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 SeptemberJune 30, 20082009

OR
o¨ 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 o¨

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 o¨Accelerated filer o¨Non-Accelerated Filer o¨ 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 o¨No x

At November 10, 2008,August 8, 2009, the number of shares outstanding of the registrant’s common stock was 2,476,367.
2,387,887.


TABLE OF CONTENTS

 
Page
Part I - Financial Information
    
Item 1.
ConsolidatedPart I - Financial Statements (unaudited):Information 
    
 
Item 1.
Consolidated Balance Sheets at September 30, 2008 and March 31, 2008Financial Statements (unaudited):3
    
 Consolidated Statements of Earnings for the Three Months Ended SeptemberBalance Sheets at June 30, 2008 and 20072009
 4and March 31, 20093
    
 Consolidated Statements of Earnings for the Six Months Ended September 30, 2008 and 2007Three4
 5Months Ended June 30, 2009 and 2008
    
 Consolidated Statements of Cash Flows for the Six Three5
Months Ended SeptemberJune 30, 20082009 and 20072008 
Notes to Consolidated Financial Statements6
    
 Notes to Consolidated
Item 2.
Management’s Discussion and Analysis of Financial StatementsCondition
 7and Results of Operations9
    
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations11
Item 3.3.
Quantitative and Qualitative Disclosure About Market Risk1612
    
Item 4.4.
Controls and Procedures1712
    
Part II - Other Information
  
Item 1.
Legal Proceedings13
    
Item 1.
Legal Proceedings17
Item 2.2.
Unregistered Sales of Equity Securities and Use of Proceeds18
Item 4.
Submission of Matters to a Vote of Security Holders18
Item 6.
Exhibits1913
    
 Signatures
Item 5.
Other Information14
 20
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)

  September 30, 2008 March 31, 2008 
ASSETS
       
        
CURRENT ASSETS       
Cash and cash equivalents
 $22,298 $3,863,784 
Accounts receivable:
       
Trade less allowance for doubtful accounts of $95,927 and $15,000 at September 30, 2008 and March 31, 2008  
511,644
  
146,022
 
Recoverable taxes and other receivables  282,695  282,083 
Receivable from Hong Kong Joint Venture  200,560  115,656 
   994,899  543,761 
Amount due from factor
  5,848,088  5,600,408 
Inventories, net of allowance for obsolete inventory of $40,000 at September 30, 2008 and March 31, 2008  
8,684,870
  
5,357,488
 
Prepaid expenses
  342,790  206,197 
Assets held for sale 
  260,009  2,850,731 
TOTAL CURRENT ASSETS  16,152,954  18,422,369 
DEFERRED TAX ASSET  2,683,968  1,914,136 
INVESTMENT IN HONG KONG JOINT VENTURE  10,662,922  9,986,579 
PROPERTY AND EQUIPMENT – NET  107,722  130,347 
OTHER ASSETS  15,486  15,486 
TOTAL ASSETS $29,623,052 $30,468,917 
        
LIABILITIES AND SHAREHOLDERS’ EQUITY
       
CURRENT LIABILITIES       
Amount due to factor
 $625,594 $0 
Accounts payable
  819,977  777,342 
Hong Kong Joint Venture accounts payable
  2,942,011  1,687,950 
Accrued liabilities:
       
Litigation reserve  401,592  401,592 
Payroll and employee benefits  369,875  158,057 
Commissions and other  260,772  105,431 
Liabilities held for sale  260,009  7,823,450 
TOTAL CURRENT LIABILITIES  5,679,830  10,953,822 
        
Long-term liability – other  93,915  91,160 
        
COMMITMENTS AND CONTINGENCIES  -  - 
SHAREHOLDERS’ EQUITY       
Common stock, $.01 par value per share; authorized 20,000,000 shares;  issued and outstanding 2,483,867 shares at September 30, 2008 and 2,487,867 shares at March 31, 2008
  
24,840
  
24,879
 
Additional paid-in capital
  13,439,750  13,453,378 
Retained earnings
  10,384,717  5,890,023 
Other comprehensive income  -  55,655 
TOTAL SHAREHOLDERS’ EQUITY  23,849,307  19,423,935 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $29,623,052 $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 September 30, 
   2008  2007 
      
