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 September 30, 2009





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
November 10, 2009, 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 September 30, 2009 and March 31, 2009
                      
                      3Consolidated
      Statements of Earnings for the Three Months Ended September 30, 2009 and
      2008
                      
                      4Consolidated
      Statements of Earnings for the Six Months Ended September 30, 2009 and
      2008
                      
                      5Consolidated
      Statements of Cash Flows for the Six Months Ended September 30, 2009 and
      2008
                      
                      6Notes
      to Consolidated Financial Statements
                      
                      7Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      10Item
      3.
                      Quantitative
      and Qualitative Disclosure About Market Risk
                      
                      13Item
      4.
                      Controls
      and Procedures
                      
                      14Part
      II - Other InformationItem
      1.
                      Legal
      Proceedings
                      
                      15Item
      6.
                      Exhibits
                      
                      16Signatures
                      
                      17


2


PART
I - FINANCIAL INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





September 30, 2009
                  
                  
                  March 31, 2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  5,983,540
                  
                  
                  $
                  284,030Accounts
      receivable:Trade,
      net of allowance, for doubtful accounts of $87,851 and $95,927 at
      September 30, 2009 and March 31, 2009
                  
                  
                  314,606
                  
                  
                  
                  55,779Other
      receivables
                  
                  
                  69,755
                  
                  
                  
                  97,780Receivable
      from Hong Kong Joint Venture
                  
                  
                  161,933
                  
                  
                  
                  312,257546,294
                  
                  
                  
                  465,816Amount
      due from factor
                  
                  
                  4,799,019
                  
                  
                  
                  4,610,401Inventories,
      net of allowance for obsolete inventory of $100,000 and $204,309 at
      September 30, 2009 and March 31, 2009, respectively
                  
                  
                  6,002,488
                  
                  
                  
                  8,997.231Prepaid
      expenses
                  
                  
                  373,848
                  
                  
                  
                  255,745Assets
      held for sale
                  
                  
                  -
                  
                  
                  
                  202,565TOTAL
      CURRENT ASSETS
                  
                  
                  17,705,189
                  
                  
                  
                  14,815,788DEFERRED
      TAX ASSET
                  
                  
                  2,164,269
                  
                  
                  
                  2,141,702INVESTMENT
      IN HONG KONG JOINT VENTURE
                  
                  
                  11,818,324
                  
                  
                  
                  10,550,373PROPERTY
      AND EQUIPMENT – NET
                  
                  
                  227,534
                  
                  
                  
                  251,366OTHER
      ASSETS
                  
                  
                  20,136
                  
                  
                  
                  18,449TOTAL
      ASSETS
                  
                  $
                  31,935,452
                  
                  
                  $
                  27,777,678LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESNote
      payable – factor
                  
                  $
                  3,416,135
                  
                  
                  $
                  -Accounts
      payable
                  
                  
                  735,637
                  
                  
                  
                  794,365Hong
      Kong Joint Venture accounts payable
                  
                  
                  1,654,029
                  
                  
                  
                  1,967,073Accrued
      liabilities:Litigation
      reserve
                  
                  
                  401,592
                  
                  
                  
                  401,592Payroll
      and employee benefits
                  
                  
                  167,891
                  
                  
                  
                  148,071Commissions
      and other
                  
                  
                  46,847
                  
                  
                  
                  202,789Liabilities
      held for sale
                  
                  
                  -
                  
                  
                  
                  202,565TOTAL
      CURRENT LIABILITIES
                  
                  
                  6,422,131
                  
                  
                  
                  3,716,455Long-term
      liability  – other
                  
                  
                  96,748
                  
                  
                  
                  95,324COMMITMENTS
      AND CONTINGENCIES
                  
                  
                  -
                  
                  
                  
                  -SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value per share; authorized 20,000,000 shares; issued and
      outstanding 2,387,887 shares at September 30, 2009 and 2,408,220 shares at
      March 31, 2009
                  
                  
                  23,879
                  
                  
                  
                  24,083Additional
      paid-in capital
                  
                  
                  13,100,979
                  
                  
                  
