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 June 30, 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. 
YesxNo ̈





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 Companyx





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes ̈Nox





At August
12, 2010, 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:Consolidated
      Balance Sheets at June 30, 2010 and March 31, 2010
                            3Consolidated
      Statements of Earnings for the Three Months Ended June 30, 2010 and
      2009
                            4Consolidated
      Statements of Cash Flows for the Three Months Ended June 30, 2010 and
      2009
                            5Notes
      to Consolidated Financial Statements
                            6Item 2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            8Item 4.
                            Controls
      and Procedures
                            11Part
      II - Other InformationItem 1.
                            Legal
      Proceedings
                            12Item 6.
                            Exhibits
                            12Signatures
                            13


2





PART
I - FINANCIAL INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





(unaudited)
                
                
                (audited)June 30, 2010
                
                
                March 31, 2010ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                2,941,799
                
                
                $
                2,253,631Assets
      held for investment
                
                
                4,043,413
                
                
                
                4,001,890Accounts
      receivable:Trade
      less allowance for doubtful accounts of $87,851 at June 30, 2010 and March
      31, 2010
                
                
                552,281
                
                
                
                266,526Other
      receivables
                
                
                69,215
                
                
                
                70,523Receivable
      from Hong Kong Joint Venture
                
                
                468,646
                
                
                
                212,622Amount
      due from factor
                
                
                1,195,552
                
                
                
                3,824,553Inventories,
      net of allowance for obsolete inventory of $100,000 at June 30, 2010 and
      March 31, 2010
                
                
                3,144,882
                
                
                
                3,439,906Prepaid
      expenses
                
                
                329,688
                
                
                
                351,192TOTAL
      CURRENT ASSETS
                
                
                12,745,476
                
                
                
                14,420,843DEFERRED
      TAX ASSET
                
                
                1,959,581
                
                
                
                1,877,156INVESTMENT
      IN HONG KONG JOINT VENTURE
                
                
                12,588,837
                
                
                
                12,153,456PROPERTY
      AND EQUIPMENT – NET
                
                
                188,007
                
                
                
                199,163OTHER
      ASSETS
                
                
                20,136
                
                
                
                20,136TOTAL
      ASSETS
                
                $
                27,502,037
                
                
                $
                28,670,754LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                575,829
                
                
                $
                689,762Hong
      Kong Joint Venture accounts payable
                
                
                265,136
                
                
                
                1,472,993Accrued
      liabilities:Payroll
      and employee benefits
                
                
                106,143
                
                
                
                232,034Commissions
      and other
                
                
                31,920
                
                
                
                47,001TOTAL
      CURRENT LIABILITIES
                
                
                979,028
                
                
                
                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 June 30, 2010 and March 31,
      2010
                
                
                23,879
                
                
                
                23,879Additional
      paid-in capital
                
                
                13,135,198
                
                
                
                13,135,198Retained
      earnings
                
                
                13,305,295
                
                
                
                13,023,428Other
      comprehensive income
                
                
                12,178
                
                
                
                -TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                26,476,550
                
                
                
                26,182,505TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                
                $
                27,502,037
                
                
                $
                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 June 30,2010
                
                
                2009Net
      sales
                
                $
                3,681,421
                
                
                $
                5,914,905Cost
      of goods sold – acquired from Joint Venture
                
                
                2,365,287
                
                
                
                4,344,489Cost
      of goods sold – other
                
                
                204,892
                
                
                
                400,582GROSS
      PROFIT
                
                
                1,111,242
                
                
                
                1,169,834Research
      and development expense
                
                
                167,103
                
                
                
                119,151Selling,
      general and administrative expense
                
                
                1,207,882
                
                
                
                1,203,078Operating
      loss
                
                
                (263,743
                )
                
                
                (152,395
                )Other
      income (expense):Interest
      income
                
                
                34,868
                
                
                
                4,151Interest
      expense
                
                
                (7,064
                )
                
                
                (5,642
                )LOSS
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                (235,939
                )
                
                
                (153,886
                )Equity
      in earnings of Joint Venture
                
                
                435,381
                
                
                
                721,107Income
      from operations before income taxes
                
                
                199,442
                
                
                
                567,221Income
      tax benefit
                
                
                (82,425
                )
                
                
                (44,244
                )NET
      INCOME
                
                $
                281,867
                
                
                $
                611,465Net
      income per share:Basic
                
                $
                0.12
                
                
                $
                0.25Diluted
                
                $
                0.12
                
                
                $
                0.25Shares
      used in computing net income per share:Basic
                
                
                2,387,887
                
                
                
                2,417,338Diluted
                
                
                2,395,328
                
                
                
                2,422,379





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


4


UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended June 30,2010
                  
                  
                  2009OPERATING
      ACTIVITIESNet
      income
                  
                  $
                  281,867
                  
                  
                  $
                  611,465Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  13,756
                  
                  
                  
                  14,147Earnings
      of the Joint Venture
                  
                  
                  (435,381
                  )
                  
                  
                  (721,107
                  )Stock-based
      compensation
                  
                  
                  -
                  
                  
                  
