recorded in the financial statements related to the grant of stock options to
employees if certain conditions were met.




9




Effective
April 1, 2006, we adopted SFAS No. 123R using the modified prospective
method. Under this method, compensation costs for all awards granted after the
date of adoption and the unvested portion of previously granted awards will be
measured at an estimated fair value and included in operating expenses or
capitalized as appropriate over the vesting period during which an employee
provides service in exchange for the award. Accordingly, prior period amounts
presented have not been restated to reflect the adoption of SFAS
No. 123R.





As a
result of adopting SFAS No. 123R, net income for the nine months ended December
31, 2008 was reduced by $7,736.  No portion of employees’
compensation, including stock compensation expense, was capitalized during the
period.





During
the nine month period ended December 31, 2008, no shares of our common stock
have been issued as a result of the exercise of the options granted under the
plan.





Fair Value
Determination.Under SFAS No. 123R,
we have elected to continue using the Black-Scholes option pricing model to
determine fair value of our awards on date of grant. We will reconsider the use
of the Black-Scholes model
if additional information becomes available in the future that indicates another
model would be more appropriate, or if grants issued in future periods have
characteristics that cannot be reasonably estimated under this
model.





StockOption
Activity.During the nine month
period ended December 31, 2008 and 2007, no stock options were
granted.





Stock Compensation
Expense.  We have elected to continue straight-line
amortization of stock-based compensation expense over the requisite service
period. Prior to the adoption of SFAS No. 123R, we recognized the effect of
forfeitures in our pro forma disclosures as they occurred. In accordance with
the new standard, we have estimated forfeitures and are only recording expense
on shares we expect to vest. For the nine months ended December 31, 2008 and
2007, we recorded $7,736 and $16,369 respectively of stock-based compensation
cost as general and administrative expense in our statement of operations. No
forfeitures have been estimated.  No portion of employees’
compensation including stock compensation expense was capitalized during the
period.





As of
December 31, 2008, there was no unrecognized compensation cost related to
share-based compensation arrangements that we expect to vest.  The
aggregate intrinsic value of currently exercisable options was $0 at December
31, 2008.





Stock
Purchase Program





In July
2008, the Company announced a stock buyback program and authorized the purchase
of up to 100,000 shares of common stock.  Shares may be purchased from
time to time under this program in the open market, through block trades and/or
in negotiated transactions.  Unless extended by the Company’s Board of
Directors, the program will terminate when 100,000 shares of common stock have
been repurchased by the Company pursuant to the program (unless increased or
decreased by the Board of Directors).  See Part II, Item 2 of this
form 10-Q.





Recently
Issued Accounting Pronouncements





Business Combinations: In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141(R), “Business Combinations,”
(“SFAS No. 141(R)”),which replaces SFAS No. 141 and issued
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” (“SFAS No. 160”), an amendment of Accounting Research
Bulletin No. 51. These two new standards will change the accounting
for and the reporting for business combination transactions and noncontrolling
(minority) interests in the consolidated financial statements, respectively.
SFAS No. 141(R) will change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
noncontrolling interests and classified as a component of equity. These two
standards will be effective for the Company for acquisitions undertaken and
financial statements issued for fiscal years beginning after December 31,
2008.




10




Fair Value
Measurements:  In September 2007, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
157, Fair Value Measurement
(SFAS 157).  This standard clarifies the principle that fair
value should be based on the assumptions that market participants would use when
pricing an asset or liability.  Additionally, it establishes a fair
value hierarchy that prioritizes the information used to develop those
assumptions.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2008.  The Company has
not yet determined the impact that the implementation of SFAS 157 will have on
its results of operations or financial condition.




The Fair Value Option for Financial
Assets and Financial Liabilities:  In February 2008, the FASB
issued SFAS No. 159,  The Fair Value Option for
Financial  Assets and Financial Liabilities, including an
amendment of FASB Statements No. 115 (SFAS No. 159).  SFAS No. 159
permits entities to choose, at specified election dates, to measure eligible
items at fair value (the “fair value option”).  A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
period.  This accounting standard is effective as of the beginning of
an entity’s first fiscal year that begins after November 15,
2008.  The effect, if any, of adopting SFAS No. 159 on the Company’s
financial position and results of operations has not been
finalized.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”), SFAS 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 generally accepted accounting
principles.  SFAS 162 is effective 60 days following the SEC’s
approval of the  Public Company Accounting Oversight Board amendments
to Interim Auditing Standards Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.  The
implementation of this standard is not expected to have a material impact on our
consolidated financial position and results of operation.





