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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 Commission file number: 0-9463
 MDI, INC.
  DELAWARE
    
    75-2626358(State or other jurisdiction
    
    (I.R.S. EmployerOf incorporation or organization)
    
    IdentificationNo.)9725 DATAPOINT DRIVE, SUITE 200SAN ANTONIO, TEXAS
    
    78229(Address of principal executive offices)
    
    (Zip Code)
 (210) 477-5400
 NONE
  COMMON STOCK, $.01 PAR VALUE
 þ o
 o o




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##### 



MDI, INC.
FORM 10-QSB
TABLE OF CONTENTS
 FORWARD LOOKING STATEMENTSPART IITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONSITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4: CONTROLS AND PROCEDURESPART IIITEM 1: LEGAL PROCEEDINGSITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDSITEM 3: DEFAULTS UPON SENIOR SECURITIESITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5: OTHER INFORMATIONITEM 6: EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCERTIFICATIONSCertification of CEO Required by Rule 13a-14(a)Certification of CFO Required by Rule 13a-14(a)Joint Certification of CEO & CFO Required by Rule 13a-14(b)
  
 Forward Looking Statements
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ITEM 1. FINANCIAL STATEMENTS
 MDI, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    523
    
    
    $
    2,140Trade accounts receivable, net
    
    
    2,558
    
    
    
    1,912Inventories
    
    
    999
    
    
    
    1,008Prepaid expenses and other current assets
    
    
    327
    
    
    
    191Total current assets
    
    
    4,407
    
    
    
    5,251Property and Equipment, net
    
    
    581
    
    
    
    661Other Assets:Goodwill
    
    
    4,612
    
    
    
    2,792Other intangible assets, net
    
    
    33
    
    
    
    35Other assets
    
    
    470
    
    
    
    520Total assets
    
    $
    10,103
    
    
    $
    9,259LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    1,206
    
    
    $
    876Accrued expenses
    
    
    298
    
    
    
    256Deferred legal settlement
    
    
    340
    
    
    
    388Accrued compensation
    
    
    396
    
    
    
    401Other current liabilities
    
    
    11
    
    
    
    70Deferred revenue
    
    
    244
    
    
    
    236Total current liabilities
    
    
    2,495
    
    
    
    2,227Long-Term Liabilities
    
    
    
    
    
    
    Total Liabilities
    
    
    2,495
    
    
    
    2,227Commitments and Contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $5 par value, issuable in
series; 2,000,000 shares authorized; Series A,
LIBOR + 2% cumulative convertible; 195,351
shares authorized, issued and outstanding
    
    
    977
    
    
    
    977Common stock, $.01 par value; 50,000,000 shares
authorized; 23,174,137 and 21,174,137 shares
issued at March 31, 2006 and December 31, 2005,
respectively
    
    
    232
    
    
    
    212Additional paid-in-capital
    
    
    168,890
    
    
    
    166,926Accumulated deficit
    
    
    (123,790
    )
    
    
    (122,382
    )Treasury stock, at cost (3,488,350 common shares
at March 31, 2006 and December 31, 2005)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    7,608
    
    
    
    7,032Total liabilities and stockholders equity
    
    $
    10,103
    
    
    $
    9,259
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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Three months ended March 31,2006
    
    
    2005Net sales
    
    $
    2,695
    
    
    $
    1,948Cost of sales (exclusive of depreciation shown separately below)
    
    
    1,250
    
    
    
    962Gross profit
    
    
    1,445
    
    
    
    986Other operating costs:Selling, general and administrative
    
    
    2,549
    
    
    
    2,544Non cash stock compensation
    
    
    164
    
    
    
    Depreciation and amortization
    
    
    121
    
    
    
    1952,834
    
    
    
    2,739Operating loss
    
    
    (1,389
    )
    
    
    (1,753
    )Other income (expense):Interest income
    
    
    
    
    
    
    2Other, net
    
    
    1
    
    
    
    (2
    )1
    
    
    
    Loss before income taxes and discontinued operations
    
    
    (1,388
    )
    
    
    (1,753
    )Income tax
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (1,388
    )
    
    
    (1,753
    )Income (loss) from discontinued operations
    
    
    (12
    )
    
    
    8Net loss
    
    
    (1,400
    )
    
    
    (1,745
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (8
    )Net loss allocable to common stockholders
    
    $
    (1,408
    )
    
    $
    (1,753
    )Basic and diluted earnings (loss) per share from:Continuing operations, less non cash stock compensation
    
    $
    (0.06
    )
    
    $
    (0.12
    )Non cash stock compensation effect
    
    
    (0.01
    )
    
    
    (0.00
    )Discontinued operations
    
    
    (0.00
    )
    
    
    0.00Basic and diluted loss per share
    
    $
    (0.07
    )
    
    $
    (0.12
    )Number of common shares used in computations
    
    
    19,685,787
    
    
    
    14,617,603
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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three months ended March 31,2006
    
    
    2005Operating Activities:Net loss
    
    $
    (1,400
    )
    
    $
    (1,745
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Non cash stock compensation
    
    
    164
    
    
    
    Loss on disposal of fixed assets
    
    
    
    
    
    
    2Depreciation and amortization
    
    
    121
    
    
    
    195Provision for losses on accounts receivable
    
    
    6
    
    
    
    (2
    )Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    (652
    )
    
    
    1,232Inventories
    
    
    9
    
    
    
    (188
    )Prepaid and other current assets
    
    
    (86
    )
    
    
    (75
    )Trade accounts payable
    
    
    330
    
    
    
