SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB
(Mark One)

[X]      QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.

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

For the transition period from                  to
                               ----------------    ----------------

                         Commission File Number: 0-24919

                             MDI Entertainment, Inc.
                -------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

          Delaware                                   73-1515699
          --------                                 -------------
(State or other jurisdiction of         (I.R.S Employer Identification No.)
incorporation or organization)

                                 201 Ann Street
                           Hartford, Connecticut 06103
                           ---------------------------
                    (Address of principal executive offices)

                                 (860) 527-5359
                         (Registrant's telephone number)

              (Former Name, Former Address and Former Fiscal Year,
                          if changed since last Report)

Check whether the registrant  (1) has filed all reports  required to be filed by
Section 13 or 15 (d) of the  Exchange Act during the past 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___

As of October 31,  2001,  11,172,306  shares of the  issuer's  common stock were
outstanding.

Transitional Small Business Disclosure Format (check one): Yes    No X
                                                               ---   -



<PAGE>

<TABLE>
<CAPTION>

                                               MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                                             FORM 10-QSB
                                          FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                                                INDEX



PART I.  FINANCIAL INFORMATION

<S>                                                                                                                     <C>
Item 1.Financial Statements................................ .............................................................1

Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and
 December 31, 2000.......................................................................................................1

Condensed Consolidated Statements of Operations (unaudited) for the nine months ended
 September 30, 2001 and 2000.............................................................................................3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended
 September 30, 2001 and 2000.............................................................................................4

Condensed Consolidated Statement of Changes in Shareholders' Equity (unaudited)
 for the nine months ended September 30, 2001............................................................................5

Condensed Consolidated  Statements of Cash Flows (unaudited)
 for the nine months ended September 30, 2001 and 2000...................................................................6

Notes to Unaudited Condensed Consolidated Financial Statements...........................................................7


Item 2. Management's Discussion and Analysis............................................................................12


PART II. OTHER INFORMATION

Item 1. Legal Proceedings...............................................................................................22

Item 2. Change in Securities and Use of Proceeds........................................................................23

Item 6. Exhibits and Reports on Form 8-K................................................................................24

   Signatures...........................................................................................................25

</TABLE>

<PAGE>



PART I
FINANCIAL INFORMATION

<TABLE>
<CAPTION>

ITEM 1.   FINANCIAL STATEMENTS

MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                    September 30,        December 31,
                                                                        2001                2000
                                                                 ----------------    -----------------
                          ASSETS                                      (unaudited)

<S>                                                                    <C>                  <C>
CURRENT ASSETS:
   Cash and cash equivalents                                             $334,927             $528,151
   Investment securities
      available-for-sale                                                      -                180,000
   Accounts receivable                                                  1,186,951            1,140,919
   Inventory                                                              873,633              285,301
   Other current assets                                                   509,314              451,983
                                                                 ----------------     -----------------

        Total current assets                                            2,904,825            2,586,354

                                                                 -----------------    -----------------
PROPERTY AND EQUIPMENT, at cost:
   Equipment                                                              287,140              250,456
   Furniture and fixtures                                                 120,361              120,361
                                                                 -----------------    -----------------
                                                                          407,501              370,817
   Less:  Accumulated depreciation                                       (254,182)            (212,137)
                                                                 -----------------    -----------------

   Property and Equipment, net                                            153,319              158,680

                                                                 -----------------    -----------------
OTHER ASSETS:
   Licensing costs, net                                                 1,515,013            1,397,680
   Other (Note 3)                                                          54,767              363,482
                                                               ------------------- --------------------

        Total other assets                                              1,569,780            1,761,162
                                                               ------------------- --------------------

        Total assets                                                   $4,627,924           $4,506,196
                                                               =================== ====================






</TABLE>



THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.



                                       1
<PAGE>





<TABLE>
<CAPTION>


MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                                                                   September 30,         December 31,
                                                                                        2001                 2000
                                                                            --------------------    ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                      (unaudited)
<S>                                                                                 <C>                   <C>
CURRENT LIABILITIES:
   Billings in excess of costs and estimated earnings
      on uncompleted contracts (Note 2)                                              $2,510,757            $2,888,985
   Current portion of long term debt                                                    302,315               955,006
   Accounts payable                                                                     641,519             1,378,444
   Accrued expenses                                                                     356,233               204,400
   Income taxes payable (Note 5)                                                         54,107                 9,871
                                                                              ------------------    ------------------

        Total current liabilities                                                     3,864,931             5,436,706


SUBORDINATED CONVERTIBLE DEBENTURE (Note 4)                                                   -               553,125
                                                                              ------------------    ------------------

        Total liabilities                                                             3,864,931             5,989,831
                                                                              ------------------    ------------------


SHAREHOLDERS' EQUITY (DEFICIT) (Notes 4 and 6):
   Common stock                                                                          11,172                10,505
   Convertible preferred stock-Series B                                                       1                     1
   Convertible preferred stock-Series C (Note 10)                                             -                     -
   Additional paid-in capital                                                         5,578,392             5,061,596
   Accumulated deficit                                                               (4,826,572)           (6,555,737)
                                                                              ------------------    ------------------

       Total shareholders' equity (deficit)                                             762,993            (1,483,635)
                                                                              ------------------    ------------------
       Total liabilities and
          shareholders' equity (deficit)                                             $4,627,924            $4,506,196
                                                                              ==================    ==================








</TABLE>


THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.



                                       2
<PAGE>

<TABLE>
<CAPTION>

MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                      Nine months ended
                                                                                        September 30,
                                                                                   2001                2000
                                                                          -----------------    ------------------
                                                                               (unaudited)           (unaudited)

<S>                                                                           <C>                     <C>
REVENUE                                                                       $ 10,687,122            $4,267,456

COST OF REVENUES                                                                 6,000,472             2,823,568
                                                                          -----------------    ------------------

     Gross profit                                                                4,686,650             1,443,888

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                                                       2,722,911             2,631,468
TERMINATED MERGER EXPENSES (NOTE 8)                                                      -               727,025
COST OF UNSUCCESSFUL FUNDING (NOTE 7)                                              188,742                     -
                                                                          -----------------    ------------------

     Operating profit (loss)                                                     1,774,997            (1,914,605)

INTEREST EXPENSE, net                                                              121,843                73,224
OTHER (INCOME) EXPENSE                                                            (110,166)               57,218
GAIN ON SALE-INVESTMENT SECURITIES. net                                            (12,669)                    -
                                                                          -----------------    ------------------

     Income (loss) before provision for income taxes                             1,775,989            (2,045,047)

PROVISION FOR INCOME TAXES (NOTE 5)                                                 46,824                 3,429
                                                                          -----------------    ------------------

     Net income (loss)                                                         $ 1,729,165           $(2,048,476)
                                                                          =================    ==================


Basic Earnings (Loss) Per Common Share (Note 6 )                                      $.16                $(.22)
                                                                        ===================    ==================

Diluted Earnings (Loss) Per Common Share (Note 6 )                                    $.14                $(.22)
                                                                        ===================    ==================






</TABLE>



THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.


                                       3
<PAGE>

<TABLE>
<CAPTION>

MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                    Three months ended
                                                                                      September 30,
                                                                                  2001                2000
                                                                        -------------------  ------------------
                                                                               (unaudited)          (unaudited)

<S>                                                                            <C>                  <C>
REVENUE                                                                        $ 4,001,656          $1,536,592

COST OF REVENUES                                                                 2,276,367             958,205
                                                                        -------------------  ------------------

     Gross profit                                                                1,725,289             578,387

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                                                         937,809             786,932
COST OF UNSUCCESSFUL FUNDING (NOTE 7)                                               99,109                   -
                                                                        -------------------  ------------------

     Operating profit (loss)                                                       688,371            (208,545)

INTEREST EXPENSE, net                                                                1,872              31,725
                                                                        -------------------  ------------------

     Income (loss) before provision for income taxes                               686,499            (240,270)

PROVISION FOR INCOME TAXES (Note 5)                                                 34,789               1,100
                                                                        -------------------  ------------------

     Net income (loss)                                                          $  651,710           $(241,370)
                                                                        ===================  ==================


Basic Earnings (Loss) Per Common Share (Note 6 )                                      $.06               $(.02)
                                                                        ===================  ==================

Diluted Earnings (Loss) Per Common Share (Note 6 )                                    $.05               $(.02)
                                                                        ===================  ==================







</TABLE>




THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.