Reclassifications





Certain
prior year amounts have been reclassified in order to conform with current year
presentation.




11




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





As used throughout this Report, “we,”
“our,” “the Company” “USI” and similar words refers to Universal Security
Instruments, Inc.





Forward-Looking
Statements





This
Quarterly Report on Form 10-Q contains certain forward-looking statements
reflecting our current expectations with respect to our operations, performance,
financial condition, and other developments.  These forward-looking
statements may generally be identified by the use of the words “may”, “will”,
“believes”, “should”, “expects”, “anticipates”, “estimates”, and similar
expressions.  These statements are necessarily estimates reflecting
management’s best judgment based upon current information and involve a number
of risks and uncertainties.  We caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and readers are advised that various factors could affect our financial
performance and could cause our actual results for future periods to differ
materially from those anticipated or projected.  While it is
impossible to identify all such factors, such factors include, but are not
limited to, those risks identified in our periodic reports filed with the
Securities and Exchange Commission, including our most recent Annual Report on
Form 10-K.





overview





We are in the business of marketing and
distributing safety and security products which are primarily manufactured
through our 50%-owned Hong Kong Joint Venture.  Our financial
statements detail our sales and other operational results only, and report the
financial results of the Hong Kong Joint Venture using the equity
method.  Accordingly, the following discussion and analysis of the
three and nine months ended December 31, 2008 and 2007 relate to the operational
results of the Company only.  A discussion and analysis of the Hong
Kong Joint Venture’s operational results for these periods is presented below
under the heading “Joint Venture.”





Discontinued
Canadian Operations





In
October 2006, we formed 2113824 Ontario, Inc., an Ontario corporation, as a
wholly-owned subsidiary of the Company for the purpose of acquiring a two-thirds
interest in two Canadian corporations, International Conduits, Ltd. (Icon) and
Intube, Inc. (Intube).  Icon and Intube are based in Toronto, Canada
and manufacture and distribute electrical mechanical tubing (EMT) steel
conduit.  Icon also sold home safety products, primarily purchased
from the Company, in the Canadian market.  The primary purpose of the
Icon and Intube acquisition was to expand our product offerings to include EMT
steel conduit, and to provide this product and service to the commercial
construction market.  On April 2, 2007, Icon and Intube were merged
under the laws of Ontario to form one corporation.





In
September 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to
provide a term loan and a line of credit facility.  These loans are
secured by all of the assets of Icon and by the corporate guarantees of the
Company and our USI Electric subsidiary, as further explained
below.





As a
result of continuing losses at Icon, management undertook an evaluation of the
goodwill from our acquisition of Icon to determine whether the value of the
goodwill has been impaired in accordance with FAS No. 142, “Goodwill and Other Intangible
Assets”.  Based on that evaluation, management determined that
the value of the goodwill from our acquisition of Icon was impaired, and
recognized an impairment charge of US$1,926,696 for the goodwill as of December
31, 2007.  The impairment was recorded in discontinued operations in
the consolidated statements of operations for the year ended March 31,
2008.





At the
time of the investment in Icon, management projected that the established U.S.
sales network would allow us to increase sales of EMT to U.S.
customers.  Despite the Company’s efforts, Icon suffered continuing
losses, and the Company was not successful in increasing Icon’s sales in the
face of competition and a weakening U.S. dollar.  On January 29, 2008,
Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and
secured lender, that Icon was in default under the terms of the Credit Agreement
dated September 22, 2007 between Icon and CIT Canada and demanding immediate
payment of all of Icon’s obligations to CIT Canada under the Credit
Agreement.  On February 11, 2008, the assets of Icon were placed under
the direction of a court appointed receiver and the operations of Icon were
suspended.  As a result of the February 11, 2008 court appointed
receivership of Icon’s assets, we no longer controlled Icon as of that
date.  In accordance with Statement of Financial Accounting Standards
No. 94, the financial statements of Icon are not consolidated with the
financial statements of the Company.  Accordingly, the accounts and
operations of Icon in our consolidated financial statements are presented as
assets and liabilities held in receivership and as the results of discontinued
operations.





12




The
production machinery and equipment of Icon were recorded at their appraised net
realizable value of US$831,555 as of March 31, 2008.  During the
quarter ended June 30, 2008, the Company revised its estimate based on
communications with the auctioneer and appraisers and adjusted the carrying
value to approximately $1,020,000, resulting in a write-up of approximately
US$190,000 during the quarter ended June 30, 2008.  On July 16, 2008,
the receiver in possession of Icon’s assets held a public auction to liquidate
production machinery and equipment held for sale.  Auction proceeds,
net of auction fees, amounted to US$1,033,652.





