##### 



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      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, 2005ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number: 0-9463
      MDI, INC.
 (Exact name of registrant as
    specified in its charter)
      Delaware

75-2626358(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)9725 Datapoint Drive,
    Suite 200
    San Antonio, Texas(Address of principal
    executive offices)

78229(Zip Code)   Registrants telephone number, including area code:
 (210) 582-2664
  Securities registered pursuant to Section 12(b) of the
    Act:
 NONE
  Securities registered pursuant to Section 12(g) of the
    Act:
  COMMON STOCK, $.01 PAR VALUE
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2 o þ
  Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



MDI,
    INC.FORM 10-KSB
    TABLE OF CONTENTS
  Regulation S-K Form 10-K Form 10-K. o
  PART IITEM 1:

BUSINESS


2ITEM 2:

PROPERTIES


5ITEM 3:

LEGAL PROCEEDINGS


7ITEM 4:

SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


7PART IIITEM 5:

MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


8ITEM 6:

SELECTED FINANCIAL
    DATA


9ITEM 7:

MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


10ITEM 7A:

QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


15ITEM 8:

FINANCIAL
    STATEMENTS AND SUPPLEMENTAL DATA


17ITEM 9:

CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


40ITEM 9A:

CONTROLS AND
    PROCEDURES


40PART IIIITEM 10:

DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


40ITEM 11:

EXECUTIVE
    COMPENSATION


40ITEM 12:

SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


41ITEM 13:

CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


41ITEM 14:

PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


41PART IVITEM 15:

EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES AND REPORTS ON
    FORM 8-K


41SIGNATURES


42   Forward
    Looking Statements
  Form 10-K, Form 10-K
 1




---



##### 



PART I  ITEM 1.
    BUSINESS  General
      www.mdisecure.com Form 10-KSB, Form 10-Q(SB), Form 8-K,
  Form 10-KSB,
      Businesses
   2




---



##### 



Markets
    and Strategy
      ®
  Products
    and Services
  ®
     3




---



##### 



Product
    Design and Development
    Supplier
    Relationships
    Competition
      Employees
      Mace
    Asset Sale
    MDI
    Switzerland Management Buyout
   4




---



##### 



Honeywell
    Asset Sale
      ITEM 1A.
    RISK
    FACTORS  Factors
    Affecting the Companys Future Results or the Price of the
    Companys Stock.
    The
    Company may not be profitable in the future
    Should
    the Company need additional capital, the Company may have
    difficulty in raising the capital.
    The
    Companys technologies may not be commercially accepted in
    the future.
      
    rapid and sometimes disruptive technological developments;
    evolving industry standards;
    changes in customer requirements;
    limited ability to accurately forecast future customer
    orders; and
    frequent new product introductions and enhancements. 5




---



##### 



The
    Company may not be able to attract, hire and retain qualified
    personnel.
  and/or
  The
    Common Stock may be de-listed from NASDAQ if the stock price
    does not meet NASDAQs continued listing
    standards.
      Some
    of the Companys products are not as profitable as
    others.
    Third
    parties may claim that the Company infringes their intellectual
    property rights.
    
    be time consuming to defend;
    result in costly litigation;
    divert managements time and attention;
    require the Company to enter into royalty and licensing
    agreements that the Company would not normally find acceptable;
    require the Company to stop selling or to redesign
    products; and
    require the Company to pay damages. 6




---



##### 



ITEM 2.
    PROPERTIES          ITEM 3.
    LEGAL
    PROCEEDINGS              ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   7




---



##### 



PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES        2005


2004High


Low


High


LowFourth Quarter

$
1.14


$
0.61


$
1.01


$
0.76Third Quarter


2.62



0.41



1.58



0.94Second Quarter


0.61



0.37



3.76



1.43First Quarter


0.93



0.59



1.75



1.11           EITF 00-19
 8




---



##### 



ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K
  Years
    Ended December 31
  2005


2004(2)


2003(2)


2002(2)


2001(2)(In thousands, except per share
    data)Income statement
    data:Net sales

