ral10qfinalnov122007.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended September 30, 2007
	OR
[ ]	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 0-9463

MDI, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	75-2626358
(State or other jurisdiction	(I.R.S. Employer
Of incorporation or organization)	Identification
	No.)

10226 SAN PEDRO AVENUE, SUITE 200
SAN ANTONIO, TEXAS	78216
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (210) 582-2664

Check whether the issuer (1) 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 [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

(Check one): Yes [ ] No [X]

As of November 12, 2007, the Company had 37,106,302 shares of common stock outstanding.

Transitional Small Business Disclosure format (check one): Yes [ ] No [X]

MDI, INC.

FORM 10-QSB

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006

Notes to Financial Statements

Item 2. Management’s Discussion and Analysis and Results of Operation.

Item 3. Controls and Procedures.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EXHIBITS

CERTIFICATIONS

Certification of Chief Executive Officer

Certification of Chief Financial Officer

Joint Certification of Chief Executive Officer and Chief Financial Officer

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

MDI, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

		September 30,		December 31,
		2007		2006
ASSETS
Current Assets:
Cash and cash equivalents	$	1,969	$	452
Trade accounts receivable, net		1,067		1,308
Inventories		466		736
Prepaid expenses and other current assets		232		107
Total current assets		3,734		2,603
Property and Equipment – net		204		192
Other Assets:
Goodwill		4,612		4,612
Other intangible assets		23		28
Other assets		506		363
Total assets	$	9,079	$	7,798
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable	$	595	$	1,473
Accrued expenses		382		263
Deferred legal settlement		364		388
Accrued compensation		387		382
Bank factoring advance		-		312
Other current liabilities		115		9
Deferred revenue		189		210
Total current liabilities		2,032		3,037
Long-Term Liabilities		-		-
Total Liabilities		2,032		3,037
Commitments 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		977
Common stock, $0.01 par value, 100,000,000 shares authorized; 32,106,302 and 22,657,610
shares issued at September 30, 2007 and December 31, 2006, respectively		321		227
Additional paid-in-capital		141,451		132,957
Stock subscription receivable		(2,600)		-
Accumulated deficit		(133,102)		(129,400)
Total stockholders' equity		7,047		4,761
Total liabilities and stockholders' equity	$	9,079	$	7,798

The accompanying notes are an integral part of these consolidated financial statements.

MDI, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

		Three months ended September 30,
		2007		2006
Net sales	$	1,843	$	1,933
Cost of sales (exclusive of depreciation shown separately below)		761		932
Gross profit		1,082		1,001
Other operating costs:
Selling, general and administrative		2,513		2,631
Depreciation and amortization		31		118
		2,544		2,749
Operating loss		(1,462)		(1,748)
Other income (expense):
Interest income		29		10
Interest expense		(1)		-
Gain on sale of assets		489		-
Other, net		-		1
		517		11
Loss before income taxes and discontinued operations		(945)		(1,737)
Income taxes		(1)		-
Loss from continuing operations		(946)		(1,737)
Loss from discontinued operations		-		-
Net loss		(946)		(1,737)
Dividend requirements on preferred stock		(8)		(8)
Net loss allocable to common shareholders	$	(954)	$	(1,745)
Basic and diluted earnings (loss) per share from:
Continued operations	$	(0.03)	$	(0.08)
Discontinued operations		0.00		(0.00)
Basic and diluted loss per share	$	(0.03)	$	(0.08)

Number of common shares used in computation		32,100,254		22,620,110

The accompanying notes are an integral part of these consolidated financial statements.

