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, 2010





OR


 ̈
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, Suite AOwings
      Mills, Maryland
                  21117(Address
      of principal executive offices)
                  (Zip
      Code)





Registrant’s telephone number,
including area code: (410)
363-3000





Inapplicable


(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
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes   ̈   No
 ̈





Indicate
by check mark 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  ̈Accelerated filer  ̈Non-Accelerated Filer
 ̈
Smaller Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈No x





At
February 11, 2011, the number of shares outstanding of the registrant’s common
stock was 2,387,887.








TABLE OF
CONTENTS





PagePart
      I - Financial InformationItem
      1.
                                      Consolidated
      Financial Statements (unaudited):Consolidated
      Balance Sheets at December 31, 2010and March 31,
      2010
                                      3Consolidated
      Statements of Earnings for the ThreeMonths Ended December 31, 2010
      and 2009
                                      4Consolidated
      Statements of Earnings for the NineMonths Ended December 31, 2010
      and 2009
                                      5Condensed
      Consolidated Statements of Cash Flows for the NineMonths Ended
      December 31, 2010 and 2009
                                      6Notes
      to Consolidated Financial Statements
                                      7Item
      2.
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      9Item
      4.
                                      Controls
      and Procedures
                                      14Part
      II - Other InformationItem
      1.
                                      Legal
      Proceedings
                                      15Item
      6.
                                      Exhibits
                                      15Signatures
                                      16


2


PART
I - FINANCIAL INFORMATION





ITEM
1.                FINANCIAL
STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





(unaudited)
                
                
                (audited)December 31, 2010
                
                
                March 31, 2010ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                7,297,247
                
                
                $
                2,253,631Assets
      held for investment
                
                
                -
                
                
                
                4,001,890Accounts
      receivable:Trade
      less allowance for doubtful accounts of $75,000 at December 31, 2010 and
      $90,000 at March 31, 2010
                
                
                203,118
                
                
                
                266,526Other
      receivables
                
                
                70,683
                
                
                
                70,523Receivable
      from Hong Kong Joint Venture
                
                
                75,958
                
                
                
                212,622Amount
      due from factor
                
                
                1,142,696
                
                
                
                3,824,553Inventories,
      net of allowance for obsolete inventory of $100,000 at December 31, 2010
      and March 31, 2010
                
                
                3,644,012
                
                
                
                3,439,906Prepaid
      expenses
                
                
                319,596
                
                
                
                351,192TOTAL
      CURRENT ASSETS
                
                
                12,753,310
                
                
                
                14,420,843DEFERRED
      TAX ASSET
                
                
                1,970,962
                
                
                
                1,877,156INVESTMENT
      IN HONG KONG JOINT VENTURE
                
                
                12,905,017
                
                
                
                12,153,456PROPERTY
      AND EQUIPMENT – NET
                
                
                189,263
                
                
                
                199,163OTHER
      ASSETS
                
                
                40,136
                
                
                
                20,136TOTAL
      ASSETS
                
                $
                27,858,688
                
                
                $
                28,670,754LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                442,292
                
                
                $
                689,762Hong
      Kong Joint Venture accounts payable
                
                
                416,027
                
                
                
                1,472,993Accrued
      liabilities:Payroll
      and employee benefits
                
                
                171,855
                
                
                
                232,034Commissions
      and other
                
                
                29,762
                
                
                
                47,001TOTAL
      CURRENT LIABILITIES
                
                
                1,059,936
                
                
                
                2,441,790Long-term
      obligation
                
                
                46,459
                
                
                
                46,459COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value per share; authorized 20,000,000 shares; issued and
      outstanding, 2,387,887 shares at December 31, 2010 and March 31,
      2010
                
                
                23,879
                
                
                
                23,879Additional
      paid-in capital
                
                
                13,135,198
                
                
                
                13,135,198Retained
      earnings
                
                
                13,593,216
                
                
                
                13,023,428TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                26,752,293
                
                
                
                26,182,505TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                
                $
                27,858,688
                