Net sales $8,381,379 $9,689,537 
Cost of goods sold – acquired from Joint Venture  4,825,503  3,987,325 
Cost of goods sold – other  1,664,603  3,759,858 
        
GROSS PROFIT  1,891,273  1,942,354 
        
Research and development expense  85,184  90,777 
Selling, general and administrative expense  1,649,290  1,520,071 
        
Operating income  156,799  331,506 
        
Other income (expense):       
Interest income  23,041  - 
Interest expense  (26,300) (12,364)
        
INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE  153,540  319,142 
        
Equity in earnings of Joint Venture  600,190  590,965 
        
Income from continuing operations before income taxes  753,730  910,107 
Provision for income tax expense  97,429  108,000 
        
INCOME FROM CONTINUING OPERATIONS  656,301  802,107 
        
Discontinued operations:      
Gain (loss) from operations of the discontinued Canadian subsidiary  2,469,041  (483,977)
Income tax benefit – discontinued operations  965,872  - 
Gain (loss) from discontinued operations  3,434,913  (483,977)
        
NET INCOME $4,091,214 $318,130 
        
Income (loss) per share:       
Basic – from continuing operations  0.26  0.32 
Basic – from discontinued operations  1.38  (0.19)
Basic – net income  1.64  0.13 
Diluted – from continuing operations  0.26  0.32 
Diluted – from discontinued operations  1.38  (0.19)
Diluted – net income  1.64  0.13 
Shares used in computing net income per share:       
Basic  2.486,176  2,483,605 
Diluted  2,486,176  2,515,513 
  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 EARNINGSCASH FLOWS
(Unaudited)

  Six Months Ended September 30, 
   2008  2007 
      
Net sales $14,574,180 $19,375,195 
Cost of goods sold - acquired from Joint Venture  8,097,713  8,175,063 
Cost of goods – other  3,008,128  6,535,929 
        
GROSS PROFIT  3,468,339  4,664,203 
        
Research and development expense  171,418  160,667 
Selling, general and administrative expense  2,893,224  3,075,606 
        
Operating income  403,697  1,427,930 
        
Other income (expense):       
Interest income  41,876  - 
Interest expense  (26,300) (70,861)
        
INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE  419,273  1,357,069 
        
Equity in earnings of Joint Venture  892,962  1,190,715 
        
Income from continuing operations before income taxes  1,312,235  2,547,784 
Provision for income tax expense  198,795  537,876 
        
INCOME FROM CONTINUING OPERATIONS  1,113,440  2,009,908 
        
Discontinued operations:       
Gain (loss) from operations of the discontinued Canadian subsidiary  2,415,382  (900,775)
Income tax benefit – discontinued operations  965,872  - 
Gain (loss) from discontinued operations  3.381,254  (900,775)
        
NET INCOME $4,494,694 $1,109,133 
        
Income (loss) per share:       
Basic – from continuing operations  0.45  0.81 
Basic – from discontinued operations  1.36  (0.36)
Basic – net income  1.81  0.45 
Diluted – from continuing operations  0.45  0.80 
Diluted – from discontinued operations  1.36  (0.36)
Diluted – net income  1.81  0.44 
Shares used in computing net income per share:       
Basic  2,487,017  2,481,802 
Diluted  2,487,017  2,523,316 
  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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Six Months Ended September 30, 
   2008  2007 
OPERATING ACTIVITIES       
Net income $4,494,694 $1,109,133 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:       
Operations of discontinued subsidiary  (3,428,897) (2,942,808)
Depreciation and amortization  22,625  24,705 
Earnings of the Joint Venture  (892,962) (1,190,715)
Changes in operating assets and liabilities:       
(Increase) decrease in accounts receivable and amounts due from factor  (698,818) 1,734,038 
(Increase) decrease in inventories and prepaid expenses  (3,463,975) 1,890,127 
Increase (decrease) in accounts payable and accrued expenses  1,663,855  (2,937,262)
(Decrease) increase in deferred taxes and other assets  (769,832) 95,678 
        
NET CASH USED IN OPERATING ACTIVITIES  (3,073,310) (2,217,104)
        