MDI, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

		Nine months ended September 30,
		2007		2006
Net sales	$	5,949	$	6,846
Cost of sales (exclusive of depreciation shown separately below)		2,686		3,348
Gross profit		3,263		3,498
Other operating costs:
Selling, general and administrative		7,312		8,201
Depreciation and amortization		89		359
		7,401		8,560
Operating loss		(4,138)		(5,062)
Other income (expense):
Interest income		56		20
Interest expense		(49)		-
Gain on sale of assets		484		-
Other, net		(29)		2
		462		22
Loss before income taxes and discontinued operations		(3,676)		(5,040)
Income taxes		(2)		-
Loss from continuing operations		(3,678)		(5,040)
Loss from discontinued operations		-		(12)
Net loss		(3,678)		(5,052)
Dividend requirements on preferred stock		(25)		(25)
Net loss allocable to common shareholders	$	(3,703)	$	(5,077)
Basic and diluted earnings (loss) per share from:
Continued operations	$	(0.12)	$	(0.24)
Discontinued operations		0.00		(0.00)
Basic and diluted loss per share	$	(0.12)	$	(0.24)

Number of common shares used in computation		29,767,250		21,036,224

The accompanying notes are an integral part of these consolidated financial statements.

MDI, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		Nine months ended September 30,
		2007		2006
Operating Activities:
Net loss	$	(3,678)	$	(5,052)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of assets		(484)		-
Non cash stock compensation		354		534
Services rendered for warrants issued		134		-
Rent forgiveness for stock warrants issued		46		-
Depreciation and amortization		89		359
Provision for losses on accounts receivable		144		16
Loss on early collection of notes receivable		29		-
Changes in operating assets and liabilities, net of dispositions:
Trade accounts receivable		97		327
Inventories		254		29
Prepaid and other current assets		103		135
Trade accounts payable		(878)		85
Accrued and other current liabilities		121		44
Net cash used in operating activities		(3,669)		(3,523)
Investing Activities:
Purchases of property and equipment		(101)		(71)
Proceeds from sale of assets		100		-
Net cash used in investing activities		(1)		(71)
Financing Activities:
Sale of common stock, net of stock acquisition costs		5,450		2,193
Net repayment of short term debt		(268)		-
Exercise of stock options		5		-
Payment of preferred stock dividends		-		(17)
Net cash provided by (used in) financing activities		5,187		2,176
Net increase (decrease) in cash and cash equivalents		1,517		(1,418)
Cash and cash equivalents, beginning of period		452		2,140
Cash and cash equivalents, end of period	$	1,969	$	722
Non cash investing and financing activities:
Purchase of assets from Ecomatrix Funding, allocated to goodwill for
2,000,000 shares of common stock	$	-	$	1,820
Subscription receivable for shares of stock	$	2,600	$	-
Stock acquisition costs for warrants issued	$	78	$	-
Note receivable issued in sale of assets	$	400	$	-
Supplemental cash flow information:
Cash paid during the year for:
Interest	$	49	$	-
Income taxes	$	-	$	-

The accompanying notes are an integral part of these consolidated financial statements.

Notes to the Consolidated Financial Statements

Note 1 Organization

MDI, Inc. (“MDI” or “the Company) was incorporated in the state of Delaware on December 1995 under the name Ultrak, Inc., and changed its name to MDI, Inc. on September 2004. The Company has its headquarters in San Antonio, Texas. (See Part I, Item 2 for a description of the Company’s business.)

Note 2 Basis of Presentation

Our Consolidated Financial Statements as of September 30, 2007 have not been audited, but have been reviewed by the Company’s outside public accounting firm. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the interim periods reported are not necessarily indicative of the results expected for the year.

Note 3 Summary of Significant Accounting Policies

Use of Estimates

In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues, income or loss from operations, and net income or loss, as well as on the value of certain assets on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include receivable reserves, recoverability of long-lived assets, revenue recognition, stock-based compensation, and recoverability of goodwill and other intangible assets.

Revenue Recognition

The Company derives revenue from sales of products and services. The following summarizes the major terms of the contractual relationships with customers and the manner in which the Company accounts for sales transactions. Revenue is recognized on product sales when goods are shipped to the customer. Revenue from the sale of contract software maintenance service is recognized over the one-year term of the agreement. Revenue related to multiple element arrangements is separated in accordance with EITF 00-21 and SOP 97-2.

Long term labor and material revenues are accounted for under the percentage-of-completion method, whereby revenues are recognized as work on contract progresses based on the costs incurred to date as a percent of total estimated costs for the contract. Costs to complete include, when appropriate, material, labor, subcontracting costs and other overhead costs. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period that the change in estimate occurs.