                
                $
                28,670,754





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 31,2010
                
                
                2009Net
      sales
                
                $
                2,475,511
                
                
                $
                6,321,490Cost
      of goods sold – acquired from Joint Venture
                
                
                1,723,931
                
                
                
                4,454,098Cost
      of goods sold – other
                
                
                -
                
                
                
                548,391GROSS
      PROFIT
                
                
                751,580
                
                
                
                1,319,001Research
      and development expense
                
                
                181,986
                
                
                
                126,713Selling,
      general and administrative expense
                
                
                1,061,936
                
                
                
                1,315,207Operating
      loss
                
                
                (492,342
                )
                
                
                (122,919
                )Other
      income (expense):Investment
      and interest income
                
                
                63,219
                
                
                
                11,026Interest
      expense
                
                
                -
                
                
                
                (27,444
                )LOSS
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                (429,123
                )
                
                
                (139,337
                )Equity
      in earnings of Joint Venture
                
                
                373,322
                
                
                
                657,023(Loss)
      income from operations before income taxes
                
                
                (55,801
                )
                
                
                517,686Income
      tax benefit (expense)
                
                
                75,346
                
                
                
                (254,196
                )NET
      INCOME
                
                $
                19,545
                
                
                $
                263,490Income
      per share:Basic
                
                
                0.01
                
                
                
                0.11Diluted
                
                
                0.01
                
                
                
                0.11Shares
      used in computing net income per share:Basic
                
                
                2,387,887
                
                
                
                2,387,887Diluted
                
                
                2,395,865
                
                
                
                2,395,201





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 31,2010
                
                
                2009Net
      sales
                
                $
                9,871,310
                
                
                $
                20,137,200Cost
      of goods sold - acquired from Joint Venture
                
                
                5,818,014
                
                
                
                14,850,994Cost
      of goods – other
                
                
                1,126,330
                
                
                
                1,149,699GROSS
      PROFIT
                
                
                2,926,966
                
                
                
                4,136,507Research
      and development expense
                
                
                503,519
                
                
                
                467,411Selling,
      general and administrative expense
                
                
                3,348,699
                
                
                
                3,853,592Operating
      loss
                
                
                (925,252
                )
                
                
                (184,496
                )Other
      income (expense):Investment
      and interest income
                
                
                173,271
                
                
                
                20,451Interest
      expense
                
                
                (4,179
                )
                
                
                (69,190
                )LOSS
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                (756,160
                )
                
                
                (233,235
                )Equity
      in earnings of Joint Venture
                
                
                1,225,326
                
                
                
                2,267,714Income
      from operations before income taxes
                
                
                469,166
                
                
                
                2,034,479Income
      tax benefit (expense)
                
                
                100,622
                
                
                
                (234,654
                )NET
      INCOME
                
                $
                569,788
                
                
                $
                1,799,825Income
      per share:Basic
                
                
                0.24
                
                
                
                0.75Diluted
                
                
                0.24
                
                
                
                0.75Shares
      used in computing net income per share:Basic
                
                
                2,387,887
                
                
                
                2,389,360Diluted
                
                
                2,395,341
                
                
                
                2,395,621





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


5


UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended December 31,2010
                              
                              
                              2009OPERATING
      ACTIVITIESNet
      income
                              
                              $
                              569,788
                              
                              
                              $
                              1,799,825Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                              
                              
                              43,428
                              
                              
                              
                              38,017Earnings
      of the Joint Venture
                              
                              
                              (1,225,326
                              )
                              
                              
                              (2,267,714
                              )Investment
      earnings
                              
                              
                              (173,271
                              )
                              
                              
                              -Changes
      in operating assets and liabilities:Decrease
      in accounts receivable and amounts due from factor
                              
                              
                              2,881,769
                              
                              
                              
                              898,754(Increase)
      decrease in inventories and prepaid expenses
                              
                              
                              (172,510
                              )
                              
                              
                              3,538,094Decrease
      in accounts payable and accrued expenses
                              
                              
                              (1,381,854
                              )
                              
                              
                              (64,279
                              )(Increase)
      decrease in deferred taxes and other assets
                              
