UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended DECEMBER 31, 2004
                                       OR
          [ ] 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 0-29798

                              CompuDyne Corporation
             (Exact name of registrant as specified in its charter)

          Nevada                                                23-1408659
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                 2530 Riva Road, Annapolis, Maryland      21401
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (410) 224-4415

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

Securities  registered  pursuant to Section 12(g) of the Act:  Common Stock $.75
                                                               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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
  will not be contained, to the best of registrant's knowledge, in definitive
 proxy or information statements incorporated by reference in Part III of this
              Form 10-K or any amendment to this Form 10-K. [ X ]

   Indicate by check mark whether the registrant is an accelerated filer (as
                       defined in Rule 12b-2 of the Act)
                                 Yes [X] NO [ ]

  As of March 25, 2005, a total of 8,123,479 shares of Common Stock, $.75 par
  value, were outstanding. The aggregate market value of Common Stock held by
 non-affiliates of the Registrant, based upon the average of the bid and asked
 prices on the Nasdaq National Market on June 30, 2004 was approximately $73.8
                             million. (see ITEM 5).


Documents incorporated by reference: Portions of the Proxy Statement relating to
     the 2005 Annual Meeting of Shareholders are incorporated in Part III.


                                       1
<PAGE>




                                     PART I

ITEM 1. BUSINESS

         CompuDyne  Corporation was reincorporated in Nevada in 1996. We believe
that we are a leading  provider of products and services to the public  security
markets. We operate in four distinct segments:  Institutional  Security Systems;
Attack Protection; Federal Security Systems; and Public Safety and Justice.

         Revenues from external clients,  gross profit, pre-tax income and total
assets for each segment for the last three years are discussed in footnote 20 to
the consolidated financial statements.

Four Business Segments
----------------------

Institutional Security Systems

         The Institutional  Security Systems ("ISS") segment is headquartered in
Montgomery,  Alabama and operates  under the trade name Norment  Security  Group
("Norment").  The clients this  segment  serves  consist  primarily of state and
local governmental units. This segment provides physical and electronic security
products and services to the corrections industry (prisons and jails) and to the
courthouse, municipal and commercial markets. ISS, through a network of regional
offices,  provides  field level design,  installation  and  maintenance  of both
physical and electronic security products.

Key products and services of the Institutional Security Systems segment include:

     o    MaxWall: a modular steel, concrete-filled, prefabricated jail cell.

     o    Airteq: a complete line of pneumatic and electro-mechanical operating
          devices, locks and hardware.

     o    Integrated Security Systems: integrated central control and monitoring
          products  for  locking,   paging,  audio,  closed  circuit  television
          cameras, nurse call and duress signals.

Attack Protection

         The  Attack  Protection   segment  is  one  of  the  country's  largest
manufacturers  of bullet,  blast and attack  resistant  windows  and doors.  The
ultimate  clients this segment serves consist  primarily of units of the Federal
Government.  These products are designed for high security  applications such as
embassies,  courthouses and Federal buildings.  We also provide our products and
services to banks,  corporate  headquarters and other  facilities  requiring the
highest  level of  protection  currently  available.  We  believe  that we are a
premier provider of Underwriters  Laboratory  ballistic  standard UL-752 Level 8
security  windows and doors,  the highest  rating level of commercial  ballistic
security windows and doors. Additionally, this segment designs and installs both
fixed and pop-up bollards and barrier security systems.

Key products of the Attack Protection segment include:

     o    Bullet  and  Blast  Protection:  integrated  and  structurally  secure
          bullet, blast and attack resistant windows and doors.

     o    Vehicle  Intrusion  Barriers:  fixed,  removable,  semi-automatic  and
          automatic vehicle bollards and wedge barrier security systems.

     o    Fiber SenSys: a sophisticated  fiber optic  monitoring  system used to
          detect physical intrusion.

     o    SecurLAN:  integrated  security  management  system designed to detect
          intrusion  attempts  aimed at  secure  and  classified  communications
          networks.

Federal Security Systems

         The Federal Security Systems segment consists of our subsidiary, Quanta
Systems  Corporation.  Our Federal  Security  Systems segment  provides  turnkey
design, production,  installation, and integration of public security and safety
systems.  The ultimate clients this segment serves consist primarily of units of
the  Federal  Government.   This  segment  is  a  security  systems  integrator,
specializing in a wide range of customized systems, including:

                                       2
<PAGE>

     o    Access Control and Biometric
     o    Asset Tracking
     o    Badging and Identification
     o    Barriers and Turnstiles
     o    Command, Control, and Communications
     o    Computer Aided Dispatch (CAD)/ Records Management
     o    Electronic Article Surveillance
     o    Fencing, Lighting, Uninterrupted Power
     o    Fire/Life Safety
     o    Information Technology
     o    Intrusion Detection (Exterior, Interior, and Duress)
     o    Fiber Optic Network
     o    Perimeter Security
     o    Smart Card
     o    Surveillance and Assessment

         Our Federal Security Systems segment provides central station oversight
and control of multiple and separate  facilities  as well as security and public
life safety systems and equipment.

Key products and services of the Federal Security Systems segment include:

     o    Regionalization  Systems: Command and control centers that consolidate
          the operation and management of 911 emergency services (fire,  rescue,
          and  police),  radio  frequency  communications,  intrusion  detection
          systems,  access control systems,  and video surveillance  systems for
          multitudes of buildings at diverse geographical locations. This system
          centralizes monitoring and dispatch functions,  maximizing utility and
          efficiency of all resources.

     o    Waterside Sentry Systems:  Multi-functional  security systems designed
          to detect, alert, monitor, track, and record water-based and shoreline
          attack threats.

     o    Flightline Sentry Systems:  An integration of surveillance,  intrusion
          detection,  access control, and other electro/mechanical  systems in a
          comprehensive,  "layered"  approach to security,  which begins  inside
          operations  centers and  extends  beyond  base  perimeters,  providing
          protection against both overt and covert acts of aggression.

     o    Signals Intelligence+ (SigInt) Systems:  Signal gathering and analysis
          products and systems used for field-based  collections and monitoring,
          providing the U.S.  intelligence  community and U.S.  allies with real
          time intelligence for strategic and tactical decision making.

Public Safety and Justice

         The Public Safety and Justice  ("PS&J")  segment consists of CorrLogic,
Inc.,  Tiburon,  Inc. and the recently acquired  businesses known as 90 Degrees,
Inc. ("90 Degrees") and Copperfire Software Solutions, Inc. ("Copperfire").  The
clients this segment  serves consist  primarily of state and local  governmental
units.  This segment  provides a fully  integrated  suite of products  including
computer-assisted  dispatch, records management and court and probation software
systems  for the law  enforcement,  fire and  rescue,  corrections  and  justice
environments.  We  believe  that  we  are  a  worldwide  market  leader  in  the
development,  implementation and support of public safety and justice automation
systems. Tiburon, acquired by us in 2002, has been in business since 1980.

Key products and services of the Public Safety and Justice segment include:

     o    Dispatch  Systems:  computer-assisted  dispatch  systems  designed for
          first responders such as police,  fire and emergency medical personnel
          that feature peer-to-peer technology that is less vulnerable to server
          and database failures.

                                       3
<PAGE>

     o    Records Management  Systems:  integrated  software modules to automate
          today's law  enforcement and fire  protection  agencies,  from initial
          incident entry to final disposition and related state reporting.

     o    Mobile  Computing  Systems:  solutions that provide  instant access to
          computer  assisted  dispatch  and  records  management  systems by law
          enforcement and emergency personnel in the field.

     o    Inmate Management Systems: development,  implementation and support of
          complex, integrated inmate management software systems.

Substantially all of the Company's  research and development  expenditures occur
in the PS&J segment.  The PS&J segment  incurred $7.1 million,  $7.1 million and
$4.8 million of research and  development  expenses in the years ended  December
31, 2004, 2003 and 2002,  respectively.  The 2002 expenses  include the expenses
incurred from the acquisition of Tiburon, which occurred on May 2, 2002.

The Market
----------

The market  opportunity for jail and prison  security  systems is related to new
facility  construction,  existing  facility  upgrades,  and  the  trend  towards
outsourcing  government services. We believe  approximately  $3.0-3.5 billion is
spent annually on correctional facility construction,  of which typically 10% to
15% relates to security hardware and security electronics,  the markets which we
currently serve. Our new MaxWall product has the potential to enable us to serve
the  jail  cell  construction  portion  of this  market,  which  constitutes  an
additional 12% to 15% of the overall market.  Other larger  security  markets we
serve  include  state  and  local  government  facilities,   federal  government
facilities and large commercial installations.

In all four  segments of our business,  we face  considerable  competition  from
large and small  companies.  We  compete  primarily  on a price  basis  with our
competitors.  While  we  are  one of  the  largest  suppliers  of  physical  and
electronic  security  to the  corrections  industry,  we  have  one  significant
competitor and many small competitors.

Most of our business occurs on a bid or request for proposal  basis.  Because of
the bid and request for proposal process, we do not generally have access to the
underlying  assumptions  that resulted in our  competitors'  bids and therefore,
other than price, we cannot determine why our bid was successful or unsuccessful
for particular contracts. Much of the Federal Security Systems work is on a cost
recoverable basis and is subject to audit by the Defense Contract Audit Agency.

The Public  Safety and Justice  segment  competes  in a market  where we believe
annual  sales are  approximately  $1 billion.  Most of the  competitors  in this
market  are  smaller  than us,  however  there  are  several  large  competitors
including divisions of Motorola, Intergraph and Northrop Grumman.

Business Strategy
-----------------

We continually strive to position the Company to meet the expanding requirements
of the public security market. We believe that we have market-leading  positions
in key areas of high-end  security systems  integration,  security  electronics,
advanced security technology  products and first responder support software.  We
are a  single  supplier  resource  for the most  difficult  and  complex  public
security and first responder  requirements.  In order to enhance our position in
the public security market, our current strategy is to:

        Pursue our existing business through internal growth. We believe that we
        have  market-leading  positions in many product and service  categories,
        which provide us a leverageable and ready-made growth platform.

        Expand our client base to encompass  high-end  commercial  clients.  Our
        products  are now  being  marketed  to  banks,  corporate  headquarters,
        private estates and other facilities.

        Migrate our Institutional  Security  capabilities to other markets. Many
        of our products and technologies, and the applications of those products
        and  technologies,  were designed to keep offenders  confined to certain
        areas and to keep inmates from  "breaking  out." These same products and
        technologies  can be adapted to keep people from  "breaking  in." We are
        currently working towards adapting our products to this new market.

        Make  selective  acquisitions  to  complement  and  enhance  our current
        technological  capabilities  and  market  access.  Our  acquisitions  of
        Norment  and  Tiburon  greatly   expanded  our  product   offerings  and
        solidified our position within the  Institutional  Security  Systems and
        Public  Safety  and  Justice  segments.  We  believe  other  acquisition
        opportunities  exist which if  successfully  consummated  could  further
        enhance our current product and service offerings.

                                       4
<PAGE>

        Develop strategic  alliances with large defense  contractors and teaming
        agreements  with other  integrators,  which may put us in a position  to
        participate in large blanket procurement projects from the Department of
        Homeland Security in response to homeland security requirements.

        Improve  our  cost   structure,   quality,   and  client  and   employee
        satisfaction,  and  re-engineer our business model to generate a greater
        degree of recurring revenue.

Corporate Information
---------------------

We were  reincorporated  in Nevada in 1996 and our  predecessor  corporation was
incorporated  in  Pennsylvania  in 1952.  Our  principal  executive  offices are
located at 2530 Riva Road,  Annapolis,  Maryland 21401.  Our telephone number is
(410) 224-4415.

General Information
-------------------

The Company  purchases  most of the parts and raw materials used in its products
from various  suppliers.  The primary raw materials used in the manufacturing of
its products are electronic  components and steel or aluminum sheets,  stampings
and castings. These materials are generally available from a number of different
suppliers.  While the bulk of such raw material is purchased from relatively few
sources of supply,  the Company  believes that  alternative  sources are readily
available.

There is no  significant  seasonality  in  CompuDyne's  business.  The Company's
construction  related  business,  ISS,  has  historically  been a very  cyclical
business in line with the cycle of prison construction in the United States.

See the Management Outlook located in Item 7 for a discussion of backlogs.

At December 31, 2004, the Company had 726 permanent employees.  Of the permanent
employees, 58 are subject to collective bargaining agreements. The Institutional
Security  Systems  Segment  regularly hires union personnel on a temporary basis
for field projects. These personnel are subject to various collective bargaining
agreements  depending  on their skills and locale.  At December 31, 2004,  there
were no temporary employees covered under collective bargaining agreements.

The ultimate clients through which substantially all of the sales of the Company
are generated are the Federal  government or state and local  governments in the
United States of America.

Cautionary Statement Regarding Forward-Looking Information
----------------------------------------------------------

Certain  statements  made  in  this  Form  10-K  with  regard  to the  Company's
expectations as to future revenues,  expenses,  financial  position and industry
conditions,  the Company's ability to secure new contracts, its goals for future
operations,   implementation  of  business  strategy  and  other  future  events
constitute  "forward-looking  statements"  within  the  meaning  of the  federal
securities  laws.  When  used in this Form  10-K,  words  such as  "anticipate,"
"believe,"  "estimate,"  "expect,"  "intend"  and similar  expressions,  as they
relate to management,  identify forward-looking statements. Although the Company
makes such statements  based on current  information and assumptions it believes
to be reasonable,  there can be no assurance that actual results will not differ
materially from those expressed or implied by such  forward-looking  statements.
Actual  results  could  differ   materially  from  those   contemplated  by  the
forward-looking  statements as a result of certain important factors,  including
but not limited to, demand for the Company's  products,  competitive factors and
pricing  pressures,  changes in legal and  regulatory  requirements,  government
budget  problems,  the ability to  successfully  grow the Company by  completing
acquisitions,  the  ability  to remain in  compliance  with its bank  covenants,
delays in government procurement  processes,  ability to obtain bid, payment and
performance bonds on various of the Company's projects,  technological change or
difficulties,  the  ability  to  refinance  debt when it  becomes  due,  product
development   risks,   commercialization   difficulties,   adverse   results  in
litigation,  the level of product returns, the amount of remedial work needed to
be performed, and general economic conditions.

Available Information
---------------------

Our website is located at  www.CompuDyne.com.  The Company  posts all of its SEC
filings  (including  its annual report on Form 10-K,  quarterly  reports on Form
10-Q,  current  reports on Form 8-K and all  amendments to these reports) on the
Company website as soon as reasonably practicable after electronically filing or
otherwise furnishing such material to the SEC.

                                       5
<PAGE>

ITEM 2.  PROPERTIES

The  Company's  principal  executive  offices are in  Annapolis,  Maryland.  The
Company leases approximately 4,358 square feet of office space.

At December 31, 2004 the  Institutional  Security Systems segment leased primary
facilities for engineering,  assembly and  administration  including:  Alabama -
43,571  square feet,  California - 15,795  square feet,  Maryland - 9,500 square
feet, Arizona - 8,369 square feet and North Carolina - 5,775 square feet.

At December 31, 2004 the Attack Protection  segment owned primary facilities for
engineering,  manufacturing and administration in Alabama - 211,703 square feet.
These  facilities  are  encumbered  by  Industrial  Revenue  Bonds.  The  Attack
Protection segment also leases 30,327 square feet of  office/warehouse  space in
Oregon.

At  December  31, 2004 the  Federal  Security  Systems  segment  leased  primary
facilities for  engineering,  assembly and  administration  in Maryland - 18,090
square feet.

At  December  31,  2004 the Public  Safety and Justice  segment  leased  primary
facilities for  engineering  and  administration  including  California - 37,945
square feet,  Colorado - 10,432 square feet, Texas - 7,711 square feet, Maryland
- 5,728  square  feet,  Oregon - 5,669  square  feet,  Utah - 5,422 square feet,
Washington - 4,000 square feet, and Wisconsin - 1,902 square feet.

The Company leases only those  properties  necessary to conduct its business and
does not invest in real  estate or  interests  in real  estate on a  speculative
basis.  The  Company  believes  that its current  properties  are  suitable  and
adequate for its current operations. As its operations grow, however, additional
space may be required to service contracts in other areas.

ITEM 3.  LEGAL PROCEEDINGS

The Company is party to certain legal  actions and  inquiries for  environmental
and other  matters  resulting  from the normal  course of business.  Some of our
businesses,  especially  Institutional  Security  Systems,  involve working as a
subcontractor  to a prime  contractor.  From time to time we make claims against
the prime  contractor,  or the prime  contractor makes claims against us. At any
point  in  time  we are  engaged  in a  number  of  claim  disputes  with  prime
contractors, some of which may have a significant negative outcome. Although the
total amount of liability with respect to these matters can not be  ascertained,
the Company  believes  that any resulting  liability  should not have a material
effect on its financial position, results of future operations or cash flows.

In addition to claims with prime  contractors,  we may also make claims  against
customers and customers may make claims against us.

The Company has learned  that the National  Association  of  Securities  Dealers
("NASD") is seeking sanctions against certain purchasers of the Company's common
stock in its 2001 PIPE  transaction.  In addition,  the Company has learned that
the placement agent for this  transaction is also being  investigated by the SEC
and the NASD. The Company is  investigating  these matters and is evaluating its
options for recovery.

