SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

Commission file number: 0-9463

MDI, INC.

Registrant’s telephone number, including area code: (210) 477-5400

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [  ] No [X]

     The aggregate market value of the voting stock held by non-affiliates of the registrant, as of September 30, 2004 was $13,792,888. As of that date 14,673,286 shares of the Registrant’s Common Stock were outstanding.

MDI, INC.
FORM 10-Q
TABLE OF CONTENTS

Forward Looking Statements

     Certain statements contained or incorporated in this report on Form 10-Q, which are not statements of historical fact, constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward looking statements are made in good faith by MDI, Inc. (the “Company” or “MDI”) pursuant to the “safe harbor” provisions of the Reform Act. These statements may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ materially from any future results, performance or achievements, whether expressed or implied. These risks, uncertainties and factors include the timely development and acceptance of new products and services, the impact of competitive pricing, fluctuations in operating results, the ability to introduce new products and services, technological changes, reliance on intellectual property and other risks. The objectives set forth in this Form 10-Q are subject to change due to global market and economic conditions beyond the control of the Company.

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ITEM 1. FINANCIAL STATEMENTS

MDI, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

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

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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

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

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AMERICAN BUILDING CONTROL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

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

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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

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MDI, Inc.

General

     MDI is a leader in the access control business and is an important participant in many Homeland Security projects. MDI’s new Security Suite^TM of products has been launched successfully. In the Company’s opinion, it is the first fully integrated system incorporating access control, video, audio alarm monitoring, and system auditing functions. The Company distributes its PointGuard^TM access control product primarily to the small to mid market commercial customer through a dealer network. ABM provides alarm management software to central monitoring stations that are owned by either organizations for their own internal use, such as large universities, or commercial operators such as surveillance companies. MVP sells monitoring and recording devices to operators of public transit vehicles. MVP also sells third-party products as well as the Company’s own branded products.

     On September 22, 2004, the Company filed a Certificate of Ownership and Merger with the Secretary of State of Delaware pursuant to Section 253 of the Delaware General Corporation Law whereby ABC Merger Corp., a wholly-owned subsidiary of the Company, was merged with and into the Company. As part of the merger, the registrant changed its name to MDI, Inc. effective as of the close of business on September 24, 2004. In accordance with the Certificate, the By-Laws of the Company were amended to reflect the change in the Company’s name. The Company’s trading symbol with the NASDAQ National Market (“NASDAQ”) was changed to MDII effective Monday, September 27, 2004, the effective date of the Company’s name change with NASDAQ.

     NASDAQ has a number of continued listing requirements, including a minimum share price requirement of $1.00 per share. If the Company’s share price falls below $1.00 per share for thirty consecutive business days, then NASDAQ could notify the Company that it is in default and give it a period of time to cure the deficiency after which NASDAQ could begin delisting proceedings. Those proceedings could lead to the Common Stock no longer trading on NASDAQ. Delisting from NASDAQ could result in a reduction in the liquidity of any investment in the Common Stock and have an adverse effect on the trading price of the Common Stock. Delisting could also reduce the ability of holders of the Common Stock to purchase or sell shares as quickly and inexpensively as they have done historically. During the third quarter 2004, the Company’s stock price closed below $1.00 per share at the end of a number of trading sessions. On November 11, 2004, the Company received a NASDAQ Stock Market letter notifying the Company that for the last 30 consecutive business days, the Company’s common stock bid price had closed under the minimum $1.00 per share requirement for continued inclusion. The letter provides the Company 180 calendar days, or until May 10, 2005, to regain compliance. Compliance is regained by the Company maintaining a common stock closing bid price of $1.00 or more for a minimum of ten consecutive business days. After the Company’s common stock shares have traded above $1.00 per share for those ten days, NASDAQ will notify the Company that it has regained compliance. A press release was issued detailing the NASDAQ notification event.

Notes to Consolidated Financial Statements

Note 1: Nature of Operations

     Basis of Presentation

     The accompanying financial statements have been derived from the accounts of MDI, Inc. and its subsidiaries (the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. The interim financial statements are prepared on an unaudited basis in accordance with accounting principles for interim reporting and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods, have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. For further information, refer to the consolidated financial statements and notes to the consolidated financial statements for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K.

     The local currency is considered the functional currency for the Company’s Swiss operations. Assets and liabilities are translated into U.S. Dollars at the rate of exchange in effect at the balance sheet date. Revenues and expenses are translated into U.S. Dollars at the average monthly exchange rates prevailing during the year. At the end of September 2004, the Swiss entity had a net asset value of $75 thousand and a favorable adjustment for foreign currency translation of $127 thousand. Based upon the Company’s

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plan to discontinue the Swiss operations prior to the end of 2004, the Company does not anticipate any future exposure due to fluctuation in foreign currency after 2004.

     Stock-Based Compensation

     The Company accounts for stock-based compensation to employees using the intrinsic value method. Compensation costs for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. No compensation cost related to stock options is reflected in the statements of operations as all options granted under the Company’s option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For stock options granted under the Company’s 2002 Stock Option Incentive Plan, the vesting period varies by individual grants as determined by the Compensation Committee of the Board of Directors. The following table illustrates the effect on operations and per share data as if the Company had applied the fair value method to employee stock-based compensation (in thousands, except per share data):

     The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of a range of 85 to 90 percent; risk-free interest rates ranging from 3.2 to 3.9 percent; no dividend yield; and expected lives of one to seven years.

     Warranty Reserves

     Reserves are provided for the estimated warranty costs when revenue is recognized. The costs of warranty obligations are estimated based on warranty policy or applicable contractual warranty, historical experience of known product failure rates and use of

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materials and service delivery charges incurred in correcting product failures. Specific warranty accruals may be made if unforeseen technical problems arise. If actual experience, relative to these factors, adversely differs from these estimates, additional warranty expense may be required.

     The table below shows the roll-forward of warranty accrual for the three and nine months ended September 30, 2004 and 2003 (in thousands):

     Reclassifications

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

Note 2: Discontinued Operations

     On September 29, 2004, the Company tentatively approved a management buyout of its Switzerland based business unit in order to avoid continuing losses within the division, subject to normal closing activities. The Company also decided that, should the management buyout not be consummated during the fourth quarter, that operations in Switzerland will be discontinued prior to the end of the year. Accordingly, the Switzerland business unit performance is presented as a component of discontinued operations for all periods.

     On July 1, 2004, the Company sold its SecurityandMore and Industrial Vision Source distribution businesses to Mace Security International, Inc. (“Mace”). The SecurityandMore and Industrial Vision Source businesses are presented as discontinued operations for all periods.

     On December 20, 2002, the Company sold its closed-circuit television (“CCTV”) business to Honeywell International, Inc. (“Honeywell”) for $36 million, subject to post-closing adjustments, plus the transfer of certain liabilities (“Honeywell Asset Sale”). The final settlements related to the CCTV business are included in discontinued operations.

     As a result of the sale of the CCTV business to Honeywell, most of the Company’s international entities no longer have any business activities and are in the process of liquidation. During the liquidation process, certain claims have been made against the Company’s French, Belgian and German entities. At the end of September 2004 an accrual of $25 thousand remained for the unsettled claims.

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     Following is a summary of the discontinued operations (in thousands):