                              
                              (113,806
                              )
                              
                              
                              229,221NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                              
                              
                              428,218
                              
                              
                              
                              4,171,918INVESTING
      ACTIVITIES:Purchase
      of assets held for sale
                              
                              
                              (3,449,359
                              )
                              
                              
                              -Proceeds
      from sale of assets held for investment
                              
                              
                              7,451,249
                              
                              
                              
                              -Investment
      earnings
                              
                              
                              173,271
                              
                              
                              
                              -Dividends
      received from Joint Venture
                              
                              
                              473,765
                              
                              
                              
                              709,735Purchase
      of property and equipment
                              
                              
                              (33,528
                              )
                              
                              
                              -NET
      CASH PROVIDED BY INVESTING ACTIVITIES
                              
                              
                              4,615,398
                              
                              
                              
                              709,735FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                              
                              
                              -
                              
                              
                              
                              (79,959
                              )Borrowing
      from factor
                              
                              
                              -
                              
                              
                              
                              4,326,852Repayment
      to factor
                              
                              
                              -
                              
                              
                              
                              (4,326,852
                              )Other
      long-term obligations
                              
                              
                              -
                              
                              
                              
                              2,145NET
      CASH USED IN FINANCING ACTIVITIES
                              
                              
                              -
                              
                              
                              
                              (77,814
                              )INCREASE
      IN CASH
                              
                              
                              5,043,616
                              
                              
                              
                              4,803,839Cash
      at beginning of period
                              
                              
                              2,253,631
                              
                              
                              
                              284,030CASH
      AT END OF PERIOD
                              
                              $
                              7,297,247
                              
                              
                              $
                              5,087,689Supplemental
      information:Interest
      paid
                              
                              $
                              4,179
                              
                              
                              $
                              69,190





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, 2010 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.





Use
of Estimates





The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
materially from those estimates.





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, 2010 and 2009:





2010
                  
                  
                  2009Net
      sales
                  
                  $
                  19,391,269
                  
                  
                  $
                  22,592,798Gross
      profit
                  
                  
                  5,495,467
                  
                  
                  
                  7,235,461Net
      income
                  
                  
                  2,537,992
                  
                  
                  
                  3,737,826Total
      current assets
                  
                  
                  13,042,670
                  
                  
                  
                  17,560,768Total
      assets
                  
                  
                  31,890,519
                  
                  
                  
                  31,323,068Total
      current liabilities
                  
                  
                  4,730,928
                  
                  
                  
                  5,389,052





During
the nine months ended December 31, 2010 and 2009, respectively, the Company
purchased $5,818,014 and $11,855,816 of products from the Joint
Venture.  For the nine month period ended December 31, 2010 and 2009,
the Company has adjusted its earnings of the Joint Venture to reflect an
increase of $35,867 and $398,801, respectively, for changes to inter-Company
profit in inventory





Income
Taxes





We
calculate our interim tax provision in accordance with the guidance for
accounting for income taxes in interim periods.  At the end of each
interim period, we estimate the annual effective tax rate and apply that tax
rate to our ordinary quarterly pre-tax income.  The tax expense or
benefit related to significant, unusual or extraordinary discrete events during
the interim period is recognized in the interim period in which those events
occurred.  In addition, the effect of changes in enacted tax laws or
rates or tax status is recognized in the interim period in which the change
occurs.





The
Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets or liabilities and their
reported amounts in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The deferred tax
assets are reviewed periodically for recoverability and valuation allowances are
provided, whenever it is more likely than not that a deferred tax asset will not
be realized.  The Company follows the financial pronouncement that
gives guidance related to the recognition and measurement of a tax position
taken or expected to be taken in a tax return and requires that we recognize in
our financial statements the impact of a tax position, if that position is more
likely than not to be sustained upon an examination, based on the technical
merits of the position.  Interest and penalties related to income tax
matters are recorded as income tax expenses.


7





Financing
Receivables





In
September 2010, the FASB issued an Accounting Standards Update requiring
enhanced disclosure of the credit quality of financing receivables, as defined
therein, and the adequacy of allowances for credit losses.





