UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly period ended September 30, 2010





OR


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


SECURITIES
EXCHANGE ACT OF 1934





Commission
file number 001-31747





UNIVERSAL
SECURITY INSTRUMENTS, INC.


(Exact
name of registrant as specified in its charter)





Maryland
            52-0898545(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





11407
      Cronhill Drive, Suite AOwings
      Mills, Maryland
            21117(Address
      of principal executive offices)
            (Zip
      Code)





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





Inapplicable


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





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





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





Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  Large
accelerated filer  ̈Accelerated filer  ̈Non-Accelerated Filer
 ̈
Smaller Reporting Company x





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





At
November 10, 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 (unaudited):Consolidated
      Balance Sheets at September 30, 2010and
      March 31, 2010
                                                  
                                                  3Consolidated
      Statements of Earnings for the ThreeMonths
      Ended September 30, 2010 and 2009
                                                  
                                                  4Consolidated
      Statements of Earnings for the SixMonths
      Ended September 30, 2010 and 2009
                                                  
                                                  5Consolidated
      Statements of Cash Flows for the SixMonths
      Ended September 30, 2010 and 2009
                                                  
                                                  6Notes
      to Consolidated Financial Statements
                                                  
                                                  7Item 2.
                                                  
                                                  Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                  
                                                  9Item 4.
                                                  
                                                  Controls
      and Procedures
                                                  
                                                  13Part
      II - Other InformationItem 1.
                                                  
                                                  Legal
      Proceedings
                                                  
                                                  14Item 6.
                                                  
                                                  Exhibits
                                                  
                                                  14Signatures
                                                  
                                                  15




2




PART
I - FINANCIAL INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS





UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





(unaudited)
                        
                        
                        (audited)September 30, 2010
                        
                        
                        March 31, 2010ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        1,342,070
                        
                        
                        $
                        2,253,631Assets
      held for investment
                        
                        
                        6,154,124
                        
                        
                        
                        4,001,890Accounts
      receivable:Trade
      less allowance for doubtful accounts of approximately $90,000 at September
      30, 2010 and March 31, 2010
                        
                        
                        189,111
                        
                        
                        
                        266,526Other
      receivables
                        
                        
                        69,049
                        
                        
                        
                        70,523Receivable
      from Hong Kong Joint Venture
                        
                        
                        431,870
                        
                        
                        
                        212,622Amount
      due from factor
                        
                        
                        1,479,361
                        
                        
                        
                        3,824,553Inventories,
      net of allowance for obsolete inventory of $100,000 atSeptember
      30, 2010 and March 31, 2010
                        
                        
                        3,064,018
                        
                        
                        
                        3,439,906Prepaid
      expenses
                        
                        
                        379,077
                        
                        
                        
                        351,192TOTAL
      CURRENT ASSETS
                        
                        
                        13,108,680
                        
                        
                        
                        14,420,843DEFERRED
      TAX ASSET
                        
                        
                        1,886,111
                        
                        
                        
                        1,877,156INVESTMENT
      IN HONG KONG JOINT VENTURE
                        
                        
                        12,731,632
                        
                        
                        
                        12,153,456PROPERTY
      AND EQUIPMENT – NET
                        
                        
                        174,256
                        
                        
                        
                        199,163OTHER
      ASSETS
                        
                        
                        20,136
                        
                        
                        
                        20,136TOTAL
      ASSETS
                        
                        $
                        27,920,815
                        
                        
                        $
                        28,670,754LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        703,705
                        
                        
                        $
                        689,762Hong
      Kong Joint Venture accounts payable
                        
                        
                        205,621
                        
                        
                        
                        1,472,993Accrued
      liabilities:Payroll
      and employee benefits
                        
                        
                        151,932
                        
                        
                        
                        232,034Commissions
      and other
                        
                        
                        36,598
                        
                        
                        
                        47,001TOTAL
      CURRENT LIABILITIES
                        
                        
                        1,097,856
                        
                        
                        
                        2,441,790Long-term
      obligation
                        
                        
                        46,458
                        
                        
                        
                        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 September 30,2010
      and March 31, 2010
                        
                        
                        23,879
                        
                        
                        
                        23,879Additional
      paid-in capital
                        
                        
                        13,135,198
                        
                        
                        
                        13,135,198Retained
      earnings
                        
                        
                        13,573,671
                        
                        
                        
                        13,023,428Other
      comprehensive income
                        
                        
                        43,753
                        
                        
                        
