UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly period ended December 31, 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
February 16, 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 December 31, 2009and
      March 31, 2009
                                                3Consolidated
      Statements of Earnings for the ThreeMonths
      Ended December 31, 2009 and 2008
                                                4Consolidated
      Statements of Earnings for the NineMonths
      Ended December 31, 2009 and 2008
                                                5Consolidated
      Statements of Cash Flows for the NineMonths
      Ended December 31, 2009 and 2008
                                                6Notes
      to Consolidated Financial Statements
                                                7Item 2.
                                                Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                10Item 3.
                                                Quantitative
      and Qualitative Disclosure About Market Risk
                                                13Item 4T.
                                                Controls
      and Procedures
                                                14Part
      II - Other InformationItem 1.
                                                Legal
      Proceedings
                                                15Item 4.
                                                Submission
      of Matters to a Vote of Security Holders
                                                15Item 6.
                                                Exhibits
                                                16Signatures
                                                17


2


PART
I - FINANCIAL INFORMATION





ITEM
1.       FINANCIAL
STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December 31, 2009
                
                
                March 31, 2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                5,087,869
                
                
                $
                284,030Accounts
      receivable:Trade,
      net of allowance, for doubtful accounts of $87,851 and $95,927 at
      December 31, 2009 and March 31, 2009
                
                
                797,861
                
                
                
                55,779Other
      receivables
                
                
                69,384
                
                
                
                97,780Receivable
      from Hong Kong Joint Venture
                
                
                156,037
                
                
                
                312,2571,023,282
                
                
                
                465,816Amount
      due from factor
                
                
                3,154,181
                
                
                
                4,610,401Inventories,
      net of allowance for obsolete inventory of $100,000 and $204,309 at
      December 31, 2009 and March 31, 2009, respectively
                
                
                5,497,833
                
                
                
                8,997,231Prepaid
      expenses
                
                
                217,049
                
                
                
                255,745Assets
      held for sale
                
                
                -
                
                
                
                202,565TOTAL
      CURRENT ASSETS
                
                
                14,980,214
                
                
                
                14,815,788DEFERRED
      TAX ASSET
                
                
                1,910,796
                
                
                
                2,141,702INVESTMENT
      IN HONG KONG JOINT VENTURE
                
                
                12,108,352
                
                
                
                10,550,373PROPERTY
      AND EQUIPMENT – NET
                
                
                213,349
                
                
                
                251,366OTHER
      ASSETS
                
                
                20,136
                
                
                
                18,449TOTAL
      ASSETS
                
                $
                29,232,847
                
                
                $
                27,777,678LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                584,516
                
                
                $
                794,365Hong
      Kong Joint Venture accounts payable
                
                
                2,259,551
                
                
                
                1,967,073Accrued
      liabilities:Litigation
      reserve
                
                
                40l,592
                
                
                
                401,592Payroll
      and employee benefits
                
                
                166,545
                
                
                
                148,071Commissions
      and other
                
                
                37,407
                
                
                
                202,789Liabilities
      held for sale
                
                
                -
                
                
                
                202,565TOTAL
      CURRENT LIABILITIES
                
                
                3,449,611
                
                
                
                3,716,455Long-term
      liability – other
                
                
                97,469
                
                
                
                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 December 31, 2009 and 2,408,220
      shares at March 31, 2009
                
                
                23,879
                
                
                
                24,083Additional
      paid-in capital
                
                
                13,106,683
                
                
                
                13,186,436Retained
      earnings
                
                
                12,555,205
                
                
                
                10,755,380TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                25,685,767
                
                
                
                23,965,899TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                
                $
                29,232,847
                
                
                $
                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 December 31,2009
                
                
                2008Net
      sales
                
                $
                6,321,490
                
                
                $
                5,595,049Cost
      of goods sold – acquired from Joint Venture
                
                
                4,454,098
                
                
                
                4,222,264Cost
      of goods sold – other
                
                
                548,391
                
                
                
                35,000GROSS
      PROFIT
                
                
                1,319,001
                
                
                
