##### Table of Contents



FORM 10-KSB
  (Mark One)þ

Annual Report pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of
    1934For the fiscal year ended
    December 31, 2006ORo

Transition Report pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of
    1934     MDI, INC.
   Delaware

75-2626358(State or other jurisdiction

(I.R.S. EmployerOf incorporation or organization)

Identification No.)10226 San Pedro Avenue,
    Suite 200
    San Antonio, Texas

78216(Address of principal executive
    offices)

(Zip Code)   (210) 582-2664
  NONE
    COMMON
    STOCK, $.01 PAR VALUE
  þ o
  Regulation S-K 10-KSB Form 10-KSB. þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



MDI,
    INC.FORM 10-KSBTable of Contents
  
  Item



Page NumberPART I1.

Description of
    Business


32.

Description of
    Property


63.

Legal
    Proceedings


64.

Submission of
    Matters to a Vote of Security Holders


6PART II5

Market for Common
    Equity, related Stockholder Matters and Small Business Issuer
    Purchases of Equity Securities


76.

Managements
    Discussion and Analysis or Plan of Operation


87.

Financial
    Statements


138.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


138A.

Controls and
    Procedures


138B.

Other
    Information


14PART III9

Directors and
    Executive Officers of the Registrant


1410.

Executive
    Compensation


1411.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


1412.

Certain
    Relationships and Related Transactions


1413.

Exhibits


1414.

Principal
    Accountant Fees and Services


15Signatures


16Report of Independent registered
    Public Accounting Firm


18Audited Consolidated Financial
    Statements


19-22Notes to Consolidated Financial
    Statements


23-33Amendment to Certificate of IncorporationSubsidiariesCertification of CEO Required by Rule 13a-14(a)Certification of CFO Required by Rule 13a-14(a)Joint Certification of CEO & CFO Required by Rule 13a-14(b)    PRELIMINARY NOTE: Form 10-KSB Form 10-KSB
 2




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##### Table of Contents



PART I  Item 1.
    Description
    of Business.  Overview
    Product
    and Service Offerings
    1.
    Enterprise-Grade
    Business    ®
    ® tm
  ®
  ® tm tm .
    state-of-the-art tm
  2.
    Global
    Systems Solutions, Inc.   3




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##### Table of Contents



3.
    Standardized
    Product Sales  out-of-the-box
  Growth
    Strategy
    ®
        Competition
  Enterprise-Grade Business Offerings
     4




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##### Table of Contents



tm tm tm
  Global Systems Solutions Business Offerings
        Employees
    Business
    Background
  Corporate Information
  www.mdisecure.com
  Company History
  ® out-of-the-box
 5




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##### Table of Contents



Item 2.
    Description
    of Property.  state-of-the-art
    sub-tenant
  Item 3.
    Legal
    Proceedings.      Item 4.
    Submission
    of Matters to a Vote of Securities Holders.   6




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##### Table of Contents



PART II

(Dollars in Thousands, except
    per Share Data)  Item 5.
    Market
    for Common Equity, and Related Stockholder matters.  Market
    Prices
    Fiscal Year ended
    December 31, 2006:

High


LowQuarter ended December 31,
    2006

$
0.55


$
0.35Quarter ended September 30,
    2006


0.72



0.43Quarter ended June 30, 2006


1.34



0.71Quarter ended March 31, 2006


1.61



0.87   Fiscal Year ended
    December 31, 2005:

High


LowQuarter ended December 31,
    2005

$
1.14


$
0.61Quarter ended September 30,
    2005


2.62



0.41Quarter ended June 30, 2005


0.61



0.37Quarter ended March 31, 2005


0.93



0.59   Stockholders
    Dividends
    Recent
    Sale of Unregistered Securities
   7




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##### Table of Contents



Equity
    Compensation Plans
    Number of securitiesNumber of securities to

Weighted-average

remaining available forbe issued upon exercise of

exercise price of

future issuance underoutstanding options and

outstanding options and

equity compensationPlan Category

warrants

warrants

plansEquity compensation plans approved
    by security holders

4,581, 973

$0.99

4,714,872Equity compensation plans not
    approved by security holders

-0-



-0-Total

4,581,973

$0.99

4,714,872   Item 6.
    Managements
    Discussion and Analysis or Plan of Operation.  General
  Use of
    Estimates and Critical Accounting Policies
    Allowance
    for Doubtful Accounts
    Impairment
    of Long-Lived Assets
    Goodwill
   8