$
8,797


$
14,245


$
16,248


$
19,558


$
18,001Cost of sales


4,627



7,953



9,728



13,410



12,883Gross profit


4,170



6,292



6,520



6,148



5,118Selling, general and
    administrative expenses


9,495



13,869



14,507



15,619



9,316Asset and goodwill impairment










650



3,338



4,466Depreciation and amortization(1)


832



990



1,821



1,854



4,374Total operating expenses


10,327



14,859



16,978



20,811



18,156Operating loss


(6,157
)


(8,567
)


(10,458
)


(14,663
)


(13,038
)Other income (expense)


630



(87
)


(148
)


(2,248
)


5,422Income (loss) from continuing
    operations before income taxes and accounting change


(5,527
)


(8,654
)


(10,606
)


(16,911
)


(7,616
)Income tax expense


















(104
)Loss from continuing operations


(5,527
)


(8,654
)


(10,606
)


(16,911
)


(7,720
)Loss from discontinued operations


(118
)


(361
)


(783
)


(301
)


6,259Gain (loss) on disposal of
    discontinued operations






1,204







(12,106
)


 9




---



##### 



2005


2004(2)


2003(2)


2002(2)


2001(2)(In thousands, except per share
    data)Net loss before accounting change


(5,645
)


(7,811
)


(11,389
)


(29,318
)


(1,461
)Cumulative effect of accounting
    change:Continuing operations(1)














(14,762
)


Discontinued operations(1)














(11,353
)


Net loss


(5,645
)


(7,811
)


(11,389
)


(55,433
)


(1,461
)Dividend requirements on preferred
    stock


(34
)


(34
)


(115
)


(117
)


(117
)Net loss allocable to common
    stockholders

$
(5,679
)

$
(7,844
)

$
(11,504
)

$
(55,550
)

$
(1,578
)Basic and Diluted loss per share:Continuing operations

$
(0.31
)

$
(0.60
)

$
(0.76
)

$
(2.26
)

$
(0.64
)Net loss per share

$
(0.32
)

$
(0.54
)

$
(0.81
)

$
(3.95
)

$
(0.13
)Number of common shares used in
    computations:


17,686



14,486



14,121



14,047



12,183Balance sheet data:Working capital

$
3,023


$
4,157


$
9,286


$
17,716


$
27,813Total assets


9,259



12,205



25,836



50,616



122,317Debt














6,600



21,612Stockholders equity


7,032



8,900



16,300



27,434



78,773     (1)
    
    On January 1, 2002, the Company adopted Statement of
    Financial Accounting Standards No. 142, Goodwill and
    Intangible Assets. No amortization for goodwill was recorded
    in 2005 or 2004. Goodwill was impaired $729 thousand in 2003
    relative to the Mace Asset Sale for the Companys Consumer
    Retail businesses and treated as part of discontinued operations.(2)
    
    There were significant restructuring activities in each year
    indicating this reference. Essentially all restructuring was
    completed during 2004. The following table summarizes the
    charges included in losses from continuing operations resulting
    from these activities (see Note 3: Restructuring Activity),
    (in thousands):  2004


2003


2002


2001General and Administrative

$
1,243


$
96


$
4,293


$
(47
)Asset impairment charges










2,973



Loss on disposal of fixed assets


502











$
1,745


$
96


$
7,266


$
(47
)   ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
    30-day
 10




---



##### 



Application
    of Critical Accounting Policies and Estimates
      Inventory
    Valuation
    Allowance
    for Doubtful Accounts
    Warranty
    Reserves
    Goodwill
   11




---



##### 



Long-lived
    Assets
    Deferred
    Income Taxes
    Fair
    Value of Financial Instruments
      Reclassifications
    Results
    of Operations
   12




---



##### 



PercentageIncrease (Decrease)Between PeriodsPercentage of Net
    Sales


2005


2004Years Ended
    December 31,


vs.