Over the past several years, we have been named in lawsuits  involving  asbestos
related  personal  injury  and  death  claims  in which  CompuDyne  Corporation,
individually and as an alleged successor,  is a defendant. We have been named as
a defendant in cases  related to claims for asbestos  exposure  allegedly due to
asbestos contained in certain of its predecessor's products. We have advised our
insurers  of each of these  cases,  and the  insurers  are  providing  a defense
pursuant to agreement with us, subject to reservation of rights by the insurers.
The insurers have advised that claims in such  litigation for punitive  damages,
exemplary  damages,  malicious and willful and wanton  behavior and  intentional
conduct are not covered.  One of the  carriers  has given  notice that  asbestos
related  claims are excluded from certain of these  policies.  The insurers have
additional coverage defenses, which are reserved, including that claims may fall
outside of a particular policy period of coverage. Litigation costs to date have
not been significant and we have not paid any settlements from our own funds.

The Company  cannot  ascertain  the total  amount of  potential  liability  with
respect to these matters,  but does not believe that any such  liability  should
have a material effect on its financial  position,  future  operations or future
cash flows.

                                       6
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.



                                       7
<PAGE>



                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

CompuDyne Common Stock is quoted on the Nasdaq National Market, under the symbol
"CDCY". There were 1,893 common shareholders of record as of March 25, 2005.

The following table sets forth the high and low sales for CompuDyne Common Stock
as quoted on the Nasdaq National Market.

                             2004                          2003
                             ----                          ----
Quarter Ended         High           Low            High          Low
-------------       ---------------------          --------------------

March 31            $ 13.19        $ 8.56          $ 7.49        $ 4.80
June 30             $ 17.46        $ 8.55          $10.20        $ 6.75
September 30        $ 11.61        $ 7.06          $10.78        $ 7.37
December 31         $  8.50        $ 6.10          $10.62        $ 7.50

The Company did not pay any dividends on its common stock during the years ended
December  31, 2004 and 2003,  and its Board of  Directors  has no  intention  of
declaring a dividend in the foreseeable future.

ITEM 6.     SELECTED FINANCIAL DATA

The  following is a  consolidated  summary of  operations  of CompuDyne  and its
subsidiaries  for the years ended December 31, 2004,  2003, 2002, 2001 and 2000.
The  information  in the  table  below is based  upon the  audited  consolidated
financial  statements of CompuDyne and its  subsidiaries for the years indicated
appearing  elsewhere in this annual  report or in prior  annual  reports on Form
10-K  filed by the  Company  with the SEC,  and  should  be read in  conjunction
therewith and the notes thereto.

<TABLE>
<CAPTION>

(In thousands except per share data):                                  For the years ended December 31
                                                      -----------------------------------------------------------------------
                                                        2004             2003          2002(a)         2001           2000(b)
                                                      --------         --------       --------       --------        --------
<S>                                                   <C>              <C>            <C>            <C>             <C>
Net sales                                             $142,782         $193,263       $155,556       $127,394        $130,611
                                                      ========         ========       ========       ========        ========
Gross profit                                          $ 37,678         $ 46,396       $ 34,816       $ 25,280        $ 25,502
Selling, general and administrative expenses            36,219           32,305         25,785         17,378          17,792
Research and development                                 7,755            7,374          4,916                            220
                                                                                                           70
Impairment of goodwill and other intangibles
                                                         1,826                -              -              -               -
                                                      --------         --------       --------       --------        --------
Operating (loss) income                               $ (8,122)        $  6,717       $  4,115       $  7,832        $  7,490
                                                      ========         ========       ========       ========        ========
Interest expense, net of interest income              $  2,289         $  1,051       $  1,394       $  2,540        $  1,934
                                                      ========         ========       ========       ========        ========

Net (loss) income                                     $ (8,198)        $  3,408       $  1,814       $  4,092        $  4,139
                                                      ========         ========       ========       ========        ========
(Loss) earnings per share (c):
 Basic: (Loss) earnings per common share              $  (1.01)         $   .43        $   .24        $   .75         $   .78
                                                      ========          =======        =======        =======         =======
Weighted average number of common
  shares outstanding                                     8,136            7,895          7,456          5,424           5,339
                                                      ========          =======        =======        =======         =======
Diluted
  (Loss) earnings per common share                    $  (1.01)         $   .42        $   .23        $   .67         $   .69
                                                      ========          =======        =======        =======         =======
Weighted average number of common
  shares and equivalents                                 8,136            8,158          7,940          6,110           6,028
                                                      ========          =======        =======        =======         =======

Total assets                                          $132,891         $115,732       $120,804       $ 74,485        $ 59,382
                                                      ========         ========       ========       ========        ========
Long-term debt                                        $ 43,123         $ 17,658       $ 27,510       $ 15,162        $ 20,217
                                                      ========         ========       ========       ========        ========
Total shareholders' equity                            $ 45,831         $ 52,927       $ 49,204       $ 32,637        $ 13,796
                                                      ========         ========       ========       ========        ========
</TABLE>

Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year's presentation.

Notes:
     (a)  Includes  operations of Tiburon,  Inc.  from May 2, 2002,  the date of
          purchase.
     (b)  Includes  operations of Fiber SenSys Inc.  from October 31, 2000,  the
          date of purchase.
     (c)  No dividends  have been paid on the Company's  Common Stock during the
          above periods.



                                       8
<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Introduction

Overview of CompuDyne Corporation

CompuDyne  Corporation was  reincorporated in Nevada in 1996. We were originally
incorporated in 1952. We believe that we are a leading  provider of products and
services to the public security markets.  We operate in four distinct  segments:
Institutional Security Systems; Attack Protection; Federal Security Systems; and
Public Safety and Justice.

The  Institutional  Security  Systems  segment is  headquartered  in Montgomery,
Alabama and operates under the trade name Norment  Security  Group  ("Norment").
This segment provides physical and electronic  security products and services to
the corrections  industry  (prisons and jails) and to the courthouse,  municipal
and  commercial  markets.  ISS  serves  as a  contractor,  responsible  for most
installation  work on larger projects.  Installations  involve  hard-line (steel
security doors,  frames,  locking devices,  etc.) and  sophisticated  electronic
security systems, including software, electronics, touch-screens, closed circuit
TV,  perimeter alarm devices and other security  monitoring  controls.  ISS also
developed a product called MaxWall.  MaxWall is a modular steel, concrete filled
prefabricated jail cell. It allows for construction projects to use considerably
less space and can save the project  owner  significant  amounts of money.  ISS,
through its regional  offices  provides  field level  design,  installation  and
maintenance of both physical and electronic security products.

Included in the  Institutional  Security  Systems  segment is the TrenTech  line
which designs, manufactures and integrates electronic security systems. TrenTech
integrates  generally  available  products and software as well as designing its
own  proprietary  systems.  TrenTech has developed a  sophisticated  proprietary
video badging system, with approximately 238 systems installed at 67 facilities,
including 62 military installations.

The Institutional  Security Systems segment also manufactures a complete line of
locks and locking  devices  under the brand name  Airteq.  Airteq is an industry
leader  in  pneumatic  and  electro-mechanical   sliding  devices  used  in  the
corrections industry.

The Attack Protection  segment is one of the country's largest  manufacturers of
bullet,  blast and attack resistant windows and doors designed for high security
applications such as embassies, courthouses, Federal buildings, banks, corporate
headquarters  and other  facilities  that insist on having the highest  level of
protection  currently  available.  We believe that we are a premier  provider of
Underwriters  Laboratory  ballistic standard UL-752 Level 8 security windows and
doors,  the highest rating level of commercial  ballistic  security  windows and
doors.  Our attack  resistant  windows and doors are integrated and structurally
secure  products with  specifically  designed  frames and  encasements  that are
integral  parts of the structure in which they are installed.  Existing  product
installations  number in the  thousands  and range from the  Middle  East to the
White House.  Working under  contracts  from prime  contractors  who have direct
contracts  with the United  States  Department of State,  the segment's  largest
client,  Attack  Protection  is a  significant  supplier  of  bullet  and  blast
resistant  windows and doors to United States  embassies  throughout  the world.
Attack Protection products are also sold to drug stores, convenience stores, and
banks to secure drive through facilities.  Other commercial applications include
guard booths,  tollbooths,  cash drawers and other similar items.  Additionally,
this  segment  designs and  installs  both fixed and pop-up  bollards  and wedge
barrier security systems.

The Attack  Protection  segment also  manufactures a  sophisticated  fiber optic
sensor system,  known as Fiber SenSys, used to detect physical  intrusion.  This
application is designed to protect large perimeters  including such applications
as Federal  facilities,  military  deployments  and bases,  oil fields,  airport
tarmacs,  public utilities,  nuclear reactors and water systems. In addition, it
has been  installed to protect the  perimeters of numerous  private  estates and
other similar properties.

The Federal Security Systems segment is known as Quanta Systems Corporation. Its
customer base includes the military,  governmental agencies, and state and local
governmental units. Federal Security Systems provides turnkey system integration
of public security and safety systems.  This segment specializes in a wide range
of customized access control and badging, intrusion detection,  surveillance and
assessment, communications, command and control, fire and life safety, and asset
tracking  systems.  Federal Security Systems provides central station  oversight
and control of multiple and separate  facilities  as well as security and public
life safety  systems  and  equipment.  This  segment  designs  and  manufactures
advanced digital signal  processing  products used in  reconnaissance of foreign
telecommunications  signals  designed for the United States  Government  and its
foreign allies.

                                       9
<PAGE>


The Public Safety and Justice segment consists of CorrLogic Inc., Tiburon,  Inc.
and the recently  acquired assets of 90 Degrees and Copperfire.  We believe that
CorrLogic is a leading developer of inmate management and institutional  medical
software systems.  CorrLogic specializes in the development,  implementation and
support of complex,  integrated  inmate management  software systems,  including
inmate  medical  management  systems that improve the efficiency and accuracy of
correctional  facility operations.  CorrLogic's focus is entirely on information
solutions for the corrections industry.

During 2002  CompuDyne  expanded its  offerings in the Public Safety and Justice
sector by completing its acquisition of Tiburon,  Inc.  Tiburon provides a fully
integrated  suite of  products  including  computer-assisted  dispatch,  records
management,  court and probation software systems for the law enforcement,  fire
and rescue,  corrections and justice environments.  The Company believes Tiburon
is a worldwide market leader in the development,  implementation  and support of
public safety and justice automation  systems. In business since 1980, with more
than 600  systems  supporting  approximately  275 active  clients,  Tiburon is a
leader in public safety and justice solutions.

During the third and fourth  quarters of 2004,  we expanded our offerings in the
Public Safety and Justice sector by completing our  acquisition of the assets of
90 Degrees and Copperfire,  respectively.  90 Degrees  provides a web-based fire
records  management  system,  which is being  integrated  into our current  PS&J
product offerings.  90 Degrees'  enterprise-wide  records  management  solutions
assist fire and EMS agencies in managing responses to emergency  situations.  We
anticipate  that as we integrate  90 Degrees'  product  offerings  into our PS&J
product  offerings,  the open web-based  technology from 90 Degrees will advance
our current fire and rescue product offerings.  Copperfire  provides  customized
report writing and forms generation  software  designed  specifically for public
safety and justice agencies. The software automates an agency's current business
practices,  turning hard copy forms into digital  images,  to create a paperless
report writing system. We believe that integration of Copperfire's products will
enhance our total offerings in PS&J.

Management Outlook

We continue to find  ourselves  in very  challenging  times.  We have four major
areas of focus:

     o    The first is increasing the amount of our backlog.
     o    The second is  migrating to a business  model with a more  predictable
          revenue stream.
     o    The third is finding attractive  acquisition candidates to enhance our
          existing business.
     o    The fourth is to improve our cost structure, quality, and customer and
          employee satisfaction.

We are continuing to experience a decline in our overall backlog. Our backlog is
a key indicator of what our future  revenues will look like.  Our backlog peaked
at December 31, 2002, at which time it exceeded $204 million.  Since then it has
continued  to decline and  although it saw a slight  increase at the ends of the
second and third quarters in 2004, it slipped to  approximately  $127 million at
December 31, 2004 as shown in the following table:

<TABLE>
<CAPTION>


                         Institutional                       Federal          Public
                           Security         Attack           Security        Safety and          Backlog
  (in thousands)            Systems        Protection        Systems          Justice             Total
                         --------------------------------------------------------------------------------

<S>                       <C>               <C>              <C>               <C>               <C>
December 31, 2002         $ 99,527          $ 18,478         $ 11,440          $ 74,867          $204,312
March 31, 2003            $ 91,602          $ 14,827         $ 11,667          $ 66,007          $184,103
June 30, 2003             $ 81,916          $ 16,552         $ 10,643          $ 72,621          $181,732
September 31, 2003        $ 68,780          $ 14,375         $ 11,528          $ 65,962          $160,645
December 31, 2003         $ 57,258          $ 10,043         $  8,326          $ 63,727          $139,354
March 31, 2004            $ 52,147          $ 12,905         $  9,269          $ 57,332          $131,653
June 30, 2004             $ 62,765          $ 17,761         $  6,296          $ 50,065          $136,887
September 30, 2004        $ 59,524          $ 19,351         $  9,018          $ 50,215          $138,108
December 31, 2004         $ 49,324          $ 20,803         $  8,299          $ 48,434          $126,860
</TABLE>

Historically,  approximately  90% of our revenues  were  generated  from sources
where the ultimate client is a federal,  state or local government unit.  During
the last few  years,  due to the  general  economic  slowdown,  state  and local
budgets,  which we are  dependent  on for our revenue  sources,  have come under
intense pressure.  Most states are currently running in a deficit situation,  as
are many local  governments.  This has caused  many of them to delay and in some
cases  cancel many  infrastructure  projects  until such time as their  economic
fortunes  rebound.  Until the economy  improves  for several  quarters and until
state  and  local  budgets  improve,  we would  anticipate  our  backlog  levels
continuing  to  remain  under  pressure.  To  address  this area of focus we are
actively  bidding on jobs and keeping our  offerings  in front of our clients so
that when or if the current  government  budget cycle turns  around,  we will be
well positioned to capitalize on new opportunities.

                                       10
<PAGE>

Our second area of focus surrounds  reengineering  our business model so that it
contains a greater  degree of recurring  revenue.  As indicated in the following
table,  approximately  13.7% of our 2004 revenue was  generated  from  recurring
revenue  sources  (primarily  maintenance  revenues),  and the majority of these
revenues  occurred in our Public Safety and Justice segment.  We define one-time
revenue as revenue derived from discrete  projects,  from which we do not expect
to generate  incremental  revenue upon the completion of the project.  We define
recurring  revenue  as sources of  revenue  from which we  anticipate  receiving
revenue in the current, as well as future periods,  for example annual renewable
maintenance contracts.

<TABLE>
<CAPTION>

                                                Year Ended December 31, 2004
                                                ----------------------------

         (in thousands)        One-time Revenue      %     Recurring Revenue     %        Total
                               ----------------    -----   -----------------   ----     --------

<S>                               <C>               <C>        <C>             <C>      <C>
Institutional Security Systems    $ 48,859          34.2       $  5,093         3.6     $ 53,952
Attack Protection                   25,161          17.6              -           -       25,161
Federal Security Systems            14,293          10.0              -           -       14,293
Public Safety and Justice           34,895          24.5         14,481        10.1       49,376
                                  --------          ----       --------        ----     --------
     Total                        $123,208          86.3       $ 19,574        13.7     $142,782
                                  ========          ====       ========        ====     ========
</TABLE>

Since the majority of our revenues are one-time revenues and are  non-recurring,
we must reinvent our book of business on a continual  basis.  This makes it very
difficult  for us to project  our future  revenue  stream and thus makes it very
difficult for us to project our earnings as well as our business  outlook.  Over
the next five years,  we intend to modify our  business  model to rely less upon
one-time  sources of revenue and more on recurring  sources of revenue.  In this
regard,  in July 2004 we hired a Chief Operating Officer (COO). The COO position
is a newly created position within CompuDyne. Our new COO, Mr. Maurice Boukelif,
brings  extensive  manufacturing  and  operational  experience  to us. Under his
leadership,  we are hopeful we will be able to transform  this business model in
the next few years.

Our third key focus area is  acquisitions.  With the January 2004  completion of
the 6.25%  Convertible  Subordinated  Notes due  January  15,  2011,  (the "2011
Notes") offering,  we have resources  available with which to fund acquisitions.
We are particularly interested in three areas.

     o    The  first  is  a  business  that  would  either  prove   additive  or
          complementary  to our  current  offerings  in the  Public  Safety  and
          Justice  segment.  Although  this  segment  has seen a decline  in its
          backlog over the prior two years,  we anticipate  this segment will be
          one of the first to see a recovery.  We envision this segment as being
          a growth segment for our business.  Our assessment is that the demands
          of our nation's first responders will grow in the foreseeable  future.
          Furthermore,  this  business  is  characterized  by  strong  recurring
          revenues, which as discussed above is one of our key business drivers.

     o    Second, we are continually  looking for companies that have attractive
          security  technology-based  products  that we can leverage by offering
          the technology to our existing clients and markets.

     o    The  third  type of  business  we are  interested  in  acquiring  is a
          high-end  commercial  security  integrator.  Our primary clientele are
          currently  governmental units.  Throughout all our segments other than
          Public Safety and Justice  (which is involved in a different  market),
          over the years we have developed  significant  skills as it relates to
          security integration and applications.  Our offerings however are sold
          almost exclusively to various  governmental units. We believe that the
          purchase of the right high end commercial  security  integrator  would
          give us a market entree  whereby we would be able to offer many of our
          existing  offerings  into the private  sector,  a wholly new  business
          arena for us,  and one that we  believe  is not  served as well as the
          governmental arena to which we have heretofore dedicated ourselves.