On
September 22, 2008, Icon’s obligations were settled in the receivership action
by order of the Ontario Superior Court.  After complete liquidation of
the assets of Icon, the receiver held CAD$2,419,831
(US$2,314,326).  Of this amount, CAD$2,150,000 (US$2,056,260) was
distributed to CIT Canada in partial settlement of Icon’s secured obligations to
CIT Canada.  The remaining cash of CAD$260,009 (US$258,066) is
currently held by the receiver for other obligations.  As a result of
the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was
realized by Icon in the quarter ended December 31,
2008.  Approximately US$3,000,000 of the gain related to
extinguishment of liabilities due to unsecured creditors.  The company
applied guidance in FAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,and
determined that a legal release of the liabilities had been achieved to allow
recognition of the gain on extinguishment of liabilities.  This gain
was partially offset in consolidation by the US$1,481,003 after-tax effect loss
recognized by the Company in settlement of its guarantee of Icon’s secured debt
and other losses attributable to the Icon discontinued operations to arrive at
the gain from discontinued operations of $3,381,254 reported for the nine months
ended December 31, 2008.





At
December 31, 2008, the assets of Icon held by the receiver consisted of cash of
US$219,402, and its liabilities include post-receivership accounts payable of
US$72,806 and a pre-receivership trade account payable of approximately
US$146,596.  The pre-receivership trade account payable is subject to
settlement in accordance with a “claim process” administrated by the
receiver.  To the extent any portion of the
pre-receivership account payable is ultimately disallowed, that portion
will increase the gain from discontinued operations.





The major
classes of assets and liabilities held in receivership reported as discontinued
operations included in the accompanying consolidated balance sheets shown
below.





December 31, 2008
                      
                      
                      March 31, 2008AssetsCash
                      
                      $
                      219,402
                      
                      
                      $
                      823,550Trade
      receivables, net
                      
                      
                      0
                      
                      
                      
                      371,793Inventories
                      
                      
                      0
                      
                      
                      
                      817,022Property,
      plant and equipment – net
                      
                      
                      0
                      
                      
                      
                      831,555Other
      assets
                      
                      
                      0
                      
                      
                      
                      6,811Assets
      of discontinued operations
                      
                      $
                      219,402
                      
                      
                      $
                      2,850,731LiabilitiesAccounts
      payable, trade and other
                      
                      $
                      219,402
                      
                      
                      $
                      3,344,624Notes
      payable – bank
                      
                      
                      0
                      
                      
                      
                      4,478,826Liabilities
      of discontinued operations
                      
                      $
                      219,402
                      
                      
                      $
                      7,823,450





In the
accompanying consolidated financial statements, the results of Icon for the
three and nine months ended December 31, 2008 have been restated and are
presented as the results of discontinued operations, and certain other prior
year amounts have been reclassified in order to conform with the current year’s
presentation.





Results
of Operations





Three Months Ended December
31, 2008 and 2007





Sales.  Net sales
for the three months ended December 31, 2008 were $5,595,049 compared to
$7,776,986 for the comparable three months in the prior fiscal year, a decrease
of $2,181,937 (28.1%).  The primary reason for the decrease in net
sales was lower sales volumes of our core product lines, including smoke alarms
and carbon monoxide alarms, to the electrical distribution trade due to a
decrease in new home construction during the quarter.




13




Gross Profit
Margin.  Gross profit margin is calculated as net sales less
cost of goods sold expressed as a percentage of net sales.  Our gross
profit margin was 23.9% and 28.4% of sales for the quarters ended December 31,
2008 and 2007, respectively.  Typically, our sales to retail customers
have lower gross profit margins than our sales to the electrical distribution
trade, and the product mix we sell to retail customers are generally lower
margin items.  Our decrease in gross profit margin for the 2008 period
was primarily due to the lower electrical distribution trade sales.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$378,501 from the comparable three months in the prior year.  As a
percentage of net sales, these expenses increased to 23.0% for the three month
period ended December 31, 2008, from 21.4% for the 2007 period.  The
increase in costs as a percentage of net sales was primarily due to fixed costs
that did not decrease at the same rate as sales.





Interest Expense and
Income.  Our interest expense on cash deposits, net of interest
charges, was $6,967 for the quarter ended December 31, 2008, compared to net
interest income of $18,370 for the quarter ended December 31,
2007.  Net interest expense in the current quarterly period resulted
from higher borrowings by us in support of increased inventory
balances.