vs.2005


2004


2003


2004


2003Net Sales


100.0
%


100.0
%


100.0
%


−38.2
%


−12.3
%Cost of sales


52.6
%


55.8
%


59.9
%


−41.8
%


−18.3
%Gross profit


47.4
%


44.2
%


40.1
%


−33.7
%


−3.5
%Operating expenses:Selling, general and administrative


107.9
%


97.4
%


89.3
%


−31.5
%


−4.4
%Asset and goodwill impairment


0.0
%


0.0
%


4.0
%


0.0
%


100.0
%Depreciation and amortization


9.5
%


7.0
%


11.2
%


−16.0
%


−45.6
%Operating loss


−70.0
%


−60.1
%


−64.4
%


−28.1
%


−18.1
%Other income (expense)


7.2
%


−0.6
%


−0.9
%


824.1
%


−41.5
%Loss before taxes, discontinued
    operations and cumulative effect of accounting change


−62.8
%


−60.8
%


−65.3
%


−36.1
%


−18.4
%Income taxes


0.0
%


0.0
%


0.0
%


0.0
%


0.0
%Loss from continuing operations


−62.8
%


−60.8
%


−65.3
%


−36.1
%


−18.4
%Income (Loss) from discontinued
    operations


−1.3
%


5.9
%


−4.8
%


114.0
%


207.7
%Net loss


−64.2
%


−54.8
%


−70.1
%


−27.7
%


−31.4
%   Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
             13




---



##### 



Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
                      Financial
    condition, liquidity and capital resources
   14




---



##### 



Contractual
    obligations and commitments
    Total


2006


2007


2008


2009


2010Contractual obligations and
    commitments:Operating leases

$
2,112


$
519


$
536


$
544


$
513


$
Office Sublease


(9
)


(9
)Total contractual obligations

$
2,103


$
510


$
536


$
544


$
513


$
     ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   15




---



##### 



Foreign
    Exchange
      Interest
    Rates
     16




---



##### 



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  Report of
    Independent Certified Public Accountants
             Helin, Donovan, Trubee & Wilkinson,
    LLP
     Report of
    Independent Registered Public Accounting Firm
           Grant
    Thornton, LLP
    17




---



##### 



MDI, INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2005


2004(In thousands, except share and
    per share data)ASSETSCurrent Assets:Cash and cash equivalents

$
2,140


$
3 ,368Trade accounts receivable, net


1,912



3,249Inventories


1,008



742Prepaid expenses and other current
    assets


191



103Assets of discontinued operations






Total current assets


5,251



7,462Property and Equipment,
    net


661



1,336Other Assets:Goodwill


2,792



2,792Other intangible assets


35



42Other assets


520



573Total assets

$
9,259


$
12,205LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable

$
876


$
1,019Accrued expenses


256



521Deferred legal settlement


388



388Accrued compensation


401



971Accrued royalties






82Other current liabilities


70



106Deferred revenue


236



218Total current liabilities

$
2,227


$
3,305Long-Term Liabilities










Total liabilities

$
2,227


$
3,305Commitments 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, issued and outstanding


977



977Common stock, $.01 par value;
    50,000,000 shares authorized; 21,174,137 and
    18,105,953 shares issued at December 31, 2005 and
    December 31, 2004, respectively


212



181Additional
    paid-in-capital


166,926



163,146Accumulated deficit


(122,382
)


(116,703
)Accumulated other comprehensive
    income






Treasury stock, at cost (3,488,350
    common shares at December 31, 2005 and 2004)


(38,701
)


(38,701
)Total stockholders equity


7,032



8,900Total liabilities and
    stockholders equity

$
9,259


$
12,205    18




---



##### 



MDI, INC.
    and SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Twelve months ended
    December 31,2005


2004


2003(In thousands, except share and
    per share data)Net sales

$
8,797


$
14,245


$
16,248Cost of sales (exclusive of
    depreciation shown separately below)


4,627



7,953



9,728Gross profit


4,170



6,292



6,520Other operating costs:14,486,103



14,121,463Selling, general and administrative


9,495



13,869



14,507Asset and goodwill impairment










650Depreciation and amortization


832



990



1,82110,327



14,859



16,978Operating loss

$
(6,157
)

