UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended June 30, 20082009

OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31747001-31747

UNIVERSAL SECURITY INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

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

7-A Gwynns Mill Court
 
11407 Cronhill Drive, Suite A
Owings 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 August 8, 2008,2009, the number of shares outstanding of the registrant’s common stock was 2,486,567.
2,387,887.


TABLE OF CONTENTS

 
Page
Part I - Financial Information
  
Part I - Financial Information
    
 
Item 1.1.
Consolidated Financial Statements (unaudited):3
    
  Consolidated Balance Sheets at June 30, 2008 2009
and March 31, 200820093
    
  Consolidated Statements of Earnings for the Three Months Ended June 30, 2008 and 20074
 Months Ended June 30, 2009 and 2008
    
  Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2008 and 20075
 Months Ended June 30, 2009 and 2008
    
  Notes to Consolidated Financial Statements6
    
 
Item 2.2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations109
    
 
Item 3.3.
Quantitative and Qualitative Disclosure About Market Risk1312
    
 
Item 4.4.
Controls and Procedures1312
    
Part II - Other Information
  
 
Item 1.
Legal Proceedings13
    
 
Item 1.2.
Legal ProceedingsUnregistered Sales of Equity Securities and Use of Proceeds1413
    
 
Item 6.5.
ExhibitsOther Information14
 
Item 6.
Exhibits14
    
  Signatures15

2

PART I - FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

ITEM 1.
FINANCIAL STATEMENTS

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

  June 30, 2008 March 31, 2008 
ASSETS
     
      
CURRENT ASSETS     
Cash and cash equivalents
 $3,288,509 $3,863,784 
Accounts receivable:       
Trade less allowance for doubtful accounts of $15,000  
524,619
  
261,678
 
Recoverable taxes and other receivables
  282,054  282,083 
   806,673  543,761 
Amount due from factor
  5,689,667  5,600,408 
Inventories, net of allowance for obsolete inventory of $40,000
  6,814,018  5,357,488 
Prepaid expenses
  345,561  206,197 
Assets held for sale 
  2,729,142  2,850,731 
TOTAL CURRENT ASSETS  19,673,570  18,422,369 
DEFERRED TAX ASSET  1,814,134  1,914,136 
INVESTMENT IN HONG KONG JOINT VENTURE  10,279,352  9,986,579 
PROPERTY AND EQUIPMENT – NET  119,035  130,347 
OTHER ASSETS  15,486  15,486 
TOTAL ASSETS $31,901,577 $30,468,917 
        
LIABILITIES AND SHAREHOLDERS’ EQUITY
       
CURRENT LIABILITIES       
Accounts payable
 $3,602,218 $2,465,292 
Accrued liabilities:
       
Litigation reserve
  401,592  401,592 
Payroll and employee benefits
  215,603  158,057 
Commissions and other
  56,579  105,431 
Liabilities held for sale
  7,816,252  7,823,450 
TOTAL CURRENT LIABILITIES  12,092,244  10,953,822 
        
Long-term liability – other  92,527  91,160 
        
COMMITMENTS AND CONTINGENCIES  -  - 
SHAREHOLDERS’ EQUITY       
Common stock, $.01 par value per share; authorized 20,000,000 shares;  issued and outstanding 2,487,867 shares at June 30, 2008 and March 31, 2008
  
24,879
  
24,879
 
Additional paid-in capital
  13,456,871  13,453,378 
Retained earnings
  6,293,503  5,890,023 
Other comprehensive (loss) income  (58,447) 55,655 
TOTAL SHAREHOLDERS’ EQUITY  19,716,806  19,423,935 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $31,901,577 $30,468,917 
  June 30, 2009  March 31, 2009 
ASSETS      
       
CURRENT ASSETS      
Cash and cash equivalents $934,820  $284,030 
Accounts receivable:        
Trade less allowance for doubtful accounts of $87,851 and        
$95,927 at June 30, 2009 and March 31, 2009  285,782   55,779 
Other receivables  139,781   97,780 
Receivable from Hong Kong Joint Venture  163,773   312,257 
   
589,336
   
465,816
 
         
Amount due from factor  4,114,963   4,610,401 
Inventories, net of allowance for obsolete inventory of $100,000 and        
$204,309 at June 30, 2009 and March 31, 2009, respectively  7,407,697   8,997.231 
Prepaid expenses  252,059   255,745 
Assets held for sale  69,988   202,565 
TOTAL CURRENT ASSETS  13,368,863   14,815,788 
DEFERRED TAX ASSET  2,188,256   2,141,702 
INVESTMENT IN HONG KONG JOINT VENTURE  11,271,479   10,550,373 
PROPERTY AND EQUIPMENT – NET  240,148   251,366 
OTHER ASSETS  20,136   18,449 
TOTAL ASSETS $27,088,882  $27,777,678 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES        
Accounts payable $463,294  $794,365 
Hong Kong Joint Venture accounts payable  1,437,440   1,967,073 
Accrued liabilities:        
Litigation reserve  401,592   401,592 
Payroll and employee benefits  101,777   148,071 
Commissions and other  32,756   202,789 
Liabilities held for sale  69,988   202,565 
TOTAL CURRENT LIABILITIES  2,506,847   3,716,455 
         
Long-term liability  – other  96,034   95,324 
         
COMMITMENTS AND CONTINGENCIES  -   - 
SHAREHOLDERS’ EQUITY        
Common stock, $.01 par value per share; authorized 20,000,000 shares;        
issued and outstanding 2,387,887 shares at June 30, 2009 and        
2,408,220 shares at March 31, 2009  23,879   24,083 
Additional paid-in capital  13,096,862   13,186,436 
Retained earnings  11,365,260   10,755,380 
TOTAL SHAREHOLDERS’ EQUITY  24,486,001   23,965,899 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $27,088,882  $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 June 30, 
   2008  2007 
      