                1,337,785Research
      and development expense
                
                
                126,713
                
                
                
                107,632Selling,
      general and administrative expense
                
                
                1,315,207
                
                
                
                1,177,776Operating
      (loss) income
                
                
                (122,919
                )
                
                
                52,377Other
      income (expense):Interest
      income
                
                
                11,026
                
                
                
                -Interest
      expense
                
                
                (27,444
                )
                
                
                (6,967
                )(LOSS)
      INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                
                
                (139,337
                )
                
                
                45,410Equity
      in earnings of Joint Venture
                
                
                657,023
                
                
                
                458,745Income
      from operations before income taxes
                
                
                517,686
                
                
                
                504,155Provision
      for income tax expense
                
                
                254,196
                
                
                
                211,642NET
      INCOME
                
                $
                263,490
                
                
                $
                292,513Income
      per share:Basic
      – net income
                
                $
                0.11
                
                
                $
                0.12Diluted
      – net income
                
                $
                0.11
                
                
                $
                0.12Shares
      used in computing net income per share:Basic
                
                
                2,387,887
                
                
                
                2,467,028Diluted
                
                
                2,395,201
                
                
                
                2,467,028




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


4


UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





Nine Months Ended December
      312009
                      
                      
                      2008Net
      sales
                      
                      $
                      20,137,200
                      
                      
                      $
                      20,169,229Cost
      of goods sold - acquired from Joint Venture
                      
                      
                      14,850,994
                      
                      
                      
                      15,322,425Cost
      of goods – other
                      
                      
                      1,149,699
                      
                      
                      
                      40,680GROSS
      PROFIT
                      
                      
                      4,136,507
                      
                      
                      
                      4,806,124Research
      and development expense
                      
                      
                      467,411
                      
                      
                      
                      279,050Selling,
      general and administrative expense
                      
                      
                      3,853,592
                      
                      
                      
                      4,071,000Operating
      (loss) income
                      
                      
                      (184,496
                      )
                      
                      
                      456,074Other
      income (expense):Interest
      income
                      
                      
                      20,451
                      
                      
                      
                      41,876Interest
      expense
                      
                      
                      (69,190
                      )
                      
                      
                      (33,267
                      )(LOSS)
      INCOME BEFORE EQUITY IN EARNINGS OF JOINTVENTURE
                      
                      
                      (233,235
                      )
                      
                      
                      464,683Equity
      in earnings of Joint Venture
                      
                      
                      2,267,714
                      
                      
                      
                      1,351,707Income
      from continuing operations before income taxes
                      
                      
                      2,034,479
                      
                      
                      
                      1,816,390Provision
      for income tax expense
                      
                      
                      234,654
                      
                      
                      
                      410,437INCOME
      FROM CONTINUING OPERATIONS
                      
                      
                      1,799,825
                      
                      
                      
                      1,405,953Discontinued
      operations:Gain
      from operations of the discontinued Canadian subsidiary
                      
                      
                      -
                      
                      
                      
                      2,415,382Income
      tax benefit – discontinued operations
                      
                      
                      -
                      
                      
                      
                      (965,872
                      )Gain
      from discontinued operations
                      
                      
                      -
                      
                      
                      
                      3,381,254NET
      INCOME
                      
                      $
                      1,799,825
                      
                      
                      $
                      4,787,207Income
      per share:Basic
      – from continuing operations
                      
                      $
                      0.75
                      
                      
                      $
                      0.57Basic
      – from discontinued operations
                      
                      
                      -
                      
                      
                      $
                      1.36Basic
      – net income
                      
                      $
                      0.75
                      
                      
                      $
                      1.93Diluted
      – from continuing operations
                      
                      $
                      0.75
                      
                      
                      $
                      0.57Diluted
      – from discontinued operations
                      
                      
                      -
                      
                      
                      $
                      1.36Diluted
      – net income
                      
                      $
                      0.75
                      
                      
                      $
                      1.93Shares
      used in computing net income per share:Basic
                      