Management
considers amounts due from the Company’s factor to be “financing receivables”.
Trade accounts receivable, other receivables, and receivables from our Hong Kong
Joint Venture are not considered by management to be financing
receivables.





The
Company sells the majority of its short-term receivables arising in the ordinary
course of business to our factor. At the time a receivable is sold to our factor
the credit risk associated with the credit worthiness of the debtor is assumed
by the factor. The Company continues to bear any credit risk associated with
delivery or warranty issues related to the products sold.





Management
assesses the credit risk of both its trade accounts receivable and its financing
receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on
that assessment. Changes in the allowance account from one accounting period to
the next are charged to operations in the period the change is
determined.  Amounts ultimately determined to be uncollectible are
eliminated from the receivable accounts and from the allowance account in the
period that the receivables’ status is determined to be
uncollectible.





Based on
the nature of the factoring agreement and prior experience, no allowance for
uncollectible financing receivables has been provided.  At December
31, 2010, an allowance of $75,000 has been provided for uncollectible trade
accounts receivable.




Assets
Held for Investment





Assets
held for investment at March 31, 2010 consisted of investments in ten different
bond and/or exchange traded funds.  These funds had no fixed maturity
date and could be traded daily.  All of the Company’s investments are
measured and recorded at fair value using quoted prices in active markets for
identical assets or liabilities (Level 1).  Due to volatility in the
bond market, all assets held for sale were converted to cash in December
2010.





Assets
held for investment are accounted for as investments available for sale and
recorded at their fair value, with unrealized gains and losses reported as a
separate component of shareholders’ equity in accumulated other comprehensive
income.  Realized gains, net of losses, of $73,367 for the nine months
ended December 31, 2010 on our investments available for sale are recognized in
results of operations as investment and interest income.





Net
Income per Common Share





Basic
earnings per common share are 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 and nine month
periods ended December 31, 2010 and 2009 is as follows:


8





Three Months Ended
                    December 31,
                  
                  
                  Nine Months Ended
                    December 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Weighted
      average number of common shares outstanding for basic EPS
                  
                  
                  2,387,887
                  
                  
                  
                  2,387,887
                  
                  
                  
                  2,387,887
                  
                  
                  
                  2,389,360Shares
      issued upon the assumed exercise of outstanding stock
    options
                  
                  
                  7,978
                  
                  
                  
                  7,314
                  
                  
                  
                  7,454
                  
                  
                  
                  6,261Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                  
                  
                  2,395,865
                  
                  
                  
                  2,395,201
                  
                  
                  
                  2,395,341
                  
                  
                  
                  2,395,621





Outstanding
options to purchase 28,427 shares of common stock as of December 31, 2010 are
not included in the above calculations as the effect would be
anti-dilutive.





Contingencies





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 the ultimate outcome of these matters will not have a
material adverse effect on the Company’s financial statements.





Subsequent
Events





The
Company evaluated its December 31, 2010 financial statements for subsequent
events through the date financial statements were issued.  The Company
is not aware of any subsequent events which would require recognition or
disclosure in the financial statements.





Recent
Accounting Pronouncements Not Yet Adopted





Changes
to accounting principles generally accepted in the United States of America
(U.S. GAAP) are established by the Financial Accounting Standards Board (FASB)
in the form of accounting standards updated (ASU’s) to the FASB’s Accounting
Standards Codification.





The
Company considers the applicability and impact of all ASU’s.  Recently
issued ASU’s were evaluated and determined to be either not applicable or are
not expected to have a material impact on our consolidated financial
statements.





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 month periods ended December 31,
2010 and 2009 relate to the operational results of the Company.  A
discussion and analysis of the Hong Kong Joint Venture’s operational results for
these periods is presented below under the heading “Joint
Venture.”