Net sales $6,192,801 $10,449,343 
Cost of goods sold  4,615,735  7,734,009 
        
GROSS PROFIT  1,577,066  2,715,334 
        
Research and development expense  86,234  69,890 
Selling, general and administrative expense  1,243,934  1,551,977 
        
Operating income  246,898  1,093,467 
        
Other income (expense):       
Interest income  18,835  - 
Interest expense  -  (58.497)
        
INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE  265,733  1,034,970 
        
Equity in earnings of Joint Venture  292,772  599,750 
        
Income from continuing operations before income taxes  558,505  1,634,720 
Provision for income tax expense  101,366  429,876 
        
INCOME FROM CONTINUING OPERATIONS  457,139  1,204,844 
        
Discontinued operations:       
Loss from operations of the discontinued Canadian subsidiary  (53,659) (413,842)
Income tax benefit – discontinued operations  -  - 
Loss from discontinued operations  (53,659) (413,842)
        
NET INCOME $403,480 $791,002 
        
Income (loss) per share:       
Basic – from continuing operations  0.18  0.49 
Basic – from discontinued operations  (0.02) (0.17)
Basic – net income  0.16  0.32 
Diluted – from continuing operations  0.18  0.48 
Diluted – from discontinued operations  (0.02) (0.17)
Diluted – net income  0.16  0.31 
Shares used in computing net income per share:       
Basic  2,487,867  2,479,979 
Diluted  2,487,867  2,533,733 

  Three Months Ended June 30, 
  2009  2008 
       
Net sales $5,914,905  $6,192,801 
Cost of goods sold – acquired from Joint Venture  4,344,489   4,615,735 
Cost of goods sold – other  400,582   - 
         
GROSS PROFIT  1,169,834   1,577,066 
         
Research and development expense  119,151   86,234 
Selling, general and administrative expense  1,203,078   1,243,934 
         
Operating (loss) income  (152,395)  246,898 
         
Other income (expense):        
Interest income  4,151   18,835 
Interest expense  (5,642)  - 
   (1,491)  18,835 
         
(LOSS) INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE  (153,886)  265,733 
         
Equity in earnings of Joint Venture  721,107   292,772 
         
Income from continuing operations before income taxes  567,221   558,505 
Provision for income tax (benefit) expense  (44,244)  101,366 
         
INCOME FROM CONTINUING OPERATIONS  611,465   457,139 
         
Discontinued operations:        
Loss from operations of the discontinued Canadian subsidiary  -   (53,659)
Income tax expense – discontinued operations  -   - 
Loss from discontinued operations  -   (53,659)
         
NET INCOME $611,465  $403,480 
         
Income (loss) per share:        
Basic – from continuing operations $0.25  $0.18 
Basic – from discontinued operations $0.00  $(0.02)
Basic – net income $0.25  $0.16 
Diluted – from continuing operations $0.25  $0.18 
Diluted – from discontinued operations $0.00  $(0.02)
Diluted – net income $0.25  $0.16 
Shares used in computing net income per share:        
Basic  2,417,338   2,487,867 
Diluted  2,422,379   2,487,867 
The accompanying notes are an integral part of these consolidated financial statements.

4

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Three Months Ended June 30, 
   2008  2007 
OPERATING ACTIVITIES     
Net income $403,480 $791,002 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:       
Operations of discontinued subsidiary  289  (2,495,581)
Depreciation and amortization  11,312  10,423 
Earnings of the Joint Venture  (292,772) (599,750)
Changes in operating assets and liabilities:       
(Increase) Decrease in accounts receivable and amounts due from factor  (352,171) 127,836 
Increase in inventories and prepaid expenses  (1,595,894) (720,031)
Increase in accounts payable and accrued expenses  1,150,480  535,715 
Decrease in deferred taxes and other assets  100,001  5,380 
        
NET CASH USED IN OPERATING ACTIVITIES  (575,275) (2,345,006)
        
INVESTING ACTIVITIES:       
Purchase of property and equipment  -  (24,916)
Activity of discontinued operation  -  (923,012)
        
NET CASH USED IN INVESTING ACTIVITIES  -  (947,928)
        
FINANCING ACTIVITIES:       
Tax benefit from exercise of stock options  -  44,076 
Payments net of borrowing from Commercial Bank  -  (1,222,554)
Activities of discontinued subsidiary  -  4,457,012 
Proceeds from issuance of common stock from exercise of employee stock options  
-
  
50,778
 
        
NET CASH PROVIDED BY FINANCING ACTIVITIES  -  3,329,312 
        
(DECREASE) INCREASE IN CASH  (575,275) 36,378 
        
Cash at beginning of period  3,863,784  - 
        
CASH AT END OF PERIOD $3,288,509 $36,378 
        
Supplemental information:       
Interest paid $- $- 

  Three Months Ended June 30, 
  2009  2008 
OPERATING ACTIVITIES      
Net income $611,465  $403,480 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Operations of discontinued subsidiary  -   289 
Depreciation and amortization  14,147   11,312 
Earnings of the Joint Venture  (721,107)  (292,772)
Stock-based compensation  5,703   3,494 
Changes in operating assets and liabilities:        
Decrease (increase) in accounts receivable and amounts due from factor  371,918   (352,171)
Decrease (increase) in inventories and prepaid expenses  1,593,220   (1,595,894)
(Increase) decrease in accounts payable and accrued expenses  (1,078,615)  1,146,986 
(Increase) decrease in deferred taxes and other assets  (48,241)  100,001 
         
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES  748,490   (575,275)
         
INVESTING ACTIVITIES:        
Purchase of property and equipment  (2,929)  - 
         
NET CASH USED IN INVESTING ACTIVITIES  (2,929)  - 
         
FINANCING ACTIVITIES:        
Purchase and retirement of common stock  (95,481)  - 
Other long-term obligations  710   - 
         
