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<SEC-DOCUMENT>0001144204-05-035392.txt : 20051114
<SEC-HEADER>0001144204-05-035392.hdr.sgml : 20051111
<ACCEPTANCE-DATETIME>20051114151713
ACCESSION NUMBER:		0001144204-05-035392
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20050930
FILED AS OF DATE:		20051114
DATE AS OF CHANGE:		20051114

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			UNIVERSAL SECURITY INSTRUMENTS INC
		CENTRAL INDEX KEY:			0000102109
		STANDARD INDUSTRIAL CLASSIFICATION:	WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065]
		IRS NUMBER:				520898545
		STATE OF INCORPORATION:			MD
		FISCAL YEAR END:			0331

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-31747
		FILM NUMBER:		051200779

	BUSINESS ADDRESS:	
		STREET 1:		7-A GWYNNS MILL COURT
		CITY:			OWINGS MILLS
		STATE:			MD
		ZIP:			21117-3586
		BUSINESS PHONE:		4103633000

	MAIL ADDRESS:	
		STREET 1:		7-A GWYNNS MILL COURT
		CITY:			OWINGS MILLS
		STATE:			MD
		ZIP:			21117-3586
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>v029261-10q.txt
<TEXT>
================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                For the Quarterly period ended September 30, 2005

                                       OR

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

                        Commission file number 001-31747

                      UNIVERSAL SECURITY INSTRUMENTS, INC.

             (Exact name of registrant as specified in its charter)

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

7-A Gwynns Mill Court
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  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X|

At November  14,  2005,  the number of shares  outstanding  of the  registrant's
common stock was 1,673,498.


================================================================================

<PAGE>

                                TABLE OF CONTENTS

Part I - Financial Information                                              Page
                                                                            ----

      Item 1. Consolidated Financial Statements (unaudited):

              Consolidated Balance Sheets at September 30, 2005
              and March 31, 2005                                               3

              Consolidated Statements of Earnings for the Three
              Months Ended September 30, 2005 and 2004                         4

              Consolidated Statements of Earnings for the Six
              Months Ended September 30, 2005 and 2004                         5

              Consolidated Statements of Cash Flows for the Six
              Months Ended September 30, 2005 and 2004                         6

              Notes to Consolidated Financial Statements                       7

      Item 2. Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                       10

      Item 3. Quantitative and Qualitative Disclosure About Market Risk       13

      Item 4. Controls and Procedures                                         13

Part II - Other Information

      Item 1. Legal Proceedings                                               15

      Item 4. Submission of Matters to a Vote of Security Holders             15

      Item 6. Exhibits                                                        16

              Signatures                                                      17


<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                    ASSETS                                      September 30, 2005   March 31, 2005
                                                                                ------------------   --------------
<S>                                                                             <C>                  <C>
CURRENT ASSETS
Cash                                                                            $          131,833   $       59,287
Accounts receivable:
  Trade (less allowance for doubtful accounts of $15,000)                                1,168,005        1,014,757
  Employees                                                                                 22,283           21,503
                                                                                ------------------   --------------
                                                                                         1,190,288        1,036,260

Amount due from factor                                                                   4,806,123        3,394,084
Inventory                                                                                3,963,827        4,834,486
Prepaid expenses                                                                           286,798          145,394
                                                                                ------------------   --------------

TOTAL CURRENT ASSETS                                                                    10,378,869        9,469,511

DEFERRED TAX ASSET                                                                         551,780          351,780

INVESTMENT IN JOINT VENTURE                                                              6,869,364        6,131,481

PROPERTY AND EQUIPMENT - NET                                                                71,882           81,690

OTHER ASSETS                                                                                15,486           15,486

TOTAL ASSETS                                                                    $       17,887,381   $   16,049,948
                                                                                ==================   ==============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable                                                                $        1,819,248   $    1,725,402
Accrued liabilities:
  Patent litigation reserve                                                                635,318          806,679
  Payroll, commissions and other                                                           436,365          620,199
                                                                                ------------------   --------------

TOTAL CURRENT LIABILITIES                                                                2,890,931        3,152,280
                                                                                ------------------   --------------

COMMITMENTS AND CONTINGENCIES                                                                   --               --

SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized 20,000,000 shares;
  issued and outstanding 1,673,498 and 1,652,998 shares at September 30, 2005
  and March 31, 2005, respectively                                                          16,735           16,530
Additional paid-in capital                                                              11,515,556       11,469,444
Retained earnings                                                                        3,464,159        1,411,694
                                                                                ------------------   --------------
TOTAL SHAREHOLDERS' EQUITY                                                              14,996,450       12,897,668
                                                                                ------------------   --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $       17,887,381   $   16,049,948
                                                                                ==================   ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

              UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                               September 30,
                                                        --------------------------
                                                            2005           2004
                                                        -----------    -----------
<S>                                                     <C>            <C>
Net sales                                               $ 7,119,100    $ 6,622,221
Cost of goods sold                                        4,840,262      4,500,443
                                                        -----------    -----------

GROSS PROFIT                                              2,278,838      2,121,778

Research and development expense                             49,636         79,995
Selling, general and administrative expense               1,700,809      1,641,124
                                                        -----------    -----------

Operating income                                            528,393        400,659

Other expense:
   Interest expense                                         (15,103)       (18,683)
                                                        -----------    -----------


INCOME BEFORE EARNINGS FROM JOINT VENTURE                   513,290        381,976

Earnings from Joint Venture:
   Equity in earnings of Joint Venture                      549,405        661,860
                                                        -----------    -----------

NET INCOME BEFORE TAXES                                   1,062,695      1,043,836

Provision for income tax (benefit) expense                 (100,000)            --
                                                        -----------    -----------

NET INCOME                                              $ 1,162,695    $ 1,043,836
                                                        ===========    ===========

Net income per common share amounts:
  Basic                                                 $      0.69    $      0.66
  Diluted                                               $      0.64    $      0.59
Weighted average number of common shares outstanding:
  Basic                                                   1,673,498      1,580,149
  Diluted                                                 1,824,937      1,757,998
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

              UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                                September 30,
                                                        ----------------------------
                                                            2005            2004
                                                        ------------    ------------
<S>                                                     <C>             <C>

Net sales                                               $ 14,042,910    $ 11,497,003
Cost of goods sold                                         9,715,118       7,890,512
                                                        ------------    ------------

GROSS PROFIT                                               4,327,792       3,606,491

Research and development expense                             101,814         146,221
Selling, general and administrative expense                3,588,869       2,822,482
                                                        ------------    ------------

Operating income                                             637,109         637,788

Other expense:
   Interest expense                                          (23,377)        (31,454)
                                                        ------------    ------------

INCOME BEFORE EARNINGS FROM JOINT VENTURE                    613,732         606,334

Earnings from Joint Venture:
   Equity in earnings of Joint Venture                     1,251,305       1,171,281
                                                        ------------    ------------

NET INCOME BEFORE TAXES                                 $  1,865,037    $  1,777,615

Provision for income tax (benefit) expense                  (187,428)             --
                                                        ------------    ------------

                                                        $  2,052,465    $  1,777,615
                                                        ============    ============

Net income per common share amounts:
  Basic                                                 $       1.23    $       1.13
  Diluted                                               $       1.13    $       1.01
Weighted average number of common shares outstanding:
  Basic                                                    1,663,318       1,572,558
  Diluted                                                  1,817,759       1,761,141
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

              UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Six Months Ended September 30,
                                                                                         2005           2004
                                                                                     -----------    -----------
<S>                                                                                  <C>            <C>
OPERATING ACTIVITIES
Net income                                                                           $ 2,052,465    $ 1,777,615
Adjustments  to reconcile net income to net cash provided by (used in)
  operating activities:
   Depreciation and amortization                                                          13,818         12,363
   Earnings of the Joint Venture                                                      (1,251,303)    (1,171,281)
   Changes in operating assets and liabilities:
      (Increase) in accounts receivable and amounts due from factor                   (1,566,067)    (1,369,578)
      Decrease (increase) in inventories and prepaid expenses                            729,255       (267,468)
      (Decrease) increase in accounts payable and accrued expenses                      (261,349)       861,294
      (Increase) in deferred tax asset                                                  (200,000)            --
                                                                                     -----------    -----------

NET CASH USED IN OPERATING ACTIVITIES                                                   (483,181)      (157,055)

INVESTING ACTIVITIES:
   Dividends received from Joint Venture                                                 513,420             --
   Purchase of property and equipment                                                     (4,010)        (1,901)
                                                                                     -----------    -----------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                      509,410         (1,901)

FINANCING ACTIVITIES:
   Proceeds from issuance of common stock from exercise of employee stock options         46,317         55,842
   Principal payments on capital lease                                                        --         (4,474)
                                                                                     -----------    -----------

NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 46,317         51,368
                                                                                     -----------    -----------

INCREASE  (DECREASE) IN CASH                                                              72,546       (107,588)

Cash at beginning of period                                                               59,287        188,190
                                                                                     -----------    -----------

CASH AT END OF PERIOD                                                                $   131,833    $    80,602
                                                                                     ===========    ===========

Supplemental information:
   Interest paid                                                                     $    23,377    $    31,454
   Income tax paid                                                                            --             --

Non-cash financing activities:
   Repayment of trade payables due the Joint Venture in lieu of cash distribution             --        458,940
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       6
<PAGE>

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

Statement of Management

The consolidated  financial  statements  include the accounts of the Company and
its  wholly  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,  2005
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.

Income Taxes

No income tax expense has been  provided for in the three and six month  periods
ended September 30, 2005,  principally as a result of the  carryforward of prior
years'  operating  losses.  The valuation  allowance  previously  established to
offset tax benefits  associated  with our net operating loss  carryforwards  and
other  deferred  tax  assets  was  reduced  during  the six month  period  ended
September  30,  2005 by  $200,000,  resulting  in a net  income  tax  benefit of
$187,428. The valuation allowance is heavily influenced by historical results of
operations  and  management   believes  recent  operating  results  support  the
recognition of a portion of the income tax benefits  associated with realization
of net  operating  loss  carryforwards  and other  deferred tax assets.  We will
continue to monitor the remaining  valuation allowance of $576,523 which offsets
future tax benefits  associated with net operating loss  carryforwards and other
deferred tax assets  until  circumstances  indicate  the  allowance is no longer
required.