9





The
Company has developed new products based on new smoke and gas detection
technologies, with what the Company believes are improved sensing technology and
product features.  The Company has applied for patents for these new
products.  Before these products can be sold, independent testing
agencies evaluate the effectiveness of the products in performing their stated
function and issue an approval and testing certificate for each
product.  In connection with its North American sales of new
generation product lines, the Company received its first certification in
December and expects to receive additional certifications by the end of this
year.





Results
of Operations





Three Months Ended December
31, 2010 and 2009





Sales.  Net sales
for the three months ended December 31, 2010 were $2,475,511 compared to
$6,321,490 for the comparable three months in the prior fiscal year, a decrease
of $3,845,979 (60.8%).  The primary reasons for the decrease in net
sales volumes were lower sales of our core product lines, including smoke alarms
and carbon monoxide alarms, to a major national retailer, as previously
announced, and, to a lesser extent, lower sales of these products to the
electrical distribution trade due to a continued reduction in new home
construction during the quarter as compared to the same quarter in the previous
year.





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 30.4% and 20.9% of sales for the quarters ended December 31,
2010 and 2009, respectively.  The increase in gross profit margin was
primarily due to reduced sales to a national retailer that had historically
provided lower gross profit margins.





Expenses.  Research
and development expense increased by $55,273 from the comparable three months in
the prior year, primarily due to the development of new products for the North
American market.  As a percentage of net sales, these expenses
increased to 7.4% for the three month period ended December 31, 2010, from 2.0%
for the 2009 period.  The increase in costs as a percentage of net
sales was primarily due to the development of new products for the North
American market and a comparison to lower overall net sales.





Selling, general and administrative
expense decreased by $253,271 from the comparable three months in the prior
year.  As a percentage of net sales, these expenses increased to 42.9%
for the three month period ended December 31, 2011 from 20.8% for the 2009
period.  The decrease in costs was primarily due to a reduction in
freight and commissions on lower net sales. The expenses increased as a
percentage of net sales, primarily due to fixed costs of administration that do
not decrease at the same rate as the reduction in net sales.





Investment Income and Interest
Expense and Income.  Our investment and interest income, net of
interest expense, was $63,219 for the quarter ended December 31, 2010, compared
to net interest expense of $16,418 for the quarter ended December 31,
2009.  The increase in interest income, net of interest expense, is
due to earnings on assets held for investment which were held for the majority
of the quarter, and to reduced borrowings from our factor.





Income
Taxes.  During the quarter
ended December 31, 2010, the Company generated a net income tax benefit of
$75,346.  For the corresponding 2009 period, the Company incurred net
income tax expense of $254,196.  The provision for income taxes for
the quarter ended December 31, 2010, as compared to the same quarter in the
prior year, is determined principally by the
loss from operations and the amount and timing of the unrealized earnings of and
the payment of dividends by the Hong Kong Joint Venture.  The income tax benefit for the three
months ended December 31, 2010 and the income tax expense for the same period of
the prior year is derived from the estimated taxes resulting from the sum of
taxable results from operations plus dividends received from the Hong
Kong Joint Venture, less the
benefit derived, if any, from the utilization of net operating losses
available.





Net Income.  We
reported net income of $19,545 for the quarter ended December 31, 2010, compared
to net income of $263,490 for the corresponding quarter of the prior fiscal
year, a $243,945  (92.6%) decrease.  The reason for the
decrease in net income is reduced revenues, principally from the loss of a
national retail customer and lower joint venture earnings.


10





Nine Months Ended December
31, 2010 and 2009





Sales.  Net sales
for the nine months ended December 31, 2010 were $9,871,310 compared to
$20,137,200 for the comparable nine months in the prior fiscal year, a decrease
of $10,265,890 (51.0%).  The primary reasons for the decrease in net
sales volumes were lower sales of our core product lines, including smoke alarms
and carbon monoxide alarms to a major national retailer, as previously
announced, and, to a lesser extent, lower sales of these products to the
electrical distribution trade due to a continued reduction in new home
construction during the period as compared to the same period in the previous
year.





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 increased from 20.5% for the period ended December
31, 2009 to 29.7% for the current period ended December 31, 2010.  The
increase in gross profit margin was primarily due to reduced sales to a national
retailer that had historically provided lower gross profit margins.