$
(8,567
)

$
(10,458
)Other income (expense):Interest expense






(1
)


(544
)Interest income


3



54



292Loss on sale of investments


(2
)


(502
)


(79
)Foreign exchange gains (losses)










(40
)Other, net


629



363



223630



(87
)


(148
)Loss before income taxes,
    discontinued operations and cumulative effect of accounting
    change

$
(5,527
)

$
(8,654
)

$
(10,606
)Income taxes










Loss from continuing operations

$
(5,527
)

$
(8,654
)

$
(10,606
)Income (loss) from discontinued
    operations


(118
)


(361
)


(783
)Gain (loss) on disposal of
    discontinued operations






1,204



Net loss

$
(5,645
)

$
(7,811
)

$
(11,389
)Dividend requirements on preferred
    stock


(34
)


(34
)


(115
)Net loss allocable to common
    stockholders

$
(5,679
)

$
(7,845
)

$
(11,504
)Basic and diluted earnings (loss)
    per share from:Continuing operations

$
(0.31
)

$
(0.60
)

$
(0.76
)Discontinued operations


(0.01
)


0.06



(0.06
)Basic and diluted loss per share

$
(0.32
)

$
(0.54
)

$
(0.81
)Number of common shares used in
    computations:


17,685,787



14,486,103



14,121,463     19




---



##### 



MDI, INC.
    and SUBSIDIARIES
  CONSOLIDATED
    STATEMENT OF STOCKHOLDERS EQUITY
  AccumulatedAdditional





otherPreferred Stock


Common Stock


paid-in


Accumulated


comprehensive


Treasury StockShares


Amount


Shares


Amount


capital


deficit


income (loss)


Shares


Amount


Total(In thousands, except share
    data)Balance, January 1,
    2003


195,351


$
977



17,494,238


$
175


$
162,269


$
(97,354
)

$
50



3,470,150


$
(38,683
)

$
27,434Net loss






















(11,389
)














(11,389
)Other comprehensive loss:Foreign currency translation
    adjustment


























74











74Unrealized loss on investments held
    for sale, net of tax


























(36
)










(36
)Total






































(11,351
)Repurchase of treasury stock






























18,200



(18
)


(18
)Exercise of stock options and
    warrants










150,715



1



145



















146Stock comp expense


















204



















204Preferred stock dividends






















(115
)














(115
)Balance,
    December 31, 2003


195,351


$
977



17,644,953


$
176


$
162,618


$
(108,858
)

$
88



3,488,350


$
(38,701
)

$
16,300Net loss






















(7,811
)














(7,811
)Other comprehensive loss:Foreign currency translation
    adjustment


























(124
)










(124
)Realized loss on investments held
    for sale, net of tax


























36











36Total






































(7,899
)Exercise of stock options and
    warrants










461,000



5



528



















533Preferred stock dividends






















(34
)














(34
)Balance,
    December 31, 2004


195,351


$
977



18,105,953


$
181


$
163,146


$
(116,703
)

$




3,488,350


$
(38,701
)

$
8,900Net loss






















(5,645
)














(5,645
)Other comprehensive loss:Foreign currency translation
    adjustmentRealized loss on investments held
    for sale, net of taxTotal






































(5,645
)Issuance 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



21,174,137


$
212


$
166,926


$
(122,382
)

$




3,488,350


$
(38,701
)

$
7,032    20




---



##### 



MDI, INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended
    December 31,2005


2004


2003(In thousands)Operating Activities:Net loss

$
(5,645
)

$
(7,811
)

$
(11,389
)Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:Loss on disposal of fixed assets


2



502



103Loss (gain) on sale of investments






55



79Loss (gain) on sale of business






(1,204
)


Stock based compensation










349Write down of non-compete deferred
    income






(408
)


(1,119
)Realized foreign currency
    translation losses






(86
)


66Depreciation and amortization


833



991



2,331Provision for losses on accounts
    receivable


(54
)


211



330Asset impairment










1,711Mark-to-market
    interest rate swap






52



188Changes in operating assets and
    liabilities, net of dispositions:Trade accounts receivable