Income
Taxes.  During the quarter ended December 31, 2008, the Company
had a net income tax expense of  $211,642.  For the
corresponding 2007 period, the Company has a provision for income taxes of
$87,757.  The effective rate of tax is 42.0% and 7.0% for the quarters
ended December 31, 2008 and 2007, respectively.  The reduced effective
rate in the prior year’s quarter is due to the recognition of the U.S. portion
of the loss on the discontinued Canadian subsidiary.





Net Income.  We
reported net income of $292,513 for the quarter ended December 31, 2008,
compared to a net loss of $1,635,789 for the corresponding quarter of the prior
fiscal year.  As discussed above under the section titled
“Discontinued Canadian Operations”, the net loss in the quarter ended December
31, 2007 was principally a result of the impairment of goodwill related to our
discontinued Canadian subsidiary.





Nine Months Ended December
31, 2008 and 2007





Sales.  Net sales
for the nine months ended December 31, 2008 were $20,169,229 compared to
$27,152,181 for the comparable nine months in the prior fiscal year, a decrease
of $6,982,952 (25.7%).  The primary reason for the decrease in net
sales was lower sales volumes of our core product lines, including smoke alarms
and carbon monoxide alarms, to the electrical distribution trade due to a
decrease in new home construction during the period.





Gross Profit
Margin.  The gross profit margin is calculated as net sales
less cost of goods sold expressed as a percentage of net sales.  The
Company’s gross profit margin decreased from 25.3% for the period ended December
31, 2007 to 23.8% for the current period ended December 31, 2008. Typically, our
sales to retail customers have lower gross profit margins than our sales to the
electrical distribution trade, and the product mix we sell to retail customers
are generally lower margin items.  Our decrease in gross profit margin
for the 2008 period was primarily due to the lower electrical distribution trade
sales.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$550,132 from the comparable nine months in the prior year.  As a
percentage of sales, these expenses were 21.6% for the nine month period ended
December 31, 2008 and 18.0% for the comparable 2007 period.  The
primary reason for the increase in expenses as a percentage of sales is that
these expenses did not decrease at the same rate as sales.





Interest Expense and
Income.  Our interest income net of interest expense was $8,609
for the nine months ended December 31, 2008, compared to net interest expense of
$52,491 for the nine months ended December 31, 2007.  Interest expense
in the comparable period of the last year resulted primarily from borrowings to
support the Canadian subsidiary.





Income
Taxes.  During the nine months ended December 31, 2008, the
Company recorded an income tax expense from continuing operations of
$410,437.  For the corresponding 2007 period, the Company had a tax
expense of $625,633.  The effective rate of tax is 22.6% and 16.5% for
the nine month periods ended December 31, 2008 and 2007,
respectively.  The reduced effective rate in the prior year’s nine
month period is due to the recognition of the U.S. portion of the loss on the
discontinued Canadian subsidiary.





Net Income.  We
reported net income of $4,787,207 for the nine months ended December 31, 2008
compared to a net loss of $526,647 for the corresponding period of the prior
fiscal year.  As discussed above under the section titled
“Discontinued Canadian Operations”, the primary reason for the increase is the
gain of $3,381,254 recognized as a result of the settlement of the obligations
or our Canadian subsidiary.




14




Financial
Condition and Liquidity





The Company has a Factoring Agreement
which supplies both short-term borrowings and letters of credit to finance
foreign inventory purchases.  The maximum amount available under the
Factoring Agreement is currently $7,950,000. Based on specified percentages of
our accounts receivable and inventory and letter of credit commitments, we had
$6,883,000 available under the Factoring Agreement at December 31,
2008.  There is $101,911 borrowed under this agreement as of December
31, 2008.  The interest rate under the Factoring Agreement on the
uncollected factored accounts receivable and any additional borrowings is equal
to the prime rate of interest charged by our lender.  At December 31,
2008, the prime rate was 4.0%.  Borrowings are collateralized by all
of our accounts receivable and inventory.





Our factored accounts receivable as of
the end of our last fiscal year were $5,600,408, and were $3,591,315 as of
December 31, 2008.  Our prepaid expenses as of the end of our last
fiscal year were $206,197, and were $156,947 as of December 31,
2008.  The decrease in prepaid expenses is due to the timing of
premium payments to various insurance carriers.





Operating activities used cash of
$2,670,667 for the nine months ended December 31, 2008.  This was
primarily due to the operations of the discontinued subsidiary and an increase
of $3,971,376 in inventories and prepaid expenses, and earnings of the Joint
Venture of $1,351,707.  For the same period last year, operating
activities provided cash of $3,122,546, primarily as a result of increases in
receivables, inventory and prepaid expenses, and the operations of the
discontinued subsidiary.