Expenses.  Research
and development expense increased by $36,108 from the comparable nine months in
the prior year, primarily due to the development of new products for the North
American market.  As a percentage of sales, these expenses were 5.1%
for the nine month period ended December 31, 2010 and 2.3% for the comparable
2009 period.  The primary reason for the increase in expenses as a
percentage of sales is due to the development of new products for the North
American market and a comparison to lower overall net sales.





Selling, general and administrative
expense decreased by $504,893 from the comparable nine months in the prior
year.  As a percentage of net sales, these expenses increased to 33.9%
for the nine month period ended December 31, 2010 from 19.1% for the 2009
period.  The decrease in costs was primarily due to a reduction in
freight and commissions on lower net sales. The expenses increased as a
percentage of net sales, primarily due to fixed costs of administration that do
not decrease at the same rate as the reduction in net sales.





Investment Income and Interest
Expense.  Net interest income, net of interest expense, was
$169,092 for the nine months ended December 31, 2010, compared to net interest
expense of $48,739 for the nine months ended December 31, 2009.  The
increase in interest income, net of interest expense, is due to earnings on
assets held for investment which were held for the majority of the nine month
period and to reduced borrowing from our factor.





Income
Taxes.  During the nine months ended December 31, 2010, the
Company recorded an income tax benefit of $100,622.  For the
corresponding 2009 period, the Company recorded a tax expense of
$234,654.  The provision for income tax benefit for the nine months
ended December 31, 2010, as compared to the same period in the prior year, is
determined principally
by the loss from operations and the amount and timing of the unrealized earnings
of and the payment of dividends by the Hong Kong Joint Venture.  The income tax benefit for the nine
months ended December 31, 2010 and the income tax expense for the same period of
the prior year is derived from the estimated taxes resulting from the sum of
taxable results from operations plus dividends received from the Hong
Kong Joint Venture, less the
benefit derived, if any, from the utilization of net operating losses
available.


Net Income.  We
reported net income of $569,788 for the nine months ended December 31, 2010
compared to net income of $1,799,825 for the corresponding period of the prior
fiscal year.  The primary reasons for the decrease are reduced
revenues, principally from the loss of a national retail customer and lower
joint venture earnings.





Financial
Condition and Liquidity





The Company has a Factoring Agreement
with CIT Group, Inc. (CIT) 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 $7,500,000. Based on
specified percentages of our accounts receivable and inventory and letter of
credit commitments, as of December 31, 2010 we had a borrowing availability
of  $2,520,740 under the Factoring Agreement and had no
borrowings.  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,
2010, the prime rate was 3.25%.  Borrowings are collateralized by all
of our accounts receivable and inventory.  The Company does not
anticipate any changes  in its ability to maintain its short-term or
long-term liquidity.





Our factored accounts receivable as of
the end of our last fiscal year was $3,824,553, and was $1,142,696 as of
December 31, 2010.  Our prepaid expenses as of the end of our last
fiscal year were $351,192, and were $319,596 as of December 31,
2010.


11





Operating activities provided cash of
$601,489 for the nine months ended December 31, 2010.  This was
primarily due to a decrease in accounts receivable and amounts due from factor
of $2,881,769, offset by a decrease in accounts payable and accrued expenses of
$1,381,854 and earnings of the Joint Venture of $1,209,050.  For the
same period last year, operating activities provided cash of $4,171,918,
primarily as a result of decreases in inventory and prepaid expenses offset by a
decrease in accounts payable and accrued expenses.





Investing activities provided cash of
$4,442,127 during the nine months ended December 31, 2010, primarily as a result
of the sale of assets held for investment.  For the same period last
year, investing activities provided cash of $709,735 related to dividends
received from the Joint Venture.  The Company invested in assets held
for investment in an effort to obtain a more favorable return.





Financing activities used cash of
$77,813 at December 31, 2009 that resulted primarily from retirement of common
stock.





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.