Uncertainty in Income Taxes

Effective at the beginning of the first quarter of 2007, the company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48, the Company has not changed any of its tax accrual estimates. The company files U.S. federal, and U.S. state tax returns. For state tax returns the company is generally no longer subject to tax examinations for years prior to 1996.

Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006 the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No, 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related interpretations. We also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. During the nine months ended September 30, 2007, the Company granted 3,205,400 options with 375,500 options vested on the date of grant, 93,100 vesting on March 31, 2007 and 2,736,800 vesting quarterly during 2007 and 2008. During the three months ended September 30, 2007, the Company granted 68,500 options that vested on the date of grant and 225,000 options were forfeited.

The Company recorded a $122 thousand and $354 thousand expense for stock compensation cost related to stock options recognized in the three months and nine months ended September 30, 2007, respectively. The Company recorded a $187 thousand and $534 thousand expense for stock compensation cost related to stock options recognized in the three months and nine months ended September 30, 2006, respectively. No future income tax benefit was recognized in the periods ended September 30, 2007 and 2006.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	September 30, 2007	September 30, 2006
Expected life in years	2.5	5.5
Expected volatility	89%	81%
Risk-free interest rate	4.8	4.7

Earnings (Loss) Per Share

The Company computes basic earnings (loss) per share based on the weighted-average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of shares outstanding, plus the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued.

As of September 30, 2007 and 2006, there were 7,222,306 and 4,603,593 stock options outstanding, respectively, but were not included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive. As of September 30, 2007 and 2006, there were 195,351 shares of preferred stock outstanding, which convert to 406,981 shares of common stock. These shares were excluded from the computation of diluted loss per share because the effect was anti-dilutive.

Reclassifications

Certain amounts have been reclassified in the prior period financial statements to conform to the current period presentation.

Note 4 Business Acquisitions, Divestures and Stockholder’s Equity

Acquisitions

Advanced Security Link - In January 2006, the Company purchased certain assets used by Ecomatrix Funding, Inc. in its Advanced Security Link operation. The purchase price was 2 million shares of the Company’s stock.

STC Holdings, Inc. - On January 31, 2007, the Company entered into a Stock Purchase Agreement with Stratis Authority, Inc. (“Stratis”) pursuant to which Stratis agreed to purchase 5,306,122 shares of common stock (“Shares”) priced at $0.49 per share and to pay for the Shares over a six month period. The Company recorded a $2.6 million stock subscription receivable for these Shares. Stratis assigned its rights to purchase the Shares to Ridgemont Investment Group LLC (“Ridgemont”) and the Company consented to the assignment on August 7, 2007 by entering into a Consent to Assignment of and Amendment to Stock Purchase Agreement pursuant to which Ridgemont agreed to purchase from the Company the Shares for the following consideration (“Purchase Price”): (a) $2,600,000 in exchange for 2,000,000 of the Shares which price has not yet been paid; and (b) in exchange for 3,306,122 of the Shares, Ridgemont agreed to transfer to the Company all of the shares of STC Holdings, Inc., the owner of the property at 10226 San Pedro Avenue, San Antonio, Texas (“Property”). The Property consists of a two-story, 32,000 square foot building, where the Company occupies the top floor consisting of 16,000 feet, as well as two other buildings bringing the total footage to 50,000. The Property is subject to a $5.5 loan secured only by the Property, there being no personal liability to the maker of the note. On October 8, 2007, the Company completed the purchase from Ridgemont of all of the shares of STC Holdings, Inc. On October 8, 2007, the closing bid price of the shares was $0.84 resulting in a market price of $2.8 million.

FAS Construction Management, Inc. - On October 19, 2007 the Company completed its acquisition of all of the outstanding shares of FAS Construction Management, Inc. in return for 5,000,000 shares of the Company. On October 19, 2007, the closing bid price of the shares was $0.85 resulting in a market price of $4.3 million. The combined companies will be headquartered in the MDI building located at 10226 San Pedro Avenue, San Antonio, TX, and will maintain their current employee base at this location. FAS will operate as a wholly owned subsidiary of MDI.