Joint Venture

The  Company  maintains  a 50%  interest  in a joint  venture  with a Hong  Kong
corporation ("Joint Venture") that has manufacturing  facilities in the Peoples'
Republic of China, for the manufacturing of consumer  electronic  products.  The
following represents  summarized balance sheet and income statement  information
of the Hong Kong Joint  Venture for the six months ended  September 30, 2005 and
2004:

                                      2005          2004
                                  -----------   -----------
      Net sales                   $11,603,563   $13,058,422
      Gross profit                  3,993,796     4,223,978
      Net income                    2,222,036     2,561,766
      Total current assets          7,227,911     6,994,456
      Total assets                 16,665,745    14,507,826
      Total current liabilities     4,630,962     4,798,055


During the six months  ended  September  30,  2005 and 2004,  respectively,  the
Company purchased $6,014,577 and $4,699,666 of products from the Hong Kong Joint
Venture.  At September 30, 2005 and 2004, the Company had amounts payable to the
Hong Kong Joint  Venture of $500,000.  For the six month period ended  September
30, 2005,  the Company has adjusted its equity in earnings of the Joint  Venture
to reflect a reduction  of  $135,149 in  inter-company  profit in  inventory  as
required by US GAAP.

Recent Accounting Pronouncements

In May 2005, the Financial  Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting Standards ("SFAS") No. 154, "Accounting for Changes and
Error  Corrections - a replacement of Accounting  Opinions Board ("APB") Opinion
No.  20  and  FASB  Statement  No.  3."  SFAS  No.  154  requires  retrospective
application to changes in accounting  principles  for prior  periods'  financial
statements,  unless it is impracticable to determine either the  period-specific
effects or the  cumulative  effect of the change.  SFAS No. 154 is effective for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after  December  15, 2005,  and earlier  adoption is  permitted  for  accounting
changes and  corrections  of errors made in fiscal  years  beginning  after this
statement  was issued.  The Company has adopted  SFAS No. 154 as of its issuance
and will apply its provisions to any changes in accounting  principle that occur
in future  periods.  The  Company's  adoption of SFAS No. 154 is not expected to
have an impact on the Company's financial condition or results of operations.


                                       7
<PAGE>

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB
Statement No. 123R,  "Share-Based  Payment," which requires companies to expense
the value of employee  stock options and similar  awards.  The effective date of
FASB 123R is for interim and annual periods beginning after June 15, 2005.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
which  provides  guidance  on the  implementation  of SFAS No.  123R,  including
guidance  related  to  share-based   payment   transactions  with  nonemployees,
valuation methods, the accounting for certain redeemable  financial  instruments
issued  under   share-based   payment   arrangements,   the   classification  of
compensation  expense,  and the accounting for income tax effects of share-based
payment arrangements under SFAS No. 123R.

In April 2005, the SEC delayed the  implementation  date for SFAS No. 123R until
an issuer's first annual period that begins after June 15, 2005. Therefore,  the
Company is required to adopt SFAS No. 123R effective April 1, 2006, using one of
three implementation alternatives.  The Company anticipates that the adoption of
SFAS  No.  123R  may  have  a  significant  impact  on the  Company's  financial
statements.  The  Company  is  currently  in the  process of  determining  which
implementation  alternative  to use and what the  overall  accounting  impact of
adopting SFAS No. 123R may be.

Reclassifications

Certain  prior year  amounts  have been  reclassified  in order to conform  with
current year presentation.

Net Income Per 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 and six month
periods ended September 30, 2005 and 2004 is as follows:

<TABLE>
<CAPTION>
                                           Three Months Ended        Six months Ended
                                              September 30,            September 30,
                                          ---------------------   ---------------------
                                             2005        2004        2005        2004
                                          ---------   ---------   ---------   ---------
<S>                                       <C>         <C>         <C>         <C>
Weighted average number of common
  shares outstanding for basic EPS        1,673,498   1,580,149   1,663,318   1,572,558

Shares issued upon the assumed
  exercise of outstanding stock options     151,439     177,849     154,441     188,583
                                          ---------   ---------   ---------   ---------

Weighted average number of common
  and common equivalent shares
  outstanding for diluted EPS             1,824,937   1,757,998   1,817,759   1,761,141
                                          =========   =========   =========   =========
</TABLE>


Basic and diluted weighted  average number of common shares  outstanding for the
three and six month periods ended  September 30, 2004 have been restated to show
the effect of a 4-for-3 stock dividend paid on April 5, 2004 to  shareholders of
record on March 15, 2004.

At  September  30, 2005,  and 2004 there were no  securities  outstanding  whose
issuance  would  have  an  anti-dilutive   effect  on  the  earnings  per  share
calculation.


                                       8
<PAGE>

Stock Based Compensation

During the period ended September 30, 2005 and 2004, the Company granted options
for the purchase of 0 and 1,000 shares, respectively,  to employees. The options
issued during the six months ended  September 30, 2004,  are  exercisable  at an
average price of $13.00 per share,  expiring in 2009,  and vest over a four year
period from the date of grant.

On July 12, 2005, the Company settled the litigation with a former director.  As
a part of this settlement, the Company accepted the June 6, 2002 exercise by the
former  director of the option to purchase 20,000 shares at an exercise price of
$2.25 per share.  The exercise  price for these  shares was paid  simultaneously
with the closing of the settlement agreement.

The Company uses the intrinsic value method as defined by Accounting  Principles
Board  Opinion  No. 25 to account for  stock-based  employee  compensation.  The
Company  has  adopted  the  disclosure   requirements  of  Financial  Accounting
Standards   Board  (FASB)   Statement  No.  123,   Accounting  for   Stock-Based
Compensation,  as amended by FASB No. 148. The following  table  illustrates the
effect on net income and  earnings  per share as if the fair value based  method
had been applied to all outstanding and unvested awards in each period.

<TABLE>
<CAPTION>
                                                       Three Months Ended          Six months Ended
                                                          September 30,              September 30,
                                                     -----------------------   ------------------------
                                                        2005         2004         2005         2004
                                                     ----------   ----------   ----------   -----------
<S>                                                  <C>          <C>          <C>          <C>
Net income, as reported                              $1,162,695   $1,043,836   $2,052,465   $ 1,777,615

Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects            (25,962)     (15,520)     (51,924)      (31,040)
                                                     ----------   ----------   ----------   -----------

Pro forma net income                                 $1,136,733   $1,028,316   $2,000,541   $ 1,746,575
                                                     ==========   ==========   ==========   ===========

Earnings per share:
Basic - as reported                                  $     0.69   $     0.66   $     1.23   $      1.13
                                                     ==========   ==========   ==========   ===========
Basic - pro forma                                    $     0.68   $     0.65   $     1.20   $      1.11
                                                     ==========   ==========   ==========   ===========
Diluted - as reported                                $     0.64   $     0.59   $     1.13   $      1.01
                                                     ==========   ==========   ==========   ===========
Diluted - pro forma                                  $     0.62   $     0.58   $     1.10   $      0.99
                                                     ==========   ==========   ==========   ===========
</TABLE>


All  share  and  per  share  amounts  included  in  the  consolidated  financial
statements  have been  retroactively  adjusted  to  reflect  the  4-for-3  stock
dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.


                                       9
<PAGE>

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

      As used  throughout  this Report,  "we," "our," "the  Company" 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 could include:  (i) our and our Hong Kong Joint Venture's
respective  ability  to  maintain  operating  profitability,   (ii)  competitive
practices in the industries in which we compete, (iii) our dependence on current
management,  (iv) the  impact  of  current  and  future  laws  and  governmental
regulations  affecting us and our Hong Kong Joint Venture,  (v) general economic
conditions,  (vi) other factors which may be identified from time to time in our
Securities and Exchange Commission filings and other public  announcements,  and
(vii) currency  fluctuations.  We do not undertake and specifically disclaim any
obligation to update any  forward-looking  statements  to reflect  occurrence of
anticipated  or  unanticipated  events or  circumstances  after the date of such
statements.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2005 and 2004

      Sales.  Net sales for the  three  months  ended  September  30,  2005 were
$7,119,100  compared to $6,622,221 for the comparable  three months in the prior
fiscal year, an increase of $496,879 (7.5%). The primary reason for the increase
in sales was an  increase  in volume of sales of smoke  alarm,  GFCI and  carbon
monoxide alarm units.

      Gross Profit  Margin.  The 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 32% of sales for the quarters ended September 30, 2005 and 2004.

      Expenses.   Research   and   development,   and   selling,   general   and
administrative expenses increased by $29,326 from the comparable three months in
the prior year. As a percentage of net sales, these expenses were reduced to 25%
for the three month period ended September 30, 2005, from 26% for the comparable
2004  period.  The  decrease in  research,  selling  and general  administrative
expense as a percent of sales was due to higher sales volume and variable  costs
that did not increase at the same rate as sales.

      Interest Expense and Income. Our interest expense, net of interest income,
decreased to $15,103 for the quarter  ended  September 30, 2005 from $18,683 for
the quarter  ended  September 30, 2004.  The lower  interest  expenses  resulted
primarily from a reduction in the average balance of borrowings.

      Net Income.  We reported net income of  $1,162,695  for the quarter  ended
September 30, 2005 compared to net income of  $1,043,836  for the  corresponding
quarter of the prior  fiscal  year.  The primary  reason for the increase in net
income is our  increased  earnings  from  domestic  operations  and  income  tax
benefits totaling $231,314,  offset by a decrease in earnings from our Hong Kong
Joint Venture of $112,455 from the same period of the prior year.

Six Months Ended September 30, 2005 and 2004

      Sales.  Net  sales  for the six  months  ended  September  30,  2005  were
$14,042,910  compared to $11,497,003  for the comparable six months in the prior
fiscal  year,  an  increase of  $2,545,907  (22%).  The  primary  reason for the
increase in sales was an increase  in volume of sales of smoke  alarm,  GFCI and
carbon monoxide alarm units.


                                       10
<PAGE>

      Gross Profit  Margin.  The gross profit  margin is calculated as net sales
less cost of goods sold  expressed as a percentage  of net sales.  The Company's
gross profit margin decreased 0.6% from 31.4% for the period ended September 30,
2004 to 30.8% for the current  period  ended  September  30,  2005.  The primary
reason for this was higher costs of goods sold which costs were not reflected in
the pricing of our products.

      Expenses.   Research   and   development,   and   selling,   general   and
administrative  expenses increased by $721,980 from the comparable six months in
the prior year. As a percentage of sales,  these expenses were 26.3% for the six
month period ended September 30, 2005 from 25.8% for the comparable 2004 period.
Various  expense  categories  contributed to the increased  dollar amount of the
expense,  but the  following  major  account  classifications  were  significant
factors in this  dollar  increase:  (i)  Commissions  and freight  charges  vary
directly with sales volume and, therefore, of the $721,980 increase in expenses,
commissions  and freight  expense of $371,729 is  attributable  to higher  sales
volume during the 2005 period. (ii) Professional fees associated with litigation
and auditing costs  increased by $339,929 for the 2005 period as compared to the
same period in the previous year. The Company  believes  professional  fees will
decrease  during  the  remainder  of the  current  fiscal  year  as  outstanding
litigation issues are resolved.