                  5,703Changes
      in operating assets and liabilities:Decrease
      in accounts receivable and amounts due from factor
                  
                  
                  2,088,530
                  
                  
                  
                  371,918Decrease
      in inventories and prepaid expenses
                  
                  
                  316,528
                  
                  
                  
                  1,593,220Decrease
      in accounts payable and accrued expenses
                  
                  
                  (1,462,762
                  )
                  
                  
                  (1,078,615
                  )Increase
      in deferred taxes and other assets
                  
                  
                  (82,425
                  )
                  
                  
                  (48,241
                  )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                  
                  
                  720,113
                  
                  
                  
                  748,490INVESTING
      ACTIVITIES:Purchase
      of assets held for investment
                  
                  
                  (29,345
                  )
                  
                  
                  -Purchase
      of property and equipment
                  
                  
                  (2,600
                  )
                  
                  
                  (2,929
                  )NET
      CASH USED IN INVESTING ACTIVITIES
                  
                  
                  (31,945
                  )
                  
                  
                  (2,929
                  )FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                  
                  
                  -
                  
                  
                  
                  (95,481
                  )Other
      long-term obligations
                  
                  
                  -
                  
                  
                  
                  710NET
      CASH USED IN FINANCING ACTIVITIES
                  
                  
                  -
                  
                  
                  
                  (94,771
                  )INCREASE
      IN CASH
                  
                  
                  688,168
                  
                  
                  
                  650,790Cash
      at beginning of period
                  
                  
                  2,253,631
                  
                  
                  
                  284,030CASH
      AT END OF PERIOD
                  
                  $
                  2,941,799
                  
                  
                  $
                  934,820Supplemental
      information:Interest
      paid
                  
                  $
                  7,064
                  
                  
                  $
                  5,642Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -





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


5


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 three months ended June 30, 2010 and 2009:





2010
                  
                  
                  2009Net
      sales
                  
                  $
                  6,795,331
                  
                  
                  $
                  5,867,623Gross
      profit
                  
                  
                  1,943,791
                  
                  
                  
                  1,568,646Net
      income
                  
                  
                  830,380
                  
                  
                  
                  938,812Total
      current assets
                  
                  
                  17,456,253
                  
                  
                  
                  14,640,539Total
      assets
                  
                  
                  31,119,018
                  
                  
                  
                  28,932,600Total
      current liabilities
                  
                  
                  4,812,591
                  
                  
                  
                  6,051,978





During
the three months ended June 30, 2010 and 2009, respectively, the Company
purchased $2,229,545 and $3,064,419 of products from the Joint Venture. 
For the three month period ended June 30, 2010 and 2009, the Company has
increased its earnings of the Joint Venture to reflect a decrease of $20,191 and
$246,180, respectively, for inter-Company profit in inventory





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, as necessary.  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 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.  Gains and losses on our investments available for sale are
recognized in results of operations as investment income when
realized.


6





Assets
held for investment consist of investments in seven different bond and/or
exchange traded funds.  All of the Company’s investments are measured and
recoded at fair value using quoted prices in active markets for identical assets
or liabilities (Level 1).





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 month periods
ended June 30, 2010 and 2009 is as follows:





Three Months Ended
                  June 30,2010
                
                
                2009Weighted
      average number of common shares outstanding for basic EPS
                
                
                2,387,887
                
                
                
                2,417,338Shares
      issued upon the assumed exercise of outstanding stock
    options
                
                
                7,441
                
                
                
                5,041Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                
                
                2,395,328
                
                
                
                2,422,379





Outstanding
options to purchase 28,427 shares of common stock as of June 30, 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 June 30, 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.


7


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 month periods
ended June 30, 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.”





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.





Results
of Operations





Three Months Ended June 30,
2010 and 2009





Sales.Net sales for
the three months ended June 30, 2010 were $3,681,421 compared to $5,914,905 for
the comparable three months in the prior fiscal year, a decrease of $2,233,484
(37.8%).  The primary reason for the reduction in net sales in the 2010
period was the previously announced non-renewal by a national retailer of our
product line beginning April 1, 2010.





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 30.2%
and 19.8% of sales for the quarters ended June 30, 2010 and 2009,
respectively.  Inasmuch as the gross profit margins on our sales to the
non-renewed national retailer were lower than our other sales, our overall sales
during the 2010 period were at higher gross profit margins.





Expenses.Research and
development, and selling, general and administrative expenses increased by
$52,756 from the comparable three months in the prior year.  As a
percentage of net sales, these expenses increased to 37.3% for the three month
period ended June 30, 2010, from 22.4% for the corresponding 2009 period. 
The increase in these expenses as a percentage of sales is primarily due to
costs that did not vary despite a reduction in net sales.





Interest Expense and Income.Our interest income, net of interest expense, was $27,804 for the quarter
ended June 30, 2010, compared to net interest expense of $1,491 for the quarter
ended June 30, 2009.  The increase in interest income is due to higher
earnings in the 2010 period on assets held for investment and lower balances on
amounts borrowed from our factor in the 2010 period.