                      
                      2,389,360
                      
                      
                      
                      2,480,330Diluted
                      
                      
                      2,395,621
                      
                      
                      
                      2,480,330




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


5


UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended December 31,2009
                  
                  
                  2008OPERATING
      ACTIVITIESNet
      income
                  
                  $
                  1,799,825
                  
                  
                  $
                  4,787,207Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Activities
      of discontinued operations
                  
                  
                  -
                  
                  
                  
                  (3,428,897
                  )Depreciation
      and amortization
                  
                  
                  38,017
                  
                  
                  
                  33,937Earnings
      of the Joint Venture
                  
                  
                  (2,267,714
                  )
                  
                  
                  (1,351,707
                  )Changes
      in operating assets and liabilities:Decrease
      in accounts receivable and amounts due from factor
                  
                  
                  898,754
                  
                  
                  
                  1,038,561Decrease
      (increase) in inventories and prepaid expenses
                  
                  
                  3,538,094
                  
                  
                  
                  (3,971,376
                  )(Decrease)
      increase in accounts payable and accrued expenses
                  
                  
                  (64,279
                  )
                  
                  
                  511,684Decrease
      (increase) decrease in deferred taxes and other assets
                  
                  
                  229,221
                  
                  
                  
                  (290,076
                  )NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                  
                  
                  4,171,918
                  
                  
                  
                  (2,670,667
                  )INVESTING
      ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  -
                  
                  
                  
                  (34,119
                  )Activities
      of discontinued operations
                  
                  
                  -
                  
                  
                  
                  2,590,722Dividends
      received from Joint Venture
                  
                  
                  709,735
                  
                  
                  
                  649,383NET
      CASH PROVIDED BY INVESTING ACTIVITIES
                  
                  
                  709,735
                  
                  
                  
                  3,205,986FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                  
                  
                  (79,959
                  )
                  
                  
                  (136,979
                  )Borrowing
      from factor
                  
                  
                  4,326,852
                  
                  
                  
                  101,911Repayment
      to factor Activities of discontinued operations
                  
                  
                  (4,326,852
                  )
                  
                  
                  (4,187,444
                  )Other
      long-term obligations
                  
                  
                  2,145
                  
                  
                  
                  4,164NET
      CASH USED IN FINANCING ACTIVITIES
                  
                  
                  (77,814
                  )
                  
                  
                  (4,218,348
                  )INCREASE
      (DECREASE) IN CASH
                  
                  
                  4,803,839
                  
                  
                  
                  (3,683,029
                  )Cash
      at beginning of period
                  
                  
                  284,030
                  
                  
                  
                  3,863,784CASH
      AT END OF PERIOD
                  
                  $
                  5,087,869
                  
                  
                  $
                  180,755Supplemental
      information:Interest
      paid
                  
                  $
                  69,190
                  
                  
                  $
                  33,267Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  -





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.





The
receivership has been completed as of September 22, 2008 and there are no
remaining assets or liabilities of Icon.





Income
Taxes





A
provision for federal and state income tax expense on continuing operations of
$234,654 and $410,437 has been provided for the nine month periods ended
December 31, 2009 and 2008, respectively.  The lower effective rate in
the current period was a result of a higher 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.





As of December 31, 2009, the Company
has recorded in other long term liabilities, an amount for uncertain tax
positions of $97,469, including imputed interest.  The Company treats
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 nine months ended December 31, 2009 and 2008:





2009
                  
                  
                  2008Net
      sales
                  
                  $
                  22,592,798
                  
                  
                  $
                  29,270,914Gross
      profit
                  
                  
                  7,235,461
                  
                  
                  
                  7,925,541Net
      income
                  
                  
                  3,737,826
                  
                  
                  
                  3,592,801Total
      current assets
                  
                  
                  17,560,768
                  
                  
                  
                  17,594,219Total
      assets
                  
                  
                  31,323,068
                  
                  
                  
                  28,312,610Total
      current liabilities
                  
                  
                  5,389,052
                  
                  
                  
                  5,900,157





During
the nine months ended December 31, 2009 and 2008, respectively, the Company
purchased $11,855,816 and $18,787,069 of products from the Joint
Venture.  For the nine month period ended December 31, 2009, the
Company has adjusted its earnings of the Joint Venture to reflect an addition of
$398,801 to inter-Company profit in inventory and a decrease of $471,840 for the
comparable period in the prior year.