NET CASH USED IN FINANCING ACTIVITIES  (94,771)  - 
         
INCREASE (DECREASE) IN CASH  650,790   (575,275)
         
Cash at beginning of period  284,030   3,863,784 
         
CASH AT END OF PERIOD $934,820  $3,288,509 
         
Supplemental information:        
Interest paid $5,642  $- 
Income taxes $-  $- 

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

5


UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Statement of Management

The consolidated financial statements include the accounts of Universal Security Instruments, Inc. (USI or the Company) and its majority owned subsidiaries.  Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the interim consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted.  The interim consolidated financial statements should be read in conjunction with the Company’s March 31, 20082009 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

In October 2006, we formed 2113824 Ontario, Inc., an Ontario corporation, as a wholly-owned subsidiary of the Company for the purpose of acquiring a two-thirds interestAs discussed in two Canadian corporations, International Conduits, Ltd. (Icon) and Intube, Inc. (Intube). Icon and Intube are based in Toronto, Canada and manufacture and distribute electrical mechanical tubing (EMT) steel conduit. Icon also sells home safety products, primarily purchased from the Company, in the Canadian market. The primary purpose of the Icon and Intube acquisition was to expand our product offerings to include EMT steel conduit, and to provide this product and service to the commercial construction market. On April 2, 2007, Icon and Intube were merged under the laws of Ontario to form one corporation.

In June 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to provide a term loan and a line of credit facility. These loans are secured by all of the assets of Icon and by the corporate guarantees of the Company and our USI Electric subsidiary.

As a result of continuing losses at Icon, management undertook an evaluation of the goodwill from our acquisition of Icon to determine whether the value of the goodwill has been impaired in accordance with FAS No. 142, “Goodwill and Other Intangible Assets”. Basedprior periods, on that evaluation, management determined that the value of the goodwill from our acquisition of Icon was impaired, and recognized an impairment charge of US$1,926,696 for the goodwill as of December 31, 2007. The impairment was recorded in discontinued operations in the consolidated statements of operations for the year ended March 31, 2008.

At the time of the investment in Icon, management projected that the established U.S. sales network would allow us to increase sales of EMT to U.S. customers. Despite our efforts, Icon suffered continuing losses, and we were not successful in increasing Icon’s sales in the face of competition and a weakening U.S. dollar. On January 29, 2008, Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and secured lender, that Icon was in default under the terms of the Credit Agreement dated June 22, 2007 between Icon and CIT Canada and demanding immediate payment of all of Icon’s obligations to CIT Canada under the Credit Agreement. On February 11, 2008, the assets of IconInternational Conduits, Ltd. (Icon), a Canadian corporation in which we own a two-thirds interest, were placed under the direction of a court appointed receiver, and the operations of Icon were suspended andsuspended. Accordingly, the assets and liabilities of Icon are not consolidated in the financial statements of the Company and are classified as assets held for sale in the consolidated balance sheets. Accordingly, thereceivership.  Our consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

As a result of Icon’s receivership and the steps taken to liquidate Icon’s assets, we have written down the non cash assets of Icon to their estimated net realizable value as of March 31, 2008. At June 30, 2008,2009, the assetsremaining asset of Icon held by the receiver consistconsists of cash of $1,473,110, trade accounts receivable (netapproximately US $70,000, and the remaining liability of allowance for doubtful accounts of $97,878) of $30,000, inventories (net of allowance for excess and obsolete inventory of $247,500) of $199,117, and prepaid expenses of $6,893, amountingIcon held by the receiver is the final disbursement that is due to total current assets of $1,709,120. At March 31, 2008, property, plant and equipment is shown atUniversal Security Instruments, Inc. as a net realizable value of $831,555. Management has revised its estimate of net realizable value at June 30, 2008 to $1,020,022. Subsequent to June 30, 2008, the property, plant and equipment was sold at auction for approximately $1,034,000. secured party.

The total valuemajor classes of assets net of applicable allowances and impairment reserves at June 30, 2008 is $2,729,142.
6

At June 30, 2008, the liabilities of Icon include trade accounts payable to unsecured creditors of $3,146,308, and secured notes payable to CIT Financial, Ltd. of $4,620,444. Other secured payables are $49,500. The total liabilities of Icon at June 30, 2008 are $7,816,252.

As noted above, the assets held for sale related to thein receivership reported as discontinued Canadian operations were adjusted to net realizable value based on management’s estimates. The process of completing the liquidation of Icon’s assets is continuing and the Company believes the process will continue into the second quarter of our 2009 fiscal year. Accordingly, the actual impairment charges incurred could differ based on the results of the liquidation process.

Subsequent to June 30, 2008, on July 16, 2008, the receiverincluded in possession of the assets of International Conduits, Ltd. (Icon) held a public auction to liquidate production machinery and equipment held for sale. The assets offered at public auction had previously been recorded at their appraised net realizable value and are recorded on the books and records of Icon at U.S. $831,555 as of March 31, 2008. Auction proceeds, net of auction fees, amounted to U.S. $1,033,652.

We anticipate that Icon’s obligations will be settled in the Ontario receivership action during the Company’s fiscal year ending March 31, 2009. Based on foreign currency exchange rates at June 30, 2008 and as a result of the settlement of Icon’s obligations, we expect that the Company will record a gain of between $3,750,000 and $4,250,000 due to debt abatement. The debt abatement is expected to be realized as the shortfall between the net proceeds of the liquidation of Icon’s assets and the total obligations of Icon.