Our fourth focus area is to improve our cost structure,  quality, and client and
employee satisfaction. Our Institutional Security business segment is undergoing
a  significant  organizational  and expense  restructuring,  including a partial
consolidation  of regional  office efforts and an increased focus on centralized
performance of the most complicated security projects. This initiative begins by
ensuring our  organization  is properly  aligned with our clients'  needs.  Many
changes have been made and initial results  indicate that our cost, our quality,
our  clients  and  our  employees  are  responding   favorably  to  the  changes
implemented thus far. We have much room for improvement as we move toward a more
client  centric  organization.  The  organization  re-alignment  is  critical to
strengthening  our  future as it allows us to deploy  the Six Sigma  methodology
across all our business  segments more  efficiently.  The Six Sigma  methodology
focuses  on defect  elimination,  which  will have a direct  impact on our cost,
quality, and client satisfaction.

                                       11
<PAGE>

We believe that if we address and implement successfully the above four areas of
focus, we will  significantly  enhance our future growth  opportunities and will
provide for more predictable financial results.

During the third and fourth  quarters of 2004,  we expanded our offerings in the
Public Safety and Justice sector by completion of our  acquisition of the assets
of 90 Degrees and Copperfire respectively.  90 Degrees provides a web-based fire
records  management  system,  which is being  integrated  into our current  PS&J
product offerings.  90 Degrees'  enterprise-wide  records  management  solutions
assist fire and EMS agencies in managing responses to emergency  situations.  We
anticipate  that as we integrate  90 Degrees'  product  offerings  into our PS&J
product  offerings,  the open web-based  technology from 90 Degrees will advance
our current fire and rescue product offerings.  Copperfire  provides  customized
report writing and forms generation  software  designed  specifically for public
safety and justice agencies. The software automates an agency's current business
practices,  turning hard copy forms into digital  images,  to create a paperless
report writing system. We believe that integration of Copperfire's products will
enhance our total offerings in Public Safety and Justice.

Results of Operations

YEARS ENDED DECEMBER 31, 2004 AND 2003

Revenues.  The Company had revenues of $142.8 million and $193.3 million for the
years ended December 31, 2004 and December 31, 2003, respectively,  representing
a decrease of $50.5 million or 26.1%. As discussed  below,  most of this decline
occurred  in our ISS  segment  due to  delayed  projects  at the state and local
levels,  largely caused by significant  budget deficits many governmental  units
are currently experiencing.

Revenues from the  Institutional  Security Systems segment were $54.0 million in
the year ended  December 31, 2004,  a decrease  from $98.7  million for the same
period  of  2003  representing  a  decrease  of  $44.7  million  or  45.3%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the decrease in revenue experienced by this segment
is  largely  attributable  to our  working on less  projects  than we did in the
previous  year.  The  principal  reason for the decline was that its backlog had
decreased  from $99.5  million at December 31, 2002 to $57.3 million at December
31, 2003 thus resulting in less work available to be performed in the year ended
December 31, 2004 as compared to the year ended  December  31, 2003.  Backlog at
December 31, 2004 had declined further to $49.3 million. The years 2003 and 2004
have been slow  bidding  periods for the  Company.  Although the gross amount of
construction  spending in the corrections area remained  relatively flat between
2002,  2003 and 2004,  the types of projects that the Company  solicits,  namely
large-scale medium to maximum security installations, declined in 2003 and 2004.
This   situation  was  further   compounded  by  the  general  state  and  local
governmental  budget  deficits  which are causing  these  governmental  units to
rethink and delay many of their pending corrections projects.

Revenues from the Attack Protection segment were $25.2 million in the year ended
December  31, 2004,  a decrease  from $28.4  million for the same period of 2003
representing a decrease of $3.2 million or 11.3%. In 2002 the Company  purchased
an existing 75,000 square foot factory for the Attack  Protection  segment on 20
acres of land in close proximity to its existing factory in Montgomery, Alabama.
This capacity increase was largely driven by the Company's  expectation that the
demands for its products, principally its bullet and blast resistant windows and
doors  would  accelerate  significantly  in the post  September  11, 2001 world.
Throughout  2002,  2003 and 2004 this  anticipated  increase  in demand  did not
materialize  leaving the segment with significant excess capacity.  This segment
is composed of two chief product offerings,  namely Norshield, which encompasses
bullet and blast resistant windows and doors and ancillary  products,  and Fiber
SenSys,  which encompasses fiber optic intrusion detection systems. For the year
ended  December  31, 2004 the  Norshield  line  experienced  a 22.7%  decline in
revenues as  compared to the year ended  December  31,  2003,  whereas the Fiber
SenSys line experienced a 40.5% increase in revenues for the comparable  period.
The Company  continues to see heightened  interest for its Fiber SenSys products
and expects sales for these items to continue to experience  sustainable growth.
The slow-down in the government  building  process  experienced  during 2002 and
2003 appears to have stabilized. It appears that projects are being released for
construction,  and thus the Attack Protection segment is experiencing  increased
bidding  activity for its products.  During 2003 the Company  furnished  bids to
supply its products for eight new embassy  projects.  At the time,  this was the
largest  number  of  embassy  projects  bid in a single  calendar  year for this
segment.  Through  December  31,  2004,  the Company  was awarded  four of these
embassy projects, for a total CompuDyne contract value of $7.0 million, and lost
the remaining four embassy projects.  During 2004, we bid on fifteen new embassy
projects.  Through  March 2005 the  Company  was  awarded  six of these  embassy
projects for a total  contract  value of $8.6  million,  and lost seven  embassy
projects to  competitors,  with two  projects  still  awaiting  award.  In 2005,
preliminary  indications  show eighteen  embassy  projects will be available for
bid. It appears to us that this increased level of new embassy construction will
continue for the next several years.

                                       12
<PAGE>

Revenues  from the Federal  Security  Systems  segment were $14.3 million in the
year ended  December 31, 2004, a decrease from $16.4 million for the same period
of 2003 representing a decrease of $2.1 million or 13.1%. A significant  portion
of this  segment's  revenue is backlog  driven.  The  Federal  Security  Systems
Segment  ended 2002 with a backlog level of $11.4  million.  Backlog at December
31, 2003 was $8.3 million and at December 31, 2004 was also $8.3 million.

Revenues  from the Public  Safety and Justice  segment were $49.4 million in the
year ended  December 31, 2004, a decrease from $49.8 million for the same period
of 2003  representing  a decrease of $0.4 million or 0.8%. In 2003,  the Company
recognized  approximately  $5.5 million of revenue related to hardware  supplied
under a contract with one of its  customers.  Minimal  margin was earned on this
hardware.  Although  PS&J ships  certain  hardware  components  to clients on an
occasional basis,  shipments of this magnitude of hardware,  done to accommodate
our client, is an unusual and non-routine event. In addition, it should be noted
that although we made two  acquisitions  in this segment in 2004 (90 Degrees and
Copperfire), these acquisitions had little impact on Public Safety and Justice's
revenues due to their  relatively  small size and due to their  occurring in the
later part of the year.

Expenses.  Cost of goods sold of $105.1  million in the year ended  December 31,
2004 were down $41.8 million or 28.4% from $146.9 million during the same period
of 2003.  This  decrease was a result of decreased  costs of goods sold of $36.9
million at the Institutional  Security Systems segment,  largely attributable to
the decreased sales of this segment. The smaller percentage decrease in sales as
compared  to the  percentage  decrease  in cost of  goods  sold  resulted  in an
increased gross profit  percentage of 26.4% for the year ended December 31, 2004
as compared to 24.0% in 2003.

Cost of  goods  sold in the  Institutional  Security  Systems  segment  of $47.5
million for the year ended  December  31, 2004 were down $36.9  million or 43.7%
from $84.4 million  during the same period of 2003.  This decrease was less than
the  related  sales  decrease  of this  segment  of 45.3%,  resulting  in a 2.5%
decrease in the gross  profit  percentage  to 11.9% from 14.4% in the year ended
December 31, 2003.  Starting in 2002 and continuing through 2004,  Institutional
Security Systems' senior management  identified  managerial problems at its West
Coast  operations and determined that numerous  problems existed there including
that the costs to complete its projects  were going to be  significantly  higher
than was previously projected. This was a result of significant cost overruns on
many  of  these  projects.   As  the  work  on  the  projects  progressed,   the
Institutional Security Systems segment identified additional cost overruns which
would cause the costs to complete  these projects to increase as a result of the
changes in the estimates to complete.  Although the problem projects  identified
in 2002 are  substantially  all  complete,  the  problems  in the ISS West Coast
operations continued into 2003 and 2004. We realized that the management changes
made in 2002 did not adequately address the root problems  identified,  and as a
result, projects started after 2002 continued to experience cost overruns due to
a lack  of  appropriate  oversight.  Staff  and  management  changes  in ISS are
ongoing.  We have revised our  estimates to complete  these  project and believe
that all future costs on these projects have been adequately  considered through
December 31, 2004.

The West Coast problems, including project overruns, resulted in losses recorded
in the following periods:


                                                        (in thousands)
        Second Half of 2002                                 $ 2,698
        First Half of 2003                                    1,674
        Third Quarter of 2003                                   541
        Fourth Quarter of 2003                                1,872
        First Quarter of 2004                                 1,271
        Second Quarter of 2004                                1,139
        Third Quarter of 2004                                 1,516
        Fourth Quarter of 2004                                2,166
                                                            -------
                Total West Coast Losses                     $12,877
                                                            =======

To  address  this  situation,  the  Company  is  implementing  more  centralized
controls,  replaced  certain  personnel  at its West  Coast  operations  and its
Alabama headquarters, and hired a Chief Operating Officer.

Cost of goods sold in the Attack  Protection  segment of $23.6  million  for the
year ended  December 31, 2004  increased $0.9 million or 4.1% from $22.7 million
during  the same  period of 2003.  This  increase  occurred  in spite of a sales
decrease of this segment of 11.3%,  resulting  in a 13.9%  decrease in the gross
profit percentage to 6.2% from 20.1% during the year ended December 31, 2003. We
are  actively  working to better  utilize  the 75,000  square  foot  factory the
Company purchased in Montgomery,  Alabama. The Airteq manufacturing operation in
Oregon was  relocated  in the  latter  part of 2003 and  consolidated  into this
facility.  This was done in an effort to enhance  the  utilization  of our owned
facilities in Alabama and thus absorb some of our excess manufacturing capacity.
Although not the primary contributor,  this did result in further utilization of
approximately  12,000 square feet of previously  unused  manufacturing  space in
this plant in Alabama.  In  addition,  we  identified,  in late 2003,  a quality
problem  with the  windows  and doors being  installed  on a project  ultimately
completed in the fourth quarter of 2004. As a result of this identified problem,
we took  remedial  action in the field to repair  this  defect.  During the year
ended December 31, 2004 we increased our estimated cost to complete this project
by $2.0 million thus causing this project to become a negative  margin  project.
Cumulative write-downs on this project amount to $2.3 million.

                                       13
<PAGE>

Cost of goods sold in the Federal  Security  Systems segment of $12.3 million in
the year ended  December  31, 2004  decreased  $1.6  million or 11.3% from $13.8
million during the same period of 2003.  This decrease was less than the related
sales  decrease of this segment of 13.1%,  resulting  in a 1.8%  decrease in the
gross profit percentage to 14.1% from 15.9% in the year ended December 31, 2003.
Substantially all of the projects awarded in this segment are discrete projects.

Cost of goods sold in the Public Safety and Justice segment of $21.7 million for
the year  ended  December  31,  2004 was down $4.2  million  or 16.2% from $25.9
million  during 2003.  This decrease was more than the related sales decrease of
this  segment  of  0.8%,  resulting  in an 8.0%  increase  in the  gross  profit
percentage to 56.0% from 48.0% in the year ended  December 31, 2003.  During the
fourth  quarter  of 2003,  our  Public  Safety and  Justice  segment  received a
complaint  alleging  that we breached  our  contract to provide a public  safety
software  system to a client.  As a result,  we recorded a $1.6 million  pre-tax
charge,  of which $600  thousand was recorded as a reduction of revenue and $1.0
million was recorded as a charge to cost of sales.  During the second quarter of
2004 this matter was  settled,  resulting  in a reversal of $0.3  million of the
accrued charge,  which was reflected as a reduction of cost of sales. The net of
this  activity  contributed  $1.9  million  of the  $3.8  million  gross  profit
improvement in 2004 compared to 2003.

Selling,  general and  administrative  expenses  were $36.2 million for the year
ended December 31, 2004, an increase of $3.9 million or 12.1% from $32.3 million
for the same  period of 2003.  Much of this  increase  is related to  additional
costs  incurred  by the  Company  related  to  legal  fees  in  connection  with
responding  to and settling the  complaint  filed by a Public Safety and Justice
segment  client,  expenses  incurred in  connection  with  evaluating  potential
acquisitions,  recruiting  fees incurred to fill the recently hired COO position
and other senior  management  positions and expenses  related to compliance with
new requirements mandated by the Sarbanes-Oxley Act and the SEC.

During the fourth  quarter of 2004 the  Company  concluded  that the  continuing
decline in the backlog in its ISS segment  constituted a triggering  event which
caused the Company to conclude it was necessary to reassess and ultimately write
off goodwill in the amount of $0.7 million and certain other  intangibles in the
amount of $1.1 million. Those amounts appear as a separate line item in the 2004
statement of operations.

In conjunction  with the  acquisition of the assets of 90 Degrees and Copperfire
and in compliance with Statement of Financial Accounting Standards No. 141 (SFAS
141) Business Combinations,  the Company preliminarily determined the fair value
of the following  identifiable  assets and assigned the indicated  lives for the
purposes of amortization and depreciation.

                              Amount
                           (in thousands)    Life (in years)
                           --------------    ---------------
Software                       $2,800                 5
Employment Contracts              120                1-3
                             --------
                               $2,920
                             ========

The  amortization  of  the  above  assets  resulted  in  the  Company  recording
amortization  expense related to these assets of $178 thousand in 2004, which is
included in operating expenses.

Research and development  expenses were $7.8 million for the year ended December
31,  2004,  an increase of $0.4  million or 5.1% from $7.4  million for the same
period of 2003.  Being a  technology-driven  enterprise,  the  Company's  Public
Safety and  Justice  segment  continually  updates  and  enhances  its  software
offerings, thus incurring significant research and development costs.

Interest expense  increased to $3.3 million for the year ended December 31, 2004
from $1.4  million  for the year ended  December  31, 2003 due to an increase in
borrowings and overall higher interest  rates.  The following table compares the
weighted average of the Company's years ended December 31, 2004 and December 31,
2003 interest bearing borrowings and the related rates charged thereon.

                                       14
<PAGE>




                                   Monthly Weighted           Monthly Weighted
                                    Average - 2004             Average - 2003
                                  Amount        Rate          Amount        Rate
                                  ------        ----          ------        ----
                               (in thousands)             (in thousands)
Bank borrowings                 $   617         4.2%         $16,208        3.6%

Industrial revenue bonds        $ 4,162         3.1%         $ 4,675        3.7%

Subordinated borrowings         $40,250         6.3%               -          -
Swap hedge agreement            $ 3,721         3.6%         $ 6,103        4.0%


In addition the Company recorded the following non-cash interest expense:

Amortization and write-off
 of deferred financing charges  $  600                       $  250

Taxes on Income.  The effective tax benefit was  approximately  21% for the year
ended December 31, 2004 and the effective tax rate was approximately 41% for the
year ended December 31, 2003. The difference in rates is largely attributable to
the losses experienced in 2004 and the related valuation  allowance  established
for  substantially  all of the  Company's net deferred tax assets as of December
31, 2004.

Net (Loss) Income.  The Company reported net (loss) income of ($8.2) million and
$3.4 million in the years ended  December 31, 2004 and 2003,  respectively.  The
reason for the loss in 2004 was the significant  decline in revenues.  While the
Company was able to  significantly  reduce its cost of goods sold,  its selling,
general and administrative  expenses increased while its revenues  significantly
decreased,  contributing to the loss.  Diluted earnings per share decreased to a
loss of ($1.01) in the year ended December 31, 2004 from a profit of $.42 in the
year ended  December 31,  2003.  The weighted  average  number of common  shares
outstanding  and  equivalents  used in computing EPS was 8.1 million in 2004 and
8.2 million in 2003.

YEARS ENDED DECEMBER 31, 2003 AND 2002

Revenues.  The Company had revenues of $193.3 million and $155.6 million for the
years ended  December 31, 2003 and 2002,  respectively.  This was an increase of
$37.7 million or 24.2%.