                        -TOTAL
      SHAREHOLDERS’ EQUITY
                        
                        
                        26,776,501
                        
                        
                        
                        26,182,505TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
                        $
                        27,920,815
                        
                        
                        $
                        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 September 30,2010
                  
                  
                  2009Net
      sales
                  
                  $
                  3,714,378
                  
                  
                  $
                  7,900,805Cost
      of goods sold – acquired from Joint Venture
                  
                  
                  1,728,796
                  
                  
                  
                  6,052,407Cost
      of goods sold – other
                  
                  
                  921,438
                  
                  
                  
                  200,726GROSS
      PROFIT
                  
                  
                  1,064,144
                  
                  
                  
                  1,647,672Research
      and development expense
                  
                  
                  154,430
                  
                  
                  
                  221,547Selling,
      general and administrative expense
                  
                  
                  1,078,881
                  
                  
                  
                  1,335,307Operating
      (loss) income
                  
                  
                  (169,167
                  )
                  
                  
                  90,818Other
      income (expense):Interest
      income
                  
                  
                  80,119
                  
                  
                  
                  5,274Interest
      expense
                  
                  
                  (2,050
                  )
                  
                  
                  (36,104
                  )(LOSS)
      INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                  
                  
                  (91,098
                  )
                  
                  
                  59,988Equity
      in earnings of Joint Venture
                  
                  
                  416,623
                  
                  
                  
                  889,584Income
      from operations before income taxes
                  
                  
                  325,525
                  
                  
                  
                  949,572Provision
      for income tax expense
                  
                  
                  57,149
                  
                  
                  
                  24,702NET
      INCOME
                  
                  $
                  268,376
                  
                  
                  $
                  924,870Income
      per share:Basic
                  
                  
                  0.11
                  
                  
                  
                  0.39Diluted
                  
                  
                  0.11
                  
                  
                  
                  0.39Shares
      used in computing net income per share:Basic
                  
                  
                  2,387,887
                  
                  
                  
                  2,387,887Diluted
                  
                  
                  2,394,750
                  
                  
                  
                  2,394,014




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




4




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





Six Months Ended September 30,2010
                              
                              
                              2009Net
      sales
                              
                              $
                              7,395,799
                              
                              
                              $
                              13,815,710Cost
      of goods sold - acquired from Joint Venture
                              
                              
                              4,094,083
                              
                              
                              
                              10,396,896Cost
      of goods – other
                              
                              
                              1,126,330
                              
                              
                              
                              601,308GROSS
      PROFIT
                              
                              
                              2,175,386
                              
                              
                              
                              2,817,506Research
      and development expense
                              
                              
                              321,533
                              
                              
                              
                              340,698Selling,
      general and administrative expense
                              
                              
                              2,286,763
                              
                              
                              
                              2,538,385Operating
      loss
                              
                              
                              (432,910
                              )
                              
                              
                              (61,577
                              )Other
      income (expense):Interest
      income
                              
                              
                              114,987
                              
                              
                              
                              9,425Interest
      expense
                              
                              
                              (9,114
                              )
                              
                              
                              (41,746
                              )LOSS
      BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                              
                              
                              (327,037
                              )
                              
                              
                              (93,898
                              )Equity
      in earnings of Joint Venture
                              
                              
                              852,004
                              
                              
                              
                              1,610,691Income
      from operations before income taxes
                              
                              
                              524,967
                              
                              
                              
                              1,516,793Provision
      for income tax (benefit) expense
                              
                              
                              (25,276
                              )
                              
                              
                              (19,542
                              )NET
      INCOME
                              
                              $
                              550,243
                              
                              
                              $
                              1,536,335Income
      per share:Basic
                              
                              
                              0.23
                              
                              
                              
                              0.64Diluted
                              
                              
                              0.23
                              
                              
                              
                              0.64Shares
      used in computing net income per share:Basic
                              
                              
                              2,387,887
                              
                              
                              
                              2,390,100Diluted
                              
                              
                              2,395,043
                              
                              
                              
                              2,395,724





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




5




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended September 30,2010
                                      
                                      
                                      2009OPERATING
      ACTIVITIESNet
      income
                                      
                                      $
                                      550,243
                                      
                                      
                                      $
                                      1,536,335Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                      
                                      
                                      24,907
                                      
                                      
                                      
                                      23,832Earnings
      of the Joint Venture
                                      
                                      
                                      (852,004
                                      )
                                      
                                      
                                      (1,610,691
                                      )Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable and amounts due from
    factor
                                      