In the accompanying consolidated financial statements, the results of Icon for the three months ended June 30, 2007 have been restated andbalance sheets are presented as the results of discontinued operations, and certain other prior year amounts have been restated in order to conform with the current year’s presentation.shown below:

  June 30, 2009  March 31, 2009 
Asset      
Cash $69,988  $202,565 
Assets held for sale $69,988  $202,565 
         
Liability        
Accounts payable, secured party $69,988  $202,565 
Liabilities held for sale $69,988  $202,565 

Income Taxes

A provision for federal and state income taxestax (benefit) expense on continuing operations of $101,366$(44,244) and $429,876$101,366 has been provided for the three month periods ended June 30, 20082009 and 2007,2008, respectively.  For income tax purposes, this provision is reduced by a $0 and $44,076 benefit derived from deductions associated with the exercise of employee stock options for the three month periods ended June 30, 20082009 and 2007,2008, respectively.  Under FAS 123,123R, the tax benefit of this deduction for the three month period ended June 30, 2008 has been treated as a credit to additional paid in capital and willdoes not require a cash payment for income taxes. For the three month period ended June 30, 2008, federal and state income taxes are $97,866 and $3,500, respectively. For the three month period ended June 30, 2007, federal and state income taxes are $388,469 and $41,407, respectively.

On April 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 prescribes a recognition threshold that a tax position is required to meet before recognition in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

In connection with the adoption of FIN 48, the Company recorded an initial liability of approximately $86,000 for income taxes, interest and penalties related to unrecognized tax benefits.  Simultaneously, the Company recorded a reduction to retained earnings. With the adoption of FIN 48, the Company has chosen to treat interest and penalties related to uncertain tax liabilities as income tax expense.  As of June 30, 2008,2009, this liability with imputed interest is $92,527.$96,034.


6

Joint Venture

The Company and its co-venturer, a Hong Kong corporation, each owns a 50% interest in a Hong Kong joint venture, Eyston Company Limited (the “Joint Venture”), that has manufacturing facilities in the People’s Republic of China, for the manufacturing of security products.  The following represents summarized balance sheet and income statement information of the Joint Venture as of and for the three months ended June 30, 20082009 and 2007:2008:

  2008 2007 
      
Net sales $7,797,035 $8,961,882 
Gross profit  1,822,409  2,338,140 
Net income  587,885  1,080,789 
Total current assets  16,206,245  13,793,083 
Total assets  25,758,228  25,458,275 
Total current liabilities  5,780,722  6,779,592 
7
  2009  2008 
Net sales $5,867,623  $7,797,035 
Gross profit  1,568,646   1,822,409 
Net income  938,812   587,885 
Total current assets  14,640,539   16,206,245 
Total assets  28,932,600   25,758,228 
Total current liabilities  6,051,978   5,780,722 

During the three months ended June 30, 20082009 and 2007,2008, respectively, the Company purchased $5,196,060$3,064,419 and $6,271,324$5,196,060 of products from the Joint Venture.  For the quarters ended June 30, 20082009 and 2007,2008, the Company has adjusted its equity in earnings of the Joint Venture to reflect a reduction of $1,171$246,180 and $59,355$1,171 for inter-company profit in inventory as required by US GAAP.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries acquired in October 2006 have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" and SFAS No. 130, "Reporting Comprehensive Income." Translation adjustments are included in other comprehensive income. All balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the current exchange rate at the balance sheet date. Statement of operations items are translated at the average foreign currency exchange rates. The resulting foreign currency translation adjustment is recorded in accumulated other comprehensive income (loss). The Company has no other components of comprehensive income (loss).Gains and losses from foreign currency transactions are included in the consolidated statements of income. The Company maintains cash in foreign banks to support its operations in Canada and Hong Kong.

Net Income Perper Common Share

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

A reconciliation of the weighted average shares of common stock utilized in the computation of basic and diluted earnings per share for the three month period ended June 30, 20082009 and 20072008 is as follows:

  
Three Months Ended
June 30, 
 
  2008 2007 
Weighted average number of common shares outstanding for basic EPS  2,487,867  2,479,979 
Shares issued upon the assumed exercise of outstanding stock options  -  53,754 
Weighted average number of common and common equivalent shares outstanding for diluted EPS  2,487,867  2,533,733 
  
Three Months Ended
June 30,
 
  2009  2008 
Weighted average number of common shares outstanding for basic EPS  2,417,338   2,487,867 
Shares issued upon the assumed exercise of outstanding stock options  5,041   0 
Weighted average number of common and common equivalent shares outstanding for diluted EPS  2,422,379   2,487,867 

Total outstandingOutstanding options to purchase 88,921 and 071,089 shares of common stock as of June 30, 2008 and 2007, respectively,2009 are not included in the above calculations as theirthe effect would be anti-dilutive.

Stock Based Compensation

As of June 30, 2007, under the terms of the Company’s Non-Qualified Stock Option Plan, as amended, 877,777 shares of our common stock are reserved for the granting of stock options, of which 873,545 have been issued, leaving 4,232 available for issuance.

Adoption of SFAS No. 123R. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, which requires compensation costs related to share-based payment transactions to be recognized in financial statements. SFAS No. 123R eliminates the intrinsic value method of accounting available under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which generally resulted in no compensation expense being recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

Effective April 1, 2006, we adopted SFAS No. 123R using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards will be measured at an estimated fair value and included in operating expenses or capitalized as appropriate over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented have not been restated to reflect the adoption of SFAS No. 123R.

8

As a result of adopting SFAS No. 123R, net income for the three months ended June 30, 2009 and 2008 was reduced by $3,494.$5,703 and $3,494, respectively.  No portion of employees’ compensation, including stock compensation expense, was capitalized during the period.

During the three month period ended June 30, 2007, 5,466 shares of our common stock have been issued as a result of the exercise of the options granted under the plan. The tax benefit, for income tax purposes, of $44,076 from the exercise of these stock options is presented as a cash flow from financing activities.

Fair Value Determination.  Under SFAS No. 123R, we have elected to continue using the Black-Scholes option pricing model to determine fair value of our awards on date of grant. We will reconsider the use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.