Investing activities provided cash of
$3,205,986 during the nine months ended December 31, 2008, principally as a
result of the liquidation of remaining assets of the discontinued
operations.  Investing activities used $1,606,881 in the prior
period., primarily related to acquisition of property and equipment related to
the discontinued operations.





Financing activities used cash of
$4,218,348 during the nine months ended December 31, 2008, principally as a
result of the payment of guaranteed debt and other activities of discontinued
operations.  In the comparable nine months in the prior year,
financing activities provided cash of $2,851,574, primarily related to
borrowings to fund the activities of the discontinued operations.





We believe that funds available under
the Factoring Agreement, distributions from the Joint Venture, and our line of
credit facilities provide us with sufficient resources to meet our requirements
for liquidity and working capital in the ordinary course of our business over
the next twelve months and over the long term.





Joint
Venture





Net Sales.  Net
sales of the Joint Venture for the three and nine months ended December 31, 2008
were $9,603,152 and $29,270,914, respectively, compared to $7,949,391 and
$23,722,803, respectively, for the comparable period in the prior fiscal
year.  The 20.8% and 23.4% respective increases in net sales by the
Joint Venture for the three and nine month periods were due to higher sales to
the Company, primarily for products purchased by the Company for sale to a
national home improvement retailer customer of the Company, and higher volumes
of sales of smoke alarm products by the Joint Venture to non-related customers
in the Australian and European market.  The Joint Venture’s management
believes that the increases in net sales to the European market were due to
increased market share in those markets.





Gross
Margins.  Gross margins of the Joint Venture for the three
month period ended December 31, 2008 increased to 28.9% from 24.8% for the 2007
corresponding period.  For the nine month period ended December 31,
2008, gross margins increased to 27.1% from the 25.6% gross margin of the prior
year’s corresponding period.  Since gross margins depend on sales
volume of various products, with varying margins, increased sales of higher
margin products and decreased sales of lower margin products affect the overall
gross margins.  The increase in the Joint Venture’s gross margins for
the three and nine month periods were due to the increase in the sales of
products to customers in the Australian and European markets.





Expenses.  Selling,
general and administrative expenses were $1,372,705 and $3,980,375,
respectively, for the three and nine month periods ended December 31, 2008,
compared to $982,291 and $3,279,276 in the prior year’s respective
periods.  As a percentage of sales, expenses were 14.3% and 13.6% for
the three and nine month periods ended December 31, 2008, compared to 12.4% and
13.8% for the three and six month periods ended December 31,
2007.  The increase in selling, general and administrative expense as
a percent of sales for the three and nine month periods was primarily due to
increased advertising and marketing expenses and increased insurance
expenses.




15




Interest Income and
Expense.  Interest expense, net of interest income, was $7,163
and $12,924 respectively, for the three and nine month periods ended December
31, 2008, compared to net interest expense of $4,519 and $20,088, respectively,
for the prior year’s periods.  The reduction in net interest expense
resulted from a decrease in the Joint Venture’s borrowings.





Net Income.  Net
income for the three and nine months ended December 31, 2008 were $1,273,660 and
$3,592,801, respectively, compared to $1,120,235 and $2,991,477, respectively,
in the comparable periods last year.  The 13.7% and 20.1% respective
increases in net income for the three and nine month periods were due primarily
to changes in the mix of products sold and gross margins as noted
above





Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the nine months ended December 31, 2008, working
capital increased by $2,740,191 from $8,953,871 on March 31, 2008 to $11,694,062
on December 31, 2008.





Critical
Accounting Policies





Management’s discussion and analysis of
our consolidated financial statements and results of operations are based on our
Consolidated Financial Statements included as part of this document. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities.  On an ongoing basis, we evaluate these estimates,
including those related to bad debts, inventories, income taxes, and
contingencies and litigation. We base these estimates on historical experiences
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily available
from other sources.  Actual results may differ from these estimates
under different assumptions or conditions.