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##### Table of Contents



Deferred
    Income Taxes
    Revenue
    Recognition
  30-day
  Stock-Based
    Compensation
    Results
    from Continuing Operations - Year ended December 31,
    2006 compared to year ended December 31, 2005
 (Dollars in Thousands, except per
    Share Data)
  Backlog
      Net
    Sales
    Costs of
    Sales
   9




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##### Table of Contents



Selling,
    General and Administrative Expenses
    Liquidity
    and Capital Resources
    $1.02/share. $3.14/share.
  Trends,
    Risks and Uncertainties
    Our limited operating history makes it difficult for us to
    evaluate our future business prospects and make decisions based
    on those estimates of our future performance .
    The Company may not be profitable in the future.
   10




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##### Table of Contents



A significant portion of our GSS business segment is
    dependent upon a relationship with one customer.
    We may engage in acquisitions, which will consume resources
    and may be unsuccessful or unprofitable.
    We expect that we will need to raise additional funds, and
    these funds may not be available when we need them .
    We must effectively manage the expected growth of our
    operations, or our Company will suffer .
    We face competition from numerous sources and competition may
    increase, leading to a decline in revenues.
   11




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##### Table of Contents



We are heavily dependent on our senior management, and a loss
    of a member of our senior management team could cause our
    business to suffer .
    Our inability to hire, train and retain qualified employees
    could cause our financial condition to suffer.
    We may be unable to pay our debts when due, which could
    materially impact our profitability and our stock price .
    RISKS
    RELATED TO OUR COMMON STOCK
    Sales of large quantities of our Common Stock could reduce
    the price of our common stock.
  $1.02/share; $3.14/share;
 12




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##### Table of Contents



Our common stock could be delisted from the NASDAQ Stock
    Market (NASDAQ) if we do not comply with the NASDAQ
    continued listing standards .
       Item 7.
    Financial
    Statements.     Item 8.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure.  None
   Item 8A.
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rule 13a-15(e) 15d-15(e)
     13




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##### Table of Contents



and/or
 Item 8B.  Other
    information   PART III  Item 9.
    Directors
    and Executive Officers of the Registrant.    Item 10.
    Executive
    Compensation.    Item 11.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    Item 12.
    Certain
    Relationships and Related Transactions.    Item 13.
    Exhibits.  INDEX TO
    EXHIBITS
  ExhibitNo.

Description3.1

Certificate of Incorporation of
    the Company, as amended to December 20, 2002 (filed as
    Exhibit 3.4 to the Companys
    Form 10-K
    for the year ended December 31, 2002)3.2

Amendment to Certificate of
    Incorporation of the Company dated September 22, 2004
    (filed as Exhibit 3.2 to the Companys
    Form 10-K
    for the year ended December 31, 2005)3.3

Amendment to Certificate of
    Incorporation of the Company dated June 22, 2006 (*)3.4

By-Laws of the Company, as amended
    to April 22, 2004 (filed as Exhibit 3.4 to the
    Companys
    Form 10-K
    for the year ended December 31, 2005)4.1

Form of certificate representing
    shares of the Common Stock (filed as Exhibit 4.1 to the
    Companys Registration Statement on
    Form S-2,
    (Registration
    No. 333-02891)4.2

Form of Warrant to Purchase Common
    Stock (incorporated by reference to our Current Report on
    Form 8-K
    filed on May 24, 2006)4.3

Registration Rights Agreement,
    dated as of May 23, 2006, by and among MDI, Inc. and
    certain parties listed therein (incorporated by reference to our
    Current Report on
    Form 8-K
    filed on May 24, 2006) 14




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##### Table of Contents



ExhibitNo.