7





Included
in the operations of the three months ended December 31, 2009 is a net charge of
approximately $142,819 for social insurance related to employment expense
incurred at the Fujian factory site in the Peoples Republic of
China.  Approximately $105,000 of this amount is related to prior
periods (approximately $64,000 relates to the fiscal 2009 filing and
approximately $18,000 related to each of the first two quarters of fiscal
2010).  Due to the limited number of employees at the Fujian factory
site in prior periods, the accrual of social insurance expense was deemed
immaterial.  With increased employment at this site, the Hong Kong
Joint Venture began accruing for social insurance in the three month period
ending December 31, 2009.





The
Company evaluated the accrual of these amounts based on the expected operating
results for the year ending March 31, 2010 and based on historical operating
results for the year ended March 31, 2009 in accordance with FASB Accounting Standards
CodificationTM (ASC)
275, Interum Reporting
and ASC 250-10-555-1, Materiality.  Management’s
evaluation indicated that the correction represents a 29.9% impact on net income
for the three months ended December 31, 2009 and a 3.8% impact on net income for
the nine months ended December 31, 2009.  The amount of the
adjustment, when compared to the operating results for the year ended March 31,
2009, or on any trend of income, is not considered by management to be
material.





Net
Income per Common Share





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





A
reconciliation of the weighted average shares of common stock utilized in the
computation of basic and diluted earnings per share for the three and nine month
periods ended December 31, 2009 and 2008 is as follows:





Three Months Ended
                    December 31,
                  
                  
                  Nine Months Ended
                    December 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average number of common shares outstanding for basic EPS
                  
                  
                  2,387,887
                  
                  
                  
                  2,467,028
                  
                  
                  
                  2,389,360
                  
                  
                  
                  2,480,330Shares
      issued upon the assumed exercise of outstanding stock
    options
                  
                  
                  7,314
                  
                  
                  
                  0
                  
                  
                  
                  6,261
                  
                  
                  
                  0Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                  
                  
                  2,395,201
                  
                  
                  
                  2,467,028
                  
                  
                  
                  2,395,621
                  
                  
                  
                  2,480,330





Outstanding
options to purchase 65,756 shares of common stock as of December 31, 2009 are
not included in the above calculations as the effect would be
anti-dilutive.





Stock
Based Compensation





Stock Option
Activity.  During the nine month period ended December 31,
2009, no stock options were granted and no shares of our common stock were
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 nine months ended
December 31, 2009 and 2008, we recorded $17,109 and $7,736, 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
December 31, 2009, there was $28,516 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 December
31, 2009.


8




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





Subsequent
Events





The
Company evaluated its December 31, 2009 financial statements for subsequent
events through February 16, 2010; 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





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.




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 nine month periods ended December 31, 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.  The receivership
was completed as of September 22, 2008 and there are no remaining assets or
liabilities of Icon.





Results
of Operations





Three Months Ended December
31, 2009 and 2008





Sales.  Net sales
for the three months ended December 31, 2009 were $6,321,490 compared to
$5,595,049 for the comparable three months in the prior fiscal year, an increase
of $726,441 (13.0%).  The primary reason for the increase in net sales
volumes was higher sales of our core product lines, including smoke alarms and
carbon monoxide alarms, to retailers and national catalog outlets.





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 23.9% of sales for the quarters ended December 31,
2009 and 2008, respectively.  The decrease in gross profit margin was
primarily due to a lower gross profit margin realized on a higher percentage of
sales to national retailers.