      Interest Expense and Income. Our interest expense, net of interest income,
decreased to $23,377 for the six months ended  September 30, 2005,  from $31,454
for the six  months  ended  September  30,  2004.  The lower  interest  expenses
resulted primarily from a reduction in the average balance of borrowings.

      Net Income.  We reported net income of $2,052,465 for the six months ended
September 30, 2005 compared to net income of  $1,777,615  for the  corresponding
period of the prior  fiscal  year.  The primary  reason for the  increase in net
income  is  increased  sales  without a  corresponding  increase  in  associated
expenses (i.e., while the expenses increased,  they did not increase at the same
rate as sales),  an  increase  in  earnings  of the Hong Kong  Joint  Venture of
$80,024 from the same period of the prior year, and income tax benefits from the
reduction in the valuation allowance provided on deferred tax assets.

FINANCIAL CONDITION AND LIQUIDITY

      Our cash needs are  currently  met by funds from our  Factoring  Agreement
which  supplies  both  short-term  borrowings  and  letters of credit to finance
foreign  inventory  purchases.  The maximum amount available under the Factoring
Agreement is currently  $7,500,000.  However,  based on specified percentages of
our accounts receivable and inventory and letter of credit  commitments,  we had
$6,122,000  available  under the Factoring  Agreement  (including the amount due
from factor of  $4,806,123),  of which $0 was borrowed as of September 30, 2005.
The interest  rate under the  Factoring  Agreement on the  uncollected  factored
accounts receivable and any additional  borrowings is equal to the prime rate of
interest charged by our lender.  At September 30, 2005, the prime rate was 6.5%.
Borrowings are collateralized by all of our accounts receivable and inventory.

      Our non-factored accounts receivable as of the end of our last fiscal year
(net of allowances for doubtful  accounts) were $1,014,757,  and were $1,168,005
as of September 30, 2005. The increase in non-factored trade accounts receivable
during the first six months of the current fiscal year is due to increased sales
to customers for which we bear the credit risk.  Our prepaid  expenses as of the
end of our last fiscal year were $145,394, and were $286,798 as of September 30,
2005.  The  increase  in  prepaid  expenses  during  the first six months of the
current  fiscal  year  is due to the  timing  of  premium  payments  to  various
insurance carriers.

      Operating  activities  used  cash of  $483,181  for the six  months  ended
September  30,  2005.  This was  primarily  due to net income being offset by an
increase in accounts  receivable and amounts due from factor of  $1,566,067,  an
increase in accounts payable and accrued  expenses of $261,349,  and an increase
in the deferred tax asset of $200,000,  offset by a decrease in inventories  and
prepaid expenses of $729,255.

      Investing  activities  provided  cash of $509,410  in the current  quarter
primarily as a result of dividends received from the Joint Venture. For the same
period last year, investing activities used cash of $1,901.

      Financing  activities  provided  cash of  $46,317  from  the  exercise  of
employee  stock  options.  For the same period last year,  financing  activities
provided cash of $51,368, primarily from the exercise of employee stock options.


                                       11
<PAGE>

      We  believe  that  funds   available   under  the   Factoring   Agreement,
distributions  from the Hong Kong Joint Venture,  and working capital provide us
with  sufficient  resources to meet our  requirements  for liquidity and working
capital in the ordinary  course of our business  over the next twelve months and
over the long term.

HONG KONG JOINT VENTURE

      Net Sales.  Net sales of the Hong Kong Joint Venture for the three and six
months ended September 30, 2005 were $5,590,351 and  $11,603,563,  respectively,
compared to $6,216,118 and $13,058,422, respectively, for the comparable periods
in the prior fiscal year. The 10.1% and 11.1% respective  decreases in net sales
for the  three and six  month  periods  were due to  reduced  volume of  product
shipped due to a temporary  reduction  in  manufacturing  capacity  arising as a
result of a lack of available trained labor.

      Net Income.  Net income for the three and six months ended  September  30,
2005 was $1,021,841  and  $2,222,036,  respectively,  compared to $1,323,720 and
$2,561,766,  respectively,  in the  comparable  periods last year. The 22.8% and
13.2%  respective  decreases  in net income for the three and six month  periods
were due to reduced sales volume as noted above.

      Gross Margins.  Gross margins of the Hong Kong Joint Venture for the three
month period ended  September 30, 2005  increased to 33.5% from 32% for the 2004
period.  For the six month period ended  September 30, 2005,  gross margins were
34.4% which was an increase  over the 32.3%  gross  margin of the prior  period.
Since  gross  margins  depend on sales  volume of various  products,  changes in
product sales mix caused these changes in gross margins.

      Expenses.  Selling,  general and administrative expenses were $821,963 and
$1,708,232,  respectively,  for the three and six month periods ended  September
30, 2005,  compared to $758,793 and $1,623,462,  in the prior year's  respective
periods.  As a percentage  of sales,  expenses  were 14.7% for the three and six
month  periods ended  September 30, 2005,  compared to 12% for the three and six
month periods ended  September  30, 2004.  The increase in selling,  general and
administrative expense was due to increased costs.

      Interest Income and Expense. Interest expense, net of interest income, was
$4,648 and  $11,498,  respectively,  for the three and six month  periods  ended
September  30,  2005,  compared  to  interest  expense of $11,714  and  $21,494,
respectively, for the prior year's periods. The decrease in net interest expense
is primarily due to increased  interest income from bonds owned by the Hong Kong
Joint Venture.

      Liquidity.  Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During the six months ended September 30, 2005,
working  capital  increased by $1,003,182  from  $1,593,767 on March 31, 2005 to
$2,596,949 on September 30, 2005.

CRITICAL ACCOUNTING POLICIES

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

      We believe the following critical  accounting policies affect management's
more  significant  judgments  and  estimates  used  in  the  preparation  of its
consolidated financial statements.  For a detailed discussion on the application
on these and other accounting policies, see Note A to the consolidated financial
statements  included  in Item 8 of the Form  10-K for the year  ended  March 31,
2005. 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:


                                       12
<PAGE>

      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.  We believe that
the  shipping  date  from our  warehouse  is the  appropriate  point of  revenue
recognition since upon shipment we have substantially  completed our obligations
which entitle us to receive the benefits  represented  by the revenues,  and the
shipping date provides a consistent point within our control to measure revenue.
Customers  may not return,  exchange or refuse  acceptance  of goods without our
approval. We have established  allowances to cover anticipated doubtful accounts
based upon historical experience.

      Inventories  are valued at the lower of market or cost. Cost is determined
on the first-in first-out method. We have recorded a reserve for obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. Management reviews the reserve quarterly.

      We  currently  have  significant  deferred tax assets  resulting  from tax
credit carryforwards,  net operating loss carryforwards and deductible temporary
differences,  which  will  reduce  taxable  income  in future  periods.  We have
provided a  valuation  allowance  on future  tax  benefits  such as foreign  tax
credits, foreign net operating losses, capital losses and net operating losses.

      A valuation allowance is required when it is more likely than not that all
or a portion of a deferred tax assets will not be realized. Forming a conclusion
that a valuation  allowance is not needed is difficult  when there is a negative
evidence such as cumulative losses and losses in recent years. Cumulative losses
weigh heavily in the overall assessment.  Accordingly,  based on current results
of  operations,  the balance of the  valuation  allowance  for our remaining net
deferred tax assets at September 30, 2005 has been reduced to $576,523.

      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, 2005.

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 believe that the
system is  effective.  There have been no changes in our  internal  control over
financial  reporting  during the most recent fiscal quarter that have materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.


                                       13
<PAGE>

      Management is aware that there is a lack of  segregation  of duties at the
Company due to the small number of employees dealing with general administrative
and  financial  matters.  However,  at this time  management  has  decided  that
considering  the employees  involved and the control  procedures  in place,  the
risks  associated  with  such  lack of  segregation  are  insignificant  and the
potential  benefits  of adding  employees  to  clearly  segregate  duties do not
justify  the  expenses   associated   with  such   increases.   Management  will
periodically reevaluate this situation.


                                       14
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      On June 10, 2003,  Leviton  Manufacturing  Co., Inc.  filed a second civil
suit against the Company and its USI Electric  subsidiary  in the United  States
District Court for the District of Maryland (Case No.  03cv1701),  alleging this
time that the  Company's  GFCI units  infringe one or more of its more  recently
issued  patents for reset lockout  technology  related to but not required by UL
Standard  943 for ground GFCI units,  effective  January  2003  ("Leviton  II").
Leviton also asserted  trade dress and unfair  competition  claims which largely
correspond to the claim in the previously reported "Leviton l" suit. On July 23,
2003, the GFCI manufacturer, Shanghai Meihao Electric, Inc., filed an action for
Declaratory  Judgment of non-infringement,  invalidity,  and unenforceability of
the asserted  patents.  The Court has  bifurcated  the action into liability and
damage phases, linked the supplier's Declaratory Judgment action with the action
against the Company,  and consolidated Leviton I with Leviton II. In March 2005,
the court  dismissed one of the Leviton patents from the suit and in April 2005,
issued a claims  construction  order that favors the  position  of the  Company.
Discovery  has closed and summary  judgment  motions have been fully briefed and
are pending  disposition by the Court. The Company moved for summary judgment of
noninfringement  of the five  remaining  patents  and for  judgment on the trade
dress claims.  Leviton  opposed  summary  judgment on the trade dress claims and
cross-moved  for a  judgment  of  infringement  on two  claims  from  one of its
asserted patents.

      On June 11, 2003, Walter Kidde Portable Equipment, Inc. 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. The plaintiff is seeking  injunctive  relief and damages to be determined
at trial.  Summary  judgment  motions  have been fully  briefed and the case was
scheduled  for a jury trial in October.  At the pretrial  conference,  the Judge
ordered a continuance  for Kidde to make a showing of ownership of the patent at
the  time the suit was  filed.  All  other  proceedings  are  stayed  pending  a
determination of whether Kidde had a standing to sue the Company at the time the
suit was filed.  The  Company  and its  counsel  believe  that 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  USI is not  yet
determinable.

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

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

      On October 5, 2005, the Company held its Annual  Meeting of  Stockholders.
The only matter submitted to the stockholders for a vote was the election of one
director  in the Class of 2008.  The nominee  was Harvey B.  Grossblatt.  At the
Meeting,  at least 1,219,905 shares were voted in favor of the nominee,  no more
than 335,535 shares were voted to withhold  approval of any nominee's  election,
and 36,738 shares abstained. As a result, the nominee was elected.