We believe the following critical
accounting policies affect management’s more significant judgments and estimates
used in the preparation of its consolidated financial statements.  For
a detailed discussion on the application on these and other accounting policies,
see Note A to the consolidated financial statements included in Item 8 of the
Form 10-K for the year ended March 31, 2008.  Certain of our
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates.  By their nature, these judgments are subject to an
inherent degree of uncertainty and actual results could differ from these
estimates.  These judgments are based on our historical experience,
terms of existing contracts, current economic trends in the industry,
information provided by our customers, and information available from outside
sources, as appropriate.  Our critical accounting policies
include:





Our revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 10, “Revenue Recognition in Financial
Statements” issued by the Securities and Exchange
Commission.  We recognize sales upon shipment of products net of
applicable provisions for any discounts or allowances.  The shipping
date from our warehouse is the appropriate point of revenue recognition since
upon shipment we have substantially completed our obligations which entitle us
to receive the benefits represented by the revenues, and the shipping date
provides a consistent point within our control to measure
revenue.  Customers may not return, exchange or refuse acceptance of
goods without our approval.  We have established allowances to cover
anticipated doubtful accounts based upon historical experience.





Inventories are valued at the lower of
market or cost.  Cost is determined on the first-in first-out
method.  We have recorded a reserve for obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions.  Management reviews the reserve quarterly. Shipping and
handling costs incurred by the Company to deliver goods to its customers are not
included in costs of goods sold but are presented as an element of selling,
general and administrative expense within the condensed consolidated statements
of earnings. The Company incurred $84,987 and $186,163 of shipping and
handling costs in the quarters ended December 31, 2008 and 2007, respectively
and $424,899 and $556,658 for the nine month period ended December 31, 2008 and
2007, respectively.




16




Impairment of Long-Lived
Assets: The Company’s policy is to review its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with Statement
of Financial Accounting Standards (“SFAS”), SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets”,(“SFAS No. 144”). The Company
recognizes an impairment loss when the sum of the expected undiscounted future
cash flows is less than the carrying amount of the asset. The measurement of the
impairment losses to be recognized is based upon the difference between the fair
value and the carrying amount of the assets.





We are subject to lawsuits and other
claims, related to patents and other matters.  Management is required
to assess the likelihood of any adverse judgments or outcomes to these matters,
as well as potential ranges of probable losses.  A determination of
the amount of reserves required, if any, for these contingencies is based on a
careful analysis of each individual issue with the assistance of outside legal
counsel.  The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.





We generally provide warranties from
one to ten years to the non-commercial end user on all products
sold.  The manufacturers of our products provide us with a one-year
warranty on all products we purchase for resale.  Claims for warranty
replacement of products beyond the one-year warranty period covered by the
manufacturers are immaterial and we do not record estimated warranty expense or
a contingent liability for warranty claims.





ITEM 3.
            QUANTITATIVE AND
      QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





No material changes have occurred in
our quantitative and qualitative market risk disclosures as presented in our
Annual Report Form 10-K for the year ended March 31, 2008.





ITEM 4.
            CONTROLS AND
      PROCEDURES





We
maintain a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information, which is required to be disclosed
by us in the reports that we file or submit under the Securities and Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission, and is accumulated and communicated to management in a timely
manner.  Our Chief Executive Officer and Chief Financial Officer have
evaluated this system of disclosure controls and procedures as of the end of the
period covered by this quarterly report, and have concluded that the system is
effective.  There have been no changes in our internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




17





PART
II - OTHER INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS





On June
11, 2003, Walter Kidde Portable Equipment, Inc. (“Kidde”) filed a civil suit
against the Company in the United States District Court for the Middle District
of North Carolina (Case No. 03cv00537), alleging that certain of the Company’s
AC powered/battery backup smoke detectors infringe on a patent acquired by
Kidde. Kidde is seeking injunctive relief and damages to be determined at trial.
On March 31, 2006, following numerous procedural and substantive rulings which
the Company believes were favorable to the Company, Kidde obtained dismissal,
without prejudice, of its suit. On November 28, 2005, prior to the March 31,
2006 dismissal of the original suit, Kidde filed a second lawsuit in the same
court (Case No. 05cv1031) based on virtually identical infringement allegations
as the earlier case.  Discovery is now closed in this second
case.  Although the asserted patent is now expired, prior to its
expiration, the Company sought and has now successfully obtained re-examination
of the asserted patent in the United States Patent and Trademark Office (USPTO)
largely based on the references cited and analysis presented by the Company
which correspond to defenses raised in the litigation.  In September,
the USPTO rejected all of the claims asserted against the Company based on the
references.  Kidde responded to the rejection to which further action
by the USPTO is pending.  Kidde also filed for and the Court granted a
stay of the litigation pending the conclusion of the reexamination. The USPTO
action fully supports the Company’s substantive position and its defenses to
Kidde.  The Company and its counsel believe that regardless of the
outcome of the reexamination, the Company has significant defenses relating to
the patent in suit.  In the event of an unfavorable outcome, the
amount of any potential loss to the Company is not yet
determinable.