Joint
Venture





Net Sales.  Net
sales of the Joint Venture for the three and nine months ended December 31, 2010
were $6,922,505 and $19,391,269, respectively, compared to $8,533,190 and
$22,592,798, respectively, for the comparable period in the prior fiscal
year.  The 18.9% and 14.2% respective decreases in net sales by the
Joint Venture for the three and six month periods were due to lower volumes of
sales of smoke alarm products to the Company for sale to a national
retailer.





Gross
Margins.  Gross margins of the Joint Venture for the nine month
period ended December 31, 2010 decreased to 28.3% from 32.0% for the 2009
corresponding period.  For the three month period ended December 31,
2010, gross margins decreased to 27.6% from the 33.7% gross margin of the prior
year’s corresponding period.  The lower gross margins for the 2010
period was due to product mix of the Joint Venture’s sales; since gross margins
depend on sales volume of various products, with varying margins, lower sales of
higher margin products and increased sales of lower margin products affect the
overall gross margins.





Expenses.  Selling,
general and administrative expenses were $1,039,048 and $3,075,969,
respectively, for the three and nine month periods ended December 31, 2010,
compared to $1,541,932 and $3,694,679 in the prior year’s respective
periods.  As a percentage of sales, expenses were 15.0% and 15.9% for
the three and nine month periods ended December 31, 2010, compared to 18.1% and
16.3% for the three and nine month periods ended December 31,
2009.  The decrease in selling, general and administrative actual
expense and as a percent of sales were primarily due to lower selling and
freight costs on decreased net sales.





Interest Income and
Expense.  Net interest income on assets held for investment was
$113,964 and $285,697 respectively, for the three and nine month periods ended
December 31, 2010, compared to net interest income of $59,504 and $153,966,
respectively, for the prior year’s periods.





Net Income.  For
the reasons stated above, net income for the three and nine months ended
December 31, 2010 was $889,164 and $2,537,992, respectively, compared to
$1,321,702 and $3,737,826, respectively, in the comparable periods last
year.





Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the nine months ended December 31, 2010, working
capital increased by $558,509 from $11,756,026 on March 31, 2010 to $12,314,535
on December 31, 2010.





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,
future projections 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.


12





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, 2010.  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:





Revenue
Recognition.  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.  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.





Income Taxes.The
Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets or liabilities and their
reported amounts in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The deferred tax
assets are reviewed periodically for recoverability and valuation allowances are
provided, whenever it is more likely than not that a deferred tax asset will not
be realized.  The Company follows the financial pronouncement that
gives guidance related to the financial statement of recognition and measurement
of a tax position taken or expected to be taken in a tax return and requires
that we recognize in our financial statements the impact of a tax position, if
that position is more likely than not to be sustained upon an examination, based
on the technical merits of the position.  Interest and penalties
related to income tax matters are recorded as income tax expenses.





Assets Held for
Investment.  Assets held for investment at March 31, 2010
consist of investments in 10 different bond and/or exchange traded
funds.  These funds have no fixed maturity date and may be traded
daily.  All of the Company’s investments are measured and recorded at
fair value using quoted prices in active markets for identical assets or
liabilities (Level 1).  These funds invest in, under normal
circumstances, a portfolio of fixed income securities, including, but not
limited to, non-mortgage securities issued or guaranteed by the U.S. Government,
its agencies, instrumentalities or sponsored enterprises (“U.S. Government
Securities”), corporate notes and commercial paper and fixed and floating rate
asset-backed securities.  All of the funds are subject to various
risks including, but not limited to interest rate risk, credit risk, high yield
risk, market risk, liquidity risk, foreign (non-U.S.) investment risk, currency
risk, leveraging risk and management risk.





Assets held for investment are
accounted for as investments available for sale and are recorded at their
fair value, with unrealized gains and losses reported as a separate component of
stockholders' equity in accumulated other comprehensive income. Gains and losses
on our investments available for sale are recognized in results of operations as
investment income when realized.