7

Stock Option Activity.  During the three month periods ended June 30, 2009, no stock options were granted.  During the three month period ended June 30, 2008 and 2007,2009, no shares of our common stock have been issued as a result of the exercise of the options were granted. granted under the plan.

Stock Compensation Expense. We have elected  Compensation expense related to continueshare-based awards is recognized on a straight-line amortizationbasis based on the value of stock-based compensation expense overshare awards that are expected to vest during the requisite service period. Prior to the adoption of SFAS No. 123R, we recognized the effect of forfeitures in our pro forma disclosures as they occurred. In accordance with the new standard, we have estimated forfeitures and are only recording expense on shares we expect to vest. For the three months ended June 30,2009 and 2008, and 2007, we recorded $3,494$5,703 and $6,438,$3,494, respectively, of stock-based compensation cost as general and administrative expense in our statement of operations. No forfeitures have been estimated.  No portion of employees’ compensation including stock compensation expense was capitalized during the period.

As of June 30, 2007,2009, there was $4,242$39,922 of unrecognized compensation cost related to share-based compensation arrangements that we expect to vest.  This cost will be fully amortized in the current fiscal year. The aggregate intrinsic value of currently exercisable options was $0$81,310 at June 30, 2008.2009.

Recently Issued Accounting Pronouncements

Business Combinations: In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”),which replaces SFAS No. 141 and issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS No. 160”), an amendment of Accounting Research Bulletin No. 51. These two new standards will change the accounting for and the reporting for business combination transactions and noncontrolling (minority) interests in the consolidated financial statements, respectively. SFAS No. 141(R) will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be re-characterized as noncontrolling interests and classified as a component of equity. These two standards will be effective for the Company for financial statements issued for fiscal years beginning after December 31, 2008.  SFAS 141(R) applies prospectively to business combinations on or after April 1, 2009.  SFAS 141R will have an impact on our accounting for business combinations once adopted, but the effect on our consolidated results of operations and financial position will be dependent upon future acquisitions, if any.

Fair Value Measurements:  In September 2007,2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial Accounting StandardsSFAS No. 157, Fair Value Measurement (SFAS 157)Measurements, (“SFAS No. 157”).  This standard clarifies the principle thatSFAS No. 157 establishes a formal framework for measuring fair value should be based onunder generally accepted accounting principles.  Although SFAS No. 157 applies (amends) the assumptions that market participants would use when pricing an asset or liability. Additionally,provisions of existing FASB and other accounting pronouncements, it establishes adoes not require any new fair value hierarchy that prioritizes the information used to develop those assumptions.measurements nor does it establish valuation standards.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company has not yet determined the impact that the implementation of SFAS 157 will have on its results of operations or financial condition.

The Fair Value Option for Financial Assets and Financial Liabilities:2007.  In February 2008, the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) which excludes SFAS No. 159, 13, The Fair Value OptionAccounting for Financial AssetsLeases, and Financial Liabilities, including an amendmentits related pronouncements that address leasing transactions from the scope of FASB Statements No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible157.  Also in February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”) which delays the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value (the “fair value option”)on a recurring basis (at least annually).  A business entity shall report unrealized gainsFSP 157-2 defers the effective date of SFAS No. 157 for non-financial assets and losses on itemsnon-financial liabilities for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of thefinancial statements issued for fiscal years beginning of an entity’s first fiscal year that begins after November 15, 2008.  The effect, if any, of adoptingFASB has issued a proposed FASB Staff Position No. 157-c, (“FSP 157-c)”, that would provide guidance on measuring liabilities under SFAS No. 159157.  SFAS No. 157 does not have a material impact on the Company’s consolidated financial position andor results of operations has not been finalized.
Reclassificationsoperations.

Certain prior year amounts have been reclassifiedSubsequent Events:  In May 2009, the Financial Accounting Standards Board issued Statement 165, Subsequent Events, to incorporate the accounting and disclosure requirements for subsequent events into U.S. generally accepted accounting principles.  Statement 165 introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance-sheet date.  The Company adopted Statement 165 as of June 30, 2009, which was the required effective date.

The Company evaluated its June 30, 2009 financial statements for subsequent events through the date the financial statements were available to be issued which was August 12, 2009.  Other than the published warning of our factor regarding a possible bankruptcy filing noted below, the Company is not aware of any other subsequent events that would require recognition or disclosure in order to conform with current year presentation.the financial statements.

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In July 2009, CIT Group, Inc. (CIT), the Company’s factor and principal lender, warned in a press release of the possibility that CIT may file for bankruptcy protection.  At June 30, 2009, the Company had no borrowings under its factoring agreement with CIT, had cash on deposit with CIT, and had availability to borrow based on its factoring agreement with CIT.  Since July 13, 2009 the Company has borrowed substantially all of its availability from CIT and transferred this amount and the cash on deposit with CIT to an account with the Company’s commercial bank.  The Company will continue to monitor its borrowing policy with respect to CIT and is reviewing its options to establish an alternate source of commercial financing, if needed.