INVESTING ACTIVITIES:       
Purchase of property and equipment  -  (30,778)
Activity of discontinued operation  2,590,722  (1,813,739)
Dividends received from Joint Venture  216,619  323,716 
        
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES  2,807,341  (1,520,801)
        
FINANCING ACTIVITIES:       
Purchase and retirement of common stock  (13,667) - 
Tax benefit from exercise of stock options  -  72,752 
Borrowing from (payments to) factor  625,594  (2,254,966)
Activities of discontinued subsidiary  (4,187,444) 6,279,738 
Proceeds from issuance of common stock from exercise of employee stock options  
-
  
155,036
 
        
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES  (3,575,517) 4,252,560 
        
Impact of foreign currency on cash  -  189,405 
        
(DECREASE) INCREASE IN CASH  (3,841,486) 704,060 
        
Cash at beginning of period  3,863,784  240,545 
        
CASH AT END OF PERIOD $22,298 $944,605 
        
Supplemental information:       
Interest paid $26,300 $70,861 
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, 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, the Company 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 sold 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 September 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 further explained below.

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 the Company’s efforts, Icon suffered continuing losses, and the Company was 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 September 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 wereare not consolidated in the financial statements of the Company and are classified as assets held for sale in thereceivership.  Our consolidated balance sheets. Accordingly, the consolidatedfinancial statements of earnings and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

On July 16, 2008, the receiver in possession of Icon’s assets held a public auction to liquidate production machinery and equipment held for sale. These assets were recorded at their appraised net realizable value of US$831,555 as of March 31, 2008. During the quarter endedAt June 30, 2008,2009, the Company revised its estimate based on further communications with the auctioneer and appraisers and adjusted the carrying value to approximately $1,020,000, resulting in a write-up of approximately US$190,000 during the quarter ended June 30, 2008. Auction proceeds, net of auction fees, amounted to US$1,033,652.
7

On September 22, 2008, Icon’s obligations were settled in the receivership action by Ontario Superior Court order. After complete liquidation of the assets of Icon, the receiver held CAD$2,419,831 (US$2,314,326). Of this amount, CAD$2,150,000 (US$2,056,260) was distributed to CIT Canada in partial settlement of Icon’s secured obligations to CIT Canada. The remaining cash of CAD$260,009 (US$258,066) is currently held by the receiver for other obligations. As a result of the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended September 30, 2008. Approximately US$3,000,000 of the gain related to extinguishment of liabilities due to unsecured creditors. The company applied guidance in FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and determined that a legal release of the liabilities had been achieved to allow recognition of the gain on extinguishment of liabilities. This gain was partially offset in consolidation by the US$1,481,003 after-tax effect loss recognized by the Company in settlement of its guarantee of Icon’s secured debt and other losses attributable to the Icon discontinued operations to arrive at the gain from discontinued operations of $3,381,254 for the six months ended September 30, 2008.

At September 30, 2008, the assetsasset of Icon held by the receiver consistedconsists of cash of US$260,009,approximately US $70,000, and its liabilities include post-receivership accounts payablethe remaining liability of US$87,009 and a pre-receivership trade account payable of approximately US$173,000. The pre-receivership trade account payable is subject to settlement in accordance with a “claim process” administratedIcon held by the receiver. Toreceiver is the extent any portion of the pre-receivership account payablefinal disbursement that is ultimately disallowed, that portion will reduce the gain from discontinued operations.due to Universal Security Instruments, Inc. as a secured party.

The major classes of assets and liabilities of businessesheld in receivership reported as discontinued operations included in the accompanying consolidated balance sheets are shown below.below:

  September 30, 2008 March 31, 2008 
Assets
     
Cash $260,009 $823,550 
Trade receivables, net  0  371,793 
Inventories  0  817,022 
Property, plant and equipment - net  0  831,555 
Other assets  0  6,811 
Assets of discontinued operations $260,009 $2,850,731 
        
Liabilities
       
Accounts payable, trade and other $260,009 $3,344,624 
Notes payable - bank  0  4,478,826 
Liabilities of discontinued operations $260,009 $7,823,450 
  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 

In the accompanying consolidated financial statements, the results of Icon for the three and six months ended September 30, 2008 have been restated and are presented as the results of discontinued operations, and certain other prior year amounts have been reclassified in order to conform with the current year’s presentation.