                  13,186,436Retained
      earnings
                  
                  
                  12,291,715
                  
                  
                  
                  10,755,380TOTAL
      SHAREHOLDERS’ EQUITY
                  
                  
                  25,416,573
                  
                  
                  
                  23,965,899TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
                  $
                  31,935,452
                  
                  
                  $
                  27,777,678





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 September
      30,2009
                
                
                2008Net
      sales
                
                $
                7,900,805
                
                
                $
                8,381,379Cost
      of goods sold – acquired from Joint Venture
                
                
                6,052,407
                
                
                
                4,825,503Cost
      of goods sold – other
                
                
                200,726
                
                
                
                1,664,603GROSS
      PROFIT
                
                
                1,647,672
                
                
                
                1,891,273Research
      and development expense
                
                
                221,547
                
                
                
                85,184Selling,
      general and administrative expense
                
                
                1,335,307
                
                
                
                1,649,290Operating
      income
                
                
                90,818
                
                
                
                156,799Other
      income (expense):Interest
      income
                
                
                5,274
                
                
                
                23,041Interest
      expense
                
                
                (36,104
                )
                
                
                (26,300
                )INCOME
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                59,988
                
                
                
                153,540Equity
      in earnings of Joint Venture
                
                
                889,584
                
                
                
                600,190Income
      from continuing operations before income taxes
                
                
                949,572
                
                
                
                753,730Provision
      for income tax expense
                
                
                24,702
                
                
                
                97,429INCOME
      FROM CONTINUING OPERATIONS
                
                
                924,870
                
                
                
                656,301Discontinued
      operations:Gain
      from operations of the discontinued Canadian subsidiary
                
                
                -
                
                
                
                2,469,041Income
      tax benefit – discontinued operations
                
                
                -
                
                
                
                965,872Gain
      from discontinued operations
                
                
                -
                
                
                
                3,434,913NET
      INCOME
                
                $
                924,870
                
                
                $
                4,091,214Income
      per share:Basic
      – from continuing operations
                
                
                0.39
                
                
                
                0.26Basic
      – from discontinued operations
                
                
                -
                
                
                
                1.38Basic
      – net income
                
                
                0.39
                
                
                
                1.64Diluted
      – from continuing operations
                
                
                0.39
                
                
                
                0.26Diluted
      – from discontinued operations
                
                
                -
                
                
                
                1.38Diluted
      – net income
                
                
                0.39
                
                
                
                1.64Shares
      used in computing net income per share:Basic
                
                
                2,387,887
                
                
                
                2,486,176Diluted
                
                
                2,394,014
                
                
                
                2,486,176





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


4


UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





Six Months Ended September
    30,2009
                
                
                2008Net
      sales
                
                $
                13,815,710
                
                
                $
                14,574,180Cost
      of goods sold - acquired from Joint Venture
                
                
                10,396,896
                
                
                
                8,097,713Cost
      of goods – other
                
                
                601,308
                
                
                
                3,008,128GROSS
      PROFIT
                
                
                2,817,506
                
                
                
                3,468,339Research
      and development expense
                
                
                340,698
                
                
                
                171,418Selling,
      general and administrative expense
                
                
                2,538,385
                
                
                
                2,893,224Operating
      (loss) income
                
                
                (61,577
                )
                
                
                403,697Other
      income (expense):Interest
      income
                
                
                9,425
                
                
                
                41,876Interest
      expense
                
                
                (41,746
                )
                
                
                (26,300
                )(LOSS)
      INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                (93,898
                )
                
                
                419,273Equity
      in earnings of Joint Venture
                
                
                1,610,691
                
                
                
                892,962Income
      from continuing operations before income taxes
                
                
                1,516,793
                
                
                
                1,312,235Provision
      for income tax (benefit) expense
                
                
                (19,542
                )
                
                
                198,795INCOME
      FROM CONTINUING OPERATIONS
                
                
                1,536,335
                
                
                
                1,113,440Discontinued
      operations:Gain
      (loss) from operations of the discontinued Canadian
    subsidiary
                
                
                -
                
                
                
                2,415,382Income
      tax benefit – discontinued operations
                
                
                -
                
                
                