In connection with the acquisition, and as an inducement to FAS employees to join the Company, the Company awarded employment inducement stock options in accordance with NASDAQ Marketplace Rule 4350 to eleven newly hired FAS employees who are not executive officers of the Company. The inducement stock options cover an aggregate of 644,000 shares of common stock and are classified as non-qualified stock options with an exercise price equal to the fair market value of MDI's common stock at the close of the trading day on the grant date. These stock options were approved by the Compensation Committee of MDI' Board of Directors. The options have a five-year term and will vest over two years with 1/8 of the total number of shares granted to vest quarterly beginning January 1, 2008 and an additional 1/8 to vest on the first day of each quarter thereafter. All shares not exercised within that time will be forfeited. In accordance with NASDAQ rules, these grants of stock options were made under a stock option plan without stockholder approval.

According to Regulation S-X and Regulation S-B, the Company will file audited financial statements of STC Holdings, Inc. and FAS Construction Management, Inc. within 75 days of date of transactions.

Divesture

ABM Data Systems Business - On September 1, 2007 the Company completed the sale and transfer of its ABM Data Systems business (“ABM Business”) to American Business Monitoring Systems, LLC for $100,000 in cash paid at closing and a $400,000 Secured Promissory Note (“Note”) due April 1, 2012. Principal and interest payments are payable monthly during the term of the Note. Repayment of the Note is secured by the ABM Business assets. The purchaser assumed all future obligations and liabilities associated with the ABM Business. The revenue of the ABM business was not significant to the overall business of the Company.

Sale of Equity

In March 2007, the Company entered into identical Securities Purchase Agreements, Registration Rights Agreements and Common Stock Purchase Warrants with two investors for the sale by MDI of 256,410 shares of common stock priced at $0.78 per share and warrants totaling 128,206 shares exercisable at $0.86 having a three year term. The total cash received by MDI at closing was $196 thousand. Also in March 2007, the Company issued two warrants for the purchase of 247,293 shares of common stock exercisable at $0.90 and having a three year term. These common stock purchase warrants were issued in lieu of $46 thousand in rent payments.

During April 2007, the Company sold approximately 725,000 shares of its common stock raising approximately $725 thousand and received $765 thousand in cash upon the exercise of a warrant which was held by Crestview Capital Partners to purchase 750,000 shares at $1.02 per share.

On May 7, 2007, the Company entered into a Securities Purchase Agreement and Registration Rights Agreement with certain institutional investors providing for the sale of 2,395,210 shares of common stock priced at $1.67 per share and warrants totaling 1,197,604 shares exercisable at $2.51 having a five year term from the date of issuance. The total cash received at closing was $4,000,000, from which approximately $40,000 was dispersed as transaction related expenses.

On April 25, May 2, and May 7, 2007, the Company issued three (3) warrants each for the purchase of 50,000 shares (150,000 total shares) of common stock exercisable at $2.50 and having a five year term. These common stock purchase warrants were issued as payment for specified services provided.

See Part II, Item 2 for further information about registration of the shares and warrant shares.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The matters discussed in this management's discussion and analysis or results of operations contain forward-looking statements that involve risks and uncertainties. For example, when we use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could" or "may," or other words that convey uncertainty of future events or outcome, we are making forward-looking statements. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences are discussed elsewhere in this quarterly report on Form 10-QSB. Forward-looking statements represent our current expectations and are inherently uncertain. The Company disclaims, any intent or obligation to update these forward-looking statements.

Business Description

The Company is engaged in the following three lines of business.