                                       4
<PAGE>


<TABLE>
<CAPTION>

MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


                               For the nine months ended September 30, 2001
                                               (Unaudited)

                                                                 Shares                Amount
                                                            ---------------       ---------------
<S>                                                            <C>                       <C>
Preferred  Stock,  par  value  $.001 per  share
  authorized 5,000,000 shares:

   Series B, liquidation amount $2,252.25
   per share:
       Balance, December 31, 2000
       and September 30, 2001                                          444             $        1
                                                            ==============        ===============


Common Stock, par value $.001 per share,
   authorized 25,000,000 shares
       Balance, December 31, 2000                               10,505,872                 10,505
       Stock options exercised                                      28,934                     29
       Issuance of  common stock                                   262,500                    263
       Conversion of subordinated debenture                        375,000                    375
                                                            ---------------       ---------------

       Balance, September 30, 2001                              11,172,306                 11,172
                                                            ===============       ---------------

Additional Paid-in Capital:
       Balance, December 31, 2000                                                       5,061,596
       Stock options exercised                                                              6,571
       Issuance of warrants                                                                28,001
       Issuance of common stock                                                           269,025
       Conversion of subordinated debenture                                               213,199
                                                                                  ---------------

       Balance, September 30, 2001                                                      5,578,392
                                                                                  ---------------

Accumulated Deficit:
       Balance, December 31, 2000                                                      (6,555,737)
       Net income                                                                       1,729,165
                                                                                  ----------------

       Balance, September 30, 2001                                                     (4,826,572)
                                                                                  ----------------


Total Shareholders' Equity, September 30, 2001                                         $  762,993
                                                                                 =================



THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.
</TABLE>

                                       5
<PAGE>
<TABLE>
<CAPTION>


MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                               Nine months ended
                                                                                                 September 30,
                                                                                           2001               2000
                                                                                     ----------------   ----------------
                                                                                        (unaudited)        (unaudited)
<S>                                                                                     <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                                  $1,729,165        $(2,048,478)
     Adjustments to reconcile net income (loss) to net
         cash provided by (used for) operating activities:
              Depreciation and amortization                                                645,753            220,200
              Stock based compensation                                                           -             46,707
              Gain on sale of investments, net                                             (12,669)                -

              Change in assets and liabilities:
                     Increase in accounts receivable                                       (46,032)           (83,750)
                     Increase in inventory                                                (588,332)           (29,845)
                     Increase in licensing costs                                          (705,603)          (267,870)
                     (Increase) decrease in other assets                                   (75,604)             4,405
                     (Decrease) increase in accounts payable                              (467,637)           706,825
                     Increase in accrued expenses                                          151,833             55,782
                     Increase in income taxes payable                                       44,236              6,481
                     (Decrease) increase in billings in excess of costs
                         and estimated earnings on uncompleted contracts                  (378,228)           430,430
                                                                                     ----------------   ----------------

              Net cash provided by (used for) operating activities                         296,882           (959,113)
                                                                                     ----------------   ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                                     (36,684)           (26,432)
    Proceeds of sale of investments                                                        192,669                  -
                                                                                     ----------------   ----------------

              Net cash provided by (used for) investing activities                         155,985            (26,432)
                                                                                     ----------------   ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of debt                                                                     (652,691)          (164,401)
    Proceeds from short-term debt                                                                -            520,000
    Proceeds from exercise of common stock options                                           6,600            153,350
    Other                                                                                        -              4,546
                                                                                     ----------------   ----------------

              Net cash (used for) provided by financing activities                        (646,091)           513,495
                                                                                     ----------------   ----------------

NET DECREASE IN CASH                                                                      (193,224)          (472,050)

CASH, beginning of the period                                                              528,151          1,019,456
                                                                                     ----------------   ----------------
CASH, end of the period                                                                  $ 334,927          $ 547,406
                                                                                     ================   ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for:
      Interest                                                                           $  57,708          $  65,277
      Income taxes                                                                       $   2,588          $   4,627
    Non-cash investing and financing activities:
      Common stock and warrants issued for license                                       $      -           $ 500,000
      Preferred stock dividend paid in common stock                                      $      -           $  18,260
      Imputed interest on subordinated convertible debenture                             $   5,625          $  16,875
      Conversion of subordinated debenture into common stock                             $ 213,574          $      -
      Common stock issued for services                                                   $ 269,288          $      -
      Expenses related to warrants                                                       $      -           $  32,750

</TABLE>

THE  ACCOMPANYING  NOTES ARE AN INTEGRAL  PART OF THESE  CONDENSED  CONSOLIDATED
FINANCIAL STATEMENTS.



                                       6
<PAGE>


MDI ENTERTAINMENT, INC. AND SUBSIDIARY


NOTES TO UNAUDITED CONDENSED  CONSOLIDATED  FINANCIAL STATEMENTS FOR NINE MONTHS
ENDED SEPTEMBER 30, 2001.

1.       PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
         FINANCIAL STATEMENTS.

         Information  in  the  accompanying   interim   condensed   consolidated
financial statements and notes to the financial statements of MDI Entertainment,
Inc.  and  subsidiary  (MDI or the  Company) for the  nine-month  periods  ended
September 30, 2001 and 2000 is unaudited.  The  accompanying  interim  unaudited
consolidated  financial  statements  have been prepared by us in accordance with
accounting  principles  generally  accepted in the United States and  Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by accounting  principles  generally  accepted in the United States for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included.  Operating  results for the nine-month period ended September 30,
2001 are not necessarily  indicative of the results that may be expected for the
year ending December 31, 2001. The consolidated  financial  statements should be
read in conjunction with the financial  statements and notes thereto included in
the audited  financial  statements  of the  Company as and for the seven  months
ended December 31, 2000.

2.       REVENUE AND COST RECOGNITION

         Revenue is derived from various  lottery  game  contracts  (mainly with
states) between the Company and the lotteries. The Company has agreed to provide
second chance prize packages  consisting of grand prizes and various merchandise
prizes. The Company also provides marketing support related to each of the games
and obtains the appropriate licenses for the right to use these properties. Many
of the lottery  contracts  require the  lotteries to pay MDI upon signing of the
contract; therefore, MDI defers this revenue and recognizes the revenue based on
the terms of the applicable game.

         Revenues from the lottery game contracts that are greater than one year
are  recognized  on the  percentage  of  completion  method,  determined  by the
percentage  of cost  incurred  to date to  estimated  total  costs on a specific
contract basis. This method is utilized as management considers cost incurred to
be the best available  measure of progress on these contracts.  Contracts' costs
include  all direct  costs.  General  and  administrative  costs are  charged to
expense as incurred.  Provisions for estimated  losses on uncompleted  contracts
are made in the period in which such losses are determined.  As of September 30,
2001, no losses were expected from existing contracts.

         The liability  "Billings in excess of costs and  estimated  earnings on
uncompleted contracts" represents billings in excess of revenues recognized.

3.       OTHER ASSETS

         Other  assets at  September  30, 2001  consisted  primarily  of prepaid
financing  costs and security  deposits.  Other assets at December 31, 2000 also
included  deferred  financing  costs  related  to the  subordinated  convertible
debenture, described in Note 4. These costs were charged to paid in capital when
the debenture was converted into common stock on March 14, 2001.


                                       7
<PAGE>



4.       SUBORDINATED CONVERTIBLE DEBENTURE

         On September 21, 1999, the Company  issued a  subordinated  convertible
debenture (the Debenture) to Scientific Games, Inc. for $750,000.  The debenture
was  converted  into common stock on March 14, 2001,  as  discussed  below.  The
Debenture bore interest at 7% per annum and was payable  semi-annually,  on June
30 and December 31 of each year,  until its maturity on September 21, 2009.  The
Debenture was convertible at the option of Scientific Games at the rate of $2.00
per share of common stock,  subject to adjustment  under certain  circumstances,
into an aggregate of 375,000  shares of common stock and was  convertible at the
Company's  option at any time after the earlier of (a) September 21, 2001 or (b)
after the underlying common stock was registered  pursuant to the Securities Act
of 1933, as amended,  and the price of the Company's common stock exceeded $3.00
per share.

         On March 14, 2001, the holder of the subordinated convertible debenture
exercised  its  conversion  privilege  and was issued  375,000  shares of common
stock.  The carrying  amount of the  debenture  was  $558,750 and the  Company's
common  stock was  trading  for  $1.75 on the date of  conversion.  The  Company
recorded  the  transaction  utilizing  the book value  method  and  accordingly,
recognized no gain or loss from the conversion.