Description10.1

Letter Agreement regarding
    purchase of certain assets (incorporated by reference to our
    Current Report on
    Form 8-K
    filed on December 9, 2005)10.2

Form of Securities Purchase
    Agreement (incorporated by reference to our Current Report on
    Form 8-K
    filed on May 24, 2006)14.1

Code of Ethics (filed as
    Exhibit 14.1 to the Companys
    Form 10-K
    for the year ended December 31, 2003)21.1

Subsidiaries of MDI, Inc. (*)31.1

Certification of Chief Executive
    Officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended (the
    Exchange Act). (*)31.2

Certification of Chief Financial
    Officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Exchange Act. (*)32.1

Joint Certification of Chief
    Executive Officer and Chief Financial Officer required by
    Rule 13a-14(b)
    or
    Rule 15d-14(b)
    of the Exchange Act and Section 1350 of Chapter 63 of
    Title 18 of the United States Code. (*)99.1

Audit Committee Charter revised by
    the Audit Committee as of April 9, 2005. (filed as
    Exhibit 99.1 to the Companys
    Form 10-K
    for the year ended December 31, 2005)99.2

Nominating Committee Charter
    adopted by the Board on March 8, 2004. (filed as
    Exhibit 99.2 to the Companys
    Form 10-K
    for the year ended December 31, 2005)    Form 10-K.
  Item 14.
    Principal
    Accountant Fees and Services.   15




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##### Table of Contents



SIGNATURES    MDI, INC.Dated: March 30, 2007

By:

/s/  J.
    Collier
    SparksJ.
    Collier Sparks Chief Executive Officer     /s/  James
    PowerJames
    Power

Chairman of the Board

Dated: March 30, 2007/s/  J.
    Collier SparksJ.
    Collier Sparks

Chief Executive Officer(Principal
    Executive Officer)

Dated: March 30, 2007/s/  Carlo
    LoiCarlo
    Loi

Vice Chairman of the Board

Dated: March 30, 2007/s/  Robert
    McCannRobert
    McCann

Director

Dated: March 30, 2007/s/  Peter
    KnepperPeter
    Knepper

Director

Dated: March 30, 2007/s/  James
    VandevereJames
    Vandevere

Director

Dated: March 30, 2007  16




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##### Table of Contents



MDI, INC.
    INDEX
  PAGEREPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

18CONSOLIDATED
    BALANCE SHEETS

19CONSOLIDATED
    STATEMENTS OF OPERATIONS

20CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY

21CONSOLIDATED
    STATEMENTS OF CASH FLOWS

22NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS

23-33  17




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm           PMB Helin
    Donovan, LLP
  
    18




---



##### Table of Contents



MDI, INC.
    AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
    (in thousands, except share and per share data)
  December 31,2006


2005ASSETSCurrent Assets:Cash and cash equivalents

$
452


$
2,140Trade accounts receivable, net


1,308



1,912Inventories


736



1,008Prepaid expenses and other current
    assets


74



191Total current assets


2,570



5,251Property and Equipment,
    net


225



661Other Assets:Goodwill


4,612



2,792Other intangible assets


28



35Other assets


363



520Total assets

$
7,798


$
9,259LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable

$
1,473


$
876Accrued expenses


263



256Deferred legal settlement


388



388Accrued compensation


382



401Bank factoring advance


312



Other current liabilities


9



70Deferred revenue


210



236Total current liabilities


3,037



2,227Long-Term Liabilities






Total Liabilities


3,037



2,227Commitments and
    Contingencies






Stockholders
    Equity:Preferred stock, $5 par
    value, issuable in series; 2,000,000 shares authorized;
    Series A, LIBOR+2% cumulative convertible;
    195,351 shares authorized and issued