                965,872Gain
      (loss) from discontinued operations
                
                
                -
                
                
                
                3,381,254NET
      INCOME
                
                $
                1,536,335
                
                
                $
                4,494,694Income
      per share:Basic
      – from continuing operations
                
                
                0.64
                
                
                
                0.45Basic
      – from discontinued operations
                
                
                -
                
                
                
                1.36Basic
      – net income
                
                
                0.64
                
                
                
                1.81Diluted
      – from continuing operations
                
                
                0.64
                
                
                
                0.45Diluted
      – from discontinued operations
                
                
                -
                
                
                
                1.36Diluted
      – net income
                
                
                0.64
                
                
                
                1.81Shares
      used in computing net income per share:Basic
                
                
                2,390,100
                
                
                
                2,487,017Diluted
                
                
                2,395,724
                
                
                
                2,487,017





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)





Six Months Ended September
    30,2009
                
                
                2008OPERATING
      ACTIVITIESNet
      income
                
                $
                1,536,335
                
                
                $
                4,494,694Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Operations
      of discontinued subsidiary
                
                
                -
                
                
                
                (3,428,897
                )Depreciation
      and amortization
                
                
                23,832
                
                
                
                22,625Earnings
      of the Joint Venture
                
                
                (1,610,691
                )
                
                
                (892,962
                )Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable and amounts due from
factor
                
                
                (269,096
                )
                
                
                (698,818
                )Decrease
      (increase) in inventories and prepaid expenses
                
                
                2,876,640
                
                
                
                (3,463,975
                )Decrease
      (increase) in accounts payable and accrued expenses
                
                
                (507,894
                )
                
                
                1,663,855(Decrease)
      in deferred taxes and other assets
                
                
                (22,830
                )
                
                
                (769,832
                )NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                
                $
                2,026,296
                
                
                
                (3,073,310
                )INVESTING
      ACTIVITIES:Activities
      of discontinued operations
                
                
                -
                
                
                
                2,590,722Dividends
      received from Joint Venture
                
                
                342,740
                
                
                
                216,619NET
      CASH PROVIDED BY INVESTING ACTIVITIES
                
                
                342,740
                
                
                
                2,807,341FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                
                
                (85,661
                )
                
                
                (13,667
                )Borrowing
      from factor
                
                
                3,416,135
                
                
                
                625,594Activities
      of discontinued operations
                
                
                -
                
                
                
                (4,187,444
                )NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                
                
                3,330,474
                
                
                
                (3,575,517
                )INCREASE
      (DECREASE) IN CASH
                
                
                5,699,510
                
                
                
                (3,841,486
                )Cash
      at beginning of period
                
                
                284,030
                
                
                
                3,863,784CASH
      AT END OF PERIOD
                
                $
                5,983,540
                
                
                $
                22,298Supplemental
      information:Interest
      paid
                
                $
                41,746
                
                
                $
                26,300





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, 2009 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





As
discussed in prior periods, on February 11, 2008, the assets of International
Conduits, Ltd. (Icon), a Canadian corporation in which we owned a two-thirds
interest, were placed under the direction of a court appointed receiver, and the
operations of Icon were suspended. Accordingly, the assets and liabilities of
Icon are not consolidated in the financial statements of the Company and are
classified as assets held in receivership.  Our consolidated financial
statements and the related note disclosures reflect the operations of Icon as
discontinued operations for all periods presented.





At
September 30, 2009, the receivership has been completed and there are no
remaining assets or liabilities of Icon.





Income
Taxes





A
provision for federal and state income tax (benefit) expense on continuing
operations of $(19,542) and $198,795 has been provided for the six month periods
ended September 30, 2009 and 2008, respectively.





As of
September 30, 2009, the Company has recorded in other long term liabilities an
amount for uncertain tax positions of $96,748, including imputed
interest.  The Company has chosen to treat interest and penalties
related to uncertain tax liabilities as income tax expense.





