ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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, including the Risk Factors discussed elsewhere in this Annual Report and other risks, could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. 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.

General

We are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50% owned Hong Kong Joint Venture. Our financial statements detail our sales and other operational results, and report the financial results of the Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2012 and 2011 relate to the operational results of the Company and its consolidated subsidiaries only and includes the Company's equity share of earnings in the Hong Kong Joint Venture. A discussion and analysis of the Hong Kong Joint Venture's operational results for these periods is presented below under the heading "Hong Kong Joint Venture."

While we believe that our overall sales are likely affected by the current global economic situation, we believe that we are specifically negatively impacted by the severe downturn in the U.S. housing market. As stated elsewhere in this report, our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies). Every downturn in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary. We anticipate that when and as the housing market recovers, sales by our USI Electric subsidiary will improve, as well.

Our operating results for the current fiscal year ended March 31, 2012 continue to be significantly impacted by the continued economic downturn of the U.S. housing market. In addition, sales of our new generation of smoke and carbon monoxide alarms were delayed while the Company pursued obtaining the necessary independent testing agency approvals necessary to begin Canadian and U.S. sales and marketing. By the beginning of the fourth quarter of the fiscal year ended March 31, 2012, the Company had obtained the necessary independent testing agency approvals and had commenced sales in both the Canadian and U.S. markets. The Company has commenced efforts to introduce our new technology to the market and we anticipate increased quarterly sales as a result of these efforts and the availability of our next generation of products to the market.

Comparison of Results of Operations for the Years Ended March 31, 2012 and 2011

Sales. In fiscal year 2012, our net sales are $13,304,602 compared to sales in the prior year of $13,249,604, an increase of $54,998, or less than one percent.

Gross Profit. Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin for the fiscal year ended March 31, 2012 was 26.4% compared to 28.4% in fiscal 2011. The decrease in 2012 gross margin is attributed to increased cost of product sold resulting from costs incurred to meet delivery commitments to a retail customer in the Canadian market.

Selling, General and Administrative Expense. Selling, general and administrative expenses increased from $4,375,241 in fiscal 2011 to $4,389,818 in fiscal 2012. As a percentage of net sales, these expenses were 33.0% for the fiscal year ended March 31, 2012 and March 31, 2011.

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Research and Development. Research and development expense for the fiscal year ended March 31, 2012 was $570,952, of which approximately $400,000 was for new product development. Research and development expense for the fiscal year ended March 31, 2011 was $615,639, of which approximately $400,000 was for new product development. The decrease in overall research and development expense for the 2012 period compared to the 2011 period was due to certain projects reaching a stage of completion during the year.

Investment and Interest Income. Investment and interest income for the fiscal year ended March 31, 2012 consisted of interest earned on cash deposits with our factor. During the fiscal years ended March 31, 2012 and 2011, we earned interest of $56,183 and $32,262, respectively from these deposits. The increase in the amount of interest earned from our factor on these deposits during the 2012 period relates to the transfer of excess cash to cash deposits with our factor from investments. Total investment and interest income declined for the year due to substantially reduced balances maintained in assets held for investment as funds were withdrawn and used to build inventory.

Investment and interest income for the fiscal year ended March 31, 2011 was $213,086. Investment and interest income is primarily earned on investments. These assets represent the investment of idle cash resources to obtain higher yields of return. Amounts were first invested in late March of the fiscal year ended March 31, 2010 and accordingly amounts earned in the fiscal year ended 2011 represent the first full year of activity on these investments.

Interest Expense. During the fiscal years ended March 31, 2012 and 2011, we incurred interest expense of $0 and $4,166, respectively. Interest expense for fiscal 2012 decreased to $0 from $4,166 in fiscal 2011. The decrease is due to a reduction in borrowing activity with our factor in fiscal 2012.

Income Taxes. For the fiscal years ended March 31, 2012 and 2011, our Federal rate of tax based on statutory rates of approximately 34.0%. The rate of tax indicated by the provision for income tax expense as shown on the Consolidated Statements of Operations for the March 31, 2012 and 2011 varies from the expected statutory rate. Footnote G to the financial statements provides a reconciliation between the amount of tax that would be expected at statutory rates and the amount of tax expense or benefit provided at the effective rate of tax for each fiscal period.

For the fiscal year ended March 31, 2012, we generated net operating loss carryovers and tax credits to offset future federal and state income taxes of $765,456 and $21,077, respectively. At March 31, 2012, we had net operating loss carryovers and tax credit carryovers of $1,578,107 and $1,605,664, respectively.

For the fiscal year ended March 31, 2011, we generated net operating loss carryovers to offset a federal and state income tax provision of approximately $261,530. Furthermore, we generated additional tax credits of $130,497 for the fiscal year ended March 31, 2011. We elected to carry our remaining net operating loss of approximately $812,651 forward to offset future taxable income. At March 31, 2011, we had tax credits of approximately $1,571,072 available to offset future taxes.

Net Loss and Income. We reported a net loss of $503,288 for the fiscal year 2012, compared to net income of $817,781 for fiscal 2011, a $1,321,069 (161.5%) decrease. The decrease in net income is primarily attributed to significantly lower earnings of the Hong Kong Joint Venture principally due to lower sales to non-affiliated customers, higher selling costs incurred to meet delivery commitments to U.S. customers and a decrease in investment and interest income due to a decrease in cash invested in short-term instruments. Our equity in the earnings of the Hong Kong Joint Venture declined from $1,691,133 in fiscal 2011 to $500,502 in fiscal 2012, a $1,190,631 (70.4%) decrease.