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


                                       15
<PAGE>

ITEM 6. EXHIBITS.

Exhibit No.
- -----------
3.1      Articles of  Incorporation  (incorporated by reference to the Company's
         Quarterly  Report on Form 10-Q for the period ended  December 31, 1988,
         File No. 0-7885)

3.2      Articles  Supplementary,   filed  October  14,  2003  (incorporated  by
         reference to Exhibit 3.1 to the  Company's  Current  Report on Form 8-K
         filed October 31, 2002, file No. 0-7885)

3.3      Bylaws,  as amended  (incorporated  by  reference to Exhibit 3.3 to the
         Company's  Quarterly  Report on Form 10-Q for the period ended June 30,
         2004, File No. 0-7885)

10.1     Non-Qualified Stock Option Plan, as amended  (incorporated by reference
         to Exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q for the
         period ended September 30, 2003, File No. 0-7885)

10.2     Hong  Kong  Joint  Venture  Agreement,   as  amended  (incorporated  by
         reference to Exhibit 10.1 to the  Company's  Annual Report on Form 10-K
         for the year ended March 31, 2003, File No. 0-7885)

10.3     Amended  Factoring  Agreement  with CIT Group  (successor  to  Congress
         Talcott,  Inc.) dated November 14, 1999  (incorporated  by reference to
         Exhibit 10.3 to the  Company's  Annual Report on Form 10-K for the year
         ended March 31, 2003, File No. 0-7885)

10.4     Amendment  to  Factoring  Agreement  with CIT  Group  (incorporated  by
         reference to Exhibit  10.4 to the  Company's  Quarterly  Report on Form
         10-Q for the period ended September 30, 2002, File No. 0-7885)

10.5     Amendment to Factoring  Agreement  with CIT Group dated  September  28,
         2004  (incorporated  by  reference  to  Exhibit  10.5 to the  Company's
         Quarterly  Report on Form 10-Q for the period ended September 30, 2004,
         File No. 1-31747)

10.6     Lease  between  Universal  Security  Instruments,   Inc.  and  National
         Instruments Company dated October 21, 1999 for its office and warehouse
         located  at  7-A  Gwynns  Mill  Court,  Owings  Mills,  Maryland  21117
         (incorporated  by reference to Exhibit  10.19 to the  Company's  Annual
         Report on Form 10-K for the Fiscal Year Ended March 31, 2000,  File No.
         0-7885)

10.7     Amended and Restated  Employment  Agreement dated July 18, 2005 between
         the Company and Harvey B. Grossblatt*

10.8     Settlement  Agreement  with  respect  to Michael  Kovens vs.  Universal
         Security Instruments,  Inc. et al (incorporated by reference to Exhibit
         10.8 to the  Company's  Quarterly  Report on Form  10-Q for the  period
         ended June 30, 2005, File No. 1-31747)

31.1     Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*

31.2     Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*

32.1     Section 1350 Certifications*

99.1     Press Release dated November 14, 2005*

*Filed herewith


                                       16
<PAGE>

                                   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 14, 2005                   By: /s/ Harvey B. Grossblatt
                                             -----------------------------------
                                             Harvey B. Grossblatt
                                             President, Chief Executive Officer

                                          By: /s/ James B. Huff
                                             -----------------------------------
                                             James B. Huff
                                             Chief Financial Officer


                                       17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>2
<FILENAME>v029261_ex10-7.txt
<TEXT>
                                                                    Exhibit 10.7

                SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT

      THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is
made and entered into as of July 18,  2005,  by and between  UNIVERSAL  SECURITY
INSTRUMENTS,  INC.,  a  Maryland  corporation  (the  "Company"),  and  HARVEY B.
GROSSBLATT (the "Executive").

                                    RECITALS

      WHEREAS,   the  Company  is  engaged  in  the   business   of   designing,
manufacturing and marketing security products (the "Business"); and

      WHEREAS,  the Executive  has served as the  President and Chief  Operating
Officer of the  Company  and, in August 2004  assumed the  additional  duties of
Chief Executive Officer of the Company; and

      WHEREAS,  the  Company  desires to  continue  to employ the  Executive  to
perform  services as the President and Chief  Executive  Officer of the Company,
and to perform other duties which may be assigned from time to time by the Board
of Directors of the Company (the "Board") from time to time at its discretion;

      WHEREAS,  the Company and  Executive  entered into an Amended and Restated
Employment Agreement dated as of April 1, 2003 (the "Original Agreement");

      WHEREAS,  the parties  desire to amend  certain  other  provisions  of the
Original  Agreement  to be  effective  from and  after the date  hereof,  and in
furtherance  thereof,  the parties have agreed to amend and restate the Original
Agreement.

      NOW,  THEREFORE,  in consideration  of the foregoing,  the mutual promises
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged,  the parties hereby agree that the
Original Agreement is hereby amended and restated in its entirety as follows:

      1. Employment.

            (a)  Agreement  to  Employ.  Upon  the  terms  and  subject  to  the
conditions of this Agreement,  the Company shall hereby employ the Executive and
the Executive hereby agrees to be employed by Company.

            (b) Term of  Employment.  Subject to Section  7, the  Company  shall
employ the Executive  pursuant to the terms hereof for the period  commencing as
of the date  hereof and ending on July 31,  2008.  The period  during  which the
Executive is employed pursuant to this Agreement,  including any renewal thereof
shall be referred to as the "Employment Period."

      2. Position and Duties.  During the Employment Period, the Executive shall
serve as, and have  responsibilities  and authority consistent with the position
of, President and Chief Executive Officer of the Company, which shall be subject
to the discretion of the Board. At the request of the Board, the Executive shall
serve as a director, officer or consultant of any subsidiary of the Company, the
Company's  50% owned  Hong Kong  Joint  Venture  or its  successor  (the  "Joint
Venture") or of any other entity in which the Company has an interest,  provided
that the Executive is  indemnified  for such service to the same extent as he is
indemnified  for  serving  in his  capacities  on  behalf  of the  Company.  The
Executive  shall  diligently and  conscientiously  devote his full and exclusive
business time and attention and best efforts in discharging his duties.  Nothing
herein shall  restrict  the  Executive  from  devoting  reasonable  time and his
expertise  to  charitable  or communal  activities.  The Company  shall  provide
appropriate  office space and services to allow the  Executive to discharge  his
duties, consistent with policies established by the Board from time to time.

      3. Compensation.

            (a) Salary.  The Company  shall pay the  Executive at the  following
minimum  rates of annual base salary  ("Annual  Base  Salary") for the following
periods:

            The date hereof through July 31, 2006       -        $300,000
            August 1, 2006 through July 31, 2007        -        $325,000
            August 1, 2007 through July 31, 2008        -        $350,000


<PAGE>

The Annual  Base  Salary for  periods  subsequent  to July 31,  2008 shall be an
amount determined by the Compensation Committee of the Board and approved by the
Board.  The Annual  Base  Salary  shall be payable  according  to the  Company's
regular payroll practices and shall be subject to all applicable federal,  state
and local withholding taxes.

            (b) Bonus.

                  (i) In addition to the Annual Base Salary, the Executive shall
receive an annual  bonus  equal to the amount  determined  pursuant to Exhibit A
attached hereto and incorporated herein by reference  ("Bonus"),  which shall be
paid by the Company  within 30 days  following the filing with the United States
Securities and Exchange  Commission of the Company's  Annual Report on Form 10-K
for the fiscal year with  respect to which the Bonus is earned.  The Bonus shall
be deemed fully earned by the  Executive  with respect to any fiscal year of the
Company during which the Executive has been employed by the Company for at least
60 days. The Bonus shall be subject to all applicable  federal,  state and local
withholding taxes.

                  (ii) To the extent the  Company  reports  income from both its
domestic  operations  (currently  shown  on the  Company's  annual  consolidated
statements  of  operations  as  "Operating  income") and Hong Kong Joint Venture
(currently shown on the Company's annual  consolidated  statements of operations
as "Equity in earnings of Hong Kong joint venture"),  the Bonus expense shall be
allocated  between such two  components in the  respective  proportions  as such
components bear to the consolidated Net Income (currently shown on the Company's
annual audited consolidated statements of operations).

            (c) Stock  Options.  In  addition  to the Annual Base Salary and any
Bonus,  the Executive  shall be eligible to receive grants of options to acquire
shares of the Company's Common Stock, as may be granted from time to time by the
Board or a committee thereof.

            (d) Compensation for Other Services. The Executive shall be entitled
to retain all cash, stock,  options or other  compensation paid for his services
as a  director  or officer of the Joint  Venture to the same  extent  such cash,
stock,  options or other compensation is paid to all similarly situated officers
or directors (as the case may be) of the Joint Venture.

      4. Benefits.  During the Employment  Period, the Company shall provide the
Executive with the following benefits:

            (a)  Participation  by the  Executive,  and his wife  and  dependant
children in any group health plans  sponsored or arranged by the Company for its
employees.  The full amount of all premiums for such  insurance  will be paid by
the Company. In the event the Executive declines or is ineligible to participate
in such group health  plans,  the Company  shall pay to the  Executive,  no less
frequently than  quarterly,  the amount of such premiums which the Company would
have paid for such period had the  Executive  accepted  such  participation  for
himself,  his wife and dependant  children.  Nothing  herein shall  obligate the
Company to continue any health plan currently offered to employees or offered to
employees in the future.  The Executive agrees to cooperate with the Company and
to take all steps  reasonably  necessary to assist the Company in obtaining such
insurance.

            (b)  Participation  in  any  retirement  plans,   disability  income
insurance and term life insurance  policies sponsored or arranged by the Company
for its employees  from time to time.  Nothing herein shall obligate the Company
to continue  any plan or policy  currently  offered to  employees  or offered to
employees in the future.

            (c) For each calendar year during the Employment Period, the Company
shall contribute the maximum amount permitted by applicable law on behalf of the
Executive to the Company's  401(k) Plan. The Executive  shall be entitled to the
full amount of this benefit  with respect to any calendar  year during which the
Executive has been employed by the Company for at least 60 days.

            (d) Three weeks per year of paid  vacation  time plus sick leave and
personal leave in accordance  with the Company's  policies for senior  executive
officers.  The  Executive  shall be entitled to the full amount of this  benefit
with respect to any fiscal year of the Company  during which the  Executive  has
been employed by the Company for 60 days.


                                       2
<PAGE>

            (e)  Use  of a  Company  owned  or  leased  automobile  or,  at  the
Executive's  option,  an automobile  payment  allowance of $1,000 per month.  In
addition,  the Company  shall pay for the  insurance,  fuel and service for such
automobile.