Financing Receivables. In
September 2010, the FASB issued an Accounting Standards Update requiring
enhanced disclosure of the credit quality of financing receivables, as defined
therein, and the adequacy of allowances for credit losses.  Management
considers amounts due from the Company’s factor to be “financing receivables”.
Trade accounts receivable, other receivables, and receivables from our Hong Kong
Joint Venture are not considered by management to be financing
receivables.


13


The
Company sells the majority of its short-term receivables arising in the ordinary
course of business to our factor. At the time a receivable is sold to our factor
the credit risk associated with the credit worthiness of the debtor is assumed
by the factor. The Company continues to bear any credit risk associated with
delivery or warranty issues related to the products sold.





Management
assesses the credit risk of both its trade accounts receivable and its financing
receivables based on the specific identification of accounts that have exceeded
credit terms. An allowance for uncollectible receivables is provided based on
that assessment. Changes in the allowance account from one accounting period to
the next are charged to operations in the period the change is
determined.  Amounts ultimately determined to be uncollectible are
eliminated from the receivable accounts and from the allowance account in the
period that the receivables’ status is determined to be
uncollectible.





Based on
the nature of the factoring agreement and prior experience, no allowance for
uncollectible financing receivables has been provided. At December 31, 2010, an
allowance of $75,000 has been provided for uncollectible trade accounts
receivable.




From time to time, 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. It is the opinion
of management, based on advice of legal counsel, that the ultimate outcome of
these matters will not have a material adverse effect on the Company’s financial
statements.





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.





recent
accounting pronouncements not yet adopted





Changes
to accounting principles generally accepted in the United Stated of America
(U.S. GAAP) are established by the Financial Accounting Standards Board (FASB)
in the form of accounting standards updated (ASU’s) to the FASB’s Accounting
Standards Codification.





We consider the applicability and
impact of all ASU’s.  Recently issued ASU’s were evaluated and
determined to be either not applicable or are not expected to have a material
impact on our consolidated financial statements.





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.


14


PART
II - OTHER INFORMATION





ITEM
1.                LEGAL
PROCEEDINGS





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.





ITEM
6.                EXHIBITS





Exhibit
No.


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 3.3 to the Company’s
      Quarterly Report on Form 10-Q for the period ended June 30, 2009, File No.
      1-31747)


10.1
            Hong
      Kong Joint Venture Agreement, as amended (incorporated by reference to
      Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year
      ended March 31, 2003, File No.
1-31747)


10.2
            Amended
      and Restated Factoring Agreement between the Registrant and The CIT
      Group/Commercial Services, Inc. (“CIT”), dated June 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 June 26,
      2007, file No. 1-31747)


10.3
            Amended
      and Restated Inventory Security Agreement between the Registrant and CIT,
      dated June 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 June 26, 2007, file No.
1-31747)


10.4
            Amendment,
      dated December 22, 2009, to Amended and Restated Factoring Agreement
      between the Registrant and CIT dated June 22, 2007 (substantially
      identical agreement entered into by the Registrant’s wholly-owned
      subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.5
      to the Company’s Quarterly Report on Form 10-Q filed February 16, 2010,
      file No. 1-31747)


10.5
            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 (incorporated by
      reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q
      for the period ended December 31, 2008, File No.
  1-31747)


10.6
            Amendment
      to Lease between Universal Security Instruments, Inc. and St. John
      Properties, Inc. dated June 23, 2009 (incorporated by reference to Exhibit
      10.9 to the Company’s Annual Report on Form 10-K for the year ended March
      31, 2009, File No. 1-31747)


10.7
            Amended
      and Restated Employment Agreement dated July 18, 2007 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,
      2007, File No. 1-31747), as amended by Addendum dated November 13, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed November 15, 2007, File No. 1-31747), by Addendum dated
      September 8, 2008 (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), and by Addendum dated March 11, 2010 (incorporated by reference
      to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March
      12, 2010, File No. 1-31747)


31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer*


31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer*


32.1
            Section
      1350 Certifications*


99.1
            Press
      Release dated February 11, 2011*


*Filed
herewith


15





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 11, 2011
              By:
              /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
              /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial Officer(principal
      financial officer)


16