Revenues from the  Institutional  Security Systems segment  increased from $84.2
million in 2002 to $98.7  million in 2003.  This was an increase  of 17.2%.  The
Institutional   Security  Systems  segment  is  largely  a  construction  driven
business.  Much of its  revenue  is  obtained  by  working  on new and  retrofit
construction  projects  in the  corrections  industry,  as opposed to sources of
recurring revenue.  As such, the increase in revenue experienced by this segment
is largely  attributable  to its ability to work on more projects than it did in
the  previous  year.  One of the  reasons it was able to do this was because its
backlog had grown from $92.3  million at December  31, 2001 to $99.5  million at
December  31, 2002 thus  providing it with the ability to engage in more work in
2003  than  it  did  in  2002.  At  December  31,  2003,  the  backlog  for  the
Institutional Security System's segment declined to $57.3 million. The year 2003
was a slow  bidding  period  for the  Company.  Although  the  gross  amount  of
construction  spending in the corrections area remained  relatively flat between
2002  and  2003,  the  types  of  projects  that the  Company  solicits,  namely
large-scale  medium to maximum  security  installations,  declined in 2003. This
situation was further  compounded  by the general  state and local  governmental
budget deficits which are causing these  governmental units to rethink and delay
many of their pending corrections projects.

Revenues from the Attack  Protection  segment were flat at $28.4 million  during
both  2003  and  2002.  The  Attack  Protection  segment  was  largely  capacity
constrained  during 2001. As a result,  the Company purchased an existing 75,000
square  foot  factory  on 20 acres of land in close  proximity  to its  existing
factory in Montgomery,  Alabama.  This  expansion  provided the segment with the
necessary capacity to generate  incremental revenue of approximately $10 million
per year. This capacity increase was largely driven by the Company's expectation
that the demands for its products,  principally  its bullet and blast  resistant
windows and doors would accelerate  significantly in the post September 11, 2001
world.  Throughout  2002 and 2003 this  anticipated  increase  in demand did not
materialize  leaving the segment with significant excess capacity.  This segment
is composed of two chief product offerings,  namely Norshield, which encompasses
the bullet and blast  resistant  windows and doors and ancillary  products,  and
Fiber SenSys,  which  encompasses its fiber optic intrusion  detection  systems.
During 2003 the Norshield line  experienced a 0.9% decline in revenues,  whereas
the Fiber  SenSys line  experienced  a 4.7%  increase  in  revenue.  The Company
continues to see heightened  interest for its Fiber SenSys  products and expects
sales  for  these  items to  continue  to  experience  sustainable  growth.  The
slow-down in the government  building process  experienced during 2002 and early
2003 has appeared to stabilize.  Now it appears that projects are being released
for  construction,  and thus  the  Attack  Protection  segment  is  experiencing
increased  bidding activity for its products.  During the fourth quarter of 2003
the  Company  furnished  bids to supply  its  products  for  eight  new  embassy
projects.  This was the  largest  number  of  embassy  projects  bid in a single
calendar year. In addition, all indications are that this increased level of new
embassy construction will continue for at least the next few years.

                                       15
<PAGE>

Revenues from the Federal Security Systems segment  increased from $13.4 million
in 2002 to $16.4 million in 2003.  This was an increase of 22.9%.  A significant
portion of this segment's revenue is backlog driven.  Its backlog is therefore a
precursor to future revenues.  The Federal Security Systems segment's failure to
have any meaningful  backlog at December 31, 2001 resulted in substantially  all
of its 2002  revenue  being driven by contract  awards it received  during 2002.
This inherently caused the segment's  revenue to be low during that period.  The
Federal  Security  Systems  Segment  ended  2002 with a  significantly  improved
backlog level of $11.4 million. As such it entered 2003 with a much greater book
of business from which to generate its increased revenue during 2003. Backlog at
December 31, 2003 was $8.3 million.

Revenues from the Public Safety and Justice segment increased $20.2 million from
$29.7  million  during 2002 to $49.8 million in 2003. On May 2, 2002 the Company
completed its acquisition of Tiburon,  Inc.  Previously,  the Company controlled
approximately  20% of Tiburon and recorded its  investment  in Tiburon under the
equity method of accounting.  Subsequent to May 2, 2002, Tiburon became a wholly
owned  subsidiary  of the  Company  at which  time its  operating  results  were
consolidated with those of the Company.  Tiburon's revenues for 2003 amounted to
$45.4 million as compared to $24.9 million for the  eight-month  period  Tiburon
was owned by CompuDyne in 2002.

Expenses. Cost of goods sold increased from $120.7 million during 2002 to $146.9
million  in 2003.  This  increase  was  largely a result of the  acquisition  of
Tiburon on May 2, 2002,  which added $11.8  million of cost of goods sold to the
results  of the  Company,  as well as  increased  costs of  goods  sold of $11.7
million at the Institutional  Security Systems segment, all largely attributable
to the increased sales levels attained by these segments.

The  smaller  percentage  increase  in cost of  goods  sold as  compared  to the
percentage increase in sales resulted in an increased gross profit percentage of
24.0% in 2003 as compared to 22.4% in 2002.

Cost of goods sold in the Institutional  Security Systems segment increased from
$72.8  million in 2002 to $84.5  million in 2003.  This was an increase of $11.7
million or 16.0%. This increase was less than the related sales increase of this
segment of 17.2%  resulting in an increase in the gross profit  percentage  from
13.5% in 2002 to 14.4% in 2003.  During 2002,  the West Coast  operations of the
Institutional Security Systems segment experienced  significant cost overruns on
many of its projects.  These cost overruns were incurred and recorded during the
third and fourth quarters of 2002 and amounted to approximately $2.4 million. As
a result,  as these  projects were brought to  completion in 2003,  the revenues
generated by them resulted in little margin or in some cases losses. The Company
recorded  approximately  $1.9 million of  additional  write-downs  on West Coast
projects that were either completed or neared completion in 2003. These were the
primary  reasons for the  depressed  gross profit  percentage  by  Institutional
Security  Systems.  To address this situation,  in 2002 the Company  implemented
more  centralized  controls  and  replaced  certain  personnel at its West Coast
operations.

Cost of goods sold in the Attack Protection segment decreased from $23.7 million
in 2002 to $22.7  million in 2003.  This was a decrease of $1.0 million or 4.5%.
This  decrease  was smaller than the related  sales  increase of this segment of
0.1%, resulting in an increase in the gross profit percentage from 16.3% in 2002
to 20.1% in 2003.  Although the results of this segment  improved in 2003,  they
are still  significantly below what is expected of this segment. We are actively
working to better utilize the new capacity  provided by the Company in 2002. One
of the actions we have taken was to relocate the AirTeq manufacturing  operation
in Oregon and consolidate it into the facilities we have in Montgomery, Alabama.
This was done in an effort to enhance the utilization of our owned facilities in
Alabama and thus use some of our excess manufacturing  capacity.  Although not a
huge   contributor,   this  did  in  fact  result  in  further   utilization  of
approximately 12,000 square feet of previously unused manufacturing space in our
new plant in Alabama.

Cost of goods sold in the Federal Security Systems segment  increased from $11.0
million in 2002 to $13.8  million in 2003.  This was an increase of $2.8 million
or 25.7%.  This increase was slightly  less than the related sales  increase for
this  segment of 22.9%.  The  Federal  Security  Systems  segment  gross  profit
percentage was 17.7% and 15.9% in 2002 and 2003 respectively.  Substantially all
of the projects awarded in this segment are discrete projects.

Cost of goods sold in the Public Safety and Justice segment increased from $13.2
million in 2002 to $25.9 million in 2003. This was an increase of $12.7 million.
Substantially  all of this  increase was a result of the  Company's  May 2, 2002
acquisition   of  Tiburon.   In  addition,   in  2003  the  Company   recognized
approximately  $5.5  million of revenue  related to  hardware  supplied  under a
contract  with one of its clients.  This hardware was furnished at minimal gross
profit of approximately 6.7%, which caused the entire margin for this segment to
be  reduced.  This  segment  recorded a $1.6  million  charge for a contract  in
litigation. This charge was recorded by reducing previously recorded revenues by
approximately $600 thousand and increasing cost of goods sold by $1.0 million.

                                       16
<PAGE>

Operating  expenses  increased  from $25.8  million in 2002 to $32.3  million in
2003.  This was an increase  of $6.5  million.  Much of the change in  operating
expenses  was a result of the  Company's  May 2, 2002  acquisition  of  Tiburon.
Included in operating  expenses in 2003 is $362 thousand  related to the closure
and relocation of its ISS Midwest  regional office and its Airteq  manufacturing
group.

In  conjunction  with the  acquisition  on May 2, 2002, of Tiburon,  Inc. and in
compliance with Statement of Financial  Accounting  Standards No. 141 (SFAS 141)
"Business  Combinations," the Company determined the fair value of the following
identifiable  assets and assigned the  indicated  lives  thereto for purposes of
amortization and depreciation.

                                              Amount          Life
                                           ------------    ----------
                                          (in thousands)   (in years)
        Trade name                         $     5,340     Indefinite
        Customer relationships             $     2,500         14
        Software                           $     3,000          5
        Backlog                            $       300          2
        Other                              $       135          3

The  amortization  of the above  intangibles  resulted in the Company  recording
amortization  expense  related to these  intangibles  of $973  thousand and $649
thousand  in 2003  and  2002,  respectively,  which  is  included  in  operating
expenses.

Research and  Development  expenses  increased from $4.9 million in 2002 to $7.4
million in 2003.  Being a technology  driven  enterprise,  the Company's  Public
Safety and Justice  segment is required  to  continually  update and enhance its
software offerings thus causing it to incur significant research and development
costs.  The increase in 2003 over 2002 is largely a  reflection  of the May 2002
acquisition of Tiburon by the Company.

Interest expense remained  relatively  constant at $1.4 million in both 2003 and
2002.

<TABLE>
<CAPTION>

                                                  Monthly Weighted           Monthly Weighted
                                                   Average - 2003              Average - 2002
                                                 Amount         Rate          Amount       Rate
                                                 ------         ----          ------       ----
                                             (in thousands)               (in thousands)
<S>                                           <C>               <C>        <C>              <C>
        Bank borrowings                       $   16,208        3.6%       $   17,983       3.8%
        Industrial revenue bonds              $    4,675        3.7%       $    4.387       2.6%
        Subordinated borrowings               $        -          -        $    1,310       4.9%

        In addition the Company recorded the
        following non-cash interest expense:
        Amortization and write-off
            of financing charges              $      250                   $      145
</TABLE>

Taxes on Income.  The  effective tax rate in 2003 was 40.8% as compared to 36.1%
in 2002.  The primary  reason for this change in effective tax rates is due to a
change in the mix in the states in which the Company's earnings occurred.

Net Income.  The Company reported net income of $3.4 million and $1.8 million in
2003 and 2002,  respectively.  Diluted  earnings per share  increased to $.42 in
2003 from $.23 in 2002. The weighted average number of common shares outstanding
and equivalents increased from 7.9 million in 2002 to 8.2 million 2003.

Liquidity and Capital Resources

The  Company  funds  its  operations  through  cash  flows  generated  from  its
operations,  bank and public  financings,  and the sale of its common stock. The
Company's  liquidity  requirements  arise  from  cash  necessary  to  carry  its
inventories and billed and unbilled receivables,  for capital  expenditures,  to
repurchase  shares of its common stock under its share repurchase  program,  for
payments  of  principal  and  interest  on  outstanding   indebtedness  and  for
acquisitions.  The ultimate clients of the Company are primarily federal,  state
and local  governmental  units.  In the event the funding of these  governmental
units is reduced for any reason,  including budgetary reductions due to economic
conditions, there is a risk that the demand for the Company's goods and services
would decrease which would reduce the availability of funds to the Company.

                                       17
<PAGE>

As of December  31,  2004,  the Company  had  working  capital of $44.0  million
compared  with $28.8  million as of  December  31,  2003.  The most  significant
changes in working capital were due to the receipt of the proceeds from the 2011
Notes  financing,  offset in part by the  concurrent  pay down of the  Company's
debt, with the balance invested in available-for-sale  marketable securities and
current acquisitions.

Net cash  provided by  operating  activities  was $4.5 million in the year ended
December 31, 2004 versus $11.0 million  provided by operating  activities in the
year ended  December  31,  2003.  The  largest  component  of cash  provided  by
operating activities was a decrease in accounts receivable of $7.5 million. This
decrease  was  largely  caused by the  decline in  revenues  experienced  by the
Company.

Net cash used for  investing  activities  was $26.8  million  in the year  ended
December  31, 2004  compared to net cash used of $1.1  million in the year ended
December 31, 2003.  In the year ended  December 31, 2004,  the net of marketable
securities  bought and redeemed was $19.5  million.  In addition $5.5 million of
cash was used to fund our two  acquisitions and $1.8 million of cash was used to
purchase property, plant and equipment.

Net cash provided by financing  activities amounted to $25.6 million in the year
ended December 31, 2004 compared with a net cash use of $9.3 million in the year
ended December 31, 2003. This amount was primarily provided through the issuance
of the  2011  Notes  offset  by the  repayment  of  $13.5  million  of our  bank
borrowings.

The following table summarizes the contractual  obligations of the Company as of
December 31, 2004 and the payments due by period, in thousands.

<TABLE>
<CAPTION>

                                    Long-Term Debt       Operating Leases       Interest on Contractual Obligations
                                    --------------       ----------------       -----------------------------------

        December 31:
<S>         <C>                        <C>                   <C>                           <C>
            2005                      $   440                $  2,376                      $ 2,637
            2006                          440                   1,259                        2,602
            2007                          440                   1,027                        2,590
            2008                          440                     539                        2,579
            2009                          440                     237                        2,567
        Thereafter                     42,055                                                3,359
                                      -------                --------                      -------
        Totals                        $44,255                $  5,438                      $16,334
                                      =======                ========                      =======
</TABLE>

In addition,  the Company enters into purchase  obligations to procure equipment
and services,  including  subcontractor  contracts,  in the  performance  of the
day-to-day  operations of its business.  Substantially  all of these obligations
are covered by our existing backlog and the revenues generated by these backlogs
are expected to be sufficient  to meet any payment  obligations  resulting  from
these purchase commitments.

On January 22, 2004, the Company  completed the offering of the 2011 Notes.  The
offering   was  for  $35  million   principal   amount  plus  an   underwriter's
over-allotment  option of $5.25 million principal amount, which was exercised in
full.  The 2011 Notes  bear  interest  at the rate of 6.25% per  annum,  payable
semi-annually,  and are convertible  into shares of common stock at a conversion
price of $13.89 per share.  The proceeds  from the 2011 Notes were used to repay
substantially all of the Company's outstanding borrowings.

During  January 2004, the Company repaid  substantially  all of its  outstanding
bank borrowings from the proceeds of the issuance of its 2011 Notes. The Company
has decided not to repay any of its Industrial  Revenue Bond ("IRB")  borrowings
as it has determined  that there are certain  favorable tax treatments  afforded
the Company when it entered  into these IRB's,  which it would lose in the event
these borrowings were repaid prematurely.

On March 31,  2004 the Company and its banks  amended  and  restated  its credit
agreement.  Under the terms of the new  agreement  $10.0  million of the line of
credit  matures on March 1, 2007 and $15.0 million of the line of credit matured
on March 1, 2005.

On October 29, 2004 and March 4, 2005,  the Company and its banks  entered  into
amendments  to the  credit  agreement  pursuant  to which the banks  waived  the
Company's  non-compliance  with its fixed charge  coverage  ratio covenant as of
September 30, 2004 and  non-compliance  with its minimum  EBITDA  covenant as of
December 31, 2004, respectively.  In addition, the Company and its banks amended
the credit  agreement to eliminate the $15 million line of credit maturing March
2005 and to  require  borrowings  under  its $10  million  line of  credit to be
collateralized by pledged marketable securities equal to 111.11% of the value of
such  borrowings.  The  credit  agreement  was also  amended  to  eliminate  the
quarterly  minimum EBITDA  covenant for the Company's  fiscal years ending after
December 31, 2004 and to provide that the minimum  fixed charge  coverage  ratio
covenant,  maximum  debt to EBITDA ratio  covenant and the minimum  consolidated
tangible net worth covenant will not become effective until March 31, 2006.

                                       18
<PAGE>

So long as the Company maintains pledged marketable  securities equal to 111.11%
of the value of its borrowings under the credit agreement,  borrowings under the
credit  agreement  shall bear  interest  at LIBOR + 1.00% or Prime + 1.00%.  The
Company incurs  commitment fees equal to a range of 0.20% to 0.35% on any unused
balances,  defined  as the  difference  between  the  total  amount of its $10.0
million line of credit less amounts  borrowed,  and outstanding under letters of
credit.

The  Company's  total  outstanding  borrowings  at December 31, 2004 amounted to
approximately  $43.1  million,  net of the  broker's  discounts.  The 2011 Notes
accounted for $39.1 million, net of the broker's discounts, of these borrowings.
The remaining  amount of $4.0 million resulted from borrowings at variable rates
and consisted of two industrial revenue bonds outstanding in the amounts of $1.4
million and $2.6  million.  The interest rate charged to the Company at December
31, 2004 for its industrial  revenue bonds was 2.13%. The variable interest rate
for these  borrowings  fluctuated  between 1.01% and 2.13% during the year ended
December  31,  2004 based on weekly  market  conditions.  These  bonds are fully
collateralized by bank letters of credit issued under the Credit Agreement.  The
Company's  banks  consider  letters  of credit as  outstanding  borrowings  when
considering the amount of availability  the Company has remaining under its line
of credit and in determining  the amount of marketable  securities  needed to be
pledged as collateral.