977



977Common stock, $0.01 par
    value; 100,000,000 and 50,000,000 shares authorized;
    22,657,610 and 21,230,637 shares issued at
    December 31, 2006 and December 31, 2005, respectively


227



212Additional
    paid-in-capital


132,957



166,926Accumulated deficit


(129,400
)


(122,382
)Treasury stock, at cost (0 and
    3,488,350 common shares at December 31, 2006 and 2005,
    respectively)






(38,701
)Total stockholders equity


4,761



7,032Total liabilities and
    stockholders equity

$
7,798


$
9,259    19




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##### Table of Contents



MDI, INC.
    and SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
    (in thousands, except share and per share data)
  Years ended December 31,2006


2005Net sales

$
8,720


$
8,797Cost of sales (exclusive of
    depreciation shown separately below)


4,419



4,627Gross profit


4,301



4,170Other operating costs:Selling, general and administrative


10,751



9,495Depreciation and amortization


534



83211,285



10,327Operating loss


(6,984
)


(6,157
)Other income (expense):Interest income


22



3Loss on disposal of fixed assets


(11
)


(2
)Other, net


1



62912



630Loss before income taxes and
    discontinued operations


(6,972
)


(5,527
)Income taxes






Loss from continuing operations


(6,972
)


(5,527
)Loss from discontinued operations


(12
)


(118
)Net loss


(6,984
)


(5,645
)Dividend requirements on preferred
    stock


(34
)


(34
)Net loss allocable to common
    stockholders

$
(7,018
)

$
(5,679
)Basic and diluted earnings (loss)
    per share from:Continuing operations

$
(0.33
)

$
(0.31
)Discontinued operations


(0.00
)


(0.01
)Basic and diluted loss per share

$
(0.33
)

$
(0.32
)Basic and diluted weighted
    average- shares outstanding:


21,472,634



17,685,787    20




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##### Table of Contents



MDI, INC.
    and SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS
    EQUITY
    (in thousands, except share data)
  AdditionalPreferred stock


Common stock


Paid-in


Accumulated


Treasury stockShares


Amount


Shares


Amount


Capital


Deficit


Shares


Amount


TotalBalance, December 31,
    2004


195,351


$
977



18,162,453


$
181


$
163,146


$
(116,703
)


3,488,350


$
(38,701
)

$
8,900Net loss






















(5,645
)










(5,645
)Sale of common stock










2,900,000



29



3,715















3,744Exercise of stock options and
    warrants










168,184



2



65















67Preferred stock dividends






















(34
)










(34
)Balance, December 31,
    2005


195,351


$
977



21,230,637


$
212


$
166,926


$
(122,382
)


3,488,350


$
(38,701
)

$
7,032Net loss






















(6,984
)










(6,984
)Business Acquisition










2,000,000



20



1,800















1,820Sale of common stock










2,875,000



29



2,115















2,144Non cash stock compensation


















732















732Exercise of stock options and
    warrants










40,323



1



50















51Preferred stock dividends






















(34
)










(34
)Retirement of treasury stock










(3,488,350
)


(35
)


(38,666
)






(3,488,350
)


38,701



Balance, December 31,
    2006


195,351


$
977



22,657,610


$
227


$
132,957


$
(129,400
)





$



$
4,761   The accompanying notes are an
    integral part of the consolidated financial statements.
 21




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##### Table of Contents



MDI, INC.
    AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
    (in thousands)
  Years ended December 31,2006


2005Operating Activities:Net loss

$
(6,984
)

$
(5,645
)Adjustments to reconcile net loss
    to net cash used in operating activities:Loss on disposal of fixed assets


11



2Non cash stock compensation


732



Depreciation and amortization


534



833Provision for losses on accounts
    receivable


221



(54
)Changes in operating assets and
    liabilities, net of dispositions:Trade accounts receivable


383



1,392Inventories


272



(267
)Prepaid and other current assets


275



(34
)Trade accounts payable


597



(143
)Accrued and other current
    liabilities


(99
)