8





Income Taxes.During
the quarter ended June 30, 2010, the Company had a net income tax benefit of
$82,425, primarily due to an increase in deferred taxes resulting from the
generation of net operating loss carryforwards related to domestic
earnings.  For the corresponding 2009 period, the Company had a net income
tax benefit of $44,244.  The higher effective rate in the current period
was a result of lower permanent difference related to unrealized equity method
earnings of the Joint Venture in excess of realized equity method of earnings of
the Joint Venture, partially offset by a reduction in income before equity in
earnings of the Joint Venture.





Net Income.We reported
net income of $281,867 for the quarter ended June 30, 2010, compared to net
income of $611,465 for the corresponding quarter of the prior fiscal year, a
$329,598 (53.9%) decrease.  The decrease in net income is primarily a
result of losses from domestic operations, offset by earnings from the Hong Kong
Joint Venture.





Financial
Condition and Liquidity





We have 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 $7,500,000. Based on specified
percentages of our accounts receivable and inventory, as of June 30, 2010 we had
$2,973,516 available to borrow, but had no borrowings 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 June 30, 2010, the
prime rate was 3.25%.  Borrowings, if any, are collateralized by all of our
accounts receivable and inventory.





Our factored accounts receivable as of
the end of our last fiscal year are $3,824,553, and were $1,195,552 as of June
30, 2010.  Our prepaid expenses as of the end of our last fiscal year were
$351,192, and were $329,688 as of June 30, 2010.





Operating activities provided cash of
$720,113 for the three months ended June 30, 2010.  This was primarily due
to a decrease in inventories and prepaid expenses of $316,528, a decrease in
accounts receivable and due from factor of $2,088,530 and offset by earnings of
the Joint Venture of $435,381, decreases in accounts payable and accrued
expenses of $1,462,762 and increases in deferred taxes and other assets of
$82,425.  For the same period last year, operating activities provided cash
of $748,490, 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.





Investing activities used cash of
$31,945 during the three months ended June 30, 2010 primarily for the purchase
of investments.  For the three months ended June 30, 2009, investing
activities used $2,929, primarily for the purchase of assets.





Financing activities had no cash
activity during the three months ended June 30, 2010.  In the three months
ended June 30, 2009, financing activities used $94,771, primarily from the
purchase and 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 months ended June 30, 2010 were $6,795,331
compared to $5,867,623 for the comparable period in the prior fiscal year. 
The increase in net sales by the Joint Venture for the three month period was
due to higher sales to unaffiliated customers.  The Joint Venture’s sales
to the Company decreased, primarily due to a reduction in inventories of
products purchased by the Company for sale to the Company’s national retail
customers.





Gross Margins.Gross
margins of the Joint Venture for the three month period ended June 30, 2010
increased to 28.6% from 26.7% for the 2009 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.


9





Expenses.Selling,
general and administrative expenses were $1,067,291 for the three month period
ended June 30, 2010, compared to $878,201 in the comparable prior year
period.  As a percentage of sales, expenses were 15.7% and 15.0% for the
three month periods ended June 30, 2010 and 2009.  The changes in selling,
general and administrative expense as a percent of sales are primarily due to
the timing of the recognition of foreign currency gains and losses on foreign
currency bonds.





Interest Income and Expense.Interest expense, net of interest income, was $1,571 for the three month
period ended June 30, 2010, compared to net interest expense of $2,093 for the
comparable prior year period.  The reduction in net interest expense
resulted from a decrease in the Joint Venture’s borrowings.





Net Income.  Net income
for the three months ended June 30, 2010 was $830,380 compared to $938,812 in
the comparable period last year.  The decrease in net income for the three
month period was due primarily to a foreign currency gain recorded in the prior
year’s comparable period.





Liquidity.Cash needs
of the Joint Venture are currently met by funds generated from operations. 
During the three months ended June 30, 2010, working capital increased by
$887,636 from $11,756,026 on March 31, 2010 to $12,643,662 on June 30,
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.





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 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, as necessary.  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,


10





Assets Held for
Investment.  Assets held for investment consist of investments in
seven different bond and/or exchange traded funds.  These funds invest in,
under normal circumstances, a portfolio of fixed income securities, including
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.  One fund invests in foreign bonds and represents
approximately 10 percent of the assets held for investment.





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.





Investments
available for sale are evaluated periodically to determine whether a decline in
their value is "other than temporary." Management reviews criteria such as the
magnitude and duration of the decline, as well as the reasons for the decline,
to predict whether the loss in value is other than temporary. If a decline in
value is determined to be other than temporary, the value of the security is
reduced and a corresponding charge to earnings is recognized.





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.





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.


11





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
            Non-Qualified
      Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the period ended
      December 31, 2003, File No.
1-31747)


10.2
            Hong
      Kong Joint Venture Agreement, as amended (incorporated by reference to
      Exhibit 10.1 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
            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)


10.6
            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)


10.7
            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)


10.8
            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 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 August 12, 2010*





*Filed
herewith


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SIGNATURES





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





UNIVERSAL
      SECURITY INSTRUMENTS, INC.(Registrant)Date:
      August 12, 2010
              By:
              /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
              /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial
Officer


13