Income Taxes

A provision for federal and state income taxestax (benefit) expense on continuing operations of $198,795$(44,244) and $537,876$101,366 has been provided for the sixthree month periods ended SeptemberJune 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 sixthree month periods ended SeptemberJune 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. An income tax benefit of $965,872 is recognized on the settlement of the Company’s guarantee of the discontinued subsidiary’s debt on the U.S. portion of the loss from discontinued operations. The benefit is presented in the discontinued operations section of the accompanying consolidated statements of earnings. For the three month periods ended September 30. 2008 and 2007, federal and state income taxes from continuing operations are $97,429 and $108,000, 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.

8
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 SeptemberJune 30, 2008,2009, this liability with imputed interest is $93,915.$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 sixthree months ended SeptemberJune 30, 20082009 and 2007:2008:

  2008
 
2007 
Net sales $19,667,762 $15,773,412 
Gross profit  5,146,125  4,103,552 
Net income  2,382,837  1,871,242 
Total current assets  17,985,028  13,218,715 
Total assets  27,998,136  24,745,290 
Total current liabilities  6,674,648  5,817,827 
  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 sixthree months ended SeptemberJune 30, 20082009 and 2007,2008, respectively, the Company purchased $13,789,174$3,064,419 and $10,394,619$5,196,060 of products from the Joint Venture.  For the quarters ended SeptemberJune 30, 20082009 and 2007,2008, the Company has adjusted its equity in earnings of the Joint Venture to reflect a reduction of $265,437$246,180 and $195,739$1,171 for inter-company profit in inventory as required by US GAAP.

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 SeptemberJune 30, 20082009 and 20072008 is as follows:

   Three Months Ended  Six Months Ended 
  September 30, September 30, 
  2008 2007 2008 2007 
Weighted average number of common shares outstanding for basic EPS  2,486,176  2,483,605  2,487,017  2,481,802 
Shares issued upon the assumed exercise of outstanding stock options  0  31,908  0  41,514 
Weighted average number of common and common equivalent shares outstanding for diluted EPS  2,486,176  2,515,513  2,487,017  2,523,316 
  
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 88,92171,089 shares of common stock as of SeptemberJune 30, 20082009 are not included in the above calculations as the effect would be anti-dilutive.

Stock Based Compensation

As of September 30, 2008, 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.

9
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.

As a result of adopting SFAS No. 123R, net income for the sixthree months ended SeptemberJune 30, 2009 and 2008 was reduced by $6,987.$5,703 and $3,494, respectively.  No portion of employees’ compensation, including stock compensation expense, was capitalized during the period.

During the six month period ended September 30, 2008, no shares of our common stock have been issued as a result of the exercise of the options granted under the plan.

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 sixthree month periods ended SeptemberJune 30, 2008 and 2007,2009, no stock options were granted.  During the three month period ended June 30, 2009, no shares of our common stock have been issued as a result of the exercise of the options 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 sixthree months ended September 30,June 2009 and 2008, and 2007, we recorded $6,987$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 SeptemberJune 30, 2008,2009, there was $749$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 SeptemberJune 30, 2008.2009.

Stock Purchase Program

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).

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 acquisitions undertaken and 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.
10

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 orderthe financial statements.

8

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 conformborrow based on its factoring agreement with current year presentation.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

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 months ended SeptemberJune 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

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 sold 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.

11
In September 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 further explained below.

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 the Company’s efforts, Icon suffered continuing losses, and the Company was 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 September 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 wereare not consolidated in the financial statements of the Company and are classified as assets held for sale in thereceivership.  Our consolidated balance sheets. Accordingly, the consolidatedfinancial statements of earnings and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

On July 16, 2008, the receiver in possession of Icon’s assets held a public auction to liquidate production machinery and equipment held for sale. These assets were recorded at their appraised net realizable value of US$831,555 as of March 31, 2008. During the quarter endedAt June 30, 2008,2009, the Company revised its estimate based on further communications with the auctioneer and appraisers and adjusted the carrying value to approximately $1,020,000, resulting in a write-up of approximately US$190,000 during the quarter ended June 30, 2008. Auction proceeds, net of auction fees, amounted to US$1,033,652.