1,392



(1,385
)


1,213Inventories


(267
)


1,841



(442
)Prepaid and other current assets


(34
)


2,631



3,883Trade accounts payable


(143
)


(1,641
)


(601
)Accrued and other current
    liabilities


(934
)


(3,777
)


(5,174
)Net cash provided by (used in)
    operating activities


(4,850
)


(10,029
)


(8,472
)Investing Activities:Purchases of property and equipment


(154
)


(221
)


(1,265
)Proceeds from the sale of property
    and equipment






30



1,608Proceeds from sale of businesses






5,340



Proceeds from redemption of
    marketable securities






1,444



5,187Purchases of marketable securities










(6,801
)Earn out payments on prior
    acquisitions










(223
)Net cash provided by (used in)
    investing activities


(154
)


6,593



(1,494
)Financing Activities:Issuance of common stock


3,810



533



Purchase of treasury stock










(18
)Payment of preferred stock
    dividends


(34
)


(34
)


(115
)Net cash provided by (used in)
    financing activities


3,776



499



(133
)Net increase (decrease) in cash
    and cash equivalents


(1,228
)


(2,937
)


(10,099
)Effect of exchange rate changes on
    cash






(2
)


(30
)Cash and cash equivalents,
    beginning of period


3,368



6,307



16,436Cash and cash equivalents, end of
    period

$
2,140


$
3,368


$
6,307Supplemental cash flow
    information:Cash paid during the year for:Interest

$



$



$
1Income taxes

$



$



$
    21




---



##### 



MDI,
    Inc.
  Notes to
    Consolidated Financial Statements
  Note 1:
    Nature of
    Operations and Summary of Significant Accounting
    Policies  Principles
    of Consolidation
    Basis
    of Presentation
    Liquidity
      Nature
    of Operations
    Use of
    Estimates
   22




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Fair
    Value of Financial Instruments
    Cash
    and Cash Equivalents
    Trade
    Accounts Receivable
    Inventories
  (first-in,
    2005


2004


2003Beginning balance

$
291


$
372


$
182Charged to expense


196



45



203Usage


(374
)


(126
)


(13
)Closing balance

$
113


$
291


$
372   Property
    and Equipment
    Engineering
    and Software Development Expenses
  The Company capitalizes software development
    costs.
 23




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    Internal
    Use Software
    Impairment
    of Long-Lived Assets
    Goodwill
  Goodwill and Intangible
    Assets.
  Income
    Taxes
    Revenue
    Recognition
    Warranty
    Reserves
   24




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
     2005


2004


2003Beginning balance

$
80


$
72


$
69Charged to expense


19



14



5Usage


(16
)


(6
)


(2
)Closing balance

$
83


$
80


$
72   Comprehensive
    Income (Loss) and Accumulated Other Comprehensive
    Loss
    Advertising
    Earnings
    Per Share
    Marketable
    Securities
    Stock-Based
    Compensation
  Accounting for Stock-Based
    Compensation Accounting for Stock Based
    Compensation  Transition and Disclosure.
     25




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
    2005


2004


2003Loss from continuing operations
    before cumulative effect of accounting change allocable to
    common stockholders:As reported

$
(5,561
)

$
(8,687
)

$
(10,721
)Deduct: Total stock-based
    compensation under fair value based method for all awards


(1,390
)


(1,456
)


(297
)Pro forma

$
(6,951
)

$
(10,143
)

$
(11,018
)Basic and diluted loss per
    share from continuing operations before cumulative effect of
    accounting change:As reported

$
(0.31
)

$
(0.60
)

$
(0.76
)Pro forma

$
(0.39
)

$
(0.70
)

$
(0.78
)       Recent
    Accounting Pronouncements
    No. 04-5, (EITF 04-5). EITF 04-5 EITF 04-5 EITF 04-5 EITF 04-5 EITF 04-5
   26




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
      Note 2:
    Discontinued
    Operations       27