Expenses.  Research
and development, and selling, general and administrative expenses increased by
$156,512 from the comparable three months in the prior year, principally due to
increases in research and development expenses and costs associated with higher
sales volume.  As a percentage of net sales, these expenses decreased
to 22.8% for the three month period ended December 31, 2009, from 23.0% for the
corresponding 2008 period.





Interest Expense and
Income.  Our interest expense, net of interest income, was
$16,418 for the quarter ended December 31, 2009, compared to net interest
expense of $6,967 for the quarter ended December 31, 2008.  The
increase in interest expense is due to increased borrowings from our
factor.


10




Income
Taxes.  During the quarter ended December 31, 2009, the Company
had a net income tax expense of $254,196, primarily due to a reduction in
deferred taxes resulting from the utilization of net operating loss
carryforwards.  For the corresponding 2008 period, the Company had a
net income tax expense of $211,642.





Net Income.  We
reported net income of $263,490 for the quarter ended December 31, 2009,
compared to net income of $292,513 for the corresponding quarter of the prior
fiscal year, a $29,023 (9.9%) decrease.  The decrease in net income is
primarily a result of losses from domestic operations, partially offset by
higher earnings from the Hong Kong Joint Venture.





Nine Months Ended December
31, 2009 and 2008





Sales.  Net sales
for the nine months ended December 31, 2009 were $20,137,200 compared to
$20,169,229 for the comparable nine months in the prior fiscal year, a decrease
of $32,029 (0.2%).  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, partially offset by increased sales
to retailers.





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 December
31, 2008 to 20.5% for the current period ended December 31, 2009.  The
decrease in gross profit margin was primarily due to a lower gross profit margin
realized on increased sales to national retailers.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$29,047 from the comparable nine months in the prior year.  As a
percentage of sales, these expenses were 21.5% for the nine month period ended
December 31, 2009 and 21.6% for the comparable 2008 period, primarily due to
increased research and development expenses.





Interest Expense and
Income.  Our interest expense, net of interest income, was
$48,739 for the nine months ended December 31, 2009, compared to net interest
income of $8,609 for the nine months ended December 31, 2008.  The
increase in interest expense is due to increased borrowings from our factor
during this period.





Income
Taxes.  During the nine months ended December 31, 2009, the
Company recorded an income tax expense from continuing operations of $234,654,
primarily due to a reduction in deferred taxes resulting from the utilization of
net operating loss carryforwards.  For the corresponding 2008 period,
the Company had a tax expense of $410,437.  The lower effective rate
in the current period was primarily a result of lower domestic taxable income,
partially offset by higher realized equity in the earnings of the Joint
Venture.





Net Income.  We
reported net income of $1,799,825 for the nine months ended December 31, 2009
compared to net income of $4,787,207 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 28.0% to $1,799,825 from $1,405,953 in the comparable
period last year.Net income from
continuing operations rose as a result of higher earnings from the Hong Kong
Joint Venture.





On December 22, 2009, we issued a press
release indicating that a national home improvement retail customer had informed
the Company that it had not renewed our product line for the fiscal year
commencing approximately April 1, 2010.  The Company’s sales to this
customer approximated $3,300,000 and $10,400,000 for the three and nine months
ended December 31, 2009, respectively.  We continue to market our
product line to national retailers but have not, at this time, entered into
agreements with other national retailers which would produce the volume of sales
to this national retailer.





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 currently $7,500,000. Based on
specified percentages of our accounts receivable and inventory and letter of
credit commitments, as of December 31, 2009 we 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
December 31, 2009, the prime rate was 3.25%.  Borrowings are
collateralized by all of our accounts receivable and inventory.


11




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 $3,154,181 as of December 31, 2009.  Our prepaid
expenses as of the end of our last fiscal year were $255,745, and were $217,049
as of December 31, 2009.





Operating activities provided cash of
$4,171,918 for the nine months ended December 31, 2009.  This was
primarily due to a decrease in inventories and prepaid expenses of $3,538,094, a
decrease in accounts receivable and due from factor of $898,754 and offset by
earnings of the Joint Venture of $2,339,124.  For the same period last
year, operating activities used cash of $2,670,667, 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
$709,735 during the nine months ended December 31, 2009 from dividends received
from the Joint Venture.  For the nine months ended December 31, 2008,
investing activities provided $3,205,986, primarily from discontinued operations
and dividends received from the Joint Venture.