On September 22, 2008, Icon’s obligations were settled in the receivership action by Ontario Superior Court order. After complete liquidation of the assets of Icon, the receiver held CAD$2,419,831 (US$2,314,326). Of this amount, CAD$2,150,000 (US$2,056,260) was distributed to CIT Canada in partial settlement of Icon’s secured obligations to CIT Canada. The remaining cash of CAD$260,009 (US$258,066) is currently held by the receiver for other obligations. As a result of the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended September 30, 2008. Approximately US$3,000,000 of the gain related to extinguishment of liabilities due to unsecured creditors. The company applied guidance in FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and determined that a legal release of the liabilities had been achieved to allow recognition of the gain on extinguishment of liabilities. This gain was partially offset in consolidation by the US$1,481,003 after-tax effect loss recognized by the Company in settlement of its guarantee of Icon’s secured debt and other losses attributable to the Icon discontinued operations to arrive at the gain from discontinued operations of $3,381,254 for the six months ended September 30, 2008.

At September 30, 2008, the assetsasset of Icon held by the receiver consistedconsists of cash of US$260,009,approximately US $70,000, and its liabilities include post-receivership accounts payablethe remaining liability of US$87,009 and a pre-receivership trade account payable of approximately US$173,000. The pre-receivership trade account payable is subject to settlement in accordance with a “claim process” administratedIcon held by the receiver. Toreceiver is the extent any portion of the pre-receivership account payablefinal disbursement that is ultimately disallowed, that portion will reduce the gain from discontinued operations.due to Universal Security Instruments, Inc. as a secured party.

The major classes of assets and liabilities of businessesheld in receivership reported as discontinued operations included in the accompanying consolidated balance sheets are shown below.

  September 30, 2008 March 31, 2008 
Assets
     
Cash $260,009 $823,550 
Trade receivables, net  0  371,793 
Inventories  0  817,022 
Property, plant and equipment - net  0  831,555 
Other assets  0  6,811 
Assets of discontinued operations $260,009 $2,850,731 
        
Liabilities
       
Accounts payable, trade and other $260,009 $3,344,624 
Notes payable - bank  0  4,478,826 
Liabilities of discontinued operations $260,009 $7,823,450 
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 

129

In the accompanying consolidated financial statements, the resultsResults of Icon for the threeOperations

Three Months Ended June 30, 2009 and six months ended September 30, 2008 have been restated and are presented as the results of discontinued operations, and certain other prior year amounts have been reclassified in order to conform with the current year’s presentation.

Results of OperationsSales.

Three Months Ended September 30, 2008 and 2007
Sales.  Net sales for the three months ended SeptemberJune 30, 20082009 were $8,381,379$5,914,905 compared to $9,689,537$6,192,801 for the comparable three months in the prior fiscal year, a decrease of $1,308,158 (13.5%$277,896 (4.5%).  The primary reasonsreason for the decrease in net sales were (i) lowervolumes was sales volumes of our core product lines to the electrical distribution trade, including smoke alarms and carbon monoxide alarms, to the electrical distribution tradedecreased due to a decrease in new home construction during the quarter, and (ii) our inability to import ground fault circuit interrupter (GFCI) units because the manufacturer has not yet received certifications for mandated UL changes to the units.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 22.6%19.8% and 20.0%25.5% of sales for the quarters ended SeptemberJune 30, 20082009 and 2007,2008, respectively.  The increasedecrease in gross profit margin was primarily due to changes in the mix of products sold.a lower gross profit margin realized on sales to a national home improvement retailer.

Expenses.  Research and development, and selling, general and administrative expenses increased by $123,626$7,939 from the comparable three months in the prior year.  As a percentage of net sales, these expenses increased to 20.7%22.4% for the three month period ended SeptemberJune 30, 2008,2009, from 16.6%21.5% for the 20072008 period.  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 expense on cash deposits, net of interest charges,income, was $3,259$1,491 for the quarter ended SeptemberJune 30, 2008,2009, compared to net interest expenseincome of $12,364$18,835 for the quarter ended SeptemberJune 30, 2007.2008.  Net interest expenseincome in the prior year’s quarterly period resulted from higher borrowings by us in support ofnet cash deposits with our Canadian subsidiary.factor.