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
     2005


2004Net proceeds received

$



$
5.6Net asset value for sold businesses






(3.4
)Goodwill






(0.7
)Professional fees and transaction
    costs






(0.3
)Net gain (loss) on sale of
    businesses

$



$
(1.2
)     Twelve months ended
    December 31, 2005TotalConsumer


Commercial


DiscontinuedRetail


Government


OperationsNet Sales

$



$



$
Gross Profit






(33
)


(33
)Operating income (loss):






(127
)


(127
)Income from discontinued operations






(118
)


(118
)   Twelve months ended
    December 31, 2004TotalConsumer


Commercial


DiscontinuedRetail


Government


OperationsNet Sales

$
10,444


$
661


$
11,105Gross Profit


2,337



269



2,606Operating income (loss):


169



(687
)


(518
)Income (loss) from discontinued
    operations


170



(531
)


(361
)   Twelve months ended
    December 31, 2003Consumer


Commercial


Total DiscontinuedRetail


Government


OperationsNet Sales

$
21,473


$
2,221


$
23,694Gross Profit


4,681



612



5,293Operating income (loss):


959



(3,975



(3,016
)Income (loss) from discontinued
    operations net of tax expense of $(123)


951



(1,734
)


(783
)   Note 3:
    Restructuring
    Activity    Accrued as of


2005


Non-cash


Amount


Accrued as ofDecember 31,


Charge


Asset


Paid in


December 31,2004


(Credit)


Write down


Cash


2005Severance


97



10







(87
)


10Relocation costs


133











(133
)


$
230


$
10


$



$
(220
)

$
10  28




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Accrued as of


2004


Non-cash


Amount


Accrued as ofDecember 31,


Charge


Asset


Paid in


December 31,2003


(Credit)


Write down


Cash


2004United Kingdom lease


330











(330
)


Severance


700



948







(1,551
)


97Relocation costs






295







(162
)


133Lewisville headquarters disposal
    of assets






502



(502
)






$
1,030


$
1,745


$
(502
)

$
(2,043
)

$
230   Accrued as of


2003


Non-cash


Amount


Accrued as ofDecember 31,


Charge


Asset


Paid in


December 31,2002


(Credit)


Write down


Cash


2003Ohio plant closure severance


175



(66
)






(109
)


United Kingdom lease


600



(90
)






(180
)


330Zurich lease


228



(148
)






(80
)


Severance


1,249



400







(949
)


700$
2,252


$
96


$



$
(1,318
)

$
1,030     2005


2004


2003General and administrative

$
10


$
1,243


$
96Loss on sale of investments






502



$
10


$
1,745


$
96   Relocation
    and consolidation
      Executive
    and Management Severance
   29




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
              United
    Kingdom Lease
    Closure
    of the Ohio Plant
    Zurich
    Lease
   30




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Note 4:
    Trade
    Accounts Receivable    Year ended
    December 31,2005


2004Gross trade accounts receivable

$
2,131


$
3,523Less: allowance for doubtful
    accounts


(219
)


(183
)Less: allowance for returns






(91
)$
1,912


$
3,249     Balance at








Balance atBeginning


Charged to


Deductions


End ofof Period


Operations


from A/R


PeriodYear ended December 31, 2005

$
274


$
83


$
(138
)

$
219Year ended December 31, 2004


169



114



(9
)


274Year ended December 31, 2003


69



104



(4
)


169   Note 5:
    Property
    and Equipment    December 31,Useful Lives

2005


2004Machinery and equipment

3-7 years

$
532


$
525Furniture and fixtures

3-7 years


279



261Software

3-8 years


3,676



3,681Buildings and land

20-30 years


170



684,657



4,535Accumulated depreciation




(3,996
)


(3,199
)$
661


$
1,336   Note 6:
    Income
    Taxes    Year Ended
    December 31,2005


2004


2003FederalCurrent

$



$



$
Deferred










State










Foreign










$



$



$
  31




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
     Year Ended
    December 31,2005


2004


2003United States

$
(5,645
)

$
(8,654
)

$
(8,353
)Foreign










(3,314
)$
(5,645
)