On June 25, 2008, Maple Chase Company
which was acquired in January 2008 by United Technologies Corporation (which
also owns Walter Kidde Portable Equipment, Inc.), filed a civil suit against the
Company in the United States District Court for the Northern District of
Illinois (Case No. 08cv3641) for patent infringement of Re 33920, a patent that
expired in March of 2007.  On January 13, 2009, the Court granted
permission to substitute Kidde for Maple Chase as the party
plaintiff.  This action involves the same patent that formed the basis
of the suit filed by Maple Chase against the Company in February 2004 (Case No.
03cv07205).   In that case, the Company successfully sought and
obtained reexamination of the asserted patent in the USPTO based on the
references cited and analysis presented by the Company.  In April
2005, the Court dismissed the earlier case subject to the outcome of the
reexamination.  After pending for more than three years and after the
expiration of the patent, a Reexamination Certificate was granted confirming
patentability of many of the claims and canceling the remaining
claims.  The 2008 case asserts infringement of the claims emerging out
of reexamination and is in its preliminary stages where discovery is about to
commence.  The Company believes that it has meritorious and
substantial technical defenses to the action and that it is entitled to a number
of legal/equitable defenses due to the long period of inaction and acquiescence
by Maple Chase and its predecessors, the amount, if any, of potential loss to
the Company is not yet determinable.  The Company intends to
vigorously defend the suit and press its pending counterclaims.





On August
21, 2008, Kidde again filed a civil suit against the Company for patent
infringement (Case No. 08cv2202) but this time in the United States District
Court for the District of Maryland.  Kidde accuses the Company of
infringement of U.S. patent 6,791,453 by communication protocols for
interconnected hazardous condition (smoke, heat and Carbon monoxide) detectors
sold by the Company.  The Company believes that it has meritorious and
substantial technical defenses to the action.  The amount, if any, of
potential loss to the Company is not yet determinable.  The Company
intends to vigorously defend the suit and press its pending counter and third
party claims.





On September 25, 2008, the Company with
its Answer and Counterclaims to Kidde filed a third-party Complaint against
United Technologies Corporation in the United States District Court for the
District of Maryland in Case No. 08cv2202 for the predatory litigation campaign
by the defendant and its subsidiary, Kidde.  On December 17, the
Company filed a motion to amend its Answer and Counterclaims which has been
opposed by both Kidde and United Technologies Corporation. That motion is
pending and case remains in a preliminary, pre-discovery stage.  In
both the original and the Amended Counterclaim, the Company is seeking
injunctive and antitrust damages.  The Company intends to vigorously
prosecute its claims.





From time
to time, the Company is involved in various lawsuits and legal matters. It is
the opinion of management, based on the advice of legal counsel, that these
matters will not have a material adverse effect on the Company’s financial
statements, beyond what has been recognized in the financial
statements.




18





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





The following table sets forth
information with respect to purchases of common stock by the Company or any
affiliated purchasers during the three months ended December 31,
2008:





Period
                  
                  Total
                    Number of
                    Shares
                    Purchased
                  
                  
                  Average
                    Price
                    Paid per
                    Share
                  
                  
                  Total Number of
                    Shares Purchased
                    as Part of
                    Publicly
                    Announced Plans
                    or Programs
                  
                  
                  Maximum Number
                    of Shares that May
                    Yet Be Purchased
                    Under the Plans or
                    ProgramsQuarter
      ended September 20, 2008
                  
                  
                  4,000
                  
                  
                  $
                  5.36
                  
                  
                  
                  4,000
                  
                  
                  
                  96,000Quarter
      ended December 31, 2008
                  
                  
                  40,575
                  
                  
                  $
                  3.06
                  
                  
                  
                  40,575
                  
                  
                  
                  55,425Total
                  
                  
                  44,575
                  
                  
                  $
                  3.27
                  
                  
                  
                  44,575
                  
                  
                  
                  55,425





In July,
2008, the Company announced a stock buyback program and authorized the purchase
of up to 100,000 shares of common stock.  Shares may be purchased from
time to time under this program in the open market, through block trades and/or
in negotiated transactions.  Unless extended by the Company’s Board of
Directors, the program will terminate when 100,000 shares of common stock have
been repurchased by the Company pursuant to the program (unless increased or
decreased by the Board of Directors).