Financial Condition, Liquidity and Capital Resources

Our cash needs are currently met by funds generated from operations and from our Factoring Agreement with CIT Group, which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The maximum we may borrow under this Agreement is $1,000,000. Based on specified percentages of our accounts receivable and inventory and letter of credit commitments, at March 31, 2012, our maximum borrowing availability under this Agreement was $1,000,000. Any outstanding principal balance under this Agreement is payable upon demand. The interest rate on the Factoring Agreement, on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by the factor which, as of March 31, 2012, was 3.25%. All borrowings are collateralized by all our accounts receivable and inventory. During the year ended March 31, 2012, working capital (computed as the excess of current assets over current liabilities) decreased by $1,047,596, from $11,540,103 on March 31, 2011, to $10,492,507 on March 31, 2012.

Our operating activities used cash of $3,823,293 for the year ended March 31, 2012 principally as a result of increasing inventories by $1,864,529, the earnings of our Hong Kong Joint Venture of $500,502, as previously discussed, lower earnings from domestic operations due to lower gross profit margins, an increase in accounts receivable and amounts due from factor of $384,947 and a decrease in trade accounts payable and accrued expenses of $164,728.

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Our operating activities used cash of $67,168 for the year ended March 31, 2011 principally as a result of lower income due to the impact of declining sales, offset by a decline in accounts receivable and amounts due from factor that provided cash of $2,157,589, which was partially offset by a use of cash associated with lower Joint Venture earnings of $1,691,133. Other items using cash include an increase in deferred tax assets of $125,405, an increase in inventories of $94,105, an increase in prepaid expenses of $168,165, a decrease in accounts payable and accrued expenses of $1,004,757 and an increase in other assets of $19,998.

Our investing activities provided cash during the fiscal year ended March 31, 2012 of $556,870, principally from cash distributions received from the Hong Kong Joint Venture.

Our investing activities provided cash of $4,542,130 during fiscal 2011 principally as a result of the sale of our investment in short-term investments of $4,001,890 and by cash distributions of the Hong Kong Joint Venture of $694,976. In addition, the Company acquired equipment of $65,302 and incurred costs of $89,434 associated with filing patents during the year.

Financing activities used cash of $275,896 during the fiscal year ended March 31, 2012, resulting from the repurchase of the Company's common stock in accordance with the Company's stock repurchase plan.

No cash was provided or used by financing activities in 2011.

While sales by the Company and by our USI Electric subsidiary have been negatively impacted by the severe downturn in the U.S. housing market, we believe that our capital resources are sufficient for our operations. We anticipate that when and as the housing market recovers, sales by the Company and by our USI Electric subsidiary will improve, as well, thereby increasing our capital resources.

Hong Kong Joint Venture

The financial statements of the Hong Kong Joint Venture are included in this Form 10-K beginning on page JV-1. The reader should refer to these financial statements for additional information. There are no material Hong Kong to US GAAP differences in the Hong Kong Joint Venture's accounting policies.

In fiscal year 2012, sales of the Hong Kong Joint Venture were $22,160,107, compared to $24,231,557 in fiscal 2011. The decrease in sales for fiscal 2012 is primarily due to the decrease in sales to unaffiliated customers.

Net income was $1,259,210 for fiscal year 2012 compared to net income of $3,339,499 for the fiscal year ended March 31, 2011. The decrease in net income for fiscal 2012 was primarily due to decreased sales to unaffiliated customers while fixed costs did not change in the same proportion as the decline in sales.

Gross margins of the Hong Kong Joint Venture for fiscal 2012 decreased to 22.6% from 26.6% in the prior fiscal year. The primary reason for the decrease is lower selling prices to the Company for sales to the US. retail market.

Selling, general and administrative expenses of the Hong Kong Joint Venture for fiscal 2012 were $4,002,052, compared to $3,447,358 in the prior fiscal year. The increase in dollars as compared to the prior fiscal year results from a reversal of value-added tax recorded in the prior fiscal year. As a percentage of sales, these expenses were 18.1% and 14.2%, respectively, for the fiscal years ended March 31, 2012 and 2011. The increase as a percentage is due to costs that do not decrease at the same rate as sales.

Investment income and interest income, net of interest expense was $458,191 for fiscal year 2012, compared to $387,887 for fiscal year 2011. The increase in interest income net of interest expense was due to increased investment in assets held for investment.

Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations. During fiscal year 2011, working capital increased from $10,290,546 on March 31, 2011 to $10,432,351 on March 31, 2012.

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Critical Accounting Policies

Management's discussion and analysis of our consolidated financial statements and results of operations are based upon our Consolidated Financial Statement 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, impairment of long-lived assets, 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 that 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 of these and other accounting policies, see Note A to the consolidated financial statements included in this Annual Report. 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:

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

Revenue Recognition: Revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured. We establish allowances to cover anticipated doubtful accounts and sales returns based upon historical experience. The Company nets the factored accounts receivable with the corresponding advance from the Factor, with the net amount reflected in the consolidated balance sheet. The Company sells trade receivables on a pre-approved non-recourse basis to the Factor under the Factoring Agreement on an ongoing basis.

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

Recently Issued Accounting Pronouncements

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

The Company considers the applicability and impact of all ASU's. Recently issues ASU's were evaluated and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.