$
(8,654
)

$
(11,667
)     Year Ended
    December 31,2005


2004


2003U.S. Federal statutory rate


(34.0
)%


(34.0
)%


(34.0
)%State tax effect


(3.0
)


(3.0
)


(3.3
)Other non-deductible expenses


0.3



0.3



0.3Net change in deferred tax assets


33.2



29.8



46.1Other, net


3.5



6.9



(9.1
)0.0
%


0.0
%


0.0
%     December 31,2005


2004Deferred tax assets:Inventories


53


$
116Accounts receivable


81



93Accrued expenses


134



439Net operating loss carry forwards


26,598



26,979Other, net


36



220Gross deferred tax assets


26,903


$
27,847Deferred tax liabilities:Property and equipment


(68
)


(66
)Goodwill amortization and
    impairment


(651
)


(601
)Gross deferred tax liabilities


(719
)

$
(667
)Valuation allowance


(26,184
)


(27,180
)Net deferred tax asset

$



$
     (2006-2025)
 32




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Note 7:
    Goodwill    Commercial


ConsumerGovernment


Retail


TotalNet carrying value at
    December 31, 2002

$
4,603


$
729


$
5,332Settlement of earn out payment on
    prior acquisition


(100
)






(100
)Impairment losses


(1,711
)






(1,711
)Net carrying value at
    December 31, 2003

$
2,792


$
729


$
3,521Sale of business






(729
)


(729
)Net carrying value at
    December 31, 2004

$
2,792


$



$
2,792No adjustment during 2005










Net carrying value at
    December 31, 2005

$
2,792


$



$
2,792             Note 8:
    Other
    Intangible Assets    Weighted


December 31, 2005Average


Gross





NetAmortization


Carrying


Accumulated


Carrying(Years)


Value


Amortization


ValueIntangible assets subject to
    amortization
    Patents and trademarks


17.1


$
98


$
(63
)

$
35December 31, 2004Intangible assets subject to
    amortization
    Patents and trademarks


17.1


$
98


$
(56
)

$
42  33




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
       Years Ending
    December 31,

Amortization Exp.2006


72007


72008


72009


72010


7Total

$
35   Note 9:
    Royalty
    Claim    Note 10:
    Financing
    Arrangements  Line
    of Credit
      Interest
    Rate Swap
   34




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Note 11:
    Commitments
    and Contingencies  Operating
    Leases
    Years Ending
    December 31,2006


5102007


5362008


5442009


513Thereafter


Total

$
2,112     Years Ending
    December 31,2005

$
5432004


6532003


710   Litigation
       35




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
     Note 12:
    Stockholders
    Equity  Preferred
    Stock
        Warrants
       36




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   EITF 00-19
  Note 13:
    Stock-Based
    Compensation  2002
    Stock Incentive Plan
    1997
    Incentive Stock Option Plan
    Stock
    Option Grants
   37




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
     2005


2004


2003Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOutstanding at beginning of year


2,071,373


$
1.30



1,562,015


$
1.52



1,642,541


$
3.35Granted


1,613,000



0.80



1,976,500



1.32



1,154,000



1.12Exercised


(168,184
)


1.28



(461,000
)


1.16



(8,215
)


1.10Forfeited


(278,096
)


1.26



(1,006,142
)


1.77



(1,226,311
)


3.59Outstanding at end of year


3,238,093


$
1.05



2,071,373


$
1.30



1,562,015


$
1.52Options exercisable at end of year


3,238,093


$
1.05



1,529,706


$
1.29



588,015


$
2.18     Options Outstanding


Options ExercisableWeighted


Weighted


Weighted


WeightedAverage


Average


Average


AverageNumber


Remaining


Exercise


Number


ExerciseRange of Exercise
    Prices

Outstanding


Contractual Life


Price


Exercisable


Price$0.45 to $0.89


1,258,800



9.5 years


$
0.71



1,258,800


$
0.71$0.90 to $1.50


1,883,833



7.3 years



1.22



1,883,833



1.22$1.51 to $1.60


85,000



8.2 years



1.57



85,000



1.57$1.61 to $9.25


10,460



4.5 years



8.06



10,460



8.063,238,093



9.5 years


$
1.05



3,238,093


$
1.05   Note 14:
    Concentration
    of Risks        Note 15:
    Related
    Party Transactions     38