5.       INCOME TAXES

         The Company  accounts for income taxes in accordance  with Statement of
Financial  Accounting  Standards No. 109 (SFAS No. 109),  "Accounting for Income
Taxes",  which requires that a deferred tax liability or asset be recognized for
the estimated future tax effects  attributable to temporary  differences between
the Company's  financial  statements  and tax return.  SFAS No. 109 provides for
recognition  of  deferred  tax  assets  for  all  future  deductible   temporary
differences  that,  more likely than not, will provide a future  benefit.  As of
September 30, 2001 and December 31, 2000, the Company had a significant deferred
tax  asset,  primarily  as a result  of net  operating  loss  carry-forwards.  A
valuation  allowance has been  established  for the full amount of this deferred
tax asset. The primary difference  between the Company's  effective tax rate and
the  statutory  tax  rate  is  the   utilization   of  the  net  operating  loss
carryforwards and the related reversal of the valuation allowance.

6.       EARNINGS PER SHARE

         Basic and diluted  earnings  (loss) per common  share are  based on the
average number of common shares  outstanding  during the period. The Company has
excluded  2,142,000  shares,  representing  the total of its Series C  Preferred
Stock on an as converted basis and origination  fees paid in common stock,  from
its weighted  average  common stock  outstanding,  as of September 30, 2001. See
"Note 10: Stock Purchase Agreement-Oxford International, Inc."

         Diluted  earnings per common share include,  in addition to  the above,
the dilutive effect of common share equivalents during the period. For the three
and nine months ended September 30, 2001, common share  equivalents  represented
convertible  preferred stock  (convertible into 444,444 shares of common stock),
dilutive stock options (convertible into 404,309 net shares of common stock) and
warrants  (convertible  into  490,084  net  shares  of common  stock)  using the
treasury  method.  For the three and nine months  ended  September  30,  2000, a
subordinated debenture convertible into 375,000 shares of common stock, warrants
to purchase  831,100  shares of common  stock and  options to  purchase  974,166
shares of  common  stock  were  excluded  from the  calculation  of the  diluted
earnings per share since their inclusion would be anti-dilutive.

         The net income (loss)  available to common  shareholders and the number
of shares used in the earnings  (loss) per common share and earnings  (loss) per
dilutive share computation for 2001 and 2000 were as follows:


                                       8
<PAGE>


                                                         Nine Months Ended
                                                           September 30,
                                                --------------------------------
                                                     2001                 2000

Net income (loss) ........................       $ 1,729,165        $(2,048,476)

Preferred stock dividends ................                -             (26,402)

                                                 -----------        -----------
Net income (loss) applicable
  to common shareholders .................       $ 1,729,165        $(2,074,878)
                                                 ===========        ===========


                                                         Nine Months Ended
                                                           September 30,
                                               ---------------------------------
                                                     2001                 2000
Basic:

Average number of common
  shares outstanding .....................        11,070,096          9,272,718
                                                                      =========
Dilutive effect of options,
  warrants and
  convertible securities .................         1,338,837
                                                  ----------
Average dilutive common
  shares outstanding .....................        12,408,933
                                                  ==========


                                                         Three Months Ended
                                                           September 30,
                                              ----------------------------------
                                                     2001                2000

Net income (loss)                                   $651,710          $(241,370)

Preferred stock dividends                                  -             (4,617)
                                                   ---------          ---------
Net income (loss) applicable
  to common shareholders                            $651,710          $(245,987)
                                                   =========          =========


                                                         Three Months Ended
                                                           September 30,
                                               ---------------------------------
                                                     2001                 2000

Basic:

Average number of common
  shares outstanding                              11,172,306          9,873,960
                                                                      =========
Dilutive effect of options,
   warrants and
   convertible securities                          1,338,837
                                                  ----------
Average dilutive common
  shares outstanding                              12,511,143
                                                  ==========


                                       9
<PAGE>

7.       COST OF UNSUCCESSFUL FUNDING

         During the nine months ended September 30, 2001 the Company recorded an
expense of $188,742  for costs  relating to the  placement  and  issuance of its
Series C Preferred  Stock to Oxford  International,  Inc.  Theses costs  include
legal,  accounting,  and  investment  banking  fees  paid.  (See  Note 10 "Stock
Purchase Agreement-Oxford International, Inc.")

8.       TERMINATED MERGER EXPENSES

         The  Company  entered  into an  Agreement  and Plan of Merger with The
Lottery  Channel,   Inc.  (Lottery  Channel)  and  the  Company's   wholly-owned
subsidiary  (established to facilitate the merger),  MDI  Acquisition,  Inc.(MDI
Acquisition),  dated as of January 26, 2000. The obligations of MDI Acquisition,
Lottery  Channel  and the  Company  to effect  the  merger  were  subject to the
fulfillment of a number of conditions including,  among others, the consummation
of certain contemplated investments and receipt of third party consents. Certain
of such  conditions  were not met and on August 25,  2000,  the  Company  sent a
notice of termination to The Lottery Channel, Inc. terminating the Agreement and
Plan of Merger. In accordance with accounting  principles  generally accepted in
the United States, $727,025 of costs related to the proposed merger were written
off, as reflected in the accompanying  financial  statements.  Subsequently,  by
letter  dated August 28,  2000,  Lottery  Channel  responded  by  purporting  to
terminate the merger agreement due to MDI's breach.  The letter claimed that the
Company was  responsible  for all cost and expenses  incurred in connection with
the transaction. The Company disputes this assertion.

         On November 7, 2000, the Company and its subsidiary,  MDI Acquisition,
Inc.,  were notified that they had been named as defendants in a complaint filed
by Lottery  Channel.  on November 2, 2000 in the Hamilton  County,  Common Pleas
Civil  Division,  Cincinnati,  Ohio,  arising from a decision to  terminate  its
merger  agreement with Lottery  Channel.  Lottery  Channel is seeking to recover
$1,763,343.29  in costs and expenses,  damages in excess of $25,000,  attorney's
fees and costs in prosecuting the action,  punitive damages and any other relief
to which it is entitled.  The Company believes that the lawsuit is without merit
and  will  vigorously  defend  its  position,  as well as  assert  a  varity  of
counterclaims  against Lottery Channel,  including a demand that Lottery Channel
pay certain expenses under the termination  provisions of the merger  agreement.
The lawsuit  alleges that MDI (i)  breached  the merger  agreement by failing to
fulfil  certain  conditions  necessary to obligate us to close the merger and by
entering  into an  agreement  with a  competitor  of  Lottery  Channel  and (ii)
breached its  fiduciary  duty to Lottery  Channel by entering  into an agreement
with a competitor of Lottery Channel.  The two conditions  specifically cited in
the complaint are the  requirement  of a $10 million  investment by the National
Broadcasting Company ("NBC"), the partial owner and strategic partner of Lottery
Channel,  and the  raising  of an  additional  $5 million in equity as part of a
private  placement.  It is the Company's  position that the condition for NBC to
invest  $10  million,  as well as to amend its  stock  purchase  agreement  with
Lottery Channel,  were conditions that Lottery Channel was obligated to, but did
not fulfill.  The condition  that $5 million in additional  equity be raised was
not  satisfied  by Lottery  Channel  for a variety  of  reasons,  including  the
legislative  environment  relating to activities in Congress with respect to the
Internet sale of lottery tickets and because of the change in financial  markets
relating to Internet  companies.  There can be no assurance as to the outcome of
this litigation.  Steven M. Saferin, the Company's President and Chief Executive
Officer, has filed a complaint, in his individual capacity, against Roger W. Ach
II, the  President  and Chief  Executive  Officer of  Lottery  Channel,  seeking
$108,000 plus interest as payment for a promissory  note, due July 30, 2000. The
Company has withdrawn its complaint in the United States  District Court for the
Southern  District  of New York  against  John  Doe.  The  complaint,  which was
originally  filed on December 19,  2000,  had sought  compensatory  and punitive
damages for defamation occuring on Internet message boards.

9.       RECENT ACCOUNTING PRONOUNCEMENTS

         On June 30,  2001  the  Financial  Accounting  Standards  Board  (FASB)
finalized  Statements  of  Financial  Accounting  Standards  No. 141,  "Business
Combinations" and No. 142, "Goodwill and Other Intangible  Assets".  Adoption of
FASB 142 is required  beginning  with the first quarter of 2002. The Company has
no planned or anticipated business combinations, which would be affected by FASB
141. The Company's  intangible  amortization  policies are consistent  with FASB
142.  Therefore,  the  implementation  of these two standards is not expected to
have a  material  impact on the  Company's  financial  condition  or  results of
operations.


                                       10
<PAGE>

10.      STOCK PURCHASE AGREEMENT - OXFORD INTERNATIONAL, INC.

         The  Company  entered  into a Stock  Purchase  Agreement  with  Oxford
International,  Inc.  ("Oxford")  with an  effective  date of  April  25,  2001.
Pursuant to that Agreement,  the Company issued to Oxford 2,100 shares of Series
C Preferred Stock (the "Series C Stock") representing approximately 15.8% of the
outstanding  common  stock  of  MDI  on  an  as  converted  basis.  The  Company
anticipated receipt of $3,200,000 in cash from this transaction.