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 six months ended September 30, 2009 and 2008:





2009
                  
                  
                  2008Net
      sales
                  
                  $
                  14,059,608
                  
                  
                  $
                  19,667,762Gross
      profit
                  
                  
                  4,363,249
                  
                  
                  
                  5,146,125Net
      income
                  
                  
                  2,416,124
                  
                  
                  
                  2,382,837Total
      current assets
                  
                  
                  15,923,351
                  
                  
                  
                  17,985,028Total assets
                  
                  
                  30,149,259
                  
                  
                  
                  27,998,136Total
      current liabilities
                  
                  
                  6,168,310
                  
                  
                  
                  6,674,648





During
the six months ended September 30, 2009 and 2008, respectively, the Company
purchased $7,577,193 and $13,789,174 of products from the Joint
Venture.  For the six month period ended September 30, 2009 and 2008,
the Company has adjusted its equity in earnings of the Joint Venture to reflect
an addition (reduction) of $402,629 and ($266,628) for inter-company profit in
inventory.





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.




7




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 six month
periods ended September 30, 2009 and 2008 is as follows:





Three Months Ended
                  September 30,
                
                
                Six Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Weighted
      average number of common shares outstanding for basic EPS
                
                
                2,387,887
                
                
                
                2,486,176
                
                
                
                2,390,100
                
                
                
                2,487,017Shares
      issued upon the assumed exercise of outstanding stock
    options
                
                
                6,127
                
                
                
                0
                
                
                
                5,624
                
                
                
                0Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                
                
                2,394,014
                
                
                
                2,486,176
                
                
                
                2,395,724
                
                
                
                2,487,017





Outstanding
options to purchase 67,756 shares of common stock as of September 30, 2009 are
not included in the above calculations as the effect would be
anti-dilutive.





Stock
Based Compensation





Stock Option
Activity.  During the six month period ended September 30,
2009, no stock options were granted. During the six month
period ended September 30, 2009, no shares of our common stock have been issued
as a result of the exercise of the options granted under the now expired stock
option plan.





Stock Compensation
Expense. Compensation expense related to share-based awards is
recognized on a straight-line basis based on the grant-date fair
value  of share awards that are expected to vest during the requisite
service period.  We have estimated forfeitures on the date of grant
and are only recording expense on shares we expect to vest. For the six months
ended September 2009 and 2008, we recorded $11,406 and $6,987, respectively, of
stock-based compensation cost as general and administrative expense in our
consolidated statement of earnings. No portion of employees’ compensation
including stock compensation expense was capitalized during the
period.





As of
September 30, 2009, there was $34,219 of 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 September
30, 2009.





Subsequent
Events





The
Company evaluated events occurring between the end of our fiscal quarter,
September 30, 2009 and November 11, 2009 when the financial statements were
available for issuance.





In July
2009, CIT Group, Inc. (CIT), the parent corporation of the Company’s factor and
principal lender, warned in a press release of the possibility that CIT may file
for bankruptcy protection.  At September 30, 2009, the Company had
$3,416,135 in borrowings under its factoring agreement with CIT, had no cash on
deposit with CIT, and had exercised substantially all of its availability to
borrow based on its factoring agreement with CIT.  Since July 13, 2009
the Company has borrowed substantially all of its availability from CIT and
transferred this amount to an account with the Company’s commercial
bank.  On November 1, 2009, the parent corporation of the Company’s
factor and principal lender, CIT, announced that it had filed for bankruptcy
protection.  While CIT has stated that its bankruptcy filing will
allow it to continue to provide funding to its customers such as the Company, it
is too early to determine the impact, if any, CIT’s bankruptcy will have on the
Company.  The Company will continue to monitor its borrowing policy
with respect to CIT and is reviewing its options to establish an alternate
source of commercial financing, if needed.





Recent
Accounting Pronouncements




The FASB
issued ASU 2009-01, Amendments based on Statement of
Financial Accounting Standards No. 168—TheFASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles,in June 2009 to codify
in ASC 105, Generally
Accepted Accounting Principles, FASB Statement 168, TheFASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, which was issued
to establish the Codification as the sole source of authoritative U.S. GAAP
recognized by the FASB, excluding SEC guidance, to be applied by nongovernmental
entities. The guidance in ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15,
2009.