                                      
                                      2,204,833
                                      
                                      
                                      
                                      (269,096
                                      )Decrease
      in inventories and prepaid expenses
                                      
                                      
                                      348,002
                                      
                                      
                                      
                                      2,876,640(Decrease)
      in accounts payable and accrued expenses
                                      
                                      
                                      (1,343,934
                                      )
                                      
                                      
                                      (507,894
                                      )(Increase)
      in deferred taxes and other assets
                                      
                                      
                                      (8,955
                                      )
                                      
                                      
                                      (22,830
                                      )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                                      
                                      
                                      923,092
                                      
                                      
                                      
                                      2,026,296INVESTING
      ACTIVITIES:Purchase
      of assets held for investment
                                      
                                      
                                      (2,108,481
                                      )
                                      
                                      
                                      -Dividends
      received from Joint Venture
                                      
                                      
                                      273,828
                                      
                                      
                                      
                                      342,740NET
      CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
                                      
                                      
                                      (1,834,653
                                      )
                                      
                                      
                                      342,740FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (85,661
                                      )Borrowing
      from factor
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,416,135NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,330,474(DECREASE)
      INCREASE IN CASH
                                      
                                      
                                      (911,561
                                      )
                                      
                                      
                                      5,699,510Cash
      at beginning of period
                                      
                                      
                                      2,253,631
                                      
                                      
                                      
                                      284,030CASH
      AT END OF PERIOD
                                      
                                      $
                                      1,342,070
                                      
                                      
                                      $
                                      5,983,540Supplemental
      information:Interest
      paid
                                      
                                      $
                                      9,114
                                      
                                      
                                      $
                                      41,746





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




6




UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Statement
of Management





The
consolidated financial statements include the accounts of Universal Security
Instruments, Inc. (USI or the Company) and its majority owned
subsidiaries.  Significant inter-company accounts and transactions
have been eliminated in consolidation. In the opinion of the Company’s
management, the interim consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted.  The interim
consolidated financial statements should be read in conjunction with the
Company’s March 31, 2010 audited financial statements filed with the Securities
and Exchange Commission on Form 10-K.  The interim operating results
are not necessarily indicative of the operating results for the full fiscal
year.





Use
of Estimates





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





Joint
Venture





The
Company and its co-venturer, a Hong Kong corporation, each owns a 50% interest
in a Hong Kong joint venture, Eyston Company Limited (the “Joint Venture”), that
has manufacturing facilities in the People’s Republic of China, for the
manufacturing of security products.  The following represents
summarized balance sheet and income statement information of the Joint Venture
as of and for the six months ended September 30, 2010 and 2009:





2010
                  
                  
                  2009Net
      sales
                  
                  $
                  12,468,764
                  
                  
                  $
                  14,059,608Gross
      profit
                  
                  
                  3,583,948
                  
                  
                  
                  4,363,249Net
      income
                  
                  
                  1,648,828
                  
                  
                  
                  2,416,124Total
      current assets
                  
                  
                  12,893,889
                  
                  
                  
                  15,923,351Total
      assets
                  
                  
                  32,196,541
                  
                  
                  
                  30,149,259Total
      current liabilities
                  
                  
                  5,103,172
                  
                  
                  
                  6,168,310





During
the six months ended September 30, 2010 and 2009, respectively, the Company
purchased $4,008,328 and $7,577,193 of products from the Joint
Venture.  For the six month period ended September 30, 2010 and 2009,
the Company has adjusted its earnings of the Joint Venture to reflect a decrease
of $27,590 and an addition of $402,629, respectively, for changes to
inter-Company profit in inventory





Income
Taxes





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





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




7




Assets
Held for Investment





Assets
held for investment consist of investments in ten different bond and/or exchange
traded funds.  These funds have no fixed maturity date and may be
traded daily.  All of the Company’s investments are measured and
recorded at fair value using quoted prices in active markets for identical
assets or liabilities (Level 1).





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.