            (f) All costs and expenses of a mobile phone for the Executive's use
in connection with the  performance of his duties,  in accordance with the terms
and conditions that the Board shall determine from time to time.

            (g)  In  addition  to  the  benefit  provided  under  Section  4(a),
reimbursement up to a maximum of $30,000 per annum for expenses  incurred by the
Executive,  his wife and  dependant  children for medical,  dental,  optical and
long-term care and prescription  drugs, or third-party payor coverage  therefor,
which are not reimbursable under any medical coverage for which the premiums are
paid by the Company.  This amount shall be increased annually by an amount equal
to the then-current medical expense  reimbursement  benefit multiplied by the in
the Consumer  Price Index for the Greater  Baltimore  Area (as determined by the
U.S. Bureau of Labor  Statistics)  for the  immediately  preceding four calendar
quarters.  All  requests  by the  Executive  for such  reimbursement  must be in
writing accompanied by receipts for such amounts.

            (h) Participation in the Company's Cafeteria  Plan/Flexible Spending
Plan.

            (i) Any other group employee benefit plans or programs to the extent
that he is qualified under the  requirements  relating to  participation  in any
such plan or program.

            (j) All reasonable  legal,  accounting and financial  planning costs
and  expenses  in  connection   with  estate  planning  and  annual  tax  return
preparation  for the Executive and his wife,  not to exceed $10,000 in any three
year period.

      5. Business Expenses. The Company shall pay or reimburse the Executive for
business  expenses  incurred by the Executive  during the  Employment  Period in
connection with his employment.

      6. Termination of Employment. Executive's employment will be terminated in
accordance  with Sections 6(a) and 6(d), or may be terminated in accordance with
Sections 6(b), (b), (c) and (f), as follows:

            (a) The Executive's  employment will be terminated upon the last day
of the Employment Period without a renewal.

            (b) The Company may terminate the Executive's  employment  hereunder
for Cause.  For purposes of this  Agreement,  the Company  shall have "Cause" to
terminate  the  Executive's  employment  hereunder  upon  (i)  the  willful  and
continued failure by the Executive to substantially perform his duties hereunder
(other than any such failure  resulting from the  Executive's  incapacity due to
physical  or mental  illness or any such  actual or  anticipated  failure  after
notice of termination  given by the Executive  pursuant to Section 6(c)),  after
written  demand for  substantial  performance  is  delivered by the Company that
specifically  identifies the manner in which the Company  believes the Executive
has not  substantially  performed his duties,  which is not cured within 30 days
after notice of such failure has been given to the Executive by the Company,  or
(ii) the willful  engaging by the  Executive in  misconduct  which is materially
injurious  to the  Company,  monetarily  or  otherwise  (including  conduct that
constitutes  competitive activity pursuant to Section 9 hereof). For purposes of
this  paragraph,  no act,  or failure to act, on the  Executive's  part shall be
considered  "willful"  unless  done,  or omitted to be done,  by him not in good
faith and without  reasonable belief that his action or omission was in the best
interest of the Company.

            (c) The Executive may  terminate his  employment  hereunder for Good
Reason for purposes of this Agreement, "Good Reason" shall mean:

                  (i) A  failure  by the  Company  to comply  with any  material
provision of this  Agreement  which his not been cured within  fifteen (15) days
after written  notice of such  noncompliance  has been given by the Executive to
the Company;

                  (ii)  Any  purported   termination   by  the  Company  of  the
Executive's  employment  other than as permitted  under this  Agreement (and for
purposes of this Agreement no such purported termination shall be effective);


                                       3
<PAGE>

                  (iii) The assignment to the Executive of any duties materially
inconsistent  with his status as the Chief Executive Officer of the Company or a
material adverse alteration in the nature or status of his  responsibilities  in
connection with such offices. For purposes of this Agreement, such alteration of
the  Executive's  duties shall be deemed to have occurred in connection with any
reorganization, merger, acquisition or other business combination of the Company
unless, in each such instance, the Executive will be the Chief Executive Officer
of (A) the Company if it is the surviving entity in any merger,  reorganization,
acquisition or other business combination with the Company, or (B) the successor
entity to the Company in any merger,  acquisition or other business  combination
with the Company.

                  (iv)  Relocation of the  Executive to a location  which is not
within  Baltimore  County or the Baltimore City  Metropolitan  area,  except for
required travel on the Company's business to an extent substantially  consistent
with the Executive's duties;

                  (v) The  failure  by the  Company  to  continue  in effect any
compensation or benefit plan in which the Executive  participated as of the date
hereof and which is  material  to the  Executive's  aggregate  compensation  and
benefits  hereunder,  unless an equitable  arrangement  (embodied in an on-going
substitute  or  alternative  plan) has been made with  respect to such plan,  or
failure by the Company to continue the Executive's  participation therein (or in
such  substitute or alternative  plan) on a basis not materially less favorable,
both  in  terms  of the  amount  of  benefits  provided  and  the  level  of the
Executive's participation relative to other participants, as existed on the date
hereof.

            (d) The  employment of the Executive  hereunder  will terminate upon
his death.

            (e) The Company may terminate the Executive's  employment  hereunder
if the Executive is Permanently Disabled (as hereafter defined). For purposes of
this Agreement,  the term "Permanently Disabled" or "Permanent Disability" shall
mean (i) becoming  permanently  disabled as provided in any permanent disability
income  policy  provided  by the  Company  under  this  Agreement  insuring  the
Executive  or (ii) in the  absence of any such  disability  income  policy,  the
inability for a period of six consecutive months, with reasonable accommodation,
due to a mental or physical injury, illness or disorder, of Executive to provide
substantially  all of the  services  required  pursuant to this  Agreement to be
provided by Executive.  Whether or not Executive is  Permanently  Disabled under
subsection (ii) shall be determined by a medical doctor agreed to by Company and
Executive.  If Company and the Executive  cannot agree on such a medical doctor,
they shall each, at their own expense, designate an unrelated medical doctor and
such medical doctors shall in turn designate a third  unrelated  medical doctor,
whose fee  shall be shared  equally  by  Company  and  Executive.  Such  medical
doctor(s) shall determine  whether  Executive is Permanently  Disabled and shall
also determine the date of the  commencement  and  termination,  if any, of such
Permanent Disability. Such determinations (whether made by unanimous or majority
vote of the  medical  doctors)  shall be binding on the parties  hereto.  If any
party (the "Second  Party")  fails to select its medical  doctor  within 30 days
after written notice from the other party (the "First Party") of the appointment
of the First Party's medical doctor, then the First Party's medical doctor shall
determine whether Executive is Permanently Disabled and shall also determine the
date of the commencement and termination, if any, of such Permanent Disability.

            (f) The Executive may terminate his employment  hereunder on 30 days
advance  written  notice  at any time  within 24  months  following  a Change of
Control,  as defined in Exhibit B  attached  hereto and  incorporated  herein by
reference (a "Change of Control").

            (g) The  Executive may  terminate  his  employment  hereunder on six
months' advance written notice at any time.

            (h) Any termination of the Executive's  employment  hereunder by the
Company or the Executive  (other than  termination by reason of the  Executive's
death) shall be  communicated by written notice to the other party in accordance
with Section  10(f).  Each such notice shall  indicate the specific  termination
provision of this Agreement relied upon and shall set forth in reasonable detail
the facts and  circumstances  claimed to provide a basis for  termination of the
Executive's employment under the provision so indicated.  If, within thirty (30)
days following any written notice of termination, the party receiving the notice
notifies  the other  party in  writing  that a  dispute  exists  concerning  the
termination,  which  notice sets forth in  reasonable  detail the basis for such
dispute,  the termination  will not be effective until the date when the dispute
is finally  determined,  either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent  jurisdiction  (the time for appeal  therefrom having expired
and no appeal having been perfected).


                                       4
<PAGE>

      7. Effect of Termination.

            (a) In the event that  Executive's  employment is terminated for any
reason,  Executive  shall be paid on the payroll date next following the date of
termination,  all  compensation,  and  reimbursement  of all  expenses,  for the
Employment  Period  accruing  through  the  effective  date  of  termination  of
employment.

            (b) In the event  the  Company  elects to not renew the  Executive's
employment  hereunder at the end of the  Employment  Period and the  Executive's
employment hereunder is terminated pursuant to Section 6(a), the Executive shall
be entitled to receive (A) a lump sum  severance  payment in an amount  equal to
the previous 12 months' Annual Base Salary and last Bonus,  and (B) for a period
of three years  following  the  termination,  the benefits set forth in Sections
4(a) and 4(g) and an amount in cash,  payable  on the  first,  second  and third
anniversaries  of the  termination,  equal to the benefit  which would have been
payable under Section 4(c) had such benefit continued.

            (c) In the event the Executive's  employment hereunder is terminated
pursuant to Section 6(c), the Executive shall be entitled to receive in addition
to the payment under Section 7(a), (A) a lump sum severance payment in an amount
equal to the previous 12 months' Annual Base Salary and last Bonus,  and (B) for
a period of three years  following  the  termination,  the benefits set forth in
Sections 4(a) and 4(g) and an amount in cash,  payable on the first,  second and
third  anniversaries of the  termination,  equal to the benefit which would have
been payable under Section 4(c) had such benefit continued.

            (d) In the event the  Executive's  employment  is  terminated by the
Company or its successor following or in anticipation of a Change of Control, or
in the event the Executive's  employment is terminated by the Executive pursuant
to Section 6(f), the Executive shall be entitled to receive,  in addition to the
payment  under  Section  7(a),  a lump sum payment in an amount equal to (A) the
Annual Base Salary for the balance of the Employment  Period, and (B) the amount
of the  last  Bonus.  For a  period  of  three  years  following  the end of the
Employment  Period,  the Executive  shall also receive the benefits set forth in
Sections 4(a) and 4(g) and an amount in cash,  payable on the anniversary of the
termination,  equal to the benefit  which would have been payable  under Section
4(c) had such benefit continued. In addition, the Executive shall be entitled to
receive  three times the previous 12 months'  Annual Base Salary and last Bonus,
provided, however, the aggregate present value of severance payments pursuant to
this Section 7(d) (plus any payments under any other plan of the Company and its
affiliates  which  are  contingent  on  a  change  of  control),  determined  in
accordance with ss.280G of the Internal Revenue Code of 1986, as amended, or any
corresponding  provision  of any  succeeding  law, may not exceed 2.99 times the
Executive's  average  annual  taxable  compensation  from  the  Company  or  its
affiliates  which is  included  in the  Executive's  gross  income  for the five
taxable  years of the  Company  ending  before  the date on which the  change of
control  occurs.  All amounts to be paid  pursuant to this Section 7(d) shall be
payable  concurrently  with the delivery by the Company or its  successor to the
Executive  of the  written  notice of  termination  or within 30 days  following
termination by the Executive, as the case may be.