         Oxford failed to pay the  consideration  of $3,200,000  required by the
April 25,  2001 Stock  Purchase  Agreement,  and  because of this  failure,  the
Company did not release its stock to Oxford and did not consider the transaction
consummated.

         The Company  entered into an "Agreement"  with Oxford with an effective
date of July 9, 2001,  whereunder the Company agreed to accept securities of two
publicly traded companies valued in excess of $3.2 million,  by reference to the
closing  prices  of  such  securities,  as of the  date  of its  receipt  of the
securities in lieu of the cash investment  Oxford agreed to make under the April
25, 2001 Stock  Purchase  Agreement.  Among other things,  Oxford agreed that it
would  not be  entitled  to  nominate  one  member  to the  Company's  Board  of
Directors;  that it could not require performance of any matters under the Stock
Purchase  Agreement and  Certificates  of  Designation up to the date of July 9,
2001 Agreement, including but not limited to payments of dividends; and that the
Certificate of Designations was null and void.

         Subsequent to the receipt of the securities of the two publicly  traded
companies from Oxford, the issuers of those securities and the Federal Bureau of
Investigation  (FBI) made assertions about Oxford.  The FBI notified the Company
of its investigations of Oxford, but did not make any assertions  concerning the
Company  or any of its  officers  or  directors.  Neither  the  Company  nor its
officers and directors are under any  investigation  by the FBI as part of their
investigation  of Oxford.

         The  Company  was  advised  that,  in  the view of the  issuers  of the
publicly  traded  securities and the FBI, the securities it received from Oxford
are or may be subject to a dispute  between the issuers and Oxford,  which could
impair the liquidity and value of the securities.  If the liquidity and value of
the securities  were, in fact,  impaired,  then the Company believes it may have
been defrauded by Oxford.

         By letter  dated July 27,  2001,  the  Company  notified  Oxford  that,
pursuant to the July 9th Agreement,  it was exercising its right to exchange the
publicly  traded  securities  it received  from Oxford for all of the  Company's
stock issued to Oxford.

         Oxford has refused to honor the  Company's exchange right. On August 6,
2001, the Company filed a Motion For Temporary Restraining Order and Preliminary
Injunction and a Verified  Complaint in the United States  District Court of the
District  of Maryland  against  Oxford and Gregory C.  Dutcher.

         Therefore, the Company has excluded 2,142,000 shares, representing  the
total of its Series C Preferred  Stock on an as converted  basis and origination
fees paid in  common  stock,  from its total  common  stock  outstanding,  as of
September 30, 2001. See "Part II Item 1: Legal Proceedings."

         Upon the filing of the  Company's  Form 8-K on July 16, 2001  reporting
these issues, NASDAQ halted trading in the Company's  securities.  On such date,
the Company also  received a letter from NASDAQ  asking it to respond to various
questions,  which  the  Company  responded  to by the  July 20,  2001  deadline.
Representatives  of the  Company  met with  NASDAQ both on July 30 and August 7,
2001 to discuss the contents of that submission and other issues  concerning the
Company's financing transaction with Oxford.

         The Company agreed with NASDAQ that,  since the Company  exercised its
right of exchange  under the Agreement  dated July 9, 2001, it no longer met the
net tangible asset maintenance  requirements for continued listing on the NASDAQ
SmallCap  Market.  The Company has applied  for,  and its  securities  have been
accepted for, trading on the  Over-The-Counter  Bulletin Board under the trading
symbol, "LTRY:OB".







                                       11
<PAGE>

THIS QUARTERLY  REPORT ON FORM 10-QSB CONTAINS  FORWARD LOOKING  STATEMENTS THAT
INVOLVE  CERTAIN  RISKS AND  UNCERTAINTIES.  OUR  ACTUAL  RESULTS  COULD  DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

        DESCRIPTION OF BUSINESS

        The following  discussion  and analysis  should be read in conjunction
with our  Condensed  Consolidated  Financial  Statements  and the notes  thereto
appearing  elsewhere in this Form 10-QSB.  All statements  contained herein that
are not historical facts, including but not limited to, statements regarding our
current business  strategy and our plans for future  development and operations,
are based upon current  expectations.  These statements are  forward-looking  in
nature and  involve a number of risks and  uncertainties.  Generally,  the words
"anticipates,"  "believes,"  "estimates,"  "expects" and similar  expressions as
they relate to us and our  management are intended to identify  forward  looking
statements.  Actual results may differ materially.  Among the factors that could
cause  actual  results  to differ  materially  are those set forth in our Annual
Report on Form 10-KSB under the caption "Description of Business-Risk  Factors."
We  wish  to  caution   readers  not  to  place  undue   reliance  on  any  such
forward-looking statements, which statements speak only as of the date made.

        Our  principal  business  has been the  scratch  ticket  segment  of the
government lottery industry.  We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment  properties
and our lottery  promotions  feature  such  properties  licensed  by us.  Prizes
awarded in such promotions  typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing  T-shirts and caps, and other related  merchandise  such as
posters, money clips,  telephones,  playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections,  watches,
clocks,  trips  and,  in the case of  Harley-Davidson(R),  Harley-Davidson  1200
Sportster and Heritage Softtail Classic motorcycles.

        We developed our strategy of identifying  such properties in early 1996.
Prior to that  time,  we had  developed  a series of  promotions  that  utilized
popular  videotapes,  compact discs and  audiocassettes as second chance lottery
prizes.  Those  promotions  enabled us to develop an  expertise  in sourcing and
distributing  products  as  second  chance  lottery  prizes  and  to  develop  a
reputation  with  lottery  personnel as a reliable  organization  attuned to the
special needs of lotteries and their players.

        We derive over ninety-five  percent (95%) of our revenues from lotteries
in two distinct ways.  First,  we may charge a lottery a license and royalty fee
to utilize a particular licensed property as a lottery game. License fees may be
fixed  assessments  while royalties are a percentage of the printing cost of the
tickets  or a  percentage  of  sales  of  the  ticket.  Contracts  for  licensed
properties  typically include an up-front license fee and a royalty based on the
manufacturing cost of tickets. Manufacturing costs of tickets usually range from
$10.00 per thousand to $30.00 per  thousand.  Actual costs depend on the size of
the  ticket  and the  quantity  printed.  Ticket  quantity  range from about one
million to as many as 60 million with an average quantity of about five million.

                                       12
<PAGE>

        Our  second  source  of  lottery  revenue  is the  sale of logo  bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games,  between 5% to 10% of a lottery's  prize fund is  typically  used for the
purchase  of  merchandise  related to the  property  the  lottery is  utilizing.
Typically,  we purchase  merchandise  from other  licensees  of the property and
resell the  merchandise  to the  lottery at a price that is  designed to include
overhead  costs,  profit,  shipping and handling  and any  marketing  support we
provide the lottery such as brochures,  posters or other advertising  assistance
for which there are no separate charges.

        Our success is dependent on our ability to maintain and secure  licensed
properties,  market these  properties  to lotteries and the  performance  of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual  license-based promotions commence or wind
down and terminate.  In addition, our licenses (which are generally for 2.5 to 4
years)  terminate at various times over the next several  years.  Moreover,  the
useful  life of a license is  generally  relatively  short as the novelty of the
game or the  popularity of the licensed  material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable.  Accordingly, period to
period comparisons may not be indicative of future results.

        We  are  in  continuous   negotiations  to  obtain  additional  licensed
properties, including those from professional sports leagues, and to extend some
existing licenses. We expect to reach several agreements over the next six to 12
months;  however we cannot  assure you that such  agreements  will  actually  be
reached.  Some of these  agreements may require the  expenditures of significant
up-front advances.

                                       13
<PAGE>

         RECENT DEVELOPMENTS

         STOCK PURCHASE AGREEMENT WITH OXFORD INTERNATIONAL, INC.

         We entered into a Stock Purchase  Agreement with Oxford  International,
Inc. with an effective date of April 25, 2001.  Pursuant to that  Agreement,  we
issued to Oxford 2,100 shares of Series C Preferred Stock (the "Series C Stock")
representing  approximately  15.8%  of our  outstanding  common  stock  on an as
converted  basis.  We  anticipated  receipt  of  $3,200,000  in cash  from  this
transaction.

         Oxford failed to pay the  consideration  of $3,200,000  required by the
April 25, 2001 Stock Purchase Agreement, and because of this failure, we did not
release our stock to Oxford and did not consider the transaction consummated.