Other than the Company's  letters of credit,  which  amounted to $5.3 million at
December  31,  2004,  the  Company  has no  other  material  off  balance  sheet
liabilities.

At  December  31,  2004 the  Company  had $4.7  million of unused  availability,
subject to the pledge of collateral under its line of credit.

As a result of the variable  nature of the interest rate on the  Company's  bank
borrowings,  any  increase  in  the  amount  of  outstanding  borrowings  and/or
decreases in the  Company's  EBITDA (an increase in the  "leverage  ratio") will
result in the Company's interest rate increasing and thus the amount of interest
expense incurred also increasing.

The Company anticipates that cash generated from operations and borrowings under
the  working  capital  line of credit  and the cash  generated  from its  recent
issuance  of the 2011 Notes  will  enable  the  Company  to meet its  liquidity,
working capital and capital  expenditure  requirements during the next 12 months
and beyond. The Company, however, may require additional financing to pursue its
strategy of growth through  acquisitions,  and to meet its long-term  liquidity,
working  capital and capital  expenditure  requirements.  If such  financing  is
required,  there are no assurances  that it will be available,  or if available,
that it can be obtained on terms  favorable to the  Company.  From time to time,
the Company may be party to one or more non-binding  letters of intent regarding
material  acquisitions,  which,  if  consummated,  may be paid for with  cash or
through the issuance of a significant  number of shares of the Company's  common
stock. The interest rate environment  earlier this year was at historic lows. In
light of this favorable  environment,  the Company determined that it was in its
best  interests to lock in a favorable  fixed  interest  rate for a  significant
amount of borrowings. These borrowings, which were made on a subordinated basis,
were used to pay off the  Company's  existing bank debt and will be available to
fund the  Company's  future growth  opportunities  and also will be available to
fund any  acquisitions  the  Company  may wish to  pursue.  These  funds will be
instrumental in the Company's growth through  acquisition  strategy.  Unlike the
Company's  existing  bank debt  availability,  the 2011 Notes do not contain any
restrictive  covenants or ratios.  As a result of securing this  borrowing,  the
Company  renegotiated its bank lines of credit.  Although the Company  currently
does not see the need to borrow  under its bank  line,  it  intends to keep this
line  available at least to provide the required  collateral  for its industrial
revenue bond borrowings.

Additional Considerations

Cost Containment
Due to current economic  conditions,  and in light of a very strong  competitive
environment,  the Company  recognizes that its ability to increase the prices it
charges  its  clients  is  limited.  As  a  result,  in  order  to  enhance  its
profitability, the Company will continue to seek ways to reduce its costs.

Pension Plan
Prior to 2003 the  Company  maintained  a money  purchase  pension  plan,  which
covered  employees at one of its divisions.  All employees at this division were
eligible  to  participate  in  this  plan  after  one  year of  service.  Annual
contributions  of  between  3% and 5% of  annual  compensation  were made by the
Company  depending on the employees'  years of service.  The expense  related to
funding the plan was $507 thousand during 2002. Effective December 31, 2002, the
Company ceased  contributions  to this plan. The  participants in this plan were
100% vested.  The plan was then terminated and the participants were given three
distribution options: a rollover to their 401K plan, a cash distribution,  or an
annuity purchase.

                                       19
<PAGE>

Total Backlog
CompuDyne's  total backlog amounted to $126.9 million at December 31, 2004. This
was a decrease of 9.0% from the  Company's  December  31, 2003 backlog of $139.4
million.  The break down of the Company's  backlog by segment is as follows,  in
thousands:


                                               December 31,       December 31,
                                                   2004                2003
                                                --------            --------


        Institutional Security Systems          $ 49,324            $ 57,258
        Attack Protection                         20,803              10,043
        Federal Security Systems                   8,299               8,326
        Public Safety and Justice                 48,434              63,727
                                                --------            --------
                 Totals                         $126,860            $139,354
                                                ========            ========

Included in the backlog of the Public Safety and Justice segment at December 31,
2004 and  December  31, 2003 is $5.1  million and $12.0  million,  respectively,
representing awards received by the segment,  for which the clients have not yet
entered  into signed  contracts.  These  awards are expected to result in signed
contracts over the next twelve months.

Corporate Reorganization
As part of the Company's  efforts to better  manage its costs,  during the first
quarter of 2005 the Company  implemented a corporate  reorganization  whereby it
dissolved an inactive  subsidiary and converted several corporate  entities into
LLCs (Limited Liability Corporations). This activity was designed to improve the
Company's  tax  reporting  structure and should help better manage the Company's
state income tax  obligations.  In  conjunction  with this  reorganization,  our
Federal  Security Systems group,  formerly known as Quanta Systems,  was renamed
CompuDyne - Integrated  Electronics,  and our Public  Safety and Justice  group,
formerly  known as Tiburon,  was renamed  CompuDyne - Public Safety and Justice,
Inc. The impact of this reorganization is not expected to have a material effect
on operations.

Critical Accounting Policies and Estimates
Percentage of Completion Accounting and Revenue Recognition.
Approximately 65% of the Company's revenues are derived from long-term contracts
where  revenue  is  recognized  under the  percentage  of  completion  method of
accounting.  The  Company's  software  related  contracts  utilize  labor  hours
incurred to date on a project,  divided by the total  expected  project hours to
determine  the  completion  percentage.  The  Company's  construction  contracts
utilize  costs  incurred  to date on a project,  divided  by the total  expected
project  costs to determine  the  completion  percentage.  Both of these methods
require  considerable  judgment and, as such, the estimates derived at any point
in time could differ  significantly from actual results.  These estimates affect
many of the balance  sheet and statement of  operations  accounts  including net
sales,  cost of goods sold,  accounts  receivable,  contract  costs in excess of
billings and billings in excess of contract costs incurred.

Revenues for support and  maintenance  contracts  are  deferred  and  recognized
ratably over the life of the contract.  Sales of products  unrelated to contract
revenue are  recognized as revenue when all of the  following  criteria are met:
persuasive evidence of an arrangement exists;  delivery has occurred or services
have been rendered;  the seller's  price to the buyer is fixed or  determinable;
and collectibility is reasonably assured.

Provisions for estimated  losses on uncompleted  contracts are recognized in the
period such losses are determined.

Inventories  are  stated at the  lower of cost or  market,  using the  First-in,
First-out  (FIFO) method.  Costs  included in inventories  consist of materials,
labor,  and  manufacturing  overhead,  which are  related  to the  purchase  and
production of inventories.

Warranty  reserves  are  estimated  and  made at the time  products  are sold or
services are rendered.  They are established using historical information on the
nature,  frequency  and average  cost of warrant  claims.  The Company  warrants
numerous  products,  the terms of which vary  widely.  In  general,  the Company
warrants its products against defect and specific non-performance.

Accounts  receivable are expected to be substantially  collected within one year
except  for a  portion  of the  receivables  recorded  as  retainage.  Retainage
expected to be collected in over one year is reflected as a current  asset as it
will be collected within the operating cycle under the related contract.

                                       20
<PAGE>

Tax valuation  allowances are  established  when the Company  believes it is not
"more  likely than not" that the Company will be able to receive tax benefits in
the future.

Goodwill and Intangible Assets.
The Company  reviews the carrying  value of goodwill and  intangible  assets not
subject to  amortization  annually during the fourth quarter of the year or when
events or changes in  circumstances  indicate that the carrying value may not be
recoverable,  utilizing a  discounted  cash flow model.  Changes in estimates of
future cash flows caused by items such as unforeseen events or changes in market
conditions could negatively affect the Company's reporting units' fair value and
result in an impairment  charge.  The Company  cannot  predict the occurrence of
events that might adversely affect the reported value of goodwill and intangible
assets not subject to amortization which totaled approximately $31.6 million and
intangible  assets  subject to  amortization  which totaled  approximately  $2.8
million, net, at December 31, 2004.

Stock Compensation Policy.
The Company accounts for its stock-based  compensation using the intrinsic value
method and in accordance with the recognition and measurement  principles of APB
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees",  and  related
interpretations.  No stock-based employee  compensation cost is reflected in net
income,  as all options  granted had an exercise  price equal to the fair market
value of the underlying common stock on the date of the grant.

Economic  Conditions  and the After Effect of the September  11, 2001  Terrorist
Attacks
Much of the work CompuDyne performs is for state and local  governmental  units.
These entities have been severely impacted by recent economic conditions and the
resulting  contraction of the tax bases of these  governmental  units.  This has
caused these  governmental  units to carefully  evaluate their budgets and defer
expenses and projects where possible.  Much of the work of the Company's  Public
Safety and Justice,  and  Institutional  Security Systems segments is contracted
with these state and local governmental units. As a result,  these segments have
seen delays in new work  available  to be bid and worked on. In  addition,  even
work  that has been  contracted  for where  possible  is being  deferred  by the
customer into the future, presumably when the tax bases will be more robust.

After the  occurrence of the tragic  events of the September 11, 2001  terrorist
attacks,  there was a general  perception that our Federal  Security Systems and
Attack  Protection  segments would see a significant  increase in order flow. To
the contrary,  in the months  subsequent to the terrorist attacks these segments
saw a slowing in new work  opportunities  as the various  federal  agencies  and
other  customers  that are the usual source of business  for the Company  slowed
their  procurement  processes  waiting  for  definitive  direction  as to how to
proceed in the post September 11 world. Now further  complicated by the military
action in Iraq, the Company's  clients are  reevaluating  priorities and budgets
and are funding only their most pressing demands while also making key decisions
as to which projects can be deferred.

As a result of the above  factors,  during the last three  years the Company has
experienced a more challenging  marketplace than it experienced in several years
prior to September 11, 2001.

Impact of Inflation
Inflation did not have a significant  effect on  CompuDyne's  operations  during
2004.

Market Risk
The Company is exposed to market risk related to changes in interest rates.  The
Company  entered  into an interest  rate swap  agreement on June 26, 2001 in the
initial  notional  amount of $11.5  million.  The  notional  amount of this swap
agreement  declines by $676 thousand on a quarterly basis until it becomes $0 on
October 1, 2005. At December 31, 2004 the notional  amount of the swap agreement
had  declined  to $2.0  million  at a fixed rate of 4.9%.  In  January  2004 the
interest  rate swap  ceased to be a  highly-effective  cash flow  hedge when the
related debt was repaid. Consequently,  the amounts previously recorded in other
comprehensive  income as changes in fair  value of the  interest  rate swap were
recognized in earnings for the year ended December 31, 2004. Upon  determination
of the  hedge  ineffectiveness,  the  cumulative  loss on the fair  value of the
interest rate swap was $155 thousand,  which was recognized in other income. The
change in fair value of the interest  rate swap for the year ended  December 31,
2004 was a gain of $134  thousand,  resulting in a remaining  liability  for the
investment  of $21  thousand.  Future  changes in the value of the interest rate
swap will be recognized in earnings.

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal amount of the 2011 Notes.  The offering was for $35 million  principal
amount plus an underwriter's  over-allotment  option of $5.25 million  principal
amount, which was exercised in full. The 2011 Notes bear interest at the rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common  stock at a  conversion  price of $13.89 per share.  The  Company  used a
portion of the proceeds of this note offering to pay down outstanding borrowings
under its variable rate bank notes. Subsequent to the pay-down of its bank notes
the only variable rate borrowings  outstanding was approximately $4.4 million of
industrial  revenue  bonds.  Since these  borrowings  bear  interest at variable
rates,  and in the event interest rates increase  dramatically,  the increase in
interest  expense to the Company  could be material to the results of operations
of the Company.

                                       21
<PAGE>

Recent Accounting Pronouncements
In December  2004, the FASB issued  Statement No. 153,  Exchanges of Nonmonetary
Assets,  an  amendment  of APB  Opinion  No. 29.  Statement  153  addresses  the
measurement  of  exchanges  of  nonmonetary  assets and  redefines  the scope of
transactions  that  should be  measured  based on the fair  value of the  assets
exchanged.  Statement 153 is effective for nonmonetary asset exchanges occurring
in fiscal  periods  beginning  after June 15, 2005. The Company does not believe
adoption  of  Statement  153 will have a  material  effect  on its  consolidated
financial position, results of operations or cash flows.

In December 2004, the FASB issued FASB Staff Position No. 109-1,  Application of
FASB  Statement  No. 109 (SFAS 109),  Accounting  for Income  Taxes,  to the Tax
Deduction  on Qualified  Production  Activities  Provided by the  American  Jobs
Creation Act of 2004 (FSP 109-1).
 FSP 109-1 clarifies that the  manufacturer's  deduction  provided for under the
American  Jobs  Creation Act of 2004 (AJCA) should be accounted for as a special
deduction  in  accordance  with  SFAS 109 and not as a tax rate  reduction.  The
adoption of FSP 109-1 will have no impact on the Company's results of operations
or financial position for fiscal year 2005 because the manufacturer's  deduction
is not  available  to the  Company  until  fiscal  year  2006.  The  company  is
evaluating the effect that the manufacturer's  deduction will have in subsequent
years.

In December 2004, the FASB issued FASB Staff Position No. 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American  Jobs Creation Act of 2004 (FSP 109-2).  The AJCA  introduces a special
one-time  dividends  received  deduction on the  repatriation of certain foreign
earnings to a U.S. taxpayer (repatriation provision),  provided certain criteria
are  met.  FSP  109-2  provides  accounting  and  disclosure  guidance  for  the
repatriation provision. The Company believes that the adoption of this statement
will have no effect on the financial  position,  results of operations,  or cash
flows of the Company.

In  December  2004,  the FASB  issued SFAS No.  123R,  "Share-Based  Payment," a
revision  of  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires the Company to expense  grants made under its stock option and
employee  stock purchase plan  programs.  That cost will be recognized  over the
vesting period of the plans. SFAS No. 123R is effective for the first interim or
annual period  beginning after June 15, 2005. The Company has not yet determined
the  method  of  adoption  or the  effect of  adopting  SFAS  123R,  and has not
determined  whether the adoption  will result in amounts that are similar to the
current pro forma  disclosures  under SFAS 123.  The Company is  evaluating  the
alternatives allowed under the standard,  which the Company is required to adopt
beginning in the third quarter of 2005.

In November 2004, the FASB issued SFAS No. 151,  "Inventory Costs," an amendment
to ARB No. 43, Chapter 4, "Inventory  Pricing," to clarify that abnormal amounts
of  idle  facility  expenses,  freight,  handling  costs  and  wasted  materials
(spoilage) should be recognized as current-period  charges. In addition, FAS 151
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal  capacity of the production  facilities.  SFAS No. 151 is
effective for inventory  costs incurred during fiscal years beginning after June
15, 2005. The Company believes there will be no material effect on the financial
position,  results of operations,  or cash flows of the Company upon adoption of
this statement.

In March 2004 the Emerging Issues Task Force ("EITF")  reached a final consensus
on EITF Issue No. 03-06,  "Participating  Securities  and the  Two-Class  Method
under FAS 128,  Earnings  Per  Share".  Issue No.  03-06  addresses  a number of
questions  regarding the  computation of earnings per share ("EPS") by companies
that have issued securities other than common stock that  contractually  entitle
the holder to participate in dividends and earnings of the company when, and if,
it declares  dividends  on its common  stock.  The issue also  provides  further
guidance in applying the two-class  method of calculating EPS. It clarifies what
constitutes a  participating  security and how to apply the two-class  method of
computing EPS once it is determined that a security is participating,  including
how to  allocate  undistributed  earnings  to such a  security.  EITF  03-06 was
effective  for the fiscal  quarter  ended June 30,  2004.  The  adoption of this
standard did not have a material  effect on the financial  position,  results of
operations or cash flows of the Company.

In January 2003 the FASB issued FASB  Interpretation  No. 46,  "Consolidation of
Variable  Interest  Entities" (FIN 46). In December 2003, FIN 46 was replaced by
FASB  Interpretation No. 46(R),  "Consolidation of Variable Interest  Entities".
FIN 46(R)  clarifies the  application  of Accounting  Research  Bulletin No. 51,
"Consolidated  Financial  Statements",  to  certain  entities  in  which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. FIN 46(R)
requires  an  enterprise  to  consolidate  a  variable  interest  entity if that
enterprise will absorb a majority of the entity's  expected losses,  is entitled
to receive a majority of the entity's expected  residual  returns,  or both. The
consolidation  provisions of FIN 46(R) were effective  immediately for interests
created  after  January  31,  2003 and were  effective  on  March  31,  2004 for
interests created before February 1, 2003. The adoption of this standard did not
have a material effect on the financial position,  results of operations or cash
flows of the Company.

                                       22
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
CompuDyne  has fixed and variable rate notes  payable.  These  on-balance  sheet
financial instruments expose the Company to interest rate risk, with the primary
interest  rate  exposure  resulting  from  changes  in the bond  market  used to
determine the interest rate applicable to the borrowings under the Company's IRB
borrowings.