8




Applying
the guidance in ASC 105 did not impact the Company’s financial condition
and results of operations. The Company has revised its references to
pre-Codification GAAP in its financial statements for the three and six month
periods ended September 30, 2009.





Business Combinations: On
April 1, 2009, we adopted authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) on business combinations. The guidance
retains the fundamental requirements that the acquisition method of accounting
(previously referred to as the purchase method of accounting) be used for all
business combinations, but requires a number of changes, including changes in
the way assets and liabilities are recognized and measured as a result of
business combinations. It also requires the capitalization of in-process
research and development at fair value and requires the expensing of
acquisition-related costs as incurred. We will apply this guidance to business
combinations completed after April 1, 2009. The effect on our consolidated
results of operations and financial position will be dependent upon future
acquisitions, if any.





Fair Value:On
January 1, 2009, we adopted the authoritative guidance on fair value measurement
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). Adoption of the new guidance did not have a material impact on
our financial statements.





In June
2009, the FASB issued authoritative guidance on the consolidation of variable
interest entities, which is effective for us beginning April 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.





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.


9





ITEM 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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 six month periods ended September 30, 2009 and 2008 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.”





Discontinued
Canadian Operations





As
discussed in prior periods, on February 11, 2008, the assets of International
Conduits, Ltd. (Icon), a Canadian corporation in which we owned a two-thirds
interest, were placed under the direction of a court appointed receiver, and the
operations of Icon were suspended. Accordingly, the assets and liabilities of
Icon are not consolidated in the financial statements of the Company and are
classified as assets held in receivership.  Our consolidated financial
statements and the related note disclosures reflect the operations of Icon as
discontinued operations for all periods presented.  At September 30,
2009, the receivership is completed and there are no remaining assets or
liabilities of Icon.





Results
of Operations





Three Months Ended September
30, 2009 and 2008





Sales.  Net sales
for the three months ended September 30, 2009 were $7,900,805 compared to
$8,381,379 for the comparable three months in the prior fiscal year, a decrease
of $480,574 (5.7%).  The primary reason for the decrease in net sales
volumes was lower sales 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.





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 20.9% and 22.6% of sales for the quarters ended September 30,
2009 and 2008, respectively.  The decrease in gross profit margin was
primarily due to a lower gross profit margin realized on increased sales to a
national home improvement retailer.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$177,620 from the comparable three months in the prior year.  As a
percentage of net sales, these expenses decreased to 19.7% for the three month
period ended September 30, 2009, from 20.7% for the corresponding 2008
period.  The decrease in costs as a percentage of net sales was
primarily due to decreases in commissions and freight expense.




10


Interest Expense and
Income.  Our interest expense, net of interest income, was
$30,830 for the quarter ended September 30, 2009, compared to net interest
expense of $3,259 for the quarter ended September 30, 2008.  The
increase in interest expense is due to increased borrowings from our
factor.





Income
Taxes.  During the quarter ended September 30, 2009, the
Company had a net income tax expense of $24,702.  For the
corresponding 2008 period, the Company had a net income tax expense of
$97,429.





Net Income.  We
reported net income of $924,870 for the quarter ended September 30, 2009,
compared to net income of $4,091,214 for the corresponding quarter of the prior
fiscal year, a $3,166,344 (77.4%) decrease.  The reason for the
decrease in net income is the inclusion in the prior period of the gain of
$3,434,913 recognized as a result of the settlement of the obligations of our
Canadian subsidiary.  Net income from continuing operations rose 40.9%
to $924,870 from $656,301 in the comparable quarter of last year as a result of
higher earnings from the Hong Kong Joint Venture.





Six Months Ended September
30, 2009 and 2008





Sales.  Net sales
for the six months ended September 30, 2009 were $13,815,710 compared to
$14,574,180 for the comparable six months in the prior fiscal year, a decrease
of $758,470 (5.2%).  The primary reason for the decrease in net sales
volumes was lower sales 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 23.8% for the period ended
September 30, 2008 to 20.4% for the current period ended September 30,
2009.  The decrease in gross profit margin was primarily due to a
lower gross profit margin realized on increased sales to a national home
improvement retailer.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$185,559 from the comparable six months in the prior year.  As a
percentage of sales, these expenses were 20.8% for the six month period ended
September 30, 2009 and 21.0% for the comparable 2008 period.  The
primary reason for the decrease in expenses as a percentage of sales is due to
decreases in commissions and freight expense.