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

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 months ended June 30, 20082009 and 20072008 relate to the operational results of the Company only.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 previously reported, as a result of continuing losses at our Canadian subsidiary, International Conduits, Ltd. (Icon),discussed in prior periods, on February 11, 2008, the assets of IconInternational Conduits, Ltd. (Icon), a Canadian corporation in which we own a two-thirds interest, were placed under the direction of a court appointed receiver, and the operations of Icon were suspended andsuspended. Accordingly, the assets and liabilities of Icon are not consolidated in the financial statements of the Company and are classified as assets held for sale in the consolidated balance sheet. Accordingly, thereceivership.  Our consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

As a result of Icon’s receivership and the steps taken to liquidate Icon’s assets, we have written down the non cash assets of Icon to their estimated net realizable value as of March 31, 2008. At June 30, 2008,2009, the assetsremaining asset of Icon held by the receiver consistconsists of cash of $1,473,110, trade accounts receivable (netapproximately US $70,000, and the remaining liability of allowance for doubtful accounts of $97,878) of $30,000, inventories (net of allowance for excess and obsolete inventory of $247,500) of $199,117, and prepaid expenses of $6,893, amountingIcon held by the receiver is the final disbursement that is due to total current assets of $1,709,120. At March 31, 2008, property, plant and equipment is shown atUniversal Security Instruments, Inc. as a net realizable value of $831,555. Management has revised its estimate of net realizable value at June 30, 2008 at approximately $1,020,000. Subsequent to June 30, 2008, the property, plant and equipment was sold at auction for approximately $1,034,000. secured party.

The total valuemajor classes of assets net of applicable allowances and impairment reserves at June 30, 2008 is $2,729,142.liabilities held in receivership reported as discontinued operations included in the accompanying consolidated balance sheets are shown below:

At June 30, 2008, the liabilities of Icon include trade accounts payable to unsecured creditors of $3,146,307, secured notes payable to CIT Financial, Ltd. of $4,620,444 and other secured amounts payable of $49,500. The total liabilities of Icon at June 30, 2008 are $7,816,252.

As noted above, the assets held for sale related to the discontinued Canadian operations were adjusted to net realizable value based on management’s estimates. The process of completing the liquidation of Icon’s assets is continuing and the Company believes the process will continue into the second quarter of our 2009 fiscal year. Accordingly, the actual impairment charges actually incurred could differ based on the actual results of the liquidation process.

We anticipate that Icon’s obligations will be settled in the Ontario receivership action during the Company’s fiscal year ending March 31, 2009. Based on foreign currency exchange rates at June 30, 2008 and as a result of the settlement of Icon’s obligations, we expect that the Company will record a gain of between $3,750,000 and $4,250,000 due to debt abatement. The debt abatement is expected to be realized as the shortfall between the net proceeds of the liquidation of Icon’s assets and the total obligations of Icon.
  June 30, 2009  March 31, 2009 
Asset      
Cash $69,988  $202,565 
Assets held for sale $69,988  $202,565 
         
Liability        
Accounts payable, secured party $69,988  $202,565 
Liabilities held for sale $69,988  $202,565 

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The results of Icon for the three month period ended June 30, 2007 have been restated and are presented in our financial statements as the results of discontinued operations, and certain prior year amounts have been restated in order to conform with the current year’s presentation.

Results of Operations

Three Months Ended June 30, 20082009 and 20072008

Sales.  Net sales for the three months ended June 30, 20082009 were $6,192,801$5,914,905 compared to $10,449,343$6,192,801 for the comparable three months in the prior fiscal year, a decrease of $4,256,542 (40.1%$277,896 (4.5%).  The primary reasonsreason for the decrease in net sales volumes was sales of our core product lines to the electrical distribution trade, including smoke alarms and carbon monoxide alarms, and ground fault circuit interrupter (GFCI) units decreased due to a decrease in new home construction during the quarter. In addition, we have not been able to import GFCI devices because the manufacturer has not yet received certifications for mandated changes to the devices.

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 25.5%19.8% and 26.0%25.5% of sales for the quarters ended June 30, 20082009 and 2007,2008, respectively.  The decrease in gross profit margin was primarily due to a lower gross profit margin realized on sales to a national home improvement retailer.

Expenses.  Research and development, and selling, general and administrative expenses decreasedincreased by $291,699$7,939 from the comparable three months in the prior year.  As a percentage of net sales, these expenses increased to 21.5%22.4% for the three month period ended June 30, 2008,2009, from 15.5%21.5% for the 20072008 period.  The decrease in dollars spent was primarily due to a reduction in commissions and freight costs associated with lower sales, and the increase in costs as a percentage of net sales was primarily due to fixed costs that did not decrease at the same rate as sales.

Interest Expense and Income.  Our interest incomeexpense on cash deposits, net of interest charges,income, was $1,491 for the quarter ended June 30, 2009, compared to net interest income of $18,835 for the quarter ended June 30, 2008, compared to net interest expense of $58,497 for the quarter ended June 30, 2007.2008.  Net interest expenseincome in the prior yearsyear’s quarterly period resulted from borrowings by us in support ofnet cash deposits with our Canadian subsidiary.factor.

Income Taxes.  During the quarter ended June 30, 2008,2009, the Company had a net income tax expensebenefit of $101,366.$44,244 as a result of a $153,886 loss before equity in earnings of the Joint Venture.  For the corresponding 20072008 period, the Company hashad a provision for income taxes of $429,876. The decrease$101,366, based on income before equity in current income tax expense reflects reduced taxable income inearnings of the period ended June 30, 2008Joint Venture of $265,733.

Net Income.  We reported net income of $403,480$611,465 for the quarter ended June 30, 2008,2009, compared to net income of $791,002$403,480 for the corresponding quarter of the prior fiscal year.year, a $207,985 (51.5%) increase.  The primary reasonsreason for the decreaseincrease in net income is a decreasean increase of $306,978$428,335 in the Company’s equity in the earnings of the Joint Venture from the same period of the prior year, and a reduction in earningspartially offset by the Company’s $153,896 operating loss due to a decrease in new home construction during the quarter.  Included in our equity in the earnings of the Joint Venture for the current period is $246,180 recognized by the Company on inter-company sales of inventory from prior periods which, in accordance with GAAP, may only be recognized by us as income upon sales by us to customers, and an adjustment of $117,050 to reflect gains on foreign currency held.