         We entered into an  "Agreement"  with Oxford with an effective  date of
July 9, 2001  whereunder we agreed to accept  securities of two publicly  traded
companies  valued in excess of $3.2 million,  by reference to the closing prices
of such  securities,  as of the date of its receipt of the securities in lieu of
the cash  investment  Oxford  Agreed to make  under the  April  25,  2001  Stock
Purchase  Agreement.  Among  other  things,  Oxford  agreed that it would not be
entitled to  nominate  one member to our Board of  Directors;  that it could not
require  performance  of any  matters  under the Stock  Purchase  Agreement  and
Certificate of Designations up to the date of July 9, 2001 Agreement,  including
but  not  limited  to  payments  of  dividends;  and  that  the  Certificate  of
Designations was null and void.

         Subsequent to the receipt of the securities of the two publicly  traded
companies from Oxford,  ithe issuers of those  securities and the Federal Bureau
of  Investigation  made  assertions  about  Oxford.  The FBI  notified us of its
investigations of Oxford,  but did not make any assertions  concerning us or any
of our officers or  directors.  Neither MDI nor its officers and  directors  are
under investigation by the FBI as part of their investigation of Oxford. We were
advised that, in the view of the issuers of the publicly  traded  securities and
the FBI,  the  securities  we  received  from  Oxford are or may be subject to a
dispute  between the issuers and Oxford,  which could impair the  liquidity  and
value of the securities.  If the liquidity and value of the securities  were, in
fact, impaired, then we believe we may have been defrauded by Oxford.

         By letter dated July 27, 2001, we notified Oxford that, pursuant to the
July 9th Agreement, we were exercising our right to exchange the publicly traded
securities we received from Oxford for all of our stock issued to Oxford.

         Oxford has refused to  honor our exchange  right. On August 6, 2001, we
filed a Motion For Temporary Restraining Order and Preliminary  Injunction and a
Verified  Complaint  in the United  States  District  Court of the  District  of
Maryland  against  Oxford and Gregory C.  Dutcher.

         We have therefore  excluded 2,142,000 shares, representing the total of
our Series C Preferred Stock on an as converted basis and origination  fees paid
in common stock,  from our total common stock  outstanding,  as of September 30,
2001. See "Part II, Item 1: Legal Proceedings."

         Upon the filing of our Form 8-K on July 16, 2001  reporting the issues,
NASDAQ halted trading in our securities. On such date, we also received a letter
from NASDAQ asking us to respond to various questions,  which we responded to by
the July 20, 2001 deadline.  Our representatives met with NASDAQ both on July 30
and August 7, 2001 to discuss the contents of that  submission  and other issues
concerning our financing transaction with Oxford.

         We agreed with NASDAQ that,  since we  exercised  our right of exchange
under an  Agreement  with  Oxford  dated July 9, 2001,  we no longer met the net
tangible asset maintenance  requirement for continued listing on NASDAQ SmallCap
Market.   Therefore,   we  moved  the   trading   of  our   securities   to  the
Over-The-Counter  Bulletin Board effective August 22, 2001. If in the future, we
meet the  criteria  for  listing  on NASDAQ,  we may elect to  reapply  for such
listing.

                                       14
<PAGE>

         SALES AND MARKETING

         The third  quarter,  which ended on September 30, 2001,  represents the
third consecutive  profitable  quarter for the Company.  This quarter,  we again
reached record revenue and earnings.  There are a variety of factors responsible
for these results.  They include the expansion of our sales and marketing  staff
to more  aggressively  pursue our  business  plan and the fact that our licensed
games are being embraced by more and more lotteries in North America.

         We have also entered into two groundbreaking  agreements,  the first of
which is with the Multi-State Lottery Association  ("MUSL"),  "), the consortium
of 22  Lotteries  that run  Powerball,  which  will  allow its  members to use a
generic advertising campaign starring the American musical icon Ray Charles, who
is under exclusive license to MDI for lottery games, advertising and promotions.
These spots should begin  airing  sometime in the fourth  quarter of fiscal year
2001 and represent the first time that 16 different lottery  jurisdictions  have
adopted the same  creative  advertising.  The largest  cooperative  MUSL program
before  ours  consisted  only  of  seven  states.  We  anticipate  two or  three
additional  states will join the  promotion  before the end of this year. We are
very excited about the potential  that this agreement has for the Company and we
are working on similar projects elsewhere.

         We also  have  signed  a  contract  with the  Virginia  Lottery,  which
affords both the lottery and MDI maximum flexibility. The contract calls for the
lottery to print scratch  tickets with a total minimum face value of $25 million
over the 31-month term of the  contract.  The Lottery may select from any of our
properties,  which are  currently  or may be licensed  by us in the future.  The
games can be set at any price  point or  quantity,  as long as the $ 25  million
amount is met  during the term of the  agreement.  Our gross  revenue  under the
contract is expected to range  between 8% and 10% of the  lottery's  prize fund,
depending on which  properties are selected.  This guarantees us a certain level
of revenue and gives the lottery the  flexibility to pick and choose from any of
our games.

         We  have  recently  executed  a  Master  License   Agreement  with  the
Federation   Internationale  de  Football   Association  for  exclusive  lottery
licensing rights for The World Cup 2002 Japan/Korea.  The agreement allows us to
market the World Cup property  anywhere in the world,  with the exception of the
host  countries of Korea and Japan.  This is a property that we have  vigorously
pursued for nearly two years.  Our strategy to expand  internationally  has been
somewhat dependent on a premier property with interest  throughout the world and
the World Cup,  which is the  largest  sporting  event in the  world,  is such a
property. Management is optimistic and believes that the World Cup will help the
company establish  relationships with numerous  lotteries through Europe,  Latin
America, Asia and Africa.

         We have also  reached an  agreement  in  principle  with  the  National
Basketball  Association  ("NBA").  This marks the first time that a professional
sports league in the United States has embraced the  lottery-licensing  concept.
We expect to finalize this agreement during the fourth quarter of 2001. However,
we cannot  provide  assurance  that a license  agreement  will be  approved  and
executed by the NBA. Nevertheless, with permission from the NBA, we have already
begun  marketing  NBA  lottery  games to our lottery  customers,  subject to our
execution of an agreement with the NBA.

         During the third quarter  ended  September 30, 2001, we created the new
position of Senior Vice President for  International  Sales and  Marketing,  and
retained Evelyn P. Yenson, the former Executive Director of the Washington State
Lottery and Senior  Director of Corporate  Communications  for Scientific  Games
International,  to serve in that  position.  Ms.  Yenson also served one term as
President of the North American  Association  of State and Provincial  Lotteries
and was the first  United  States'  delegate  of the World  Lottery  Association
Executive Committee.

                                       15
<PAGE>

         OPERATIONAL RESULTS

         The quarter ended  September 30, 2001 continues the trend of profitable
operations  started  in the  first  two  quarters  of fiscal  year  2001.  As we
indicated after the termination of our merger with The Lottery Channel in August
2000, and through the ensuing months,  our focus has been on developing our core
business.  The results of this third profitable  quarter reflect that focus. Our
revenue of over $4.0 million is a new record for any single quarter.

         Our revenue for the three months ended June 30, 2001 is more than twice
our revenue for the  three-month  period ended  September 30, 2000,  and we have
earned  $.06 per  common  share as opposed to a loss of $(.02) per share for the
same  period in 2000.  We believe  our core  business  is strong.  Our  contract
backlog  continues  to be strong and our games  continue to perform  well in the
marketplace.  We believe the  acceptance of licensed games by lotteries in North
America  has never been  higher.  It is our aim to continue to focus on the core
business as we strive to increase  shareholder  value,  build a more  successful
company and strengthen  our position as the leader in our licensed  lottery game
market.

         INTERNET PLATFORMS

         Our initiative  to provide customers with Internet  components  related
to our licensed games  continues to add value to our lottery  customers.  By the
end of December 2001, we expect to have launched ten web sites tied to our state
lottery  promotions.  The MDI  model  enables  a lottery  consumer  to  register
non-winning  tickets for second  chance  merchandise  drawings on the  Internet,
instead  of going to the  expense  of  physically  mailing  the  tickets  to the
lottery,  thus  providing  a tangible  convenience  and a real cost  savings for
lottery consumers.