Assets
held for investment consist of the following as of September 30,
2010:





Gross Unrealized
                
                
                Gross UnrealizedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair ValueMutual
      funds - corporate bonds
                
                $
                4,267,793
                
                
                $
                43,753
                
                
                $
                -
                
                
                $
                4,311,546Exchange
      traded bond funds
                
                
                1,842,578
                
                
                
                -
                
                
                
                -
                
                
                
                1,842,578Total
                
                $
                6,110,371
                
                
                $
                43,753
                
                
                $
                -
                
                
                $
                6,154,124





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





Three Months Ended
                          September 30,
                        
                        
                        Six Months Ended
                          September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Weighted
      average number of common shares outstanding for basic EPS
                        
                        
                        2,387,887
                        
                        
                        
                        2,387,887
                        
                        
                        
                        2,387,887
                        
                        
                        
                        2,390,100Shares
      issued upon the assumed exercise of outstanding stock
    options
                        
                        
                        6,863
                        
                        
                        
                        6,127
                        
                        
                        
                        7,156
                        
                        
                        
                        5,624Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                        
                        
                        2,394,750
                        
                        
                        
                        2,394,014
                        
                        
                        
                        2,395,043
                        
                        
                        
                        2,395,724





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




8




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





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





Forward-Looking
Statements





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





overview





We are in
the business of marketing and distributing safety and security products which
are primarily manufactured through our 50%-owned Hong Kong Joint
Venture.  Our financial statements detail our sales and other
operational results only, and report the financial results of the Hong Kong
Joint Venture using the equity method.  Accordingly, the following
discussion and analysis of the three and six month periods ended September 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.”





The
Company has developed new products based on new smoke and gas detection
technologies, with what the Company believes are improved sensing technology and
product features.  The Company has applied for patents for these new
products.  Before these products can be sold, independent testing
agencies evaluate the effectiveness of the products in performing their stated
function and issue an approval and testing certificate for each
product.  The Company has experienced delays in the certification
process, but now believes the testing agencies will begin issuing approvals
during the fiscal quarter ending December 31, 2010.





Results
of Operations





Three Months Ended September
30, 2010 and 2009





Sales.  Net sales
for the three months ended September 30, 2010 were $3,714,378 compared to
$7,900,805 for the comparable three months in the prior fiscal year, a decrease
of $4,186,427 (53.0%).  The primary reasons for the decrease in net
sales volumes were lower sales of our core product lines, including smoke alarms
and carbon monoxide alarms, to a major national retailer, as previously
announced; and, to a lesser extent, lower sales of these products to the
electrical distribution trade due to a decrease in new home construction during
the quarter.





Gross Profit
Margin.  Gross profit margin is calculated as net sales less
cost of goods sold expressed as a percentage of net sales.  Our gross
profit margin was 28.6% and 20.9% of sales for the quarters ended September 30,
2010 and 2009, respectively.  The increase in gross profit margin was
primarily due to reduced sales to a national retailer that had historically
provided lower gross profit margins.




9




Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$323,544 from the comparable three months in the prior year.  As a
percentage of net sales, these expenses increased to 33.2% for the three month
period ended September 30, 2010, from 19.7% for the 2009 period.  The
increase in costs as a percentage of net sales was primarily due to fixed costs
that do not decrease in the same rate as the reduction in sales.





Interest Expense and
Income.  Our interest income, net of interest expense, was
$78,069 for the quarter ended September 30, 2010, compared to net interest
expense of $30,830 for the quarter ended September 30, 2009.  The
increase in interest income, net of interest expense, is due to earnings on
assets held for investment and reduced borrowings from our factor.





Income
Taxes.  During the quarter ended September 30, 2010, the
Company incurred net income tax expense of $57,149.  For the
corresponding 2009 period, the Company incurred net income tax expense of
$24,702.  The provision for income tax expense for the quarter ended
September 30, 2010, as compared to the same quarter in the period year, is
impacted principally by the amount and timing of the unrealized earnings of and
the payment of dividends by the Hong Kong Joint Venture.





Net Income.  We
reported net income of $268,376 for the quarter ended September 30, 2010,
compared to net income of $924,870 for the corresponding quarter of the prior
fiscal year, a $656,494 (71.0%) decrease.  The reason for the decrease
in net income is reduced revenues, principally from the loss of a national
retail customer and lower joint venture earnings.





Six Months Ended September
30, 2010 and 2009





Sales.  Net sales
for the six months ended September 30, 2010 were $7,395,799 compared to
$13,815,710 for the comparable six months in the prior fiscal year, a decrease
of $6,419,911 (46.5%).  The primary reasons for the decrease in net
sales volumes were lower sales of our core product lines, including smoke alarms
and carbon monoxide alarms to a major national retailer, as previously
announced; and, to a lesser extent, lower sales of these products to the
electrical distribution trade due to a decrease in new home construction during
the period.