Interest Expense and
Income.  Our interest expense, net of interest income, was
$32,321 for the six months ended September 30, 2009, compared to net interest
income of $15,576 for the six months ended September 30, 2008.  The
increase in interest expense is due to increased borrowings from our
factor.





Income
Taxes.  During the six months ended September 30, 2009, the
Company recorded an income tax benefit from continuing operations of
$19,542.  For the corresponding 2008 period, the Company had a tax
expense of $198,795.





Net Income.  We
reported net income of $1,536,335 for the six months ended September 30, 2009
compared to net income of $4,494,694 for the corresponding period of the prior
fiscal year.  The primary reasons for the decrease is the gain of
$3,381,254 recognized in the prior year’s period as a result of the settlement
of the obligations of our Canadian subsidiary.  Net income from
continuing operations rose 40.9% to $924,870 from $656,301 in the comparable
quarter of last year.Net income from
continuing operations rose 38.0% to $1,536,335 from $1,113,440 in the comparable
period of the prior year as a result of higher earnings from the Hong Kong Joint
Venture.





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 September 30, 2009 we had borrowed $3,416,135 under
the Factoring Agreement, substantially all of our availability under the
Factoring Agreement.  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
September 30, 2009, the prime rate was 3.25%.  Borrowings are
collateralized by all of our accounts receivable and inventory.





Our factored accounts receivable as of
the end of our last fiscal year (net of allowances for doubtful accounts) were
$4,610,401, and were $4,799,019 as of September 30, 2009.  Our prepaid
expenses as of the end of our last fiscal year were $255,745, and were $373,848
as of September 30, 2009.




11




Operating activities provided cash of
$2,026,296 for the six months ended September 30, 2009.  This was
primarily due to a decrease in inventories and prepaid expenses of $2,876,640,
offset by a decrease in accounts payable and accrued expenses of $507,894 and
earnings of the Joint Venture of $1,542,354.  For the same period last
year, operating activities used cash of $3,073,310, primarily as a result of
unremitted earnings of the Hong Kong Joint Venture and increases in inventory
and prepaid expenses offset by a decrease in accounts payable and accrued expenses,
which was due to a build-up in the Company’s inventory balances during that
period to meet forecasted sales orders.





Investing activities provided cash of
$342,740 during the six months ended September 30, 2009.





Financing activities provided cash of
$3,330,474 during the six months ended September 30, 2009, primarily from
borrowings from our factor.





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 July 2009, the parent
corporation of the Company’s factor and principal lender, CIT, warned in a press
release of the possibility that it may file for bankruptcy
protection.  Since July 13, 2009 we borrowed substantially all of our
availability from CIT and transferred this amount to a deposit account with our
commercial bank.  At September 30, 2009, we had $3,416,135 in
borrowings under our factoring agreement with CIT, had no cash on deposit with
CIT, and had exercised substantially all of our availability to borrow based on
our Factoring Agreement.  On November 1, 2009, the parent corporation
of the Company’s factor and principal lender, CIT, announced that it had filed
for bankruptcy protection.  While CIT has stated that its bankruptcy
filing will allow it to continue to provide funding to its customers such as the
Company, it is too early to determine the impact, if any, CIT’s bankruptcy will
have on the Company.  We will continue to monitor our borrowing policy
with respect to CIT, and we are reviewing our options to establish an alternate
source of commercial financing, if needed.





Joint
Venture





Net Sales.  Net
sales of the Joint Venture for the three and six months ended September 30, 2009
were $8,191,985 and $14,059,608, respectively, compared to $11,870,728 and
$19,667,762, respectively, for the comparable period in the prior fiscal
year.  Although the Joint Venture’s sales to the Company increased,
primarily for products purchased by the Company for sale to the Company’s new
national home improvement retailer customer, the 31.0% and 28.5% 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 non-related
customers in the Australian and European market.