         LICENSES AND CONTRACTS

         In addition to the Multi-State Lottery Association promotion there were
43 other MDI-licensed lottery promotions underway in North America and Australia
at the end of the quarter ended  September  30, 2001.  During this quarter there
were eight games launched,  which we anticipate will generate revenues in excess
of $3.3 million  over the next year and a half.  These new games join another 35
games on sale prior to the  beginning of the quarter.  With the MUSL  promotions
and at least 4 other MDI licensed  promotions  already  launched or scheduled to
launch prior to the end of the fiscal  year,  2001 will mark the first time that
lotteries have launched more than 50 of our proprietary  games and/or promotions
in a single fiscal year.

         During the quarter ended  September  30, 2001,  we had active  licensed
games on sale in 20 of the 39  government  lottery  jurisdictions  in the United
States, three of the five provincial lotteries in Canada, and in Australia.

         In addition  to our  Multi-State  Lottery  Association  promotion,  the
following licensed games launched during the quarter ended September 30, 2001:

                                                              Total Anticipated
      State                      Game                         Contract Revenues
--------------------------------------------------------------------------------

Delaware                   Elvis                                  $   93,000
Florida                    Elvis                                     750,000
Illinois                   Harley-Davidson                         1,039,200
Kansas                     Harley-Davidson                           115,000
New Jersey                 NASCAR Drivers                            700,000
New Jersey                 Jacks or Better                           500,000
Pennsylvania               Wheel of Fortune                          182,400
West Virginia              Elvis                                     310,000
                                                              --------------
   Total                                                         $ 3,689,600
                                                              ==============

                                       16
<PAGE>

<TABLE>
<CAPTION>

                                                                                  Nine months ended
                                                                                     September 30
                                                              -----------------------------------------------------------

                                                                          2001         %            2000           %
                                                                          ----         -            ----           -


<S>                                                                  <C>           <C>           <C>             <C>
Revenue                                                             $ 10,687,122   100.0%        $4,267,456      100.0%

Cost of revenues                                                       6,000,472    56.1%         2,823,568       66.2%
                                                              -----------------------------------------------------------

    Gross profit                                                       4,686,650    43.9%         1,443,888       33.8%

Selling, general and administrative expenses                           2,722,911    25.5%         2,631,468       61.7%
Terminated merger expenses                                                    -      0.0%           727,025       17.0%
Cost of unsuccessful funding                                             188,742     1.8%                 -        0.0%
                                                              -----------------------------------------------------------

    Operating profit (loss)                                            1,774,997    16.6%        (1,914,605)     -44.9%

Interest expense                                                         136,739     1.3%            83,341        2.0%
Interest income                                                          (14,896)   -0.1%           (10,117)      -0.2%
Other (income) expense                                                  (110,166)   -1.0%            57,218        1.3%
Gain on sale-investment securities, net                                  (12,669)   -0.1%                 -        0.0%
                                                              -----------------------------------------------------------


    Income (loss) before provision for income taxes                    1,775,989    16.5%        (2,045,047)     -48.0%

Provision for income taxes                                                46,824     0.4%             3,429        0.1%
                                                              -----------------------------------------------------------

    Net income (loss)                                                $ 1,729,165    16.1%      $ (2,048,476)     -48.1%
                                                              ===========================================================
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000

         Results for the first three-quarters of 2001 reflect a 150% increase in
revenue compared to the same nine month period of the fiscal year ended December
31,  20000.  Our  Harley-Davidson(R)  license  "leads  the  pack"  of  launching
increased revenue and profitability. Revenue for the nine months ended September
30, 2001 was  $10,687,100  compared  to  $4,267,500  for the nine  months  ended
September 30, 2000.  Harley-Davidson(R),  which  launched in 9 states during the
nine-month period ended September 30, 2001, accounted for 45% of our revenue for
such period. This was followed by Elvis(R) (13.5% of revenue), NASCAR(R) Drivers
(12.9% of revenue),  SPAM(R) (6.7% of revenue), and Wheel of Fortune(R) (6.2% of
revenue)  properties.  The remaining 15.7% of revenue was from 10 other licensed
properties.   Revenue  for  the  nine  months  ended  September  30,  2001  were
concentrated in five states with New Jersey, California,  Pennsylvania,  Florida
and  Illinois  accounting  for over 57% of  revenue  recognized  during the nine
months ended  September 30, 2001.  Our regional sales approach has enabled us to
continue to penetrate new markets. For the nine-month period ended September 30,
2001 16.8% of revenues  came from sales to new  customers,  including  the state
lotteries of Illinois, Michigan, New Mexico, West Virginia and Delaware.

                                       17
<PAGE>

         Cost of revenue as a  percentage  of  revenue  decreased  to 56.1% from
66.2% for the nine months ended  September  30, 2001 compared to the nine months
ended  September 30, 2000.  This decrease in the cost ratio reflects our ability
to achieve a higher gross profit due to product mix and creative game design.

         The gross profit  increased in the nine months ended September 30, 2001
to $4,686,700  (43.9% of revenue) compared to $1,443,900 (33.8 % of revenue) for
the nine months  ended  September  30,  2000.  This  represents  a gross  profit
percentage increase of 29.9% over the nine months ended September 30, 2000.

         Selling, general and  administrative expenses were $2,722,900 (25.5% of
revenue) for the nine months ended September 30, 2001 compared to $2,631,500 for
the nine months  ended  September  30,  2000.  Salaries  and  employee  benefits
increased  approximately  $216,000 during the first nine months of 2001 compared
to the same period in 2000. This increase is attributable to the increased sales
staffing needed to develop our regional and global sales  organization which has
helped to maintain our sales  backlog of $13.4 million as of September 30, 2001.
Notwithstanding this increase in salaries and employee benefits the total of the
other  selling,  general and  administrative  expenses is actually lower for the
nine months ended September 30, 2001 compared to the nine months ended September
30, 2000.  This was possible even though revenue  increased by 150% for the nine
months ended  September 30, 2001 compared to the nine months ended September 30,
2000.

         Costs of  unsuccessful  funding of $188,700  for the nine  months ended
September  30, 2001  includes  legal,  accounting  and  investment  banking fees
associated with the unsuccessful  placement of our Series C Preferred Stock with
Oxford  International,  Inc.  which is discussed in greater  detail in "Part II,
Item 1 Legal Proceedings."

         Terminated merger expenses for the nine months ended September 30, 2000
of $727,000 relate to our unsuccessful merger with The Lottery Channel, Inc.

         Operating income was $1,775,000  (16.6% of revenue) for the nine months
ended September 30, 2001 compared to an operating loss of $(1,914,600) (44.9% of
revenue) for the nine months ended September 30, 2000. This substantial positive
net increase of $3,689,600 is due to the factors described above.

         Interest  expense was $136,700 for the nine months ended  September 30,
2001  compared to $83,300 for the nine months ended  September  30,  2000.  This
increase in interest  expense is attributable to both interest and  amortization
of  warrant  costs  associated  with  $720,000  of  additional  short-term  debt
outstanding  during most of the nine months ended  September  30, 2001.  All but
$260,000  of this debt was paid off  during the  second  quarter  ended June 30,
2001.  We  anticipate  repaying  the  remaining  $260,000,  which is owed to our
President and Chief Executive Officer, sometime in the first quarter of 2002.

         Other income was $110,200 for the  nine months ended September 30, 2001
compared to a $57,200  expense for the nine months ended September 30, 2000. The
$110,200 income for the nine months ended September 30, 2001 was attributable to
forgiveness  of debt owed to our attorneys and settled  during the first quarter
of 2001.  The  $57,200  expense  for the nine months  ended  September  30, 2000
represented legal fees in excess of an inventory loss judgement favorable to us.

         The gain on sale of  securities  of $12,700 for the nine  months  ended
September  30,  2001  was  attributable  to the  sale of  eLot  stock  held  for
investment.

         For the  reasons  set  forth  above,  we had  income  before  taxes  of
$1,776,000  for the nine months  ended  September  30,  2001  compared to a loss
before taxes of $(2,045,000) for the nine months ended September 30, 2000.

         The  foregoing  resulted in a $.16 basic  earnings per share and a $.14
diluted earnings per share on net income for the nine months ended September 30,
2001. Loss per share on a basic and diluted basis was $(.22) for the nine months
ended September 30, 2000.