            (e) In the event the Executive's  employment is terminated  pursuant
to Section 6(d), the Executive's estate shall be entitled to receive:

                  (i) A lump sum  payment  in an amount  equal to the sum of (i)
                  the  Executive's  then  current  Annual  Base  Salary  for the
                  greater of (A) the balance of the Employment Period or (B) one
                  year, in either case reduced by any individual  life insurance
                  benefits  the  premiums for which are paid for by the Company,
                  (ii) the amount of the last Bonus, and (iii) an amount in cash
                  equal to the benefit under Section 4(c) for the last completed
                  fiscal year of the Company,  payable  within 15 days following
                  receipt by the  Company of  insurance  proceeds on the life of
                  the  Executive  or, if there is no such  insurance,  within 30
                  days  following  the date of death.  The Company will exercise
                  its best  efforts  to  promptly  collect  any  such  insurance
                  proceeds.

                  (ii) The  continuation  of the  benefits set forth in Sections
                  4(a) and 4(g) for the  longer of (A) the  balance of the Term,
                  or (B)  three  years  following  the  date of the  Executive's
                  death;  provided,  however,  that if the  terms  of the  group
                  health  plans  sponsored  or  arranged  by the Company for its
                  employees  limit the length of time  during  which the benefit
                  set forth in Section 4(a) may be provided,  the Company  shall
                  pay to the  Executive's  estate  with  respect  to any  period
                  during  which  such  benefit  may  not be  provided,  no  less
                  frequently  than  quarterly,  a sum equal to the amount of the
                  premiums which the Company would have paid for such period had
                  the benefit set forth in Section 4(a) continued.


                                       5
<PAGE>

In the event the Executive's  employment is terminated pursuant to Sections 6(a)
or (c) and  thereafter  the Executive  dies,  the provisions of Sections 7(b) or
7(c), as the case may be, shall control.

            (f) In the event the Executive's  employment is terminated  pursuant
to Section 6(e), the Executive shall be entitled to receive:

                  (i) The  continuation of the payment of the  Executive's  then
                  current  Annual Base Salary for the balance of the  Employment
                  Period,  reduced by any group or individual  disability income
                  insurance  benefits the premiums for which are paid for by the
                  Company and Social  Security  disability  benefits paid to the
                  Executive.  The net  amount  payable  hereunder  shall be paid
                  according to the Company's regular payroll practices; and

                  (ii) The  continuation  of the  benefits set forth in Sections
                  4(a)  and  4(g),  and  an  amount  in  cash,  payable  on  the
                  anniversary  of the  termination,  equal to the benefit  which
                  would have been  payable  under  Section 4(c) had such benefit
                  continued, for the longer of (A) the balance of the Employment
                  Period,   or  (B)  three  years  following  the  date  of  the
                  Executive's Permanent Disability;  provided,  however, that if
                  the terms of the group health  plans  sponsored or arranged by
                  the Company for its employees  limit the length of time during
                  which the benefit set forth in Section  4(a) may be  provided,
                  the Company  shall pay to the  Executive  with  respect to any
                  period during which such benefit may not be provided,  no less
                  frequently  than  quarterly,  a sum equal to the amount of the
                  premiums which the Company would have paid for such period had
                  the benefit set forth in Section 4(a) continued.

            (g) All amounts paid under  Sections  7(c) or (d) shall be increased
by an amount so that when the total  amount paid is reduced by  federal,  state,
and local income taxes computed at the highest  marginal rates  applicable to an
individual  residing in the state in which the Executive  resided at the time of
termination, the net amount is equal to the amount contemplated by Sections 7(c)
or (d), as the case may be.

            (h) As a  condition,  and in  consideration,  of the  payment of any
amounts under Sections 7(b) - (g), the Executive or his estate,  as the case may
be,  shall  execute  a release  which  shall  fully,  forever,  irrevocably  and
unconditionally  release, remise and discharge the Company, its subsidiaries and
successors-in-interest, and its officers, directors, stockholders, predecessors,
corporate  affiliates,  agents  and  employees  (each  in their  individual  and
corporate  capacities)  (hereinafter,  the "Released  Parties") from any and all
claims, charges, complaints,  demands, actions, causes of action, suits, rights,
debts,  sums  of  money,  costs,  accounts,  reckonings,  covenants,  contracts,
agreements,  promises,  doings,  omissions,  damages,  executions,  obligations,
liabilities,  and expenses (including  reasonable attorneys' fees and costs), of
every kind and nature  which the  Executive  or his estate,  as the case may be,
ever had or then has against the Released Parties arising out of the Executive's
employment  with the  Company,  including,  but not limited  to, all  employment
discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.
ss.2000e, et seq., the Age Discrimination in Employment Act, 29 U.S.C. ss.621 et
seq., the Americans With Disabilities Act of 1990, 42 U.S.C.,  ss.12101 et seq.,
the  Rehabilitation  Act of 1973, 29 U.S.C.  ss.701 et seq., the Fair Employment
Practices  Act, and the Human Rights Act, all as amended and all claims  arising
out of the Fair  Credit  Reporting  Act,  15  U.S.C.  ss.1681  et seq.,  and the
Employee Retirement Income Security Act of 1974, 29 U.S.C. ss.1001.

      8. Company  Obligations.  The amounts payable to the Executive pursuant to
Section 7 following  termination of his  employment  shall be in addition to any
rights the Executive  may have with respect to previously  granted stock options
and any rights the  Executive  may have  arising  from claims of breaches by the
Company of the terms of this Agreement.

      9. Restrictive Covenants.

            (a) Non-competition. During the Employment Period and any additional
period  during  which  the  Executive  receives  compensation  from the  Company
pursuant to Section 7, the Executive will not directly or indirectly,  either as
principal,  agent,  employee, or in any other capacity,  enter into or engage in
any business in which the Company is engaged during the Employment Period.


                                       6
<PAGE>

            (b)  CONFIDENTIALITY.  DURING THE EMPLOYMENT PERIOD AND AT ALL TIMES
AFTER THE  TERMINATION  OF THIS  AGREEMENT FOR ANY REASON,  PROVIDED THE COMPANY
FULFILLS ITS POST TERMINATION  OBLIGATIONS TO THE EXECUTIVE AS SET FORTH HEREIN,
THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY TRADE  SECRETS,  CUSTOMER
LISTS  OR OTHER  CONFIDENTIAL  INFORMATION  PERTAINING  TO THE  BUSINESS  OF THE
COMPANY.

            (c) Company Property. Promptly following the Executive's termination
of  employment  for any reason,  the  Executive  shall return to the Company all
property of such entity, and originals and any copies thereof in the Executive's
possession or under his control,  including  all  confidential  information  and
trade secrets, in whatever media or in whatever form.

            (d) Non-solicitation of Employees.  During the Employment Period and
any additional period during which the Executive receives  compensation from the
Company  pursuant to Section 7, the  Executive  shall not directly or indirectly
induce any management or supervisor-level  employee of the Company or any of its
affiliates to terminate  employment  with such entity,  and will not directly or
indirectly,  either  individually or as owner,  agent,  employee,  consultant or
otherwise,  employ or offer  employment  to any person who is or was employed by
the Company or a subsidiary thereof as a management or supervisor-level employee
unless such person  shall have ceased to be employed by such entity for a period
of at least three months.

            (e)  INJUNCTIVE  RELIEF WITH  RESPECT TO  COVENANTS.  THE  EXECUTIVE
ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND OBLIGATIONS OF THE EXECUTIVE WITH
RESPECT  TO  NON-COMPETITION,   NON-SOLICITATION,  CONFIDENTIALITY  AND  COMPANY
PROPERTY  RELATE  TO  SPECIAL,  UNIQUE  AND  EXTRAORDINARY  MATTERS  AND  THAT A
VIOLATION OF ANY OF THE TERMS OF SUCH COVENANTS AND  OBLIGATIONS  WILL CAUSE THE
COMPANY AND ITS SUBSIDIARIES  IRREPARABLE INJURY FOR WHICH ADEQUATE REMEDIES ARE
NOT AVAILABLE AT LAW.  THEREFORE,  THE EXECUTIVE AGREES THAT THE COMPANY AND ITS
SUBSIDIARIES SHALL BE ENTITLED TO AN INJUNCTION, RESTRAINING ORDER OR SUCH OTHER
EQUITABLE  RELIEF AS A COURT OF  COMPETENT  JURISDICTION  MAY DEEM  NECESSARY OR
APPROPRIATE  TO RESTRAIN THE  EXECUTIVE  FROM  COMMITTING  ANY  VIOLATION OF THE
COVENANTS AND OBLIGATIONS  CONTAINED IN THIS SECTION.  THESE INJUNCTIVE REMEDIES
ARE  CUMULATIVE AND ARE IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES THE COMPANY
OR ITS  SUBSIDIARIES  MAY  HAVE  AT LAW OR IN  EQUITY.  IN  THE  EVENT  (I)  THE
ENFORCEABILITY  OF ANY OF THE COVENANTS  CONTAINED IN THIS SECTION IS CHALLENGED
BY EXECUTIVE IN ANY JUDICIAL PROCEEDING,  (II) EXECUTIVE IS NOT ENJOINED IN SUCH
PROCEEDING  FROM  BREACHING  SUCH COVENANT,  AND (III)  EXECUTIVE  DOES, IN FACT
BREACH SUCH COVENANT, THEN, IF A COURT OF COMPETENT JURISDICTION DETERMINES THAT
THE  CHALLENGED  COVENANT  IS  ENFORCEABLE,  THE TIME  PERIOD  SET FORTH IN SUCH
COVENANT SHALL BE DEEMED TOLLED UPON THE INITIATION OF SUCH PROCEEDING UNTIL THE
DISPUTE IS FINALLY RESOLVED AND ALL PERIODS OF APPEAL HAVE EXPIRED.