1. Physical and Electronic Security– MDI began as a manufacturer and marketer of enterprise-grade physical and electronic security technologies that include open architecture security command and control software, intelligent access control hardware and video surveillance management solutions. We are both a manufacture and a supplier of software, hardware and professional engineering and design services which are used in controlling access to facilities and in providing video and audio surveillance of facilities, people and other property. This business began over 25 years ago when the United States Federal Government engaged us to design and install “enterprise-grade” security systems to protect some of their very high exposure facilities in Washington, D.C. Over the last 25 years, this business has grown to include many other government facilities, such as military bases, as well as corporate office facilities, schools and university campuses and infrastructure facilities such as oil and gas refineries and pipelines.

a. SAFEnet® Operating System - Because each installation required a custom or tailored design, we developed a common software “operating system” which today is known as “SAFEnet”. This is an open architecture access control, intrusion detection and video security software. We believe it has no peer and will become the backbone for the future growth and success of our company.

b. Pointguard® Xtreme Security Platform – This product is the upgrade path to the very successful Pointguard® product. This product is a simplified version of our Enterprise-Grade SAFEnet product. It has been sculpted to make the screens and initial setup easier for the average user, but with the SAFEnet core to allow for full upward migration as a user’s needs grow.

c. Viewpoint™ Digital Video Recorders - In January 2006, the Company purchased assets and intellectual property from Ecomatrix Funding, Inc., including those relating to its DVR product line. The Company has since merged the DVR product line it acquired from Ecomatrix with its own DVR product lines to create the Company’s state-of-the-art Viewpoint™ DVR product. Through its engineering efforts, the Company has combined the best features of the two product lines, with the latest hardware available, providing the Company a highly competitive offering in the video DVR market.

d. Standard Design Products - The Company also sells a line of its products for which it has developed a standardized design. These are the “out-of-the-box” security products and include digital video recorders, video cameras, small access control systems and related products. These products are sold through marketing co-ops such as PSA and Northern Video, as well as through the Company sales staff our dealer network.

e. Professional Services Group (“PSG”) - The PSG provides the design, installation, system implementation, and end user training of the customized SAFEnet system to our clientele. The PSG business offerings are unique to the integrated security systems market. Through this group, MDI has brought to the marketplace the system flexibility of its SAFEnet system and its customizing capabilities where large, sophisticated systems users demand a solution that provides them the exact system capabilities to meet demanding market needs. The PSG has been actively involved with large U.S. government contractors in country-wide command and control infrastructure projects in select foreign markets. The PSG tailored-consulting approach to meeting customer needs, when managed by our talented group of industry experts, (most with over 20 years of high-end industry experience) bring real world solutions to our most sophisticated clients.

2. School Safety - Through its LearnSafe™ Initiative, the Company provides a complete safety and security program for public and private school systems. The Company created its Learn Safe™ Initiative in response to an alarming increase in violence and employee misconduct in our nation’s schools. The imperative was simple: provide our nation’s children and teachers with the ability to learn and teach in a safe environment. The Learn Safe™ Initiative provides the tools and training to dramatically decrease the risk of violence that kids face daily. The Learn Safe™ Initiative combines a security curriculum, continuing education programs, and a robust suite of technology and security services.

a. Nortel Solutions – Nortel Solutions has partnered with the Company to be the exclusive systems integrator for the Learn Safe™ Initiative, providing best-in-class technology products and services focused on network infrastructure, information security, Internet content management and wireless communications.

b. Assa Abloy – The Company and Assa Abloy have established a business partnership to target the national educational security market under the Learn Safe™ Initiative establishing Assa Abloy as the Learn Safe preferred product line for access control hardware in school security engagements.

c. The Cooperative Purchasing Network (“TCPN”) and Texas Region 4 Education Service Center (“Region 4 ESC”) – The Company and TCPN and Region 4 are partners in developing a program which will make the LearnSafe Initiative™ accessible and economically feasible for all school districts in Texas and nationwide. Region 4 provides school districts with professional development and technical assistance that supports statewide goals for school improvement and student achievement. TCPN is an operating unit of the Region 4, and can be used by public and private schools, colleges, universities, cities, counties and other government agencies to purchase products and services without having to undergo the high costs and extensive time associated with a competitive bidding process. TCPN has customers utilizing their contracts in 41 states. Last year, 67% of Texas school districts utilized the contract.