The following information  summarizes our sensitivity to market risks associated
with  fluctuations in interest rates as of December 31, 2004. To the extent that
the Company's  financial  instruments  expose the Company to interest rate risk,
they are presented in the table below.  The table presents  principal cash flows
and related  interest  rates by year of maturity of the Company's  notes payable
with variable rates of interest in effect at December 31, 2004.

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal  amount of 6.25%  Convertible  Subordinated  Notes due on January  15,
2011.  The 2011  Notes  bear  interest  at a rate of 6.25%  per  annum,  payable
semi-annually,  and are convertible  into shares of common stock at a conversion
price of $13.89 per share.  The  Company  used a portion of the  proceeds of the
2011  Notes to pay down its  variable  bank notes  payable.  The pay down of its
variable borrowings reduced the Company's interest rate risk.


        Financial Instruments by Expected Maturity Date
<TABLE>
<CAPTION>


        Notes Payable             Variable                                 Fixed
         Year Ending              Rate ($)       Average Variable        Rate ($)        Average Fixed
         December 31            (in thousands)    Interest Rate       (in thousands)     Interest Rate
        ------------            ---------------   --------------      --------------     -------------
         <S>                           <C>               <C>                <C>              <C>
         2005                        $   440           2.63%              $     -                -
         2006                            440           2.63%                    -                -
         2007                            440           2.63%                    -                -
         2008                            440           2.63%                    -                -
         2009                            440           2.63%                    -                -
         Thereafter                    1,805           2.63%                40,250            6.25%
                                     --------                             ---------
         Total                       $ 4,005           2.63%              $ 40,250            6.25%
         Fair Value                  $ 4,005           2.63%              $ 33,500            11.00%

       Interest Rate Swaps        Variable
         Year Ending              Rate ($)        Average Variable       Average
         December 31            (in thousands)      Pay Rate           Receive Rate
        ------------            ---------------   --------------      --------------
         2005                          $2,029             4.90%                2.55%
         2006                              -               -                     -
         2007                              -               -                     -
         2008                              -               -                     -
         2009                              -               -                     -
         Thereafter                        -               -                     -
                                      --------
         Total                         $2,029             4.90%                2.55%
         Fair Value                    $  (21)

</TABLE>


                                       23
<PAGE>


             ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  following  consolidated  financial  statements of the  Corporation  and its
subsidiaries are included herein as indicated below:

     Report of Independent Registered Public Accounting Firm -
     PricewaterhouseCoopers LLP
     Report of Independent Registered Public Accounting Firm - Deloitte & Touche
     LLP
     Consolidated Balance Sheets at December 31, 2004 and 2003
     Consolidated Statements of Operations for the years ended December 31,
     2004, 2003 and 2002
     Consolidated Statement of Changes in Shareholders' Equity for the years
     ended December 31, 2004, 2003 and 2002
     Consolidated Statements of Cash Flows for the years ended December 31,
     2004, 2003 and 2002
     Notes to Consolidated Financial Statements



                                       24
<PAGE>



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
CompuDyne Corporation
Annapolis, Maryland

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statement of operations,  changes in shareholders' equity and cash
flows  present  fairly,  in all material  respects,  the  financial  position of
CompuDyne  Corporation and its subsidiaries at December 31, 2004 and the results
of its  operations  and its cash flows for the year ended  December  31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition,  in our opinion,  the financial statement schedule for the
year ended December 31, 2004 listed in the index  appearing  under Item 15(a)(2)
presents  fairly,  in all material  respects,  the information set forth therein
when read in conjunction  with the related  consolidated  financial  statements.
These   financial   statements   and  financial   statement   schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements and financial statement schedule based on
our audit.  We conducted our audit of these  statements  in accordance  with the
standards of the Public  Company  Accounting  Oversight  Board (United  States).
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Baltimore, Maryland
March 31, 2005




                                       25
<PAGE>



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
CompuDyne Corporation
Annapolis, Maryland

We have  audited  the  accompanying  consolidated  balance  sheets of  CompuDyne
Corporation  and   subsidiaries  as  of  December  31,  2003,  and  the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each of the two years in the period ended  December  31,  2003.  Our audits also
included the financial  statement schedule for the years ended December 31, 2003
and 2002,  listed in the Index at Item 15a(2).  These  financial  statements and
financial  statement  schedule  are  the  responsibility  of  the  Corporation's
management.  Our  responsibility  is to  express  an  opinion  on the  financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,   the  financial  position  of  CompuDyne   Corporation  and
subsidiaries at December 31, 2003, and the results of their operations and their
cash flows for each of the two years in the period ended  December 31, 2003,  in
conformity with accounting principles generally accepted in the United States of
America.  Also,  in  our  opinion,  such  financial  statement  schedule,   when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.

DELOITTE & TOUCHE LLP

Baltimore, Maryland
March 8, 2004




                                       26
<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                         December 31,
                                        ASSETS                                         2004         2003
                                                                                    ----------     -------
                                                                                     (dollars in  thousands)
Current Assets
<S>                                                                                 <C>          <C>
        Cash and cash equivalents                                                  $  5,198     $  1,869
        Marketable securities                                                        19,577            -
        Accounts receivable, net                                                     34,291       41,780
        Contract costs in excess of billings                                         16,087       17,568
        Inventories                                                                   5,165        6,704
        Deferred tax assets                                                               -        1,371
        Prepaid expenses and other                                                    5,412        2,322
                                                                                   --------     --------
           Total Current Assets                                                      85,730       71,614

Property, plant and equipment, net                                                   12,094       10,079
Goodwill, net                                                                        25,894       23,350
Other intangible assets, net                                                          8,460        9,785
Other                                                                                   713          904
                                                                                   --------     --------
           Total Assets                                                            $132,891     $115,732
                                                                                   ========     ========


                                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
        Accounts payable and accrued liabilities                                   $ 21,771     $ 21,078
        Billings in excess of contract costs incurred                                13,497       13,551
        Deferred revenue                                                              5,998        6,036
        Current portion of notes payable                                                440        2,103
                                                                                   --------     --------
           Total Current Liabilities                                                 41,706       42,768

Notes payable                                                                         3,565       15,555
Convertible subordinated notes payable, net                                          39,118            -
Deferred tax liabilities                                                              2,072        3,662
Other                                                                                   599          820
                                                                                   --------     --------
           Total Liabilities                                                         87,060       62,805

Commitments and Contingencies

Shareholders' Equity
        Preferred stock, 2,000,000 shares authorized and unissued                         -            -
        Common stock, par value $.75 per share: 50,000,000 and
         15,000,000 shares authorized at December 31, 2004 and
         2003, respectively; 8,943,856 and 8,567,680 shares issued
         at December 31, 2004 and 2003, respectively                                  6,707        6,426
        Additional paid-in-capital                                                   44,368       42,755
        Retained earnings (accumulated deficit)                                        (272)       7,926
        Accumulated other comprehensive gain (loss)                                      14         (93)
        Treasury stock, at cost; 721,077 shares and 594,877
          shares at December 31, 2004 and 2003, respectively
                                                                                     (4,986)      (4,087)
                                                                                   --------     --------
           Total Shareholders' Equity                                                45,831       52,927
                                                                                   --------     --------
           Total Liabilities and Shareholders' Equity                              $132,891     $115,732
                                                                                   ========     ========

</TABLE>


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



                                       27
<PAGE>


                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                                  2004           2003            2002
                                                            ------------    -----------    ------------
                                                                (in thousands, except per share data)
Revenues:
<S>                                                             <C>            <C>             <C>
  Contract revenues earned                                      $114,899       $160,709        $122,727
  Other revenues                                                  27,883         32,554          32,829
                                                            ------------    -----------    ------------
    Total revenue                                                142,782        193,263         155,556


Cost of  Sales                                                   105,104        146,867         120,740
                                                            ------------    -----------    ------------

Gross profit                                                      37,678         46,396          34,816

Selling, general and administrative expenses                      36,219         32,305          25,785
Research and development
                                                                   7,755          7,374           4,916
Impairment of goodwill and other intangibles
                                                                   1,826              -               -
                                                            ------------    -----------    ------------
                                                                                     --              --
(Loss) income from operations                                     (8,122)        6,717            4,115
                                                            ------------    -----------    ------------


Other expense (income)
  Interest expense                                                 3,298          1,389           1,427
  Interest income                                                 (1,009)          (338)            (33)
  Other (income) expense
                                                                      19            (90)           (119)
                                                            ------------    -----------    ------------
    Total other expense                                            2,308            961           1,275
                                                            ------------    -----------    ------------


(Loss) income before income taxes                                (10,430)         5,756           2,840
Income taxes (benefit) expense                                    (2,232)         2,348           1,026
                                                            ------------    -----------    ------------

Net (loss) income                                               $ (8,198)      $  3,408         $ 1,814
                                                            ============    ===========    ============

Earnings (loss) per share:
-------------------------
Basic earnings (loss) per common share                          $  (1.01)      $    .43        $    .24
                                                            ============    ===========    ============

Weighted average number of common
 shares outstanding                                                                               7,456
                                                                   8,136          7,895

Diluted earnings (loss) per common share                        $  (1.01)      $    .42        $    .23
                                                            ============    ===========    ============

Weighted average number of common
 shares and equivalents                                            8,136          8,158           7,940
                                                            ============    ===========    ============
</TABLE>




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

                                       28
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                              Accumulated
                                                   Additional   Retained         Other
                                   Common Stock      Paid-in    Earnings      Comprehensive     Treasury Stock
                                 Shares    Amount    Capital    (Deficit)     Income (Loss)    Shares    Amount      Total
                                 ----------------    -------    ---------     -------------    ----------------      -----

<S>                                <C>     <C>        <C>         <C>            <C>             <C>     <C>        <C>
Balance at January 1, 2002        7,133   $ 5,350    $ 27,976    $ 2,704        $   (114)       478     $(3,279)   $ 32,637
Tax  benefit from the exercise
 of stock options
                                                          253                                                           253
Common stock issued in
 connection with acquisition
 of Tiburon, Inc.                 1,124       843      13,406                                                        14,249
Warrant issued in
 connection with acquisition
 of  Tiburon, Inc.                                        262                                                           262
Warrants exercised in
 cashless exercise                    9         6          58                                     4         (64)          -
Stock options exercised             126        95         553                                                           648
Purchase of  treasury shares
                                                                                                 92        (577)       (577)
                                --------------------------------------------------------------------------------------------
  Subtotal                        8,392     6,294      42,508      2,704            (114)       574      (3,920)     47,472
Comprehensive income:
  Net income                                                       1,814                                              1,814
Other comprehensive income,
 net of tax:
  Loss on interest rate swap
   agreement                                                                         (74)                               (74)
  Translation adjustment                                                              (8)                                (8)
                                                                                                               -------------
Comprehensive income (loss)                                                                                           1,732
                                --------------------------------------------------------------------------------------------
Balance at December 31, 2002      8,392     6,294      42,508      4,518            (196)       574      (3,920)     49,204

Tax benefit from the exercise
 of stock options                                         127                                                           127
Acquisition of Tiburon
 Purchase price adjustment                               (370)                                                         (370)
Stock options exercised             128        96         360                                                           456
Warrants exercised                   48        36         130                                    21        (166)          -
Purchase of treasury shares
                                                                                                  -          (1)         (1)
                                --------------------------------------------------------------------------------------------
  Subtotal                        8,568     6,426      42,755      4,518            (196)       595      (4,087)     49,416
Comprehensive income:
  Net income                                                       3,408                                              3,408
Other comprehensive
 income, net of tax:
  Gain on interest rate
   swap agreement                                                                    110                                110
Translation adjustment                                                                (7)                                (7)
                                                                                                               -------------
Comprehensive income (loss)
                                                                                                                      3,511
                                --------------------------------------------------------------------------------------------
Balance at December 31, 2003
                                  8,568     6,426      42,755      7,926             (93)       595      (4,087)     52,927

Common stock issued in
 connection with acquisition         72        54         585                                                           639
Stock options exercised             304       227       1,028                                                         1,255
Purchase of treasury shares                                                                     126        (899)       (899)
                                --------------------------------------------------------------------------------------------
  Subtotal                        8,944     6,707      44,368      7,926             (93)       721      (4,986)     53,922
Comprehensive income:
  Net loss                                                        (8,198)                                            (8,198)
Other comprehensive
 income, net of tax:
  Gain on interest rate swap
   agreement                                                                          93                                 93
Unrealized gain on available
for
 sale marketable securities                                                           14                                 14
                                                                                                               -------------
Comprehensive income (loss)                                                                                          (8,091)
                                --------------------------------------------------------------------------------------------
Balance at December 31, 2004      8,944   $ 6,707    $ 44,368    $  (272)       $     14        721     $(4,986)   $ 45,831
                                =============================================================================================
</TABLE>



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


                                       29
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,

                                                                               2004         2003         2002
                                                                             -------      -------       -------
                                                                                       (in thousands)
Cash flows from operating activities:
<S>                                                                         <C>           <C>           <C>
Net (loss) income                                                            $(8,198)     $ 3,408       $ 1,814

Adjustments  to reconcile  net (loss)  income to net cash  provided by
 (used in) operations:
        Depreciation and amortization                                          2,921        2,988         2,848
        Deferred income tax (benefit) expense                                   (219)         245          (288)
        Equity earnings in affiliated company                                      -            -           (23)
        Gain (loss) from disposition of property, plant and equipment              2            -            (1)
        Impairment of goodwill and other intangibles                           1,826            -             -
        Amortization of debt discount                                            176            -             -
        Unrealized loss on interest rate swap                                     21            -             -
        Amortization of discounts of marketable securities                       (18)           -             -

Changes in assets and liabilities:
        Accounts receivable                                                    7,507        3,388        (4,828)
        Contract costs in excess of billings                                   1,481        1,305         4,533
        Inventories                                                            1,539         (303)         (158)
        Prepaid expenses and other current assets                             (3,160)         188           (67)
        Other assets                                                             191         (237)          (49)
        Accounts payable and accrued liabilities                                 616         (830)       (4,887)
        Billings in excess of contract costs incurred                            (54)         (51)        1,871
        Deferred revenue                                                         (38)         224         1,021
        Other liabilities
                                                                                 (66)         665            (9)
                                                                             -------      -------       -------
Net cash flows provided by operating activities                                4,527       10,990         1,777
                                                                             -------      -------       -------

Cash flows from investing activities:
        Purchase of marketable securities                                    (42,361)           -             -
        Redemption of marketable securities                                   22,824           -             -
        Additions to property, plant and equipment                            (1,784)      (1,068)       (3,150)
        Proceeds from sale of property, plant and equipment                        4           14            40
        Net payment for acquisitions                                          (5,526)        (71)       (10,362)
                                                                             -------      -------       -------


Net cash flows used in investing activities                                  (26,843)      (1,125)      (13,472)
                                                                             -------      -------       -------

Cash flows from financing activities:
        Warrants exercised                                                         -          166            64
        Stock options exercised                                                1,255          583           902
        Purchase of treasury stock                                              (899)        (167)         (641)
        Repayments of subordinated notes payable                                   -            -        (1,762)
        Borrowings of bank notes                                                   -            -        15,500
        Repayment of bank notes and lines of credit                          (13,653)      (9,852)       (1,390)
        Borrowings of convertible subordinated notes payable                  38,942
                                                                             -------      -------       -------
                                                                                                -             -
Net cash flows provided by (used in) financing activities                     25,645       (9,270)       12,673
                                                                             -------      -------       -------

Net change in cash and cash equivalents                                        3,329          595           978
Cash and cash equivalents at the beginning of the year                                      1,274           296
                                                                             -------      -------       -------
                                                                               1,869
Cash and cash equivalents at the end of the year                             $ 5,198      $ 1,869       $ 1,274
                                                                             =======      =======       =======

Supplemental  disclosures  of cash flow  information:
  Cash paid during the year for:
        Interest                                                             $ 1,573      $ 1,087       $ 1,314
        Income taxes, net of refunds                                         $   771      $ 1,873       $ 2,137
  Common stock issued in connection with acquisition                         $   639            -       $14,300
</TABLE>

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



                                       30
<PAGE>



                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations CompuDyne  Corporation,  a Nevada corporation,  operates in
four sectors of the security industry - Institutional  Security Systems,  Attack
Protection, Public Safety and Justice, and Federal Security Systems.

The  Institutional  Security  Systems segment  provides  physical and electronic
security products and services to the corrections  industry (jails and prisons),
and to the courthouse, municipal and commercial markets.

The Attack Protection segment  manufactures  bullet,  blast and attack resistant
windows  and  doors  designed  for  high-end  security  applications,  including
embassies,   courthouses,   Federal  Reserve   buildings  and  banks;  and  also
manufactures  fiber optic  systems used to detect  physical  intrusion,  protect
large  perimeters  and for the physical  protection of data lines;  and,  fixed,
removable, semi-automatic vehicle bollards and wedge barrier security systems.

The Federal  Security  Systems  segment  provides  the United  States  military,
governmental  agencies and state and local units with specialty  engineering and
security services, often of a classified nature.

The Public  Safety and  Justice  segment  provides a fully  integrated  suite of
products including computer assisted dispatching,  records management, court and
probation software systems for the law enforcement, fire and rescue, corrections
and justice environments.  In addition,  the Company's Public Safety and Justice
segment provides sophisticated inmate management software.