      10.  Arbitration.  Any  dispute to be  submitted  to  binding  arbitration
pursuant  to  the  terms  of  this  Agreement  shall  be  submitted  to  binding
arbitration in Baltimore,  Maryland, in accordance with the rules and procedures
of the American Arbitration Association. The arbitrator's decision will be final
and may be  enforced  through any court  having  jurisdiction.  All  proceedings
before the  arbitrator(s)  shall be confidential and neither  arbitrating  party
shall  comment to any third party on the  arbitration  or subject  matter of the
arbitration  except as required to permit the  conduct of the  arbitration.  The
arbitrator(s)  shall award to a prevailing  party in the arbitration the cost of
such prevailing party's  reasonable  attorneys' fees,  arbitration  expenses and
other expenses  reasonably  incurred in connection  with the dispute or disputes
being reviewed by the  arbitrator(s).  Furthermore,  if a party files a judicial
action alleging claims subject to arbitration under this Agreement,  and another
arbitrating  party   successfully  stays  the  judicial  action  and/or  compels
arbitration  of the claims,  the party bringing the claims in court will pay the
other party's costs and expenses,  including attorneys' fees. THE PARTIES HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY  ACTION OR OTHER  PROCEEDING  BROUGHT TO
ENFORCE OR OTHERWISE RELATING TO THIS AGREEMENT.

      11. Miscellaneous.

            (a) Binding  Effect.  This Agreement shall be binding on the Company
and  any  person  or  entity  which  succeeds  to the  interest  of the  Company
(regardless of whether such succession  occurs by operation of law, by reason of
the sale of all or a  portion  of the  Company's  stock or  assets  or a merger,
consolidation  or  reorganization  involving the Company).  This Agreement shall
also inure to the benefit of the Executive's  heirs,  executors,  administrators
and legal representatives.


                                       7
<PAGE>

            (b)  Assignment.  Neither  this  Agreement  nor any of the rights or
obligations  hereunder  shall be assigned or  delegated  by either  party hereto
without the prior written consent of the other party.

            (c) Entire  Agreement.  This Agreement  supersedes any and all prior
agreements  between the parties hereto,  and  constitutes  the entire  agreement
between the parties hereto with respect to the matters  referred to herein,  and
no other  agreement,  oral or  otherwise,  shall be binding  between the parties
unless it is in writing  and signed by the party  against  whom  enforcement  is
sought.  There  are no  promises,  representations,  inducements  or  statements
between the parties other than those that are expressly  contained  herein.  THE
EXECUTIVE  ACKNOWLEDGES  THAT HE IS ENTERING INTO THIS AGREEMENT OF HIS OWN FREE
WILL AND ACCORD, AND WITH NO DURESS, THAT HE HAS READ THIS AGREEMENT AND THAT HE
UNDERSTANDS  IT AND ITS LEGAL  CONSEQUENCES.  No parol or other  evidence may be
admitted to alter, modify or construe this Agreement,  which may be changed only
by a writing signed by the parties hereto.

            (d) Severability;  Reformation. In the event that one or more of the
provisions of this Agreement shall become invalid,  illegal or  unenforceable in
any  respect,  the  validity,  legality  and  enforceability  of  the  remaining
provisions  contained herein shall not be affected thereby.  In the event any of
Section 9(a),  (b), (c), (d) or (e) is not  enforceable  in accordance  with its
terms, the Executive and the Company agree that such Section, or such portion of
such  Section,  shall be  reformed  to make it  enforceable  in a  manner  which
provides the Company the maximum rights permitted under applicable law.

            (e) Waiver.  Waiver by either  party hereto of any breach or default
by the other party of any of the terms of this Agreement  shall not operate as a
waiver of any other breach or default,  whether similar to or different from the
breach or default waived.  No waiver of any provision of this Agreement shall be
implied  from any  course of  dealing  between  the  parties  hereto or from any
failure by either  party  hereto to assert its or his  rights  hereunder  on any
occasion or series of occasions.

            (f) Notices.  Any notice  required or desired to be delivered  under
this Agreement shall be in writing and shall be delivered personally, by courier
service, by registered mail, return receipt requested,  or by telecopy and shall
be effective  upon  dispatch to the party to whom such notice shall be directed,
and  shall be  addressed  as  follows  (or to such  other  address  as the party
entitled  to notice  shall  hereafter  designate  in  accordance  with the terms
hereof):

      If to the Company:     Universal Security Instruments, Inc.
                             7-A Gwynns Mill Court
                             Owings Mills, Maryland  21117
                             Fax (410) 363-2218
                             Attention:  Chairman of the Compensation Committee

      If to the Executive:   Harvey B. Grossblatt
                             28 Westspring Way
                             Lutherville, Maryland   21093

            (g)  Amendments.  This  Agreement  may not be  altered,  modified or
amended except by a written instrument signed by each of the parties hereto.

            (h)  Headings.  Headings to sections in this  Agreement  are for the
convenience  of the parties only and are not intended to be part of or to affect
the meaning or interpretation hereof.

            (i)  Counterparts.  This Agreement may be executed in  counterparts,
each of which  shall be  deemed an  original  but both of which  together  shall
constitute one and the same Agreement.

            (j) Withholding.  Any payments  provided for herein shall be reduced
by any amounts  required  to be withheld by the Company  from time to time under
applicable  federal,  state or local  income or  employment  tax laws or similar
statutes or other provisions of law then in effect.


                                       8
<PAGE>

            (k) Governing Law. This  Agreement  shall be governed by the laws of
the State of Maryland, without reference to principles of conflicts or choice of
law under which the law of any other jurisdiction would apply.

            (l) Context.  Unless the context of this Agreement  clearly requires
otherwise,  references  to the plural  include  the  singular,  to the  singular
include the plural,  to the part include the whole, and to the male gender shall
also  pertain  to the  female  and  neuter  genders  and  vice  versa.  The term
"including"  is not  limiting,  and the  term  "or"  has the  inclusive  meaning
represented by the phrase  "and/or".  The words  "hereof,"  "herein,"  "hereby",
"hereto",  "hereunder"  and  similar  terms  in  this  Agreement  refer  to this
Agreement  as a whole and not to any  particular  provision  of this  Agreement.
Section and Exhibit and clause references are to this Agreement unless otherwise
specified.

      IN WITNESS  WHEREOF,  the Company has caused this Agreement to be executed
by its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.

WITNESS:                                    THE COMPANY:
                                            UNIVERSAL SECURITY INSTRUMENTS, INC.

____________________________                By: /s/ James B. Huff
                                               ---------------------------------
                                                James B. Huff
                                                Vice President

                                            THE EXECUTIVE:

____________________________                /s/ Harvey B. Grossblatt
                                            ------------------------------------
                                            HARVEY B. GROSSBLATT


                                       9
<PAGE>

                                    EXHIBIT A

                                  BONUS FORMULA

      For purposes of the Bonus calculation,  the Company's "Pre-Tax Net Income"
with  respect to any fiscal  year means the amount of net income  before  income
taxes and before Bonus  calculation which will be reported by the Company in its
annual audited  consolidated  financial  statements  with respect to such fiscal
year, as determined pursuant to Generally Accepted  Accounting  Principles as in
effect of the date of this Agreement.

      With  respect to any fiscal  year of the  Company in which the Company has
achieved  Pre-Tax  Net Income,  the amount of Pre-Tax Net Income  equal to 8% of
shareholders'  equity as of the start of the fiscal year shall be excluded  from
the Bonus calculation (the "Bonus Threshold").  Thereafter,  the Executive shall
be  entitled  to  receive  as a Bonus an amount  equal to the  aggregate  of the
percentages  of such  Pre-Tax  Net Income in excess of the Bonus  Threshold,  as
specified below:

      On Pre-Tax Net Income up to and including $1 million                    3%

      On all portions of Pre-Tax Net Income from over $1 million
         up to and including $2 million                                       4%

      On all portions of Pre-Tax Net Income from over $2 million
         up to and including $3 million                                       5%

      On all portions of Pre-Tax Net Income from over $3 million
         up to and including $4 million                                       6%

      On all portions of Pre-Tax Net Income over $4 million                   7%


                                       10
<PAGE>

                                    EXHIBIT B

                                CHANGE OF CONTROL

      For the  purposes  of this  Agreement,  a "Change  of  Control"  means the
occurrence of any one or more of the following events:

            (i) The direct or  indirect  acquisition  of  ownership,  holding or
power to vote more than 25% of the Company's voting stock.

            (ii) The  acquisition  of the ability to control  the  election of a
majority of the Company's directors.

            (iii) The acquisition of a controlling influence over the management
or  policies  of the  Company by any  person or by  persons  acting as a "group"
(within the meaning of Section 13(d) of the Securities Exchange Act of 1934).

            (iv) During any period of two consecutive  years,  individuals  (the
"Continuing Directors") who at the beginning of such period constitute the Board
of  Directors  of the Company  (the  "Existing  Board")  cease for any reason to
constitute  at least  two-thirds  thereof,  provided that any  individual  whose
election  or  nomination  for  election  as a member of the  Existing  Board was
approved by a vote of at least  two-thirds of the  Continuing  Directors then in
office shall be considered a Continuing Director. The decision of the Continuing
Directors  as to  whether  or not a Change  in  Control  has  occurred  shall be
conclusive and binding on all parties.

            (v) The sale or other disposition of all or substantially all of the
assets of the Company in one transaction or a series of transactions (other than
financing arrangements).

            (vi) A merger, consolidation or share exchange involving the Company
and any other  person or entity,  including  any of the equity  owners as of the
date  hereof,  in  which  the  Company  or one of its  subsidiaries  is not  the
surviving entity.

            (vii)  Any other  "business  combination"  (as  defined  in  Section
3-601(e) of the Maryland General  Corporation Law) involving the Company and any
person or  entity,  including  any of the equity  owners as of the date  hereof,
whether or not such person or entity is an "interested  stockholder"  under that
statute.


                                       11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>v029261_ex31-1.txt
<TEXT>
                                                                    Exhibit 31.1

                                  CERTIFICATION

      I, Harvey B. Grossblatt, certify that:

      1. I have  reviewed  this  Quarterly  Report  on Form  10-Q  of  Universal
Security Instruments, Inc.;

      2.  Based on my  knowledge,  this  report  does  not  contain  any  untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge,  the financial  statements,  and other financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

      4. The  Registrant's  other  certifying  officer and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

            (a)   Designed such disclosure  controls and  procedures,  or caused
                  such  disclosure  controls and procedures to be designed under
                  our supervision,  to ensure that material information relating
                  to the Registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            (b)   Evaluated the  effectiveness  of the  Registrant's  disclosure
                  controls  and  procedures  and  presented  in this  report our
                  conclusions about the effectiveness of the disclosure controls
                  and  procedures,  as of the end of the period  covered by this
                  report based on such evaluation; and

            (c)   Disclosed  in  this  report  any  change  in the  Registrant's
                  internal control over financial reporting that occurred during
                  the Registrant's  most recent fiscal quarter (the Registrant's
                  fourth  fiscal  quarter in the case of an annual  report) that
                  has materially affected, or is reasonably likely to materially
                  affect,  the  Registrant's  internal  control  over  financial
                  reporting; and

      5. The Registrant's other certifying  officer and I have disclosed,  based
on our most recent evaluation of internal control over financial  reporting,  to
the  Registrant's  auditors  and the audit  committee of  Registrant's  board of
directors (or persons performing the equivalent function):

            (a)   All significant  deficiencies  and material  weaknesses in the
                  design  or  operation  of  internal   control  over  financial
                  reporting which are reasonably  likely to adversely affect the
                  Registrant's ability to record, process,  summarize and report
                  financial information; and

            (b)   Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  Registrant's internal control over financial reporting.