                                       18
<PAGE>




<TABLE>
<CAPTION>
                                                                                Three months ended
                                                                                  September 30,
                                                           -------------------------------------------------------------

                                                                      2001         %              2000           %
                                                                      ----         -              ----           -

<S>                                                                <C>             <C>           <C>             <C>
Revenue                                                          $ 4,001,656     100.0%        $1,536,592      100.0%

Cost of revenues                                                   2,276,367      56.9%           958,205       62.4%
                                                           -------------------------------------------------------------

    Gross profit                                                   1,725,289      43.1%           578,387       37.6%

Selling, general and administrative expenses                         937,809      23.4%           786,932       51.2%
Cost of unsuccessful funding                                          99,109       2.5%                 -        0.0%

                                                           -------------------------------------------------------------
    Operating profit (loss)                                          688,371      17.2%          (208,545)     -13.6%

Interest expense                                                       7,995       0.2%            32,853        2.1%
Interest income                                                       (6,123)     -0.2%            (1,128)      -0.1%
                                                           -------------------------------------------------------------

    Income (loss) before provision for income taxes                  686,499      17.2%          (240,270)     -15.6%

Provision for income taxes                                            34,789       0.9%             1,100        0.1%
                                                           -------------------------------------------------------------

    Net income (loss)                                             $  651,710      16.3%        $ (241,370)     -15.7%
                                                           =============================================================
</TABLE>


THREE MONTHS ENDED  SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000.

         Results  for the  third  quarter  of 2001  reflect a 160%  increase  in
revenue  as  our  Harley-Davidson(R)  license  "leads  the  pack"  of  launching
increased revenue and profitability into this year. Revenue for the three months
ended  September 30, 2001 was  $4,001,700  compared to $1,536,600  for the three
months ended September 30, 2000. Harley-Davidson(R),  which launched in Illinois
and Kansas in the third  quarter of 2001,  accounted  for 49.9% of our  revenue.
NASCAR(R)  Drivers and Elvis  accounted  for 21.4% and 10.8% of the  three-month
period's revenues, respectively. The remaining 17.9% represented revenue from 10
other licensed  properties.  Sales for the three months ended September 30, 2001
were  concentrated  in five states  with  Illinois,  New  Jersey,  Pennsylvania,
California and Florida  accounting for over 68% of revenue recognized during the
three months ended  September 30, 2001.  Our regional sales approach has enabled
us to continue to penetrate new markets.  26.9% of revenues for the  three-month
period ended September 30, 2001 came from sales to new customers,  including the
state lotteries of Illinois, Michigan, New Mexico, West Virginia and Delaware.

                                       19
<PAGE>

         Cost of revenues as a  percentage  of revenue  decreased  to 56.9% from
62.4% for the three months ended September 30, 2001 compared to the three months
ended  September 30, 2000.  This decrease in the cost ratio reflects our ability
to achieve a higher gross profit due to product mix and creative game design.

         Gross profit  increased in the three months ended September 30, 2001 to
$1,725,300  (43.1% of revenue)  compared to $578,400  (37.6% of revenue) for the
three months ended  September  30, 2000.  This result  represents a gross profit
percentage increase of 14.6% over the three months ended September 30, 2000.

         Selling,  general and administrative  expenses  were $937,800 (23.4% of
revenue)  for the three  months ended  September  30, 2001  compared to $786,900
(51.2% of revenue) for the three months ended  September  30, 2000.  The largest
single component increasing within selling,  general and administrative expenses
was salaries and employee benefits,  which increased  approximately  $85,000 for
the three months ended  September  30, 2001.  This increase is  attributable  to
increased sales staffing to develop our regional sales  organization,  which has
helped to maintain our sales  backlog of $13.4 million as of September 30, 2001.
Accounting and legal expenses  increased $25,400 over the same period in 2000 as
a result of our  efforts  to remain  on  NASDAQ.  There  were  additional  costs
associated with our Fort Worth, Texas office,  which was opened in October 2001,
of $11,600.

         Costs of  unsuccessful  funding of $99,100 for the three  months ended
September  30, 2001  includes  legal,  accounting  and  investment  banking fees
associated with the unsuccessful  placement of our Series C Preferred Stock with
Oxford  International,  Inc.  which is discussed in greater  detail in "Part II,
Item 1 Legal Proceedings."

         Operating income was $688,400 (17.2% of revenue) for the three months
ended  September 30, 2001 compared to an operating loss of $(208,500)  (13.6% of
revenue)  for the three  months  ended  September  30,  2000.  This  substantial
positive net increase of $896,900 is due to the factors described above.

         Interest  expense was $8,000 for the three months ended  September  30,
2001  compared to $32,900 for the three months ended  September  30, 2000.  This
reduction in interest  expense is  attributable  to the  retirement of short-tem
debt in the  second  quarter  of  2001  and the  conversion  of our  convertible
subordinated debenture, which occurred in the first quarter of 2001.

         Interest  income was $6,100 for the three  months ended  September  30,
2001  compared to $1,100 for the three months  ended  September  30, 2000.  This
additional interest income is attributable to our improved cash position for the
three months ended September 30, 2001.

         For the reasons set forth above, we had income before taxes of $686,500
for the three months ended September 30, 2001 compared to a loss before taxes of
$(240,300) for the three months ended September 30, 2000.

         The foregoing  resulted in a $.06 basic and a $.05 diluted earnings per
share on net income for the three months ended September 30, 2001. For the three
months  ended  September  30, 2000 we had a basic and diluted  loss per share of
$(.02).



                                       20
<PAGE>

         LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 2001, we had cash and cash  equivalents of $334,900
compared to $528,200 as of December 31, 2000.  This  decreased  cash position is
attributable  to  increases  in  inventory,  acquisition  of new  licenses,  the
reduction of accounts  payable and repayment of short-term debt occurring during
the nine months ended September 30, 2001.

         As of September  30,  2001,  we had  a net working  capital  deficit of
$960,100.  However,  within  current  liabilities  is $2,510,800 of "Billings in
excess of cost and estimated  earnings on  uncompleted  contracts"  representing
unrecognized revenue (i.e., amounts invoiced to, or received from our customers,
but which  may not be  recognized  as  revenue  until we  purchase  the  related
contracted merchandise). Accordingly,  such  liability will not adversely impact
cash flow,  except to the extent that we need to purchase  merchandise and incur
subsequent   fulfillment  costs  relative  to  this  revenue,   which  typically
approximates 50% of the related revenue. Without such liability, working capital
would have been $295,300.

         As part of our continuing effort to improve working capital, in January
2001,  we negotiated a stock for fees exchange with two of our law firms and our
investment  banking  firm.  The cash flow  savings  from this  exchange  totaled
$269,025.

         Our  indebtedness as of September 30, 2001 was $302,315,  consisting of
an installment note, with a remaining balance of $42,315,  and a short-term note
of $260,000 both payable to our President and Chief Executive Officer. As stated
earlier, we repaid $460,000 of short-term loans to unrelated parties late in the
second quarter ended June 30, 2001.

         The convertible subordinated debenture,  with an outstanding balance of
$558,750,  was converted into common stock on March 14, 2001. Under the terms of
the  conversion we paid the interest  payments which would have been due through
September 21, 2001.

         As more fully  disclosed under "Recent  Developments" in April 2001, we
entered into an agreement to sell Series C Convertible  Preferred Stock for $3.2
million. The funds were never received and attempts were made to restructure the
financing  transaction.  We  agreed  to  accept  securities  in  lieu  of  cash.
Ultimately, we determined to exercise our right to exchange these securities for
our stock. See "Part II, Item 1: Legal Proceedings"

         We do not have any material  capital  commitments  and do not currently
anticipate making any substantial expenditure other than in the normal course of
business.  We have  undertaken an aggressive  program of acquiring new licenses,
some of which may require substantial up front payments.


        SEASONALITY AND REVENUE FLUCTUATIONS

        Our  business is not  seasonal.  However,  our  revenues are expected to
fluctuate  as  individual  license-based  promotions  commence  or wind down and
terminate.  The useful life of a promotion is generally  relatively short as the
novelty of the game or the popularity of the licensed  material wanes over time.
In addition,  our licenses (which are generally for 2.5 to 4 years) terminate at
various  times over the next several  years.  The life span of a promotion,  the
timing of agreements  with the lotteries to run  promotions,  the acquisition of
new licenses and the  commencement  of new promotions are  unpredictable.  Also,
since most lotteries are government  agencies with lottery executives  appointed
by the  state's  governor  or other  high  ranking  official,  opportunities  or
projects in progress can be slowed after an election if the  incumbent  governor
is  not  re-elected.  Accordingly,  period  to  period  comparisons  may  not be
indicative of future results.



                                       21
<PAGE>


                                     PART II
                                OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS.

         On August 6, 2001, we filed a Motion For Temporary  Restraining  Order
and  Preliminary  Injunction  and a  Verified  Complaint  in the  United  States
District Court of the District of Maryland  against Oxford  International,  Inc.
and its principal, Gregory C. Dutcher.