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 $7,950,000.$7,500,000. Based on specified percentages of our accounts receivable and inventory and letter of credit commitments, and reduced by $3,000,000 representing the Company’s guarantee of the term loan facility of Icon, we had $4,950,000$3,925,000 available under the Factoring Agreement.Agreement at June 30, 2009.  There arewere no amounts borrowed under this agreement as of June 30, 2008.2009.  The interest rate under the Factoring Agreement on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by our lender.  At June 30, 2008,2009, the prime rate was 5.0%3.25%.  Borrowings are collateralized by all of our accounts receivable and inventory.

Our non-factoredfactored accounts receivable as of the end of our last fiscal year (net of allowances for doubtful accounts) were $5,600,408,$4,610,401, and were $5,689,667$4,114,963 as of June 30, 2008.2009.  Our prepaid expenses as of the end of our last fiscal year were $206,197,$255,745, and were $345,561$252,059 as of June 30, 2008. The increase in prepaid expenses during the first three months of the current fiscal year is due to the timing of premium payments to various insurance carriers.2009.

Operating activities usedprovided cash of $575,275$748,490 for the three months ended June 30, 2008.2009.  This was primarily due to an increasea decrease in accounts receivable of $352,171, an increase$371,918, and decreases in inventories and prepaid expenses of $1,593,220, offset by a decrease in accounts payable and accrued expenses of $1,150,480, increases in inventories and prepaid expenses of $1,595,894,$1,077,028 and earnings of the Joint Venture of $292,772.$721,107.  For the same period last year, operating activities used cash of $2,345,006,$575,275, 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 in the operations of the discontinued subsidiary.Company’s inventory balances during that period to meet forecasted sales orders.

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Investing activities provided noused cash of $2,929 during the three months ended June 30, 2008. Investing2009.

10

Financing activities used $947,928 in the prior period, principally as a resultcash of the activities of the discontinued operations.

Financing activities provided no cash$94,771 during the three months ended June 30, 2008. In the comparable three months in the prior year, financing activities provided cash of $3,329,312,2009, primarily from the activitiesacquisition and retirement of the discontinued operations.Company stock in accordance with our stock repurchase plan.

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 capitalcapital.  In July 2009, CIT warned in a press release of the ordinary coursepossibility that it may file for bankruptcy protection.  At June 30, 2009, we had no borrowings under our factoring agreement with CIT, had cash on deposit with CIT, and had availability to borrow based on our Factoring Agreement.  Since July 13, 2009 we borrowed substantially all of our business overavailability from CIT and transferred this amount and the next twelve monthscash on deposit with CIT to a certificate of deposit account with our commercial bank.  We will continue to monitor our borrowing policy with respect to CIT, and over the long term.we are reviewing our options to establish an alternate source of commercial financing, if needed.

Joint Venture

Joint Venture

Net Sales.  Net sales of the Joint Venture for the three months ended June 30, 20082009 were $7,797,035,$5,867,623, compared to $8,961,882,$7,797,035, for the comparable period in the prior fiscal year.  The decrease in net sales for the three month period was due to decreased sales of smoke alarm products to non-related customers.the Company.

Net Income.  Net income for the three months ended June 30, 20082009 was $587,885,$938,812, compared to $1,080,789$587,885 in the comparable period last year.  The 45.6% decrease59.7% increase in net income for the three month period was due primarily to the recognition of currency gain and to reduced sales to non-related customers.selling, general and administrative expenses over the prior year’s quarter.

Gross Margins.  Gross margins of the Joint Venture for the three month period ended June 30, 2008 decreased2009 increased to 23.4%26.7% from 26.1%23.4% for the 20072008 period.  Since gross margins depend on sales volume of various products, changes in the sales mix toof items sold to a large U.S. national retailer caused these changes in gross margins.

Expenses.  Selling, general and administrative expenses were $1,218,586,$878,201 for the three month period ended June 30, 2008,2009, compared to $1,245,860$1,218,586 in the prior year’s period.  As a percentage of sales, expenses were 15.0% for the three month period ended June 30, 2009, compared to 15.6% for the three month period ended June 30, 2008, compared to 13.9% for the three month period ended June 30, 2007.2008.  The increasedecrease in selling, general and administrative expense in dollars and as a percent of sales was primarily due to fixed costs that did not decrease at the same rate as sales.decreases in selling expenses due to lower sales volumes.

Interest Income and Expense.  Interest expense, net of interest income, was $1,494$2,093 for the three month period ended June 30, 2008,2009, compared to net interest incomeexpense of $5,975$1,494 for the prior year’s period.  Net interest expense resulted from an increase in the Joint Venture’s borrowings.

Liquidity.  Cash needs of the Joint Venture are currently met by funds generated from operations.  During the three months ended June 30, 2008,2009, working capital increaseddecreased by $3,645,931$562,638 from $6,779,592$9,151,199 on March 31, 20082009 to $10,425,523$8,588,561 on June 30, 2008.2009.

Critical Accounting Policies

Management’s discussion and analysis of our consolidated financial statements and results of operations are based on our Consolidated Financial Statements included as part of this document. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

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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, 2008.2009.  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:

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Revenue Recognition.Our revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” issued by the Securities and Exchange Commission.  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. Shipping and handling costs incurred by the Company to deliver goods to its customers are not included in costs of goods sold but are presented as an element of selling, general and administrative expense within the condensed consolidated statements of earnings. The Company incurred $175,676 and $189,851 of shipping and handling costs in the quarters ended June 30, 2008 and 2007, respectively.

Impairment of Long-Lived Assets:Assets.  The Company’s policy is to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”), SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, (“SFAS No. 144”). The Company recognizes an impairment loss when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. The measurement of the impairment losses to be recognized is based upon the difference between the fair value and the carrying amount of the assets.

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, 2008.2009.


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 believehave 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.