Date: November 14, 2005                               /s/ Harvey B. Grossblatt
                                                      --------------------------
                                                      Harvey B. Grossblatt
                                                      Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>4
<FILENAME>v029261_ex31-2.txt
<TEXT>
                                                                    Exhibit 31.2

                                  CERTIFICATION

      I, James B. Huff, certify that:

      1. I have  reviewed  this  Quarterly  Report  on Form  10-Q  of  Universal
Security Instruments, Inc.;

      2.  Based on my  knowledge,  this  report  does  not  contain  any  untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge,  the financial  statements,  and other financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

      4. The  Registrant's  other  certifying  officer and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

            (a)   Designed such disclosure  controls and  procedures,  or caused
                  such  disclosure  controls and procedures to be designed under
                  our supervision,  to ensure that material information relating
                  to the Registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            (b)   Evaluated the  effectiveness  of the  Registrant's  disclosure
                  controls  and  procedures  and  presented  in this  report our
                  conclusions about the effectiveness of the disclosure controls
                  and  procedures,  as of the end of the period  covered by this
                  report based on such evaluation; and

            (c)   Disclosed  in  this  report  any  change  in the  Registrant's
                  internal control over financial reporting that occurred during
                  the Registrant's  most recent fiscal quarter (the Registrant's
                  fourth  fiscal  quarter in the case of an annual  report) that
                  has materially affected, or is reasonably likely to materially
                  affect,  the  Registrant's  internal  control  over  financial
                  reporting; and

      5. The Registrant's other certifying  officer and I have disclosed,  based
on our most recent evaluation of internal control over financial  reporting,  to
the  Registrant's  auditors  and the audit  committee of  Registrant's  board of
directors (or persons performing the equivalent function):

            (c)   All significant  deficiencies  and material  weaknesses in the
                  design  or  operation  of  internal   control  over  financial
                  reporting which are reasonably  likely to adversely affect the
                  Registrant's ability to record, process,  summarize and report
                  financial information; and

            (d)   Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  Registrant's internal control over financial reporting.

Date: November 14, 2005                             /s/ James B. Huff
                                                    --------------------------
                                                    James B. Huff
                                                    Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>5
<FILENAME>v029261_ex32-1.txt
<TEXT>
                                                                    Exhibit 32.1

                           SECTION 1350 CERTIFICATIONS

      In connection with the Quarterly Report of Universal Security Instruments,
Inc. (the  "Company")  on Form 10-Q for the period ending  September 30, 2004 as
filed  with  the   Securities   and  Exchange   Commission  and  to  which  this
Certification  is an exhibit (the  "Report"),  the  undersigned  hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

            (1)   The Report fully  complies  with the  requirements  of section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

            (2)   The information  contained in the Report fairly  presents,  in
                  all material respects,  the financial  condition and result of
                  operations of the Company for the periods reflected therein.

Date: November 14, 2005                            /s/ Harvey B. Grossblatt
                                                   ---------------------------
                                                   Harvey B. Grossblatt
                                                   Chief Executive Officer

                                                   /s/ James B. Huff
                                                   ---------------------------
                                                   James B. Huff
                                                   Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>v029261_ex99-1.txt
<TEXT>
                                                                    Exhibit 99.1

[USI Logo]                                                 For Immediate Release

                                           Contact: Harvey Grossblatt, President
                                            Universal Security Instruments, Inc.
                                                          410-363-3000, Ext. 224
                                                                              or
                                                          Don Hunt, Jeff Lambert
                                             Lambert, Edwards & Associates, Inc.
                                                                    616-233-0500

    Universal Security Instruments Reports Record Earnings for Second Quarter
                    Sales Increase 8%; Net Earnings Rise 11%

OWINGS MILLS, MD, November 14, 2005: Universal Security Instruments, Inc. (AMEX:
UUU) today  announced its highest  quarterly  earnings in the company's  36-year
history for its fiscal second quarter ended September 30, 2005.

The Company  reported its net sales rose 8% to $7,119,100 in the second  quarter
of fiscal  2006,  compared to net sales of  $6,622,221  for the same period last
year. Net earnings were $1,162,695,  or $0.69 per basic share ($0.64 per diluted
share)  compared  to  $1,043,836,  or $0.66 per basic  share  ($0.59 per diluted
share) for the  comparable  period last year.  Included in the results was a net
tax benefit of $100,000 for the Company's quarter ended September 30, 2005.

For the six months  ended  September  30,  2005,  sales rose 22% to  $14,042,910
versus  $11,497,003  for the same period last year.  The  Company  reported  net
earnings  of  $2,052,465,  or $1.23 per basic share  ($1.13 per  diluted  share)
compared to net  earnings  of  $1,777,615,  or $1.13 per basic share  ($1.01 per
diluted  share) last year.  Included  in the  results  for the six months  ended
September 30, 2005 was a net tax benefit of $187,428.

"We  continue to grow our top and bottom  lines by gaining  market share for our
core smoke and carbon  monoxide  alarm  products  while  improving  our domestic
operational  results.  Overall,  we continue  to execute  our  strategy to build
market share in a  quality-focused  manner and I believe we are  well-positioned
heading into the second half of our fiscal year," said Harvey Grossblatt,  chief
executive officer of Universal.

Universal's Hong Kong  manufacturing  joint venture will begin production in its
new state-of-the-art  250,000-square-foot  manufacturing  facility in the Fujian
province of Southern China this month in response to anticipated growth.

"Our Hong Kong operation  continued to perform well,  though their  contribution
for the  period  was  reduced  by  capacity  and  labor  constraints  and we are
confident  their  added  manufacturing  space will help drive  future  sales and
earnings," Grossblatt said.

UNIVERSAL SECURITY INSTRUMENTS,  INC. is a U.S.-based  manufacturer (through its
Hong Kong Joint Venture) and distributor of safety and security devices. Founded
in 1969,  the  Company  has a 36-year  heritage  of  developing  innovative  and
easy-to-install products,  including smoke, fire and carbon monoxide alarms. For
more  information  on  Universal  Security  Instruments,  visit our  website  at
www.universalsecurity.com.

                                    * more *

            7-A GWYNNS MILL COURT o OWINGS MILLS, MARYLAND 21117, USA
                   (410) 363-3000 o www.universalsecurity.com

<PAGE>

Universal/Page 2

                      UNIVERSAL SECURITY INSTRUMENTS, INC.
                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                                            (UNAUDITED)
                                                                                        Three Months Ended
                                                                                           September 30,
                                                                                   ---------------------------
                                                                                        2005           2004
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>
Sales                                                                              $  7,119,100   $  6,622,221
Net income*                                                                           1,162,695      1,043,836
Income per share
  Basic                                                                                    0.69           0.66
  Diluted                                                                                  0.64           0.59
Weighted average number of common shares outstanding
  Basic                                                                               1,673,498      1,580,149
  Diluted                                                                             1,824,937      1,757,998

                                                                                            (UNAUDITED)
                                                                                         Six Months Ended
                                                                                           September 30,
                                                                                   ---------------------------
                                                                                       2005           2004
                                                                                   ------------   ------------
Sales                                                                              $ 14,042,910   $ 11,497,003
Net income*                                                                           2,052,465      1,777,615
Income per share
  Basic                                                                            $       1.23   $       1.13
  Diluted                                                                          $       1.13   $       1.01
Weighted average number of common shares outstanding
  Basic                                                                               1,663,318      1,572,558
  Diluted                                                                             1,817,759      1,761,141
</TABLE>


Net tax benefit of $100,000  was recorded for the quarter  ended  September  30,
2005 and  $187,428 for the six months ended  September  30, 2005,  respectively.
This tax benefit is due to a reduction  in the  valuation  allowance  previously
established  associated  with our  deferred  tax assets.  Due to the tax benefit
carryforward of prior years' operating losses, no tax liability was incurred for
the quarter and six months ended September 30, 2005.

                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                         ASSETS                                           September 30,
                                                                                   ---------------------------
                                                                                       2005           2004
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>
Cash                                                                               $    131,833   $     80,602
Accounts receivable and amount due from factor                                        5,996,411      4,595,203
Inventory                                                                             3,963,827      2,928,642
Prepaid expenses                                                                        286,798        313,528
                                                                                   ------------   ------------
TOTAL CURRENT ASSETS                                                                 10,378,869      7,917,975

INVESTMENT IN HONG KONG JOINT VENTURE                                                 6,869,364      5,544,627

PROPERTY AND EQUIPMENT - NET                                                             71,882         82,969
OTHER ASSETS AND DEFERRED TAX ASSET                                                     567,266         72,385
                                                                                   ------------   ------------
TOTAL ASSETS                                                                       $ 17,887,381   $ 13,617,956
                                                                                   ============   ============

                          LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued expenses                                              $  1,819,248   $  1,860,574
Accrued liabilities                                                                   1,071,683        722,903
Current obligations under capital lease                                                      --          2,750
                                                                                   ------------   ------------
TOTAL CURRENT LIABILITIES                                                             2,890,931      2,586,227
                                                                                   ------------   ------------
LONG TERM DEBT
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and
  outstanding  1,673,498 and 1,580,729  shares at September 30, 2005 and
  September 30, 2004, respectively                                                       16,735         15,809
Additional paid-in capital                                                           11,515,556     11,244,465
Retained earnings (accumulated deficit)                                               3,464,159       (228,545)
                                                                                   ------------   ------------
TOTAL SHAREHOLDERS' EQUITY                                                           14,996,450     11,031,729
                                                                                   ------------   ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                         $ 17,887,381   $ 13,617,956
                                                                                   ============   ============
</TABLE>

All shares have been  adjusted to reflect  the  4-for-3  stock split  payable on
April 5, 2004.

Statements  contained in this press  release that are not  historical  facts are
forward-looking  statements  as that term is defined in the  Private  Securities
Litigation Reform Act of 1995.  Although  UNIVERSAL SECURITY  INSTRUMENTS,  INC.
believes that the expectations reflected in such forward-looking  statements are
reasonable;   the   forward-looking   statements   are   subject  to  risks  and
uncertainties  that could cause actual results to differ  materially  from those
projections.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