(934
)Net cash used in operating
    activities


(4,058
)


(4,850
)Investing Activities:Purchases of property and equipment


(102
)


(154
)Net cash used in investing
    activities


(102
)


(154
)Financing Activities:Issuance of common stock


2,194



3,810Net proceeds from factoring payable


312



Payment of preferred stock
    dividends


(34
)


(34
)Net cash provided by financing
    activities


2,472



3,776Net decrease in cash and cash
    equivalents


(1,688
)


(1,228
)Cash and cash equivalents,
    beginning of period


2,140



3,368Cash and cash equivalents, end of
    period

$
452


$
2,140Non cash Investing:Purchase of assets from Ecomatrix
    Funding, allocated to goodwill for 2,000,000 shares of
    common stock

$
1,820


$
Supplemental cash flow
    information:Cash paid during the year for:Interest

$



$
Income taxes

$



$
    22




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##### Table of Contents



MDI,
    Inc.
 Notes to
    Consolidated Financial Statements  Note 1:
    Nature of
    Operations and Summary of Significant Accounting
    Policies  Business
    Description
    Basis of
    Presentation and Principles of Consolidation
    Liquidity
      Use of
    Estimates
    Fair
    Value of Financial Instruments
    Cash and
    Cash Equivalents
   23




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##### Table of Contents



Trade
    Accounts Receivable
    Inventories
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
    Goodwill
  Goodwill and Intangible
    Assets.
  Deferred
    Income Taxes
    Revenue
    Recognition
   24




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##### Table of Contents



Warranty
    Reserves
    Advertising
    Stock-Based
    Compensation
  Form 10-KSB
    (thousands)Loss from continuing operations
    allocable to common stockholders:As reported

$
(5,679
)Deduct: Total stock-based
    compensation under fair value based method for all awards


(1,390
)Pro forma

$
(7,069
)Basic and diluted loss per
    share from continuing operations allocable to common
    stockholders:As reported

$
(0.31
)Pro forma

$
(0.40
)   Earnings
    (Loss) Per Share
     25




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##### Table of Contents



Recent
    Accounting Pronouncements
            Note 2:
    Business
    Acquisition    Note 3:
    Discontinued
    Operations   26




---



##### Table of Contents



Note 4:
    Trade
    Accounts Receivable    Year ended December 31,2006


2005Gross trade accounts receivable

$
1,727


$
2,131Less: allowance for doubtful
    accounts


(419
)


(219
)$
1,308


$
1,912   Note 5:
    Inventory    Year ended December 31,2006


2005Inventory

$
844


$
1,121Less: inventory allowance


(108
)


(113
)$
736


$
1,008   Note 6:
    Property
    and Equipment    December 31,Useful Lives

2006


2005Machinery and equipment

3-7 years

$
572


$
532Furniture and fixtures

3-7 years


279



279Software

3-8 years


3,676



3,676Leasehold improvements

20-30 years


159



1704,686



4,657Accumulated depreciation




(4,461
)


(3,996
)$
225


$
661     Note 7:
    Income
    Taxes   27




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##### Table of Contents



Year Ended December 31,2006


2005U.S. Federal statutory rate


(34.0
)%


(34.0
)%State tax effect


(3.0
)


(3.0
)Other non-deductible expenses


3.8



0.3Net change in valuation allowance


32.4



33.2Other, net


0.8



3.50.0
%


0.0
%     December 31,2006


2005Deferred tax assets:Property and equipment


156



Inventories


46



53Accounts receivable


103



81Accrued expenses


140



134Net operating loss carry forwards


26,097



23,986Other, net


44



36Gross deferred tax assets


26,586



24,290Deferred tax liabilities:Property and equipment






(68
)Goodwill amortization and
    impairment


(749
)


(651
)Gross deferred tax liabilities


(749
)


(719
)Valuation allowance


(25,837
)