Gross
Margins.  Gross margins of the Joint Venture for the three
month period ended September 30, 2009 increased to 34.1% from 28.0% for the 2008
corresponding period.  For the six month period ended September 30,
2009, gross margins increased to 31.0% from the 26.1% 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.





Expenses.  Selling,
general and administrative expenses were $1,274,546 and $2,152,747,
respectively, for the three and six month periods ended September 30, 2009,
compared to $1,389,104 and $2,607,670 in the prior year’s respective
periods.  As a percentage of sales, expenses were 15.6% and 15.3% for
the three and six month periods ended September 30, 2009, compared to 11.7% and
13.3% for the three and six month periods ended September 30,
2008.  The increase in selling, general and administrative expense as
a percent of sales was primarily due to variable costs that remained constant
despite decreased net sales.





Interest Income and
Expense.  Interest expense, net of interest income, was $1,509
and $3,602, respectively, for the three and six month periods ended September
30, 2009, compared to net interest expense of $4,267 and $5,761, 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 six months ended September 30, 2009 were $1,477,312 and
$2,416,124, respectively, compared to $1,732,256 and $2,382,837, respectively,
in the comparable periods last year.  The 14.7% and 1.4% respective
decrease and increase in net income for the three and six month periods were due
primarily to decreased sales volume as noted above.




12




Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the six months ended September 30, 2009, working
capital increased by $603,842 from $9,151,199 on March 31, 2009 to $9,755,041 on
September 30, 2009.





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, 2009.  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 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.





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, 2009.


13





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





As
previously reported, 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
a patent acquired by Kidde (US 4,972,181).  Kidde was 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 July, the
USPTO issued a final rejection of all of the claims asserted against the Company
based on the references.  Kidde filed a response to the rejection
which was subject to an October 19, 2009 advisory action by the USPTO rejecting
its additional arguments.  Kidde is entitled to take an appeal to the
Board of Patent Appeals and Interferences.  The litigation is stayed
pending the conclusion of the reexamination proceedings. 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.





As further previously reported, on June
25, 2008, Maple Chase Company which was acquired in January 2008 by United
Technologies Corporation (UTC), which also owns Kidde, 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 cancelling the remaining
claims.  The 2008 case asserts infringement of the claims emerging out
of reexamination.  On June 10, 2009, the Court granted the Company’s
motion to amend its Answer and Counterclaims seeking injunctive and antitrust
damages against Kidde and filed a third-party Complaint against its parent
company, United Technologies Corporation.   Kidde and UTC filed a
motion to dismiss the antitrust claims which was denied by the Court on October
22, 2009.  Discovery is now underway.  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 Kidde/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.





As
reported in the Company’s Annual Report of Form 10-K for the fiscal year ended
March 31, 2009, on August 21, 2008, Kidde filed its latest civil suit against
the Company for patent infringement (Case No. 08cv2202), this time in the United
States District Court for the District of Maryland.  Kidde accuses the
Company of infringement of US 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.





As further reported in the Company’s
Annual Report of Form 10-K for the fiscal year ended March 31, 2009, on
September 25, 2008, the Company with its Answer and Counterclaims to Kidde filed
a third-party Complaint against UTC 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 March 31, 2009, Kidde
filed for reexamination of the ‘453 patent.  That reexamination
request was declined by the USPTO.  Kidde and UTC filed a joint motion
to dismiss the Company’s antitrust claims and the Company filed a second motion
to amend its Answer and Counterclaims.  On October 9, 2009, the Court
held a hearing but has not yet issued its decision on the patent claim
interpretation and the motions to dismiss and amend.  Otherwise, the
case is in the discovery phase.  The Company intends to vigorously
prosecute its claims.




15




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
            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
      September 30, 2003, File No.
1-31747)


10.2
            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)


10.3
            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)


10.4
            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)


10.5
            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 September 30,
      2007, 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 November 11, 2009*





*Filed
herewith


16





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:
      November 11, 2009
                            By:
                            /s/
      Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
                            /s/
      James B. HuffJames
      B. HuffVice
      President, Chief Financial
Officer


17