Income Taxes.  During the quarter ended SeptemberJune 30, 2008,2009, the Company had a net income tax benefit of $868,443 due to net operating losses generated principally$44,244 as a result of thea $153,886 loss recognized on the settlementbefore equity in earnings of the Company’s guarantee of the debt of its Canadian subsidiary.Joint Venture.  For the corresponding 20072008 period, the Company hashad a provision for income taxes of $108,000.$101,366, based on income before equity in earnings of the Joint Venture of $265,733.

Net Income.  We reported net income of $4,091,214$611,465 for the quarter ended SeptemberJune 30, 2008,2009, compared to net income of $318,130$403,480 for the corresponding quarter of the prior fiscal year.year, a $207,985 (51.5%) increase.  The primary reason for the increase in net income is an increase of $428,335 in the gain of $3,434,913 recognized as a resultCompany’s equity in the earnings of the settlementJoint Venture from the same period of the obligations of our Canadian subsidiary.

Six Months Ended September 30, 2008 and 2007

Sales. Net sales forprior year, partially offset by the six months ended September 30, 2008 were $14,574,180 compared to $19,375,195 for the comparable six months in the prior fiscal year, a decrease of $4,801,015 (24.8%). The primary reason for the decrease in net sales was lower sales volumes of our core product lines, including smoke alarms and carbon monoxide alarms, to the electrical distribution tradeCompany’s $153,896 operating loss due to a decrease in new home construction during the period.

Gross Profit Margin. The gross profit margin is calculated as net sales less costquarter.  Included in our equity in the earnings of goods sold expressed as a percentage of net sales. The Company’s gross profit margin decreased from 24.1% for the period ended September 30, 2007 to 23.8%Joint Venture for the current period ended September 30, 2008. The decreaseis $246,180 recognized by the Company on inter-company sales of inventory from prior periods which, in gross profit margin was primarily dueaccordance with GAAP, may only be recognized by us as income upon sales by us to a change in the mixcustomers, and an adjustment of products sold.$117,050 to reflect gains on foreign currency held.

13
Expenses. Research and development, and selling, general and administrative expenses decreased by $171,631 from the comparable six months in the prior year. As a percentage of sales, these expenses were 21.0% for the six month period ended September 30, 2008 and 16.7% for the comparable 2007 period. The primary reason for the increase in expenses as a percentage of sales is that these expenses did not decrease at the same rate as sales.
Interest Expense and Income. Our interest income net of interest expense was $15,576 for the six months ended September 30, 2008, compared to net interest expense of $70,861 for the six months ended September 30, 2007. Interest expense in the comparable period of the last year resulted primarily from borrowings to support the Canadian subsidiary.

Income Taxes. During the six months ended September 30, 2008, the Company recorded an income tax expense from continuing operations of $198,795. For the corresponding 2007 period, the Company had a tax expense of $537,876.

Net Income. We reported net income of $4,494,694 for the six months ended September 30, 2008 compared to net income of $1,109,133 for the corresponding period of the prior fiscal year. The primary reasons for the increase is the gain of $3,381,254 recognized as a result of the settlement of the obligations of our Canadian subsidiary.

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, we had $4,188,000$3,925,000 available under the Factoring Agreement.Agreement at June 30, 2009.  There is $625,594were no amounts borrowed under this agreement as of SeptemberJune 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 SeptemberJune 30, 2008,2009, the prime rate was 5.0%3.25%.  Borrowings are collateralized by all of our accounts receivable and inventory.

Our factored accounts receivable as of the end of our last fiscal year (net of allowances for doubtful accounts) were $5,600,408,$4,610,401, and were $5,848,088$4,114,963 as of SeptemberJune 30, 2008.2009.  Our prepaid expenses as of the end of our last fiscal year were $206,197,$255,745, and were $342,790$252,059 as of SeptemberJune 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 $3,073,310$748,490 for the sixthree months ended SeptemberJune 30, 2008.2009.  This was primarily due to the operations of the discontinued subsidiary and to an increasea decrease in accounts receivable of $698,818, 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 $1,663,855, increases in inventories and prepaid expenses of $3,463,975,$1,077,028 and earnings of the Joint Venture of $892,962.$721,107.  For the same period last year, operating activities used cash of $2,217,104,$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.