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





On September 8, 2008, the Company held
its Annual Meeting of Stockholders.  The only matter submitted to the
stockholders for a vote was the election of one director in the Class of
2011.  The nominee was Harvey B. Grossblatt.  At the
Meeting, at least 1,908,379 shares were voted in favor of the nominee, no more
than 289 shares abstained,
were voted against, or were voted to withhold approval of the nominee’s election
(any of which has the same effect as a “no” vote).  As a result, the
nominee was elected.





Directors
not up for re-election and continuing in office after the Meeting are: Ira
Bormel, Cary Luskin, and Ronald A. Seff, M.D.





ITEM 5.
            OTHER
      INFORMATION.





On
November 4, 2008, we entered into an operating lease for new headquarters space
located in Baltimore County, Maryland.  The lease is for 12,000 square
feet of office and warehouse space for a term of 10 years through February 28,
2019.  The current rental, with common area maintenance, is
approximately $8,250 per month during the current fiscal year, with increasing
rentals at 3% per year through the term of the lease.





19





ITEM
      6.
            EXHIBITS





ExhibitNo.3.1
                
                Articles
      of Incorporation (incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q for the period ended December 31, 1988, File No.
      1-31747)3.2
                
                Articles
      Supplementary, filed October 14, 2003 (incorporated by reference to
      Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31,
      2002, File No. 1-31747)3.3
                
                Bylaws,
      as amended (incorporated by reference to Exhibit 3.1 to the Company’s
      Current Report on Form 8-K filed July 25, 2008, File No.
      1-31747)10.1
                
                Non-Qualified
      Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the period ended
      December 31, 2003, File No. 1-31747)10.2
                
                Hong
      Kong Joint Venture Agreement, as amended (incorporated by reference to
      Exhibit 10.2 to Amendment No. 1 on Form 10-K/A to the Company’s Annual
      Report on Form 10-K for the year ended March 31, 2006, File No.
      1-31747)10.3
                
                Amended
      and Restated Factoring Agreement between the Registrant and The CIT Group
      Commercial Services Inc. (“CIT”), dated September 22, 2007 (substantially
      identical agreement entered into by the Registrant’s wholly-owned
      subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed September 26, 2007, File
      No. 1-31747)10.4
                
                Amended
      and Restated Inventory Security Agreement between the Registrant and CIT,
      dated September 22, 2007 (substantially identical agreement entered into
      by the Registrant’s wholly-owned subsidiary, USI Electric, Inc.)
      (incorporated by reference to Exhibit 10.2 to the Company’s Current Report
      on Form 8-K filed September 26, 2007, File No. 1-31747)10.5
                
                Credit
      Agreement between International Conduits Ltd. (“Icon”) and CIT Financial
      Ltd. (“CIT Canada”), dated September 22, 2007 (“CIT Canada Credit
      Agreement”) (incorporated by reference to Exhibit 10.3 to the Company’s
      Current Report on Form 8-K filed September 26, 2007, File No.
      1-31747)10.6
                
                General
      Security Agreement between CIT Canada and Icon, dated September 22, 2007,
      with respect to the obligations of Icon under the CIT Canada Credit
      Agreement (incorporated by reference to Exhibit 10.4 to the Company’s
      Current Report on Form 8-K filed September 26, 2007, File No.
      1-31747)10.7
                
                Guaranty
      made by the Registrant and USI Electric Inc., in favor of CIT Canada,
      dated September 22, 2007, with respect to the obligations of Icon under
      the CIT Canada Credit Agreement (incorporated by reference to Exhibit 10.5
      to the Company’s Current Report on Form 8-K filed September 26, 2007, File
      No. 1-31747)10.8
                
                Lease
      between Universal Security Instruments, Inc. and St. John Properties, Inc.
      dated November 4, 2008 for its office and warehouse located at 11407
      Cronhill Drive, Suites A-D, Owings Mills, Maryland
  21117*10.9
                
                Second
      Amended and Restated Employment Agreement dated July 18, 2006 between the
      Company and Harvey B. Grossblatt (incorporated by reference to Exhibit
      10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended
      December 31, 2006, File No. 1-31747)10.10
                
                Addendum
      to Second Amended and Restated Employment Agreement dated September 8,
      2008 between the Company and Harvey B. Grossblatt (incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed September 8, 2008, File No. 1-31747)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer*31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer*32.1
                
                Section
      1350 Certifications*99.1
                
                Press
      Release dated February 12,
2009*





*Filed
herewith





20




SIGNATURES





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





UNIVERSAL
      SECURITY INSTRUMENTS, INC.
                                      (Registrant)Date:
      February 12, 2009
                                    By:
                                    /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
                                    /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial
Officer




21