(23,571
)Net deferred tax asset

$



$
     (2007-2025)
 28




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##### Table of Contents



Note 8:
    Goodwill    TotalNet carrying value at
    December 31, 2004

$
2,792No adjustment during 2005


Net carrying value at
    December 31, 2005

$
2,792Asset purchase (Note 2)


1,820Net carrying value at
    December 31, 2006

$
4,612         Note 9:
    Other
    Intangible Assets    Weighted


December 31, 2006Average


Gross





NetAmortization


Carrying


Accumulated


Carrying(Years)


Value


Amortization


ValueIntangible assets subject to
    amortization Patents and trademarks


17.1


$
98


$
(70
)

$
28$
98


$
(70
)

$
28December 31,
    2005Intangible assets subject to
    amortization Patents and trademarks


17.1


$
98


$
(63
)

$
35$
98


$
(63
)

$
35       Years ending December 31,

Amortization Exp.2007


72008


72009


72010


7Total

$
28  29




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##### Table of Contents



Note 10:
    Financing
    Arrangements  Factoring
    Arrangement
    Note 11:
    Commitments
    and Contingencies  Operating
    Leases
    Years Ending
    December 31,2007


2402008


2552009


240Total

$
735     Years Ending
    December 31,2006

$
5372005

$
543   Litigation
      Note 12:
    Stockholders
    Equity  Preferred
    Stock
   30




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##### Table of Contents



Common
    Stock
        Treasury
    Stock
    Note 13:
    Stock-Based
    Compensation  2002
    Stock Incentive Plan
       31




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##### Table of Contents



Stock
    Option Grants
      Expected life in years


5.5Expected volatility


83
%Risk-free interest rate


4.8
%Weighted average per share grant
    date fair value

$
0.52     2006


2005Weighted





WeightedAverage





AverageExercise





ExerciseShares


Price


Shares


PriceOutstanding at beginning of year


3,238,093


$
1.05



2,071,373


$
1.30Granted


1,514,323



0.86



1,613,000



0.80Exercised


(40,323
)


1.24



(168,184
)


1.28Forfeited


(130,120
)


1.17



(278,096
)


1.26Outstanding at end of year


4,581,973


$
0.99



3,238,093


$
1.05Options exercisable at end of year


4,171,973


$
1.01



3,238,093


$
1.05     Options Outstanding


Options ExercisableWeighted


Weighted





WeightedAverage


Average





AverageNumber


Remaining


Exercise


Number


ExerciseRange of Exercise
    Prices

Outstanding


Contractual Life


Price


Exercisable


Price$0.45 to $0.89


1,935,800



8.6 years


$
0.71



1,648,300


$
0.71$0.90 to $1.50


2,555,833



7.7 years



1.16



2,433,333



1.17$1.51 to $1.60


85,000



6.2 years



1.58



85,000



1.58$1.61 to $9.25


5,340



2.8 years



8.39



5,340



8.394,581,973



8.2 years


$
0.99



4,171,973


$
1.01     Note 14:
    Related
    Party Transactions   32




---



##### Table of Contents



Note 15:
    Quarterly
    Operating Results  First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter2006:Net sales

$
2,695


$
2,219


$
1,933


$
1,873Gross profit


1,445



1,054



1,001



801Net loss


(1,408
)


(1,923
)


(1,745
)


(1,942
)Net loss per share, basic

$
(0.07
)

$
(0.09
)

$
(0.08
)

$
(0.08
)Net loss per share, diluted

$
(0.07
)

$
(0.09
)

$
(0.08
)

$
(0.08
)   First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter2005:Net sales

$
1,948


$
1,754


$
2,346


$
2,749Gross profit


986



803



1,079



1,302Net loss


(1,754
)


(1,307
)


(1,588
)


(1,030
)Net loss per share, basic

$
(0.12
)

$
(0.09
)

$
(0.10
)

$
(0.06
)Net loss per share, diluted

$
(0.12
)

$
(0.09
)

$
(0.10
)

$
(0.06
)   Note 16:
    Subsequent
    Events     33