Gross Profit
Margin.  The gross profit margin is calculated as net sales
less cost of goods sold expressed as a percentage of net sales.  The
Company’s gross profit margin increased from 20.4% for the period ended
September 30, 2009 to 29.4% for the current period ended September 30,
2010.  The increase in gross profit margin was primarily due to
reduced sales to a national retailer that had historically provided lower gross
profit margins.





Expenses.  Research
and development, and selling, general and administrative expenses decreased by
$270,787 from the comparable six months in the prior year.  As a
percentage of sales, these expenses were 35.3% for the six month period ended
September 30, 2010 and 20.8% for the comparable 2009 period.  The
primary reason for the decrease in expenses as a percentage of sales is due to
fixed expenses that do not decrease at the same rate as the reduction in
sales.





Interest Expense and
Income.  Our interest income, net of interest expense, was
$105,873 for the six months ended September 30, 2010, compared to net interest
expense of $32,321 for the six months ended September 30, 2009.  The
increase in interest income, net of interest expense, is due to earnings on
assets held for investment and reduced borrowing from our factor.





Income
Taxes.  During the six months ended September 30, 2010, the
Company recorded an income tax benefit of $25,276.  For the
corresponding 2009 period, the Company recorded a tax benefit of
$19,542.  The provision for income tax benefit for the six months
ended September 30 2010, as compared to the same period in the prior year, is
impacted principally by the amount and timing of the unrealized earnings of and
the payment of dividends by the Hong Kong Joint Venture.





Net Income.  We
reported net income of $550,243 for the six months ended September 30, 2010
compared to net income of $1,536,335 for the corresponding period of the prior
fiscal year.  The primary reasons for the decrease are reduced
revenues, principally from the loss of a national retail customer and lower
joint venture earnings.




10




Financial
Condition and Liquidity





The Company has a Factoring Agreement
with CIT Group, Inc. (CIT) which supplies both short-term borrowings and letters
of credit to finance foreign inventory purchases.  The maximum amount
available under the Factoring Agreement is currently $7,500,000. Based on
specified percentages of our accounts receivable and inventory and letter of
credit commitments, as of September 30, 2010 we had a borrowing availability
of  $2,742,466 under the Factoring Agreement and had no
borrowings.  The interest rate under the Factoring Agreement on the
uncollected factored accounts receivable and any additional borrowings is equal
to the prime rate of interest charged by our lender.  At September 30,
2010, the prime rate was 3.25%.  Borrowings are collateralized by all
of our accounts receivable and inventory.





Our factored accounts receivable as of
the end of our last fiscal year was $3,824,553, and was $1,479,361 as of
September 30, 2010.  Our prepaid expenses as of the end of our last
fiscal year were $351,192, and were $379,077 as of September 30,
2010.





Operating activities provided cash of
$923,092 for the six months ended September 30, 2010.  This was
primarily due to a decrease in accounts receivable and due from factor of
$2,204,853 and a decrease in inventories and prepaid expenses of $348,002,
offset by a decrease in accounts payable and accrued expenses of $1,343,934 and
earnings of the Joint Venture of $852,004.  For the same period last
year, operating activities provided cash of $2,026,296, primarily as a result of
decreases in inventory and prepaid expenses offset by a decrease in accounts
payable and accrued expenses.





Investing activities used cash of
$1,834,653 during the six months ended September 30, 2010, and provided cash of
$342,740 at September 30, 2009, primarily as a result of the increase in assets
held for investment.  The Company increased its assets held for
investment in an effort to obtain a more favorable return.





Financing activities provided no cash
during the six months ended September 30, 2010, compared to $3,330,474 at
September 30, 2009 that resulted primarily from borrowing from our
factor.





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





Joint
Venture





Net Sales.  Net
sales of the Joint Venture for the three and six months ended September 30, 2010
were $5,673,433 and $12,468,764, respectively, compared to $8,191,985 and
$14,059,608, respectively, for the comparable period in the prior fiscal
year.  The 30.7% and 11.3% respective decreases in net sales by the
Joint Venture for the three and six month periods were due to lower volumes of
sales of smoke alarm products to the Company for sale to a national
retailer.





Gross
Margins.  Gross margins of the Joint Venture for the three
month period ended September 30, 2010 decreased to 28.9% from 34.1% for the 2009
corresponding period.  For the six month period ended September 30,
2010, gross margins decreased to 28.7% from the 31.0% gross margin of the prior
year’s corresponding period.  The lower gross margins for the 2010
period was due to product mix of the Joint Venture’s sales; since gross margins
depend on sales volume of various products, with varying margins, 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 $969,630 and $2,036,921, respectively,
for the three and six month periods ended September 30, 2010, compared to
$1,274,546 and $2,152,747 in the prior year’s respective periods.  As
a percentage of sales, expenses were 17.1% and 16.3% for the three and six month
periods ended September 30, 2010, compared to 15.6% and 15.3% for the three and
six month periods ended September 30, 2009.  The increase in selling,
general and administrative expense as a percent of sales was primarily due to
certain fixed costs that remained constant despite decreased net
sales.