d. Texas Safe Schools Week – In October 2007, the LearnSafe™ Initiative and its partners founded the first-ever Texas Safe Schools Week, which is to be observed across the state of Texas every year on the week of October 21-27. Texas Safe Schools Week is the first statewide effort of its kind and is designed to increase awareness of school violence prevention, promote classroom and campus safety, and spread the word about programs designed to help all members of school communities throughout the state of Texas operate in productive, safe environments.

e. TEACh Safety™ Curriculum – In partnership with The SBS Group, the TEACh Safety ™ curriculum was developed to provide the LearnSafe Initiative the critical components to offer the ideal wrap-around school safety program. Through the TEACh Safety curriculum, educators and school staff are provided the training to identify the early warning signs of problems in the school environment and the critical knowledge and training in how to address those problems.

3. Construction Management and Contractor Services - On October 19, 2007, the Company purchased FAS Construction Management, Inc. “(FAS”), a premier contractor and construction management firm. As an MDI company, FAS provides the Company with a comprehensive spectrum services including nationwide security assessments, risk audits, security consulting, professional project management and construction management services to MDI existing and future clients. This client base will include the numerous school districts where MDI expects to implement its LearnSafe™ Initiative. The combination will bring together the strength of FAS’ nation-wide system of architects, engineers and construction management capabilities, which is currently consulting on several hundred construction related projects.

Growth Strategy and Competition

The Company’s growth strategy focuses on developing each of the three business markets. While we have always been a manufacturer of enterprise-grade business offerings, as part of our growth strategy, we have returned to high level customization of SAFEnet®, our enterprise-grade software. The high level systems’ capability, combined with our professional services offerings through the PSG, provides for a complete systems solution for the large sophisticated users in the integrated security marketplace. The competition in the enterprise-grade electronic access control intrusion detection systems manufacturer business is still primarily Lenel, Softwarehouse, and GE Systems (formerly Casi-Rusco). These companies are owned by large corporations. Lenel is owned by United Technologies Corporation, Softwarehouse by Tyco, and GE Systems by General Electric. The advantage that MDI has in the enterprise-grade business offerings is our flexibility to accommodate large system users. MDI has always been known for its system stability and its ability to meet a customer’s needs by providing a custom software component, which subsequently becomes a part of the standard system for supportability. None of our competitors provide that service as a normal part of their business offerings.

The Learn Safe Initiative has received tremendous acceptance with the Texas Regional Educational Service Centers we have been in contact with, and particularly Region 4 ESC where Houston is the main city. We have negotiated agreements with specific School Districts to provide the LearnSafe Initiative for installation in their facilities. The challenge today is in creating the individual purchasing and payment plan for the school districts desiring implementation of the Learn Safe Initiative. We continue to work on this and are optimistic that we will reach solutions for some, or all, of these School Districts in the fourth quarter of 2007.

FAS is already a profitable company which immediately adds financial strength to the Company in the form of additional revenue and earnings. Its current professional relationships and clientele give MDI needed talent and resources as well as new customers for MDI’s products and services.

Cash Requirements

We will continue to have a need to generate additional cash to finance our business and its growth. This will be done through a combination of the sale of our equity and/or by borrowing money.

Financial Condition, Liquidity and Capital Resources

In the first nine months of 2007, the Company’s cash and cash equivalents increased $1,517 thousand from $452 thousand at December 31, 2006 to $1,969 thousand at September 30, 2007. The Company had net cash used in operating activities of $3,669 thousand for the first nine months of 2007.

Management believes that the Company will be able to satisfy its liquidity requirements for at least the next 12 months through cash in hand, collection of receivables, management of expenses and additional financing. However, no assurance can be given that any financing, if obtained, will be adequate to meet our capital needs.

Risks Associated With Our Common Equity

Our Common Stock is available for purchase and sale through the NASDAQ Stock Market. Please refer to the Company’s latest Form 10-KSB for information about risks associated with the Company’s Common Equity.