Investing activities providedused cash of $2,807,341$2,929 during the sixthree months ended SeptemberJune 30, 2008, principally as a result of the activities of the discontinued operations. Investing activities used $1,520,801 in the prior period.2009.

10

Financing activities used cash of $3,575,517$94,771 during the sixthree months ended SeptemberJune 30, 2008, principally as a result of the activities of discontinued operations. In the comparable six months in the prior year, financing activities provided cash of $4,252,560,2009, 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.
14
Joint Venturewe are reviewing our options to establish an alternate source of commercial financing, if needed.

Joint Venture

Net Sales.  Net sales of the Joint Venture for the three and six months ended SeptemberJune 30, 20082009 were $11,870,728 and $19,667,762, respectively,$5,867,623, compared to $6,811,530 and $15,773,412, respectively,$7,797,035, for the comparable period in the prior fiscal year.  Although the Joint Venture’s sales to the Company increased, primarily for products purchased by the Company for sale to the Company’s new national home improvement retailer customer, the 74.3% and 24.7% respective increasesThe decrease in net sales by the Joint Venture for the three and six month periods wereperiod was due to higher volumes ofdecreased sales of smoke alarm products to non-related customers in the Australian and European market. The Joint Venture’s management believes that these increases in net sales to the European market were due to increased market share in those markets.Company.

Net Income.  Net income for the three months ended June 30, 2009 was $938,812, compared to $587,885 in the comparable period last year.  The 59.7% increase in net income for the three month period was due primarily to the recognition of currency gain and to reduced 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 SeptemberJune 30, 20082009 increased to 28.0%26.7% from 25.9%23.4% for the 2007 corresponding period. For the six month period ended September 3, 2008 gross margins increased to 26.1% from the 26.0% gross margin of the prior year’s corresponding period.  Since gross margins depend on sales volume of various products, with varying margins, increased sales of higher margin products and decreased sales of lower margin products affect the overall gross margins. The increase in the Joint Venture’s gross margins for the three and six month periods were due to the increasechanges in the sales mix of productsitems sold to customersa large U.S. national retailer caused these changes in the Australian and European markets.gross margins.

Expenses.  Selling, general and administrative expenses were $1,389,104 and $2,607,670, respectively,$878,201 for the three and six month periodsperiod ended SeptemberJune 30, 2008,2009, compared to $1,051,125 and $2,296,985$1,218,586 in the prior year’s respective periods.period.  As a percentage of sales, expenses were 11.7% and 13.3%15.0% for the three and six month periodsperiod ended SeptemberJune 30, 2008,2009, compared to 15.4% and 14.6%15.6% for the three and six month periodsperiod ended SeptemberJune 30, 2007.2008.  The decrease in selling, general and administrative expense in dollars and as a percent of sales was primarily due to variable costs that remained constant despite increased net sales.decreases in selling expenses due to lower sales volumes.

Interest Income and Expense.  Interest expense, net of interest income, was $4,267 and $5,761, respectively,$2,093 for the three and six month periodsperiod ended SeptemberJune 30, 2008,2009, compared to net interest expense of $9,594 and $15,569, respectively,$1,494 for the prior year’s periods. The reduction in netperiod.  Net interest expense resulted from a decreasean increase in the Joint Venture’s borrowings.

Net IncomeLiquidity.. Net income for the three and six months ended September 30, 2008 were $1,732,256 and $2,382,837, respectively, compared to $790,453 and $1,871,242, respectively, in the comparable periods last year. The 119.0% and 23.9% respective increases in net income for the three and six month periods were due primarily to increased sales volume and gross margins as noted above

Liquidity.  Cash needs of the Joint Venture are currently met by funds generated from operations.  During the sixthree months ended SeptemberJune 30, 2008,2009, working capital increaseddecreased by $2,356,309$562,638 from $8,953,871$9,151,199 on March 31, 20082009 to $11,310,380$8,588,561 on SeptemberJune 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.
15

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:

11

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 September 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.