Summary of Significant Accounting Policies The consolidated financial statements
of CompuDyne  Corporation and its subsidiaries  have been prepared in accordance
with accounting principles generally accepted in the United States of America.

Principles of Consolidation The consolidated  financial  statements  include the
accounts of CompuDyne Corporation and its subsidiaries (collectively "CompuDyne"
or "the Company"). On May 2, 2002, CompuDyne completed its acquisition of all of
the  issued and  outstanding  shares of  Tiburon  at which  time  Tiburon,  Inc.
("Tiburon") became a wholly owned subsidiary of CompuDyne.  Prior to May 2, 2002
the Company  accounted for its investment in Tiburon using the equity method and
such  investment  was  included  in  Investment  in  Affiliated   Company.   All
significant  inter-company  balances and  transactions  have been  eliminated in
consolidation.

Use of Estimates The  preparation  of financial  statements  in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  These include  estimates of
percentage-completion  on  long-term  contracts  and  valuation  allowances  for
contracts,  accounts  receivable,  inventories  and deferred tax assets.  Actual
results could differ from those estimates.

Revenue  Recognition  Much of the Company's  revenues are derived from long-term
contracts where revenue is recognized under the percentage of completion  method
of  accounting.  Revenues and the  associated  costs from software  products and
related  hardware  installations,  as well as computer  programming  and systems
engineering services delivered as part of the Company's delivery of its software
products, are recognized using the  percentage-of-completion  method using labor
hours  incurred  relative to total  estimated  contract  hours as the measure of
progress towards completion.  The Company's construction contracts utilize costs
incurred to date on a project  divided by the total  expected  project  costs to
determine the completion  percentage.  Revenue under cost reimbursable contracts
is  recognized  to the  extent of costs  incurred  to date plus a  proportionate
amount  of the fee  earned.  Revenue  under  time  and  materials  contracts  is
recognized to the extent of billable  rates times hours  incurred plus materials
expense incurred.  Revenue from fixed price construction contracts is recognized
under the  percentage  of  completion  method,  whereby  a portion  of the total
contract price is recognized  based on the amount of costs incurred to date as a
percentage  of total  estimated  costs.  Changes in revenue,  costs,  and profit
estimates occurring during the course of a contract are recognized in the period
in which the  revisions  are  determined.  Revenues for support and  maintenance
contracts  are  deferred  and  recognized  ratably  over the life of the service
contract once the system is installed.  Sales of products  unrelated to contract
revenue are  recognized as revenue when all of the  following  criteria are met:
persuasive evidence of an arrangement exists;  delivery has occurred or services
have been rendered;  the seller's  price to the buyer is fixed or  determinable;
and  collectibility  is reasonably  assured.  Provisions for estimated losses on
uncompleted  contracts are recognized in the period such losses are  determined.
Costs and  estimated  earnings in excess of billings  on  uncompleted  contracts
represent  the excess of contract  revenues  recognized to date over billings to
date on certain contracts. Billings in excess of costs and estimated earnings on
uncompleted  contracts  represent the excess of billings to date over the amount
of revenue recognized to date on certain contracts.

                                       31
<PAGE>

Research and Development  Expenditures  for research and development are charged
to operations as incurred.

Goodwill Goodwill  represents the cost in excess of the fair value of net assets
acquired. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"),  "Goodwill and
Other  Intangible  Assets",  which  was  effective  January  1,  2002.  SFAS 142
requires,  among other things, the discontinuance of goodwill  amortization.  In
addition,  the standard includes provisions for the  reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles,  reclassification of certain intangibles out of
previously  reported  goodwill and the  identification  of  reporting  units for
purposes of assessing  potential future  impairments of goodwill.  SFAS 142 also
requires the Company to complete a  transitional  goodwill  impairment  test six
months from the date of adoption.  The result of this impairment test identified
that as of January 1, 2002 there were no  impairments  of goodwill or intangible
assets. CompuDyne will continue to conduct impairment assessments annually as of
October 1 of each  fiscal year or when events  indicate a  triggering  event has
occurred.  During the fourth  quarter of 2004,  the Company  concluded  that the
continuing  decline in the backlog in its ISS segment  constituted  a triggering
event. The Company  performed our interim  impairment test of the reporting unit
as of December 31, 2004 and based on our valuation concluded it was necessary to
write off the value of the  segment's  goodwill in the amount of $739  thousand.
This  write-off is included in impairment of goodwill and other  intangibles  in
the 2004 statement of operations.  As of October 1 and December 31, 2004,  there
were no other impairments of goodwill.

Cash and Cash  Equivalents The Company  considers all highly liquid  investments
with an  original  or  remaining  maturity  of three  months  or less to be cash
equivalents.  The Company  deposits cash and cash  equivalents  with high credit
quality financial institutions.  These deposits may exceed the federally insured
limits.

Marketable  Securities The Company's  marketable  securities are  categorized as
available-for-sale  securities,  as defined by Statement of Financial Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities," and as a result, were reported at fair value.  Unrealized gains and
losses are reported as a component of accumulated other comprehensive  income in
shareholders'  equity.  The amortized  costs of debt  securities is adjusted for
accretion of discounts  from the date of purchase to maturity.  The accretion is
included  in  interest  income  on the  investments.  The  cost  for  marketable
securities was determined  using the specific  identification  method.  The fair
values of marketable  securities are estimated  based on the quoted market price
for these securities.

Property,  Plant, and Equipment Property, plant and equipment are stated at cost
less accumulated  depreciation.  Depreciation of plant and equipment is computed
principally by the straight-line method based upon the estimated useful lives of
the various classes of assets.  Leasehold  improvements are amortized over their
useful  lives  or the  term  of the  underlying  lease,  whichever  is  shorter.
Maintenance  and repair  costs are  charged to  operations  as  incurred;  major
renewals and betterments are  capitalized.  Any gain or loss from the retirement
or sale of an asset is credited or charged to operations.

Inventories  Inventories  are stated at the lower of cost or  market,  using the
First-in,  First-out  (FIFO) method.  Costs  included in inventories  consist of
materials,  labor, and manufacturing overhead, which are related to the purchase
and production of inventories.

Warranty  Reserves In November  2002,  the FASB  issued  Interpretation  No. 45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of  Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December  31,  2002.  The  liabilities  should  reflect  the fair  value,  at
inception,  of the  guarantors'  obligations  to stand ready to perform,  in the
event that the specified  triggering events or conditions occur. The adoption of
this standard did not have a material effect on the financial position,  results
of  operations  or cash flows of  CompuDyne.  The  Interpretation  also requires
disclosure of  accounting  policies and  methodologies  with respect to warranty
accruals,  as well as a  reconciliation  of the change in these accruals for the
reporting  period.  Refer  to Note 13,  "Product  Warranties,"  in the  Notes to
Consolidated Financial Statements for additional information.

Deferred Revenue The Company  provides ongoing  maintenance and service for many
of  its  completed  projects.  Much  of  this  work  is  performed  pursuant  to
maintenance  agreements,  which typically cover such services for a twelve month
period.  The Company  recognizes  revenue under these contracts ratably over the
term of the contract. Any revenues not yet earned under the contract is recorded
as deferred revenue in the accompanying financial statements

                                       32
<PAGE>

Fair  Value  and  Hedging  The  Company  hedged  the  cash  flows of some of its
long-term  debt using an  interest  rate swap.  The Company  entered  into these
derivative  contracts  to manage its  exposure to  interest  rate  movements  by
achieving a desired  proportion of fixed rate versus  variable rate debt. In the
interest  rate swap,  the Company  agreed to exchange the  difference  between a
variable  interest rate and either a fixed or another  variable  interest  rate,
multiplied by a notional principal amount.

Income Taxes The Company  follows  Statement of Financial  Accounting  Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS 109, deferred income
taxes are recognized for the future tax consequences of differences  between tax
bases of assets and  liabilities  and financial  reporting  amounts,  based upon
enacted tax laws and statutory tax rates  applicable to the periods in which the
differences are expected to affect taxable income.

Stock-Based  Compensation  As of December  31,  2004,  the Company  continues to
account for its stock-based compensation plans, using the intrinsic value method
and in accordance with the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based  employee  compensation  cost is reflected in net income,  as all
options  granted  had an exercise  price  equal to the fair market  value of the
underlying  common stock on the date of grant. The following table  illustrates,
in accordance  with the provisions of SFAS No. 148,  "Accounting for Stock-Based
Compensation - Transition and Disclosure," the effect on net income and earnings
per share if the Company had applied the fair value  recognition  provisions  of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.

<TABLE>
<CAPTION>

                                                                                      For the Year Ended December 31,
                                                                                 2004              2003              2002
                                                                                -------           -------            ------
                                                                                    (in thousands, except per share data)
<S>                                                                             <C>               <C>               <C>
Net (loss) income, as reported                                                  $(8,198)          $ 3,408           $ 1,814
Deduct:  Total stock-based employee compensation expense determined
under fair value based method for all awards net of  related tax effects          1,040             1,117             1,374
                                                                                -------           -------            ------
Pro forma net (loss) income                                                     $(9,238)          $ 2,291            $  440
                                                                                =======           =======            ======

(Loss) earnings per share:
Basic - as reported                                                             $ (1.01)           $  .43            $  .24
Basic - pro forma                                                               $ (1.14)           $  .29            $  .06

Diluted - as reported                                                           $ (1.01)           $  .42            $  .23
Diluted - pro forma                                                             $ (1.14)           $  .28            $  .06
</TABLE>


The fair value of the  Company's  stock-based  option  awards to  employees  was
estimated using the Black-Scholes  model assuming no expected  dividends and the
following weighted-average assumptions:

                                              For the Year Ended December 31,
                                            2004           2003           2002
                                            -----         ------         -----
      Expected life in years                 5.4            6.6            7.5
      Risk-free interest rate                3.4%           2.9%           5.0%
      Expected volatility                   75.3%          79.5%          74.0%


Corporate  Reorganization  As part of the Company's efforts to better manage its
costs,  during the first  quarter of 2005 the  Company  implemented  a corporate
reorganization whereby it dissolved an inactive subsidiary and converted several
corporate entities into LLCs (Limited Liability Corporations). This activity was
designed to improve the Company's tax reporting structure and should help better
manage the Company's  state income tax  obligations.  In  conjunction  with this
reorganization,  our Federal  Security  Systems group,  formerly known as Quanta
Systems, was renamed CompuDyne - Integrated  Electronics,  and our Public Safety
and Justice  group,  formerly known as Tiburon,  was renamed  CompuDyne - Public
Safety and Justice, Inc.

Other Recently Issued Accounting Pronouncements
In December  2004, the FASB issued  Statement No. 153,  Exchanges of Nonmonetary
Assets,  an  amendment  of APB  Opinion  No. 29.  Statement  153  addresses  the
measurement  of  exchanges  of  nonmonetary  assets and  redefines  the scope of
transactions  that  should be  measured  based on the fair  value of the  assets
exchanged.  Statement 153 is effective for nonmonetary asset exchanges occurring
in fiscal  periods  beginning  after June 15, 2005. The Company does not believe
adoption  of  Statement  153 will have a  material  effect  on its  consolidated
financial position, results of operations or cash flows.

                                       33
<PAGE>

In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109 and
not as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
the Company's results of operations or financial position for fiscal year 2005
because the manufacturer's deduction is not available to the Company until
fiscal year 2006. The company is evaluating the effect that the manufacturer's
deduction will have in subsequent years.

In December 2004, the FASB issued FASB Staff Position No. 109-2,  Accounting and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American  Jobs Creation Act of 2004 (FSP 109-2).  The AJCA  introduces a special
one-time  dividends  received  deduction on the  repatriation of certain foreign
earnings to a U.S. taxpayer (repatriation provision),  provided certain criteria
are  met.  FSP  109-2  provides  accounting  and  disclosure  guidance  for  the
repatriation provision. The Company believes that the adoption of this statement
will have no effect on the financial  position,  results of operations,  or cash
flows of the Company.

In  December  2004,  the FASB  issued SFAS No.  123R,  "Share-Based  Payment," a
revision  of  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation"  and
superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires the Company to expense  grants made under its stock option and
employee  stock purchase plan  programs.  That cost will be recognized  over the
vesting period of the plans. SFAS No. 123R is effective for the first interim or
annual period  beginning after June 15, 2005. The Company has not yet determined
the  method  of  adoption  or the  effect of  adopting  SFAS  123R,  and has not
determined  whether the adoption  will result in amounts that are similar to the
current pro forma  disclosures  under SFAS 123.  The Company is  evaluating  the
alternatives allowed under the standard,  which the Company is required to adopt
beginning in the third quarter of 2005.

In November 2004, the FASB issued SFAS No. 151,  "Inventory Costs," an amendment
to ARB No. 43, Chapter 4, "Inventory  Pricing," to clarify that abnormal amounts
of  idle  facility  expenses,  freight,  handling  costs  and  wasted  materials
(spoilage) should be recognized as current-period  charges. In addition, FAS 151
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal  capacity of the production  facilities.  SFAS No. 151 is
effective for inventory  costs incurred during fiscal years beginning after June
15, 2005. The Company believes there will be no material effect on the financial
position,  results of operations,  or cash flows of the Company upon adoption of
this statement.

In March 2004 the Emerging Issues Task Force ("EITF")  reached a final consensus
on EITF Issue No. 03-06,  "Participating  Securities  and the  Two-Class  Method
under FAS 128,  Earnings  Per  Share".  Issue No.  03-06  addresses  a number of
questions  regarding the  computation of earnings per share ("EPS") by companies
that have issued securities other than common stock that  contractually  entitle
the holder to participate in dividends and earnings of the company when, and if,
it declares  dividends  on its common  stock.  The issue also  provides  further
guidance in applying the two-class  method of calculating EPS. It clarifies what
constitutes a  participating  security and how to apply the two-class  method of
computing EPS once it is determined that a security is participating,  including
how to  allocate  undistributed  earnings  to such a  security.  EITF  03-06 was
effective  for the fiscal  quarter  ended June 30,  2004.  The  adoption of this
standard did not have a material  effect on the financial  position,  results of
operations or cash flows of the Company.

In January 2003 the FASB issued FASB  Interpretation  No. 46,  "Consolidation of
Variable  Interest  Entities" (FIN 46). In December 2003, FIN 46 was replaced by
FASB  Interpretation No. 46(R),  "Consolidation of Variable Interest  Entities".
FIN 46(R)  clarifies the  application  of Accounting  Research  Bulletin No. 51,
"Consolidated  Financial  Statements",  to  certain  entities  in  which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional  subordinated financial support from other parties. FIN 46(R)
requires  an  enterprise  to  consolidate  a  variable  interest  entity if that
enterprise will absorb a majority of the entity's  expected losses,  is entitled
to receive a majority of the entity's expected  residual  returns,  or both. The
consolidation  provisions of FIN 46(R) were effective  immediately for interests
created  after  January  31,  2003 and were  effective  on  March  31,  2004 for
interests created before February 1, 2003. The adoption of this standard did not
have a material effect on the financial position,  results of operations or cash
flows of the Company.

Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year's presentation.

                                       34
<PAGE>


2.   ACQUISITION OF TIBURON, INC.

On January  25,  2002,  the  Company  and  Tiburon,  Inc.  entered  into a First
Amendment  Agreement  whereby upon the satisfaction of certain  conditions,  the
Company agreed to purchase all of the issued and  outstanding  common shares and
other common stock  equivalents it did not already own for a combination of cash
and stock.  All  requisite  conditions  were met and the Company  completed  the
purchase of Tiburon,  Inc. on May 2, 2002. CompuDyne  distributed  approximately
1.1 million shares of CompuDyne common stock and  approximately  91,000 warrants
to purchase shares of the Company's stock,  valued collectively at $14.3 million
and approximately  $10.4 million,  net in cash to acquire the portion of Tiburon
that the  Company  did not  previously  own.  Including  the  Company's  initial
investment  of $6.0  million in Tiburon and  transaction  costs  resulted in the
Company recording $35.5 million as the value of the consideration  paid for this
acquisition. At December 31, 2004 the Company recorded additional goodwill and a
deferred tax liability for the indefinite lived intangible asset recorded at the
time of purchase and also reflected  this  adjustment in the 2003 balance sheet.
This deferred tax liability was valued at $2.1 million. To fund the cash portion
of the Tiburon  acquisition,  the Company negotiated a $10.0 million increase in
its borrowing  facility from its banks. The remainder of the cash  consideration
paid was funded from the Company's working capital.

Tiburon   provides   a   fully   integrated   suite   of   products    including
computer-assisted  dispatch, records management and court and probation software
systems  for the law  enforcement,  fire and  rescue,  corrections  and  justice
environments.  The Company  believes Tiburon is a worldwide market leader in the
development,  implementation and support of public safety and justice automation
systems.