As of January 1, 2007 there were 22,657,610 shares of common stock outstanding. Since that date, the Company entered into agreements to sell 5,306,122 shares of common stock under a Stock Purchase Agreement, as described in Part II, Item 2 below; 2,395,210 shares under a Securities Purchase Agreement and Registration Rights Agreement, as described in Part II, Item 2 below; 981,410 shares of common stock to nine (9) accredited investors, as described in Part II, Item 2 below; 750,000 shares to Crestview Capital Master LLC pursuant to its exercise of a warrant granted to it dated May 23, 2006, an additional 3,450 shares pursuant to warrant exercise, 12,500 shares granted under option exercises and 5,000,000 shares of common stock under a Stock Purchase Agreement as described in Part II, Item 2 below. There are currently 37,106,302 shares of common stock outstanding. In addition, since January 1, 2007, the Company issued warrants to purchase 1,868,103 shares of its common stock, as described in Part II, Item 2 below and stock options to 11 employees of FAS Construction Management, Inc. to purchase 644,000 shares of common stock as described in Part II, Item 2 below.

When all of the shares sold and warrant shares issued are registered with the SEC and sold in the public market, it could cause the market price of our common stock to drop by increasing the total number of shares offered for sale to the public. An overabundance of available shares in the market may limit the price growth potential of our Common Stock even if our business is doing well, because the available supply may exceed the demand for our shares. This phenomenon may impair our ability to raise needed capital by reducing the price at which we could sell our common stock. In addition, the Company may seek future financings that involve the issuance of equity securities or instruments convertible into or exchangeable for equity securities and any such future financings may further reduce the price of our common stock.

Long-Term Debt

Through the purchase of the shares of STC, the Company now owns its assets which consist solely of the Property. In association with the purchase and development of the Property, STC (“Borrower”) executed a Promissory Note (“Note”) dated April 5, 2007 in the original principal amount of $5,500,000 in favor of Capmark Finance, Inc., a California corporation (“Lender”). The Note is governed by the terms and conditions set forth in a Loan Agreement dated April 5, 2007 which provide, among other things for: (i) a Maturity Date of April 9, 2010; (ii) payment monthly of interest only until the Maturity Date; (iii) payment on the Maturity Date of all unpaid principal and interest; (iv) Borrower is given the right to extend the Maturity Date for two additional 12-month terms; (v) Borrower may prepay the Note; (vi) the repayment of the Note is secured by the Property only, there being no personal liability to the Borrower.

Results of Operations

The following tables contain information regarding the percentage of net sales of certain income and expense items for the three months and nine months ended September 30, 2007 and 2006 and the percentage changes in these income and expense items from year to year. The percentage increase (decrease) column in the tables below reflects the increase (decrease) in the dollar change between the periods.

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006



	Three months ended September 30, 2007		Three months ended September 30, 2006		Three months ended September 30,
	Dollars	% of Net Sales	Dollars	% of Net Sales	Change In Dollar Value	Percentage Change In Dollar Value

Net Sales	$1,843	100%	$1,933	100%	$(90)	-5%
Gross profit	1,082	59%	1,001	52%	81	8%
Selling, general and administrative	2,513	136%	2,631	136%	(118)	-4%
Operating loss	(1,462)	-79%	(1,748)	-90%	286	16%
Net loss	(946)	-51%	(1,737)	-90%	791	46%

Sales decreased $90 thousand. Expressed in dollars, gross profit increased $81 thousand. Selling, general and administrative (SG&A) expenses decreased $118 thousand. This reflects our efforts to reduce costs in 2006. Net loss decreased $791 thousand. This is due primarily to reduced SG&A costs and the sale of assets during the quarter.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006



	Nine months ended September 30, 2007		Nine months ended September 30, 2006		Nine months ended September 30,
	Dollars	% of Net Sales	Dollars	% of Net Sales	Change In Dollar Value	Percentage Change In Dollar Value

Net Sales	$5,949	100%	$6,846	100%	$(897)	-13%
Gross profit	3,263	55%	3,498	51%	(235)	-7%
Selling, general and administrative	7,312	123%	8,201	120%	(889)	-11%
Operating loss	(4,138)	-70%	(5,062)	-74%	924	18%
Net loss	(3,678)	-62%	(5,052)	-74%	1,374	27%

Sales decreased $897 thousand, however gross profit as a percent of sales improved. Expressed in dollars, gross profit decreased $235 thousand. The decrease in gross profit is due primarily to a decrease in net sales partially offset by improved margin from our year to date product mix. Selling, general and administrative (SG&A) expenses decreased $889 thousand. This reflects our efforts to reduce costs in 2006. Net loss decreased $1,374 thousand. This is due primarily to reduced SG&A costs and the sale of assets during the quarter.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. Under the supervision and with the participation of management, at the end of the period covered by this report the Certifying Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, the Certifying Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relative to our company required to be disclosed in our periodic filings with the SEC.