Interest Income and
Expense.  Interest income on assets held for investment was
$71,235 and $121,516 respectively, for the three and six month periods ended
September 30, 2010, compared to net interest expense of $53,449 and $93,857,
respectively, for the prior year’s periods.





Net Income.  Net
income for the three and six months ended September 30, 2010 was $818,448 and
$1,648,828, respectively, compared to $1,477,312 and $2,416,124, respectively,
in the comparable periods last year.  The 44.6% and 31.8% respective
decrease and increase in net income for the three and six month periods were due
primarily to decreased sales volume as noted above.




11




Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the six months ended September 30, 2010, working
capital decreased by $3,965,309 from $11,756,026 on March 31, 2010 to $7,790,717
on September 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.  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.





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




12




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.





recent
accounting pronouncements not yet adopted





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





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





ITEM 4.
            CONTROLS AND
      PROCEDURES





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




13




PART
II - OTHER INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS





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





ITEM 6.
            EXHIBITS





Exhibit No.3.1
                    
                    Articles
      of Incorporation (incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q for the period ended December 31, 1988, File No.
      1-31747)3.2
                    
                    Articles
      Supplementary, filed October 14, 2003 (incorporated by reference to
      Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31,
      2002, file No. 1-31747)3.3
                    
                    Bylaws,
      as amended (incorporated by reference to Exhibit 3.3 to the Company’s
      Quarterly Report on Form 10-Q for the period ended June 30, 2009, File No.
      1-31747)10.1
                    
                    Hong
      Kong Joint Venture Agreement, as amended (incorporated by reference to
      Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year
      ended March 31, 2003, File No. 1-31747)10.2
                    
                    Amended
      and Restated Factoring Agreement between the Registrant and The CIT
      Group/Commercial Services, Inc. (“CIT”), dated June 22, 2007
      (substantially identical agreement entered into by the Registrant’s
      wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 26,
      2007, file No. 1-31747)10.3
                    
                    Amended
      and Restated Inventory Security Agreement between the Registrant and CIT,
      dated June 22, 2007 (substantially identical agreement entered into by the
      Registrant’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by
      reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed June 26, 2007, file No. 1-31747)10.4
                    
                    Amendment,
      dated December 22, 2009, to Amended and Restated Factoring Agreement
      between the Registrant and CIT dated June 22, 2007 (substantially
      identical agreement entered into by the Registrant’s wholly-owned
      subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.5
      to the Company’s Quarterly Report on Form 10-Q filed February 16, 2010,
      file No. 1-31747)10.5
                    
                    Lease
      between Universal Security Instruments, Inc. and St. John Properties, Inc.
      dated November 4, 2008 for its office and warehouse located at 11407
      Cronhill Drive, Suites A-D, Owings Mills, Maryland 21117 (incorporated by
      reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q
      for the period ended December 31, 2008, File No.
  1-31747)10.6
                    
                    Amendment
      to Lease between Universal Security Instruments, Inc. and St. John
      Properties, Inc. dated June 23, 2009 (incorporated by reference to Exhibit
      10.9 to the Company’s Annual Report on Form 10-K for the year ended March
      31, 2009, File No. 1-31747)10.7
                    
                    Amended
      and Restated Employment Agreement dated July 18, 2007 between the Company
      and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.7 to the
      Company’s Quarterly Report on Form 10-Q for the period ended December 31,
      2007, File No. 1-31747), as amended by Addendum dated November 13, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed November 15, 2007, File No. 1-31747), by Addendum dated
      September 8, 2008 (incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed September 8, 2008, File No.
      1-31747), and by Addendum dated March 11, 2010 (incorporated by reference
      to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March
      12, 2010, File No. 1-31747)31.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer*31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer*32.1
                    
                    Section
      1350 Certifications*99.1
                    
                    Press
      Release dated November 11,
2010*





*Filed
herewith




14




SIGNATURES





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





UNIVERSAL
      SECURITY INSTRUMENTS, INC.(Registrant)Date:
      November 11, 2010
              By:
              /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
              /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial
Officer




15