         We asked  the court to enter an Order and  Decree  to the  effect  that
Oxford  and Mr.  Dutcher  (and  their  officers,  agents,  servants,  employees,
attorneys and any persons in active  concert or  participation  with them) shall
not transfer, alienate, sell, gift, pledge without giving notice of our right to
exchange,  hypothecate, give, grant an option as to, or otherwise dispose in any
way any of our shares of stock that we  transferred to Oxford.  In addition,  we
requested the court to set a date for a Preliminary  Injunction maintaining such
an Order and Decree, or alternatively,  entering a mandatory  injunction causing
the parties to exchange our stock for the securities we received from Oxford.

         The court held a telephone  conference  on August 6, 2001.  During  the
telephone conference,  according to the order, Mr. Dutcher stated that he had no
intention of  transferring of our stock within the next 20 days. At 4:00 p.m. on
August 6, 2001,  the court  ordered,  among  other  things,  that Oxford and Mr.
Dutcher, and their officers,  agents,  servants,  employees,  attorneys, and any
person in active  concert or  participation  with them,  shall not  transfer  or
otherwise dispose in any way of any shares of our stock that were transferred to
Oxford by us. The Temporary  Restraining Order issued by the court was to expire
at 5 p.m. on August 16, 2001, unless within such time the order was extended for
good  cause,  or  unless  Oxford  and  Mr.  Dutcher  consent  to  an  extension.
Subsequently,  by agreement of the parties,  the material terms of the August 6,
2001 Temporary  Restraining  Order were extended to September 7, 2001,  with the
parties to confer  with the Judge  during  the week of  September  4,  2001,  to
schedule  a  Preliminary  Injunction  hearing.  Oxford  and Mr.  Dutcher,  their
officers,  agents,  servants  employees,  attorneys,  and any  person  in active
concert or participation  with them, still cannot transfer or otherwise  dispose
of our stock during that time period. Copies of the Temporary Restraining Orders
have been forwarded to Prudential Securities Inc. During discovery in litigation
we issued a subpoena to Prudential. In response to that subpoena, on October 24,
2001,we were provided with a copy of the Series C preferred stock certificate by
Prudential, which stock was the subject of the Court's order to prevent transfer
or disposal,  indicating  that this stock  certificate  remains in  Prudential's
physical  possession and has not been  transferred or disposed of as directed by
the Court's Order.

         Subsequent to filing the Complaint,  we filed an Amended Complaint. In
our  Verified  Amended  Complaint,  we  alleged  claims  of  federal  and  state
securities fraud and common law fraud, claims of misrepresentation and breach of
contract, and other claims. We asked for remedies including specific performance
that  Oxford and Mr.  Dutcher  transfer  our stock to us,  rescission,  monetary
damages and injunctive relief, as referenced above.




                                       22
<PAGE>


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         We entered into a Stock Purchase  Agreement with Oxford  International,
Inc. with an effective date of April 25, 2001.  Pursuant to that  Agreement,  we
issued  to  Oxford  2,100  shares  of  Series C  Preferred  Stock,  representing
approximately 15.8% of our outstanding common stock on an as converted basis. We
anticipated receipt of $3,200,000 in cash from this transaction.

         Oxford failed to pay the  consideration  of $3,200,000  required by the
April 25, 2001 Stock Purchase Agreement, and because of this failure, we did not
release its stock to Oxford and did not consider the transaction consummated.

         We entered into an  "Agreement"  with Oxford with an effective  date of
July 9, 2001  whereunder we agreed to accept  securities of two publicly  traded
companies  valued in excess of $3.2 million,  by reference to the closing prices
of such securities as of the date of our receipt of the  securities,  in lieu of
the cash  investment  Oxford  agreed to make  under the  April  25,  2001  Stock
Purchase  Agreement.  Among  other  things,  Oxford  agreed that it would not be
entitled to  nominate  one member to our Board of  Directors;  that it could not
require  performance  of any  matters  under the Stock  Purchase  Agreement  and
Certificate of Designations up to the date of July 9, 2001 Agreement,  including
but  not  limited  to  payments  of  dividends;  and  that  the  Certificate  of
Designations was null and void.

         The Series C Preferred Stock originally had a liquidation preference of
$1,523.81 per share, paid a cumulative  preferred dividend at the rate of 8% per
annum,  payable in cash or common stock at our  discretion,  and was convertible
into an aggregate of 2,100,000  shares of common  stock,  subject to  adjustment
only for events such as stock splits,  stock dividends and similar  events,  and
was not adjustable or resettable  based on the market price of the common stock.
If not previously  converted by Oxford, five hundred twenty five (525) shares of
the Series C Preferred Stock would have been automatically converted into common
stock no later  than 120 days from the  issue  date,  and  after a  registration
statement  covering the full amount of the shares of common stock underlying the
Series C Preferred  Stock had been filed by us with the  Securities and Exchange
Commission,  and an aggregate of five hundred twenty five (525) shares of Series
C Preferred  Stock would have been  automatically  converted  into common  stock
every ninety (90) days  thereafter.  We were not permitted to create or increase
the authorized number of shares of any class or series of stock ranking prior to
or on  parity  with the  Series C  Preferred  Stock  either as to  dividends  or
liquidation  without  approval of the holders of at least a majority of the then
outstanding shares of Series C Preferred Stock.

         Oxford  had the  option  of  nominating  one  member  of our  Board  of
Directors  reasonably  acceptable  to us so long as the sum of (i) the aggregate
number of shares  of common  stock  issuable  upon  conversion  of the  Series C
Preferred  Stock and (ii)  aggregate  number of shares of common  stock owned by
Oxford and its  subsidiaries  was equal to or greater than  2,100,000 and Oxford
and its  subsidiaries  beneficially  owned greater than ten percent (10%) of the
number of shares of our common stock outstanding.

         In connection with the  transaction,  we issued  an aggregate of 42,000
shares  of common  stock as an  origination  fee.  We also  contemplated  paying
Venture Partners Capital,  LLC, a registered  broker-dealer with whom our former
Executive Vice President of Finance is affiliated, a $256,000 cash fee. Such fee
was not paid  due to the  circumstances  surrounding  the  transaction.  We also
therefore  excluded  2,142,000  shares,  representing  the total of our Series C
Preferred  Stock on an as converted  basis and  origination  fees paid in common
stock,  from our total common stock  outstanding,  as of September 30, 2001. See
"Item 1. Legal Proceedings."



                                       23
<PAGE>




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Exhibits



         Exhibit 10.1               Agreement, dated July 9, 2001, between
                                    MDI Entertainment, Inc and Oxford
                                    International, Inc.
                                    (Incorporated by reference to Form
                                    8-K filed July 16, 2001).

(b)      Reports on Form 8-K

                                    Filed on July 16, 2001 (Item 5: Other
                                    Events- Amendment of Financing Agreement
                                    regarding Oxford International,Inc.).

                                    Filed  on  July  24,  2001  (Item  5:  Other
                                    Events-NASDAQ    halts    trading   of   MDI
                                    Entertainment,Inc. securities -Press release
                                    dated July 19, 2001).

                                    Filed on July 31, 2001 (Item 5: Other Evets-
                                    MDI exercises  its option to exchange  stock
                                    it received from Oxford International,  Inc.
                                    for MDI Stock  issued to Oxford;  correction
                                    to  previously  reported  date of securities
                                    trade halt by NASDAQ).

                                    Filed on August 8, 2001 (Item 5: Other
                                    Events- Officer Changes and Filing of
                                    Temporary Restraining Order, Preliminary
                                    Injunction and Verified Complaint against
                                    Oxford International, Inc. and
                                    Gregory C. Dutcher).

                                    Filed on August 23, 2001 (Item 5: Other
                                    Events-MDI accepted to trade on the
                                    Over-The-Counter Bulletin Board.).






                                       24
<PAGE>





                                 SIGNATURE PAGE


         In accordance with the  requirements of the Securities  Exchange Act of
1934,  the  registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

Dated: October 31, 2001




                                                         MDI ENTERTAINMENT, INC.
                                                                 (Registrant)


                                            By:           /s/ Steven M. Saferin
                                                              Steven M. Saferin
                                                  President and Chief Executive
                                                           Officer and Director
                                                   (Principal Executive Officer)


                                                By:   /s/ Kenneth M. Przysiecki
                                                          Kenneth M. Przysiecki
        Vice President of Accounting and Administration, Secretary and Director
                                                  (Principal Financial Officer)






                                       25
<PAGE>



                             EXHIBIT INDEX
--------------------------------------------------------------------------------

          No.                       Description


          10.1                      Agreement, dated July 9, 2001,
                                    between MDI Entertainment, Inc and
                                    Oxford International, Inc.
                                    (Incorporated by reference to Form
                                    8-K filed July 16, 2001).