Changes in Internal Controls

Our Certifying Officer has indicated that there were no changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of his evaluation, and there were no such control actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

No material developments occurred during the quarter with respect to our on-going litigation. For a discussion of this litigation, please refer to the Company’s Form 10-QSB for the prior two quarters and its latest Form 10-KSB for information about litigation involving the Company. We currently are not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 31, 2007, the Company entered into a Stock Purchase and Registration Rights Agreement with Stratis Authority, Inc. (the “Investor”) providing for the sale by MDI of 5,306,122 shares of common stock priced at $0.49 per share. MDI filed a registration statement with the SEC on Form S-3 on July 19, 2007 and on July 31, 2007 the SEC advised the Company that it will not review the registration statement. Stratis assigned its rights to purchase the Shares to Ridgemont Investment Group LLC (“Ridgemont”) and the Company consented to the assignment on August 7, 2007 by entering into a Consent to Assignment of and Amendment to Stock Purchase Agreement pursuant to which Ridgemont agreed to purchase from the Company the Shares for the following consideration (“Purchase Price”): (a) $2,600,000 in exchange for 2,000,000 of the Shares which price has not yet been paid; and (b) in exchange for 3,306,122 of the Shares, Ridgemont agreed to transfer to the Company all of the shares of STC Holdings, Inc., the owner of the property at 10226 San Pedro Avenue, San Antonio, Texas (“Property”). The Property consists of a two-story, 32,000 square foot building, where the Company occupies the top floor consisting of 16,000 feet, as well as two other buildings bringing the total footage to 50,000. The Property is ~~valued at approximately $9.5 million and is~~ subject to a $5.5 loan secured only by the Property, there being no personal liability to the maker of the note. On October 8, 2007, the Company completed the purchase from Ridgemont of all of the shares of STC Holdings, Inc.

On October 19, 2007 the Company completed its acquisition of all of the outstanding shares of FAS Construction Management, Inc. in return for 5,000,000 shares of the Company. The combined companies will be headquartered in the MDI building located at 10226 San Pedro Avenue, San Antonio, TX, and will maintain their current employee base at this location. FAS will operate as a wholly owned subsidiary of MDI. MDI is required to file with the SEC by November 19, 2007 a registration statement registering the shares for resale.

Item 6. Exhibits and Reports on Form 8-K

Exhibits

31.1 Certification of CEO Pursuant to Rule 13a-14(a)

31.2 Certification of CFO Pursuant to Rule 13a-14(a)

32.1 Joint Certification of CEO and CFO Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Reports on Form 8-K

The following reports on Form 8-K were filed during the three months ended September 30, 2007:

On August 7, 2007, the Company filed a Form 8-K stating that it and Ridgemont Investment Group LLC (“Ridgemont”), executed a Consent to Assignment of and Amendment to Stock Purchase Agreement (the “Agreement”) pursuant to which Ridgemont agreed to purchase from MDI 5,306,122 registered common shares of the Company and that the agreement reached with Ridgemont replaces the one that MDI made on June 21, 2007 to acquire 50% of Data Rose Limited Partnership, the partnership that owns the offices MDI formerly occupied at 9725 Datapoint. That agreement has been terminated with no liability to either party.

On July 16, 2007 the Company filed a Form 8-K dated July 16, 2007 stating that James Vandevere resigned as a member of the Board of Directors.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.

	MDI, INC.

November 12, 2007	By:	/s/ Michael Sweet
		Michael Sweet
		Senior Vice President and Chief Financial Officer