Financing activities used cash of
$77,813 during the nine months ended December 31, 2009, primarily from the
purchase and retirement of common stock.  In the nine months ended
December 31, 2008, financing activities used $4,218,348, primarily from
discontinued operations.





We believe that funds available under
the Factoring Agreement, distributions from the Joint Venture, and our line of
credit facilities provide us with sufficient resources to meet our requirements
for liquidity and working capital.





Joint
Venture





Net Sales.  Net
sales of the Joint Venture for the three and nine months ended December 31, 2009
were $8,533,190 and $22,592,798, respectively, compared to $9,603,152 and
$29,270,914, respectively, for the comparable period in the prior fiscal
year.  The 11.1% and 22.8% respective decreases in net sales by the
Joint Venture for the three and nine month periods were due to lower sales to
the Company.  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 retail customers in future periods.





Gross
Margins.  Gross margins of the Joint Venture for the three
month period ended December 31, 2009 increased to 33.7% from 28.9% for the 2008
corresponding period.  For the nine month period ended December 31,
2009, gross margins increased to 32.0% from the 27.1% 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 $1,541,932 and $3,694,679,
respectively, for the three and nine month periods ended December 31, 2009,
compared to $1,372,705 and $3,980,375 in the prior year’s respective
periods.  As a percentage of sales, expenses were 18.1% and 16.3% for
the three and nine month periods ended December 31, 2009, compared to 14.3% and
13.6% for the three and nine month periods ended December 31,
2008.  The changes in selling, general and administrative expense as a
percent of sales are primarily due to variable costs that remain constant
despite changes in net sales.





Interest Income and
Expense.  Interest expense, net of interest income, was $1,919
and $5,521, respectively, for the three and nine month periods ended December
31, 2009, compared to net interest expense of $7,163 and $12,924, respectively,
for the prior year’s periods.  The reduction in net interest expense
resulted from a decrease in the Joint Venture’s borrowings.





Net Income.  Net
income for the three and nine months ended December 31, 2009 were $1,321,702 and
$3,737,826, respectively, compared to $1,273,660 and $3,592,801, respectively,
in the comparable periods last year.  The 3.8% and 4.0% increase in
net income for the three and nine month periods were due primarily to higher
gross margins as noted above.





Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the nine months ended December 31, 2009, working
capital increased by $2,626,751 from $9,151,199 on March 31, 2009 to $11,777,950
on December 31, 2009.


12





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 4T.
            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 has appealed to the Board of Patent
Appeals and Interferences which is now pending.  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 previously reported, on September
25, 2008, the Company filed a third-party Complaint against United Technologies
Corporation (UTC), the parent of Kidde, in the United States District Court for
the District of Maryland with its Answer and Counterclaims to Kidde 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 UA patent 6,791,453.  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 December 16, 2009, the Court issued its
decision on the patent claim interpretation and denied Kidde and UTC’s motions
to dismiss.  The case is now in the discovery phase.





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





On October 12, 2009, the Company held
its Annual Meeting of Stockholders.  The only matter submitted to the
stockholders for a vote was the election of one director in the Class of
2012.  The nominee was Ronald A. Seff, M.D.  At the Meeting,
at least 2,022,379 shares were voted in favor of the nominee, no more than
137,728 shares abstained, were voted against, or were voted to withhold approval
of the nominee’s election (any of which has the same effect as a “no”
vote).  As a result, the nominee was elected.





Directors
not up for re-election and continuing in office after the Meeting are: Ira
Bormel, Harvey B. Grossblatt and Cary Luskin.




15




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.)*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)31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer*31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer*32.1
            Section
      1350 Certifications*99.1
            Press
      Release dated February 16, 2010*





*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:
      February 16, 2010
              By:
              /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
              /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial
Officer




17