16

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.

 
12

PART II - OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

OnAs 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 on a patent acquired by Kidde. Kidde is(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 (05cv1031 M.D.N.C.)(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 September,July, the USPTO rejectedissued a final rejection of all of the claims asserted against the Company based on the references.  Kidde filed forhas not responded to the rejection but is entitled to take an appeal to the Board of Patent Appeals and the Court granted a stay of theInterferences.  The litigation is stayed pending the conclusion of the reexamination.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.

OnAs 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 recently filed2008 case asserts infringement of the claims emerging out of reexaminationreexamination. 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 in its preliminary stages.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, thepredecessors.  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.

On August 21, 2008, Kidde again filed a civil suit against the Company for patent infringement (Case No. 08CV2202) but this time in the United States District Court for Maryland. Kidde accuses the Company of infringement of US patent 6,791,453 by communication protocols for interconnected hazardous condition (smoke, heat and Carbon monoxide) detectors sold by the Company. The amount, if any, of potential loss to the Company is not yet determinable. The Company believes that it has meritorious and substantial technical defenses to the action. The Company also believes that it is entitled to a number of legal/equitable defenses due to the predatory litigation campaign against it by Kidde and its parent corporation United Technologies Corporation, and on September 25, 2008, the Company, with its Answer and Counterclaims to Kidde, filed a third-party Complaint against United Technologies Corporation and Kidde. The Company is seeking injunctive and antitrust damages.  The Company intends to vigorously defend the suit and press its pending counter and third party claims.

17
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 2.
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 SeptemberJune 30, 2008:2009:

13

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
 
July 1, 2008 – July 31, 2008  1,300 $5.01  1,300  98.700 
August 1, 2008 – August 31, 2008  - $0.00  -  98,700 
September 1, 2008 – September 30, 2008  2,700 $5.52  2,700  96,000 
Total  4,000 $5.36  4,000  96,000 
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).

ITEM 4.5.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.OTHER INFORMATION

On September 8, 2008,August 11, 2009, the Company heldCompany’s Board of Directors amended Article I, Section 1 of its Annual MeetingBylaws to provide that the Company’s annual meeting of Stockholders. The only matter submitted to the stockholders for a vote wasshall be held on such date as may be selected by the electionBoard of one directorDirectors.  Prior to this amendment, the Bylaws provided that the Company’s annual meeting of the stockholders shall be held on such date in the Classmonth of 2011. The nominee was Harvey B. Grossblatt. AtSeptember as may be selected by the Meeting, at least 1,908,379 shares were voted in favorBoard of the nominee, no more than 289 shares abstained, were voted against, or were voted to withhold approval of the nominee’s election (any of which has the same effect as a “no” vote). As a result, the nominee was elected.

Directors not up for re-election and continuing in office after the Meeting are: Ira Bormel, Cary Luskin, and Ronald A. Seff, M.D.
18
Directors.

ITEM 6.
EXHIBITS

Exhibit No.
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 SeptemberJune 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 SeptemberJune 26, 2007, Filefile No. 1-31747)
10.4Amended and Restated Inventory Security Agreement between the Registrant and CIT, dated SeptemberJune 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 SeptemberJune 26, 2007, File2008, file No. 1-31747)
10.5Credit Agreement between International Conduits Ltd. (“Icon”) and CIT Financial Ltd. (“CIT Canada”), dated September 22, 2007 (“CIT Canada Credit Agreement”) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 26, 2007, File No. 1-31747)
10.6General Security Agreement between CIT Canada and Icon, dated September 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 September 26, 2007, File No. 1-31747)
10.7Guaranty made by the Registrant and USI Electric Inc., in favor of CIT Canada, dated September 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 September 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)
10.910.7Second Amended 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, File No. 1-31747)
10.10Addendum to Second Amended and Restated Employment Agreement dated September 8, 2008 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2008,2007, 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 November 13, 2008*August 12, 2009*
*Filed herewith

1914
 
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 13, 2008August 12, 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
 
2015