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PART II - OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

As reported in the Company’s Annual Report of Form 10-K for the fiscal year ended March 31, 2009, 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 has not responded to the rejection but is entitled to take an appeal to the Board of Patent Appeals and Interferences.  The litigation is stayed pending the conclusion of the reexamination proceedings. The USPTO action fully supports the Company’s substantive position and its defenses to Kidde.  The Company and its counsel believe that regardless of the outcome of the reexamination, the Company has significant defenses relating to the patent in suit.  In the event of an unfavorable outcome, the amount of any potential loss to the Company is not yet determinable.

As further reported in the Company’s Annual Report of Form 10-K for the fiscal year ended March 31, 2009, on June 25, 2008, Maple Chase Company which was acquired in January 2008 by United Technologies Corporation (“UTC”) (which also owns Walter Kidde Portable Equipment, Inc.), filed a civil suit against the Company in the United States District Court for the Northern District of Illinois (Case No. 08cv3641) for patent infringement of Re 33920, a patent that expired in March of 2007.  On January 13, 2009, the Court granted permission to substitute Kidde for Maple Chase as the party plaintiff.  This action involves the same patent that formed the basis of the suit filed by Maple Chase against the Company in February 2004 (Case No. 03cv07205).   In that case, the Company successfully sought and obtained reexamination of the asserted patent in the USPTO based on the references cited and analysis presented by the Company.  In April 2005, the Court dismissed the earlier case subject to the outcome of the reexamination.   After pending for more than three years and after the expiration of the patent, a Reexamination Certificate was granted confirming patentability of many of the claims and cancelling the remaining claims.  The 2008 case asserts infringement of the claims emerging out of reexamination. On June 10, 2009, the Court granted the Company’s motion to amend its answer and counterclaims seeking injunctive and antitrust damages against Kidde, and the Company filed a third-party complaint against UTC, Kidde’s parent company.   Kidde and UTC filed a motion to dismiss the antitrust claims which is being opposed by the Company.  Discovery is now underway.  The Company believes that it has meritorious and substantial technical defenses to the action and that it is entitled to a number of legal/equitable defenses due to the long period of inaction and acquiescence by Kidde/Maple Chase and its predecessors.  The amount, if any, of potential loss to the Company is not yet determinable.  The Company intends to vigorously defend the suit and press its pending counterclaims.

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 6.2.
EXHIBITS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information with respect to purchases of common stock by the Company or any affiliated purchasers during the three months ended June 30, 2009:

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Period 
Total
Number of
Shares
Purchased
  
Average
Price
Paid per
Share
  
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
  
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
April 2009  12,733  $4.19   12,733   8,420 
May 2009  8,400  $5.01   8,400   20 
June 2009  -  $0.00   -   - 
Total  21,133  $4.52   21,133   20 

In July 2008, the Company announced a stock buyback program and authorized the purchase of up to 100,000 shares of common stock.  Shares may be purchased from time to time under this program in the open market, through block trades and/or in negotiated transactions.  Unless extended by the Company’s Board of Directors, the program will terminate when 100,000 shares of common stock have been repurchased by the Company pursuant to the program (unless increased or decreased by the Board of Directors).

Exhibit No. ITEM 5.OTHER INFORMATION

On August 11, 2009, the Company’s Board of Directors amended Article I, Section 1 of its Bylaws to provide that the Company’s annual meeting of the stockholders shall be held on such date as may be selected by the Board of Directors.  Prior to this amendment, the Bylaws provided that the Company’s annual meeting of the stockholders shall be held on such date in the month of September as may be selected by the Board of Directors.

ITEM 6.EXHIBITS

Exhibit No.
3.1Articles 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)
3.2Articles 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, Filefile No. 1-31747)
3.3Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 25, 2008, File No. 1-31747)amended*
10.1Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2003, File No. 1-31747)
10.2Hong Kong Joint Venture Agreement, as amended (incorporated by reference to Exhibit 10.2 to Amendment No. 1 on Form 10-K/A10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2006,2003, File No. 1-31747)
10.3Amended and Restated Factoring Agreement between the Registrant and The CIT Group 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, Filefile No. 1-31747)
10.4Amended and Restated Inventory Security Agreement between the Registrant and CIT, dated June 22, 20072008 (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, File2008, file No. 1-31747)
10.5Credit Agreement between International Conduits Ltd. (“Icon”) and CIT Financial Ltd. (“CIT Canada”), dated June 22, 2007 (“CIT Canada Credit Agreement”) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 26, 2007, File No. 1-31747)
10.6General Security Agreement between CIT Canada and Icon, dated June 22, 2007, with respect to the obligations of Icon under the CIT Canada Credit Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed June 26, 2007, File No. 1-31747)
10.7Guaranty made by the Registrant and USI Electric Inc., in favor of CIT Canada, dated June 22, 2007, with respect to the obligations of Icon under the CIT Canada Credit Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed June 26, 2007, File No. 1-31747)
10.8Lease between Universal Security Instruments, Inc. and National Instruments CompanySt. John Properties, Inc. dated October 21, 1999November 4, 2008 for its office and warehouse located at 7-A Gwynns Mill Court,11407 Cronhill Drive, Suites A-D, Owings Mills, Maryland 21117 (incorporated by reference to Exhibit 10.1910.8 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2008, File No. 1-31747)
10.6Amendment 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 Fiscal Year Endedyear ended March 31, 2000,2009, File No. 1-31747)
10.910.7Amended and Restated Employment Agreement dated July 18, 20062007 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2006,2007, File No. 1-31747)
31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1Section 1350 Certifications*
99.1Press Release dated August 13, 2008*12, 2009*

*Filed herewith

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SIGNATURES

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

 
UNIVERSAL SECURITY INSTRUMENTS, INC.
 (Registrant)
   
Date: August 13, 200812, 2009By:/s/ Harvey B. Grossblatt
  Harvey B. Grossblatt
  President, Chief Executive Officer
   
 By:/s/ James B. Huff
  James B. Huff
  Vice President, Chief Financial Officer
 
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