---



##### 



MDI,
    Inc.
  Notes to Consolidated Financial
    Statements  (Continued)
   Note 16:
    Quarterly
    Operating Results (unaudited)  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
)


(1,029
)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
)   First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter2004:Net sales

$
3,459


$
3,265


$
4,575


$
2,946Gross profit


1,352



1,481



2,352



1,107Net loss


(2,792
)


(2,408
)


(809
)


(1,836
)Net loss per share, basic:

$
(0.19
)

$
(0.17
)

$
(0.06
)

$
(0.12
)Net loss per share, diluted:

$
(0.19
)

$
(0.17
)

$
(0.06
)

$
(0.12
)   Note 17:
    Subsequent
    Events   39




---



##### 



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Form 10-QSB
    Regulation S-K.
  ITEM 9A.
    CONTROLS
    AND PROCEDURES  Rules 13a-15(e) 15d-15(e)
   PART III  ITEM 10.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF REGISTRANT    ITEM 11.
    EXECUTIVE
    COMPENSATION   40




---



##### 



ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   PART IV  ITEM 15.
    EXHIBITS,
    FINANCIAL STATEMENTS AND REPORTS ON
    FORM 8-K  Financial
    Statements
  Form 10-K:
              Financial
    Statement Schedules
   41




---



##### 



SIGNATURES      By:
    /s/  J. Collier Sparks         /s/  James PowerJames
    Power

Chairman of the Board

Dated: March 31, 2006/s/  J. Collier
    SparksJ.
    Collier Sparks

Chief Executive Officer (Principal
    Executive Officer)

Dated: March 31, 2006/s/  Carlo LoiCarlo
    Loi

Vice Chairman of the Board

Dated: March 31, 2006/s/  Lance BorvanskyLance
    Borvansky

Director

Dated: March 31, 2006/s/  Peter B. KnepperPeter
    B. Knepper

Director, Interim COO and
    Interim CFO

Dated: March 31, 2006  42




---



##### 



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 the Certificate of
    Incorporation of the Company dated September 22, 20043
.3

By-Laws of the Company, as amended
    to June 7, 2002 (filed as Exhibit 3.7 to the
    Companys
    Form 10-K
    for the year ended December 31, 2002)3
.4

Amendment of the By-Laws of the
    Company, dated April 22, 2004.4
.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))10
.1

Amended and Restated Ultrak, Inc.
    1988 Non-Qualified Stock Option Plan, as of June 1, 2001
    (filed as Exhibit 10.43 to the Companys
    Form 10-K
    for the year ended December 31, 2001) (+)10
.2

Amendment No. 1 to the
    Amended and Restated Ultrak, Inc. 1988 Non-Qualified Stock
    Option Plan effective as of December 4, 2001 (filed as
    Exhibit 10.47 to the Companys
    Form 10-K
    for the year ended December 31, 2001) (+)10
.3

Ultrak, Inc. 1997 Incentive Stock
    Option Plan (filed as Exhibit 10.1 to the Companys
    Form 10-Q
    for the quarter ended March 31, 1997) (+)10
.4

Ultrak, Inc. 2002 Stock Incentive
    Plan (filed as Exhibit B to the Companys definitive
    proxy statement for the 2002 annual meeting of
    stockholders) (+)10
.5

Agreement, dated July 9,
    2004, between the Company and Danny Mills. (+)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 the Company (filed
    as Exhibit 21.1 to the Companys
    Form 10-K
    for the year ended December 31, 2002)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 Interim 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 Interim 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, 2003)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, 2003)     (*)
    Exhibits marked with an (*) are filed with this
    Form 10-K.
    All others are incorporated by reference from the indicated SEC
    filing.(+)
    Indicates management contract or compensatory plan or
    arrangement. 43