    (461
    )Accrued and other current liabilities
    
    
    (62
    )
    
    
    322Net cash used in operating activities
    
    
    (1,570
    )
    
    
    (720
    )Investing Activities:Purchases of property and equipment
    
    
    (39
    )
    
    
    (94
    )Net cash used in investing activities
    
    
    (39
    )
    
    
    (94
    )Financing Activities:Issuance of common stockPayment of preferred stock dividends
    
    
    (8
    )
    
    
    (8
    )Net cash used in financing activities
    
    
    (8
    )
    
    
    (8
    )Net decrease in cash and cash equivalents
    
    
    (1,617
    )
    
    
    (822
    )Cash and cash equivalents, beginning of period
    
    
    2,140
    
    
    
    3,368Cash and cash equivalents, end of period
    
    $
    523
    
    
    $
    2,546Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    Non-cash investing and financing activitiesGoodwill acquisition from purchase of Advanced Security Link
with common stock
    
    $
    1,820
    
    
    $
    
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MDI, Inc.
 Notes to Consolidated Financial Statements
 Note 1: General / Nature of Operations and Significant Accounting Principles
 General
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Basis of Presentation
   Stock-Based Compensation
     Three months ended March 31,2005Net Loss allocable to common stockholders:As reported
    
    $
    (1,753
    )Deduct: Total stock compensation under fair value method
for all awards, net of taxes
    
    
    (275
    )Pro forma
    
    $
    (2,028
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.12
    )Pro forma
    
    $
    (0.14
    )
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Warranty Reserves
   Three months ended March 31,2006
    
    
    2005Beginning balance
    
    $
    83
    
    
    $
    80Charged to expense
    
    
    3
    
    
    
    2Usage
    
    
    
    
    
    
    (14
    )Closing balance
    
    $
    86
    
    
    $
    68
 Reclassifications
  Note 2: Business Acquisition:
  Note 3: Trade Accounts Receivable
  March 31,
    
    
    December 31,2006
    
    
    2005Gross trade accounts receivable
    
    $
    2,783
    
    
    $
    2,131Less: allowance for doubtful
accounts
    
    
    (225
    )
    
    
    (219
    )Net trade
accounts receivable
    
    $
    2,558
    
    
    $
    1,912
 Note 4: Earnings Per Share
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Note 5: Severance Compensation:
  Accrued at
    
    
    2006 Charges
    
    
    Amount paid
    
    
    Accrued atDecember 31, 2005
    
    
    (credits)
    
    
    in cash
    
    
    March 31, 2006Severance
    
    
    10
    
    
    
    75
    
    
    
    (65
    )
    
    
    20$
    10
    
    
    $
    75
    
    
    $
    (65
    )
    
    $
    20
  Results of Operations
  PercentagePercentage of Net Sales
    
    Increase (Decrease)Three Months ended March 31,
    
    Between Periods2006
    
    2005
    
    2006 vs. 2005Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    38.3
    %Cost of sales
    
    
    46.4
    %
    
    
    49.4
    %
    
    
    29.9
    %Gross profit
    
    
    53.6
    %
    
    
    50.6
    %
    
    
    46.6
    %Operating expenses:Selling, general and administrative
    
    
    100.7
    %
    
    
    130.6
    %
    
    
    6.6
    %Depreciation and amortization
    
    
    4.5
    %
    
    
    10.0
    %
    
    
    -37.9
    %Operating loss
    
    
    -51.5
    %
    
    
    -90.0
    %
    
    
    20.8
    %Other income (expense)
    
    
    -0.0
    %
    
    
    -0.0
    %
    
    
    0.0
    %Loss before taxes and discontinued operations
    
    
    -51.5
    %
    
    
    -90.0
    %
    
    
    20.8
    %Income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    -51.5
    %
    
    
    -90.0
    %
    
    
    20.8
    %Loss from discontinued operations
    
    
    -0.4
    %
    
    
    0.4
    %
    
    
    250.0
    %Net loss
    
    
    -51.9
    %
    
    
    -89.6
    %
    
    
    19.8
    %Net loss allocable to common stockholders
    
    
    -52.2
    %
    
    
    -90.0
    %
    
    
    19.7
    %
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
    9




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Financial Condition, Liquidity and Capital Resources
     10




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Contractual Obligations and Commitments
  Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Contractual
obligations and
commitments:Operating leases
    
    $
    2,108
    
    
    $
    420
    
    
    $
    599
    
    
    $
    576
    
    
    $
    513
    
    
    $
    $
    2,108
    
    
    $
    420
    
    
    $
    599
    
    
    $
    576
    
    
    $
    513
    
    
    $
    
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rates
  
 ITEM 4. CONTROLS AND PROCEDURES
  11




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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
       
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 a)
    
    Exhibits. The following is a list of the Exhibits filed with this Form 10-QSB.
    12




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b)
    
    Reports on Form 8-K. The following reports on Form 8-K were filed during the three months
ended March 31,2006:
 1.
    
    MDI entered into a definitive agreement (the Acquisition Agreement) on December 9,
2005 to acquire from Ecomatrix Funding, Inc. (Seller) the business of privately-held
Advanced Security Link (ASL) of Costa Mesa, California. On January 5, 2006, MDI completed
the acquisition pursuant to the terms of the Acquisition Agreement.2.
    
    On February 2, MDI announced estimates of certain financial results for the fourth
quarter ended December 31, 2005.
 
 SIGNATURES
  MDI, INC.Dated: May 15, 2006
    
    By:
    
    /s/ Peter B. Knepper

Peter B. KnepperInterim Chief Financial Officer
 13