The purchase price was recorded as follows (in thousands):

        Goodwill                              $ 21,883
        Current assets                          20,215
        Property plant and equipment             3,653
        Other long-term assets                   8,917
        Liabilities assumed                    (19,168)
                                              --------
        Purchase price                        $ 35,500
                                              ========

The  following  are the  Company's  unaudited  pro-forma  results  assuming  the
acquisition of Tiburon had occurred on January 1, 2002:

                                               Twelve Months Ended
                                                December 31, 2002
                                       -------------------------------------
                                       (in thousands, except per share data)

         Revenue                                   $  169,304
         Net income                                $    2,077
         Earnings per share
         Basic                                     $      .28
         Diluted                                   $      .26

These  unaudited pro forma results have been prepared for  comparative  purposes
only and do not  purport to be  indicative  of the results of  operations  which
would have actually  resulted had the  combination  been effective on January 1,
2002, or of future results of operations.

3.       EARNINGS PER SHARE

Earnings per share are presented in accordance with SFAS No. 128,  "Earnings Per
Share." This Statement  requires dual presentation of basic and diluted earnings
per share on the face of the statement of  operations.  Basic earnings per share
is computed using the weighted average number of shares  outstanding  during the
period and excludes any dilutive  effects of options or warrants and convertible
securities.  Diluted  earnings per share is computed using the weighted  average
number of common and  common  stock  equivalent  shares  outstanding  during the
period;  common stock  equivalent  shares are excluded from the  computation  if
their effect is  antidilutive.  Stock  options and warrants to purchase  729,800
shares for 2004,  901,770  shares for 2003 and 488,500  shares for 2002 were not
dilutive  and,  therefore,  were not  included  in the  computation  of  diluted
earnings per common  share.  Additionally,  the 2,897,768  shares  issuable upon
conversion of the 6.25% Convertible Subordinated Notes due January 15, 2011 (the
"2011 Notes") are excluded for the year ended December 31, 2004 as the effect is
antidilutive.

                                       35
<PAGE>

The  computations of the Company's  basic and diluted  earnings per common share
amounts were as follows:

<TABLE>
<CAPTION>

                                                           2004                2003             2002
                                                          --------------------------------------------
                                                             (in thousands, except per share data)
<S>                                                       <C>                <C>               <C>
Net (loss)  income                                        $(8,198)           $ 3,408           $ 1,814
                                                          =======            =======           =======
Weighted average common shares outstanding                  8,136              7,895             7,456
Effect of dilutive stock options and warrants                                    263               484
                                                          -------            -------           -------
                                                                -
Diluted weighted average common shares outstanding        $ 8,136            $ 8,158           $ 7,940
                                                          =======            =======           =======
Net earnings (loss) per common share
Basic                                                     $ (1.01)           $   .43           $   .24

Diluted                                                   $ (1.01)           $   .42           $   .23
</TABLE>

In March 2004, the EITF reached a final consensus on Issue 03-6,  "Participating
Securities and the Two-Class  Method under FASB Statement No. 128,  Earnings Per
Share" ("Issue 03-6"), effective June 30, 2004 (see Note 1). Issue 03-6 requires
the use of the two-class method to compute earnings per share for companies that
have issued  securities other than common stock that  contractually  entitle the
holder to  participate in dividends and earnings of the Company when, and if, it
declares dividends on its common stock.

The 2011 Notes contain contingent participation rights. The participation rights
are contingent  upon the ability,  based on the  undistributed  earnings for the
period, of the Company to declare and distribute dividends per share equal to or
in  excess  of the per share  fair  value of the  Company's  common  stock.  The
contingency  was not met for the year ended December 31, 2004.  Accordingly,  no
undistributed  earnings have been allocated to the 2011 Notes. At each reporting
period, the Company assesses whether the contingency  criteria have been met and
consequently  if  undistributed  earnings  should be allocated to  participating
securities.

4.   INVESTMENTS IN MARKETABLE SECURITIES

The  Company's  marketable  securities  are  categorized  as  available-for-sale
securities,  as defined by Statement of Financial  Accounting Standards No. 115,
"Accounting for Certain  Investments in Debt and Equity Securities." At December
31,  2004  all  of the  Company's  investments  in  marketable  securities  were
classified as available-for-sale,  and as a result, were reported at fair value.
Unrealized  gains and losses are  reported as a component of  accumulated  other
comprehensive  income  in  shareholders'  equity.  The  amortized  costs of debt
securities is adjusted for  accretion of discounts  from the date of purchase to
maturity.  The accretion is included in interest income on the investments.  The
cost for marketable securities was determined using the specific  identification
method.  The fair values of marketable  securities  are  estimated  based on the
quoted market price for these securities.

Marketable  securities at December 31, 2004 are  summarized,  in  thousands,  as
follows:
<TABLE>
<CAPTION>

                                                                     Gross Unrealized
                                                                     ----------------
                                                      Cost           Gains      Losses      Fair Value
                                                      ----           -----      ------      ----------
         Collateralized mortgage obligations
          (CMO's) consisting of securities
          issued by Fannie Mae,
<S>                                                <C>               <C>       <C>           <C>
          Freddie Mac, and Ginnie Mae              $  19,554         $ 23      $      -      $19,577
</TABLE>

The cost and  estimated  fair value of current debt  securities  at December 31,
2004, by contractual maturity,  are shown below. Expected maturities will differ
from contractual  maturities  because the issuers of the securities may have the
right to repay obligations  without  prepayment  penalties.  It is the Company's
policy to classify  available-for-sale  securities that are available for use in
current operations as a current asset.

                                                                     Estimated
         (in thousands)                               Cost           Fair Value
                                                     --------        --------
         Due after one year and beyond               $ 19,554        $ 19,577
                                                     --------        --------
         Total debt securities                       $ 19,554        $ 19,577
                                                     ========        ========

In  conjunction  with the waivers  obtained by the  Company  from its bank,  the
Company has agreed to pledge to its bank, marketable securities equal to 111.11%
of the  value  of its  outstanding  obligation  to the  bank,  as  defined.  The
provisions  of this pledge  were  formally  agreed to in March  2005.  Had these
provisions  been in effect at December  31,  2004,  the Company  would have been
required to pledge  approximately  $5.9 million of its marketable  securities as
collateral for its bank obligations.

                                       36
<PAGE>

5.   ACCOUNTS RECEIVABLE

     Accounts receivable consist of the following:
                                                             December 31,
                                                      -------------------------
                                                        2004              2003
                                                      --------         --------
     U.S. Government Contracts                              (in thousands)
          Billed                                       $ 6,181          $ 1,946
          Unbilled                                         384              805
                                                      --------         --------
                                                         6,565            2,751
                                                      --------         --------
     Commercial
          Billed                                        23,760           31,078
          Retainage                                      5,885            9,203
                                                      --------         --------
                                                        29,645           40,281
                                                      --------         --------
     Total accounts receivable                          36,210           43,032
     Less: allowance for doubtful accounts              (1,919)          (1,252)
                                                      --------         --------
     Accounts receivable, net                         $ 34,291         $ 41,780
                                                      ========         ========

The Company expects to collect  substantially  all  receivables  within one year
except  for a  portion  of the  receivables  recorded  as  retainage.  Retainage
expected to be collected in over one year amounts to $1.4 million, or 25% of the
total retainage amount at December 31, 2004, and is reflected as a current asset
as it will be collected  within the operating cycle under the related  contract.
Substantially  all of the U.S.  Government billed  receivables  result from cost
reimbursable or time-and-material contracts. Direct sales to the U.S. Government
for the years ended  December 31, 2004,  2003 and 2002 were  approximately  $9.9
million, $12.6 million, and $11.5 million, respectively, or 7.0%, 6.5%, and 7.4%
of the Company's total net sales for the respective years. The sales to the U.S.
Government  were in the  Institutional  Security  Systems and  Federal  Security
Systems  segments.  No single  customer  accounted  for greater  than 10% of the
Company's  net  sales.   Contract  costs  for  services  provided  to  the  U.S.
Government,  including  indirect  expenses,  are subject to audit by the Defense
Contract Audit Agency  ("DCAA").  All contract  revenues are recorded in amounts
expected to be realized  upon final  settlement.  In the opinion of  management,
adequate provisions have been made for adjustments, if any, that may result from
the government audits. The Company received final approval on its indirect costs
billed  to the U. S.  Government  for 2000  from  DCAA in April  2004 and  final
approval on its indirect costs billed to the U.S.  Government for 2001 from DCAA
in August 2004. No significant payments or billings were made as a result of the
approval  of the 2000 and 2001 rates.  The years  2002,  2003 and 2004 are still
open and subject to audit.  The Company does not expect the audit of these years
to have a material effect on its financial position or results of operations.

6.   CONTRACTS IN PROCESS

Amounts included in the financial statements,  which relate to recoverable costs
and accrued  profits not yet billed on contracts in process,  are  classified as
current assets. Billings on uncompleted contracts in excess of incurred cost and
accrued  profits are classified as current  liabilities.  The Company expects to
bill and collect  substantially all costs in excess of billings within one year.
Summarized below are the components of the amounts:

<TABLE>
<CAPTION>


                                                                   December 31,
                                                            -------------------------

                                                             2004               2003
                                                           ---------         ---------

                                                                 (in thousands)
<S>                                                        <C>               <C>
Costs and estimated earnings on uncompleted contracts      $ 286,041         $ 285,297
Less customer progress payments                              289,449           287,316
                                                           ---------         ---------
                                                           $  (3,408)        $  (2,019)
                                                           =========         =========
Included in the consolidated balance sheets:
Costs and estimated earnings in excess of billings
 on uncompleted contracts                                  $  16,087         $  17,568
Billings in excess of contract costs and estimated
 on uncompleted contracts                                    (13,497)          (13,551)
Deferred revenue                                              (5,998)           (6,036)
                                                           =========         =========
                                                           $  (3,408)        $  (2,019)
                                                           =========         =========
</TABLE>

                                       37
<PAGE>





7.   INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                   December 31,
                                                            -------------------------
                                                              2004              2003
                                                            -------           -------
                                                                  (in thousands)
<S>                                                         <C>               <C>
      Raw materials                                         $ 2,929           $ 3,745
      Work in progress                                        1,840             2,310
      Finished goods                                            396               649
                                                            -------           -------
                                                            $ 5,165           $ 6,704
                                                            =======           =======

      Reserve for excess and absolute inventory             $ 1,362           $   840
                                                            =======           =======
</TABLE>


8.   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>

                                                                       December 31,               Estimated
                                                                -------------------------         Useful Life
                                                                  2004               2003         In Years
                                                                --------          --------        -----------

                                                                     (in thousands)
<S>                                                             <C>               <C>                <C>
      Land                                                      $    435          $    435
      Buildings and leasehold improvements                         4,897             4,888          7-39
      Machinery and equipment                                      7,050             6,982          3-10
      Furniture and fixtures                                       1,191             1,132          3-10
      Automobiles                                                    458               530           3-7
      Software                                                     9,027             6,111           3-7
      Construction in progress                                       605                 -
                                                                --------          --------
                                                                   23,663           20,078
           Less: accumulated depreciation and amortization       (11,569)           (9,999)
                                                                --------          --------
                                                                $ 12,094          $ 10,079
                                                                ========          ========
</TABLE>

The  Company  acquired  software  in  purchases  of the assets of 90 Degrees and
Copperfire at $2.2 million and $0.6 million, respectively.

Depreciation  expense for the years ended December 31, 2004,  2003, and 2002 was
$2.6 million, $2.6 million and $2.4 million, respectively.

9.   GOODWILL

The December 31, 2004 audited consolidated financial statements include the fair
market  value of the assets  acquired  and  liabilities  assumed and the related
allocations of the purchase price related to the acquisition of the assets of 90
Degrees  on  August  11,  2004.  Goodwill  recorded  for  the 90  Degrees  asset
acquisition was approximately $1.9 million.

The December 31, 2004 audited consolidated financial statements also include the
fair market value of the assets acquired and liabilities assumed and the related
allocations  of the purchase  price related to the  acquisition of Copperfire on
December 15, 2004.  Goodwill  recorded for the Copperfire asset  acquisition was
approximately $1.4 million.

The Company  reviews the carrying value of goodwill  annually  during the fourth
quarter of the year or whenever events or changes in circumstances indicate that
the carrying  value may not be  recoverable,  utilizing a  discounted  cash flow
model.  Changes  in  estimates  of future  cash  flows  caused by items  such as
unforeseen  events or changes in market  conditions could negatively  affect the
reporting  unit's  fair value and result in an  impairment  charge.  The Company
cannot predict the occurrence of events that might adversely affect the reported
value of  goodwill  of $26.0  million at December  31,  2004.  During the fourth
quarter  of 2004,  the  Company  concluded  that the  continuing  decline in the
backlog in its ISS segment  constituted  a  triggering  event  which  caused the
Company to conclude  it was  necessary  to write off the value of the  segment's
goodwill in the amount of $739 thousand.


                                       38
<PAGE>



Goodwill, by segment, consists of the following, in thousands:

                                                 December 31,      December 31,
                                                     2004               2003
                                                  --------           --------


      Institutional Security Systems              $     -            $    739
      Attack Protection                                728                728
      Public Safety & Justice                       25,166             21,883
                                                  --------           --------
                                                  $ 25,894           $ 23,350
                                                  ========           ========

10.  INTANGIBLE ASSETS

The December 31, 2004 audited consolidated financial statements include the fair
market  value of the assets  acquired  and  liabilities  assumed and the related
allocations  of the purchase  price related to the  acquisition of 90 Degrees on
August 11, 2004.  Intangible  assets for the 90 Degrees  asset  acquisition  are
approximately $60 thousand.

The December 31, 2004 audited consolidated financial statements include the fair
market  value of the assets  acquired  and  liabilities  assumed and the related
allocations  of the purchase  price related to the  acquisition of Copperfire on
December 15, 2004.  Intangible  assets for the Copperfire asset  acquisition are
approximately $60 thousand.

Intangible  assets include the trade name,  customer  relationships  and backlog
from the acquisition of Tiburon,  Inc. in 2002. Other intangibles  include trade
names,  Department  of State  Certifications,  Underwriters  Laboratories,  Inc.
listings,  and patents  related to the  acquisition  of Norment and Norshield in
1998.  With the  exception  of trade names,  which have  indefinite  lives,  the
intangible assets are being amortized using the straight-line method.

The weighted average life for purposes of amortization of identified  intangible
assets  acquired  in  2004  was  two  years  for the  covenant  not to  complete
agreements and employment contracts.

Intangible assets consist of the following, in thousands:
<TABLE>
<CAPTION>

                                                          December 31,
                                                  -------------------------       Amortizable
                                                     2004              2003          Lives
                                                  --------          --------      -----------
                                                         (in thousands)            (in years)
<S>                                               <C>               <C>              <C>
           Trade names                            $  5,673          $  6,913       Indefinite
           Customer relationships                    2,500             2,500           14
           Backlog                                     300               300            2
           Other                                     1,305             1,220           1-20
                                                  --------          --------
                                                     9,778            10,933
           Less: accumulated amortization           (1,318)           (1,148)

                                                  --------          --------
                                                  $  8,460          $  9,785
                                                  ========          ========
</TABLE>

Amortization  expense  for the  Company's  intangible  assets for the year ended
December  31, 2004 was $358  thousand.  During the fourth  quarter of 2004,  the
Company concluded that the continuing  decline in the backlog in its ISS segment
constituted  a  triggering  event  which  caused the  Company to conclude it was
necessary to write off certain of the segment's  intangible assets in the amount
of $1.1 million as a result of these assets being impaired.  There were no other
impairments  of intangible  assets.  The following  schedule  lists the expected
amortization expense for each of the years ending December 31, in thousands:

                            Year
                            ----
                            2005                         $   310
                            2006                             265
                            2007                             257
                            2008                             225
                            2009                             225
                                                         -------
                            Total                        $ 1,282
                                                         =======



                                       39
<PAGE>




11.       ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2004 and 2003 consisted
of the following:

<TABLE>
<CAPTION>



                                                      2004                  2003
                                                 ----------------------------------
                                                             (in thousands)
<S>                                                  <C>                  <C>
Accounts payable                                     $ 9,406              $ 14,456
Liability for marketable security purchased            4,336                     -
Accrued payroll costs                                  3,323                 4,375
Income taxes payable                                     707                     -
Other accrued expenses                                 3,999                 2,247
                                                    --------              --------
                                                    $ 21,771              $ 21,078
                                                    ========              ========
</TABLE>


12.  NOTES PAYABLE AND LINE OF CREDIT
<TABLE>
<CAPTION>

                                                                                    December 31,      December 31,
                                                                                        2004               2003
                                                                                   -------------      -----------

                                                                                           (in thousands)
<S>                                                                                     <C>                <C>
Industrial revenue bond,  interest payable quarterly at a variable rate of 1.14%
to  2.13%  (2.13%  at  December  31,  2004)   principal   payable  in  quarterly
installments of $35,000. The bond is fully collateralized
by a $1.4 million letter of credit and a bond guarantee agreement.                    $  1,400           $  1,540

Industrial revenue bond, interest payable quarterly at a variable rate
of 1.01% to 2.13% (2.13% at December 31, 2004)  principal payable
in yearly installments of $300,000 until 2013 when the installments become
$100,000.  The bond is fully collateralized
by a $2.6 million letter of credit and a bond guarantee agreement.                       2,605              2,905

6.25%  Convertible  Subordinated  Notes due  January  15,  2011.  The notes bear
interest  at  a  rate  of  6.25%  per  annum,  payable  semi-annually,  and  are
convertible  into  shares of common  stock at a  conversion  price of $13.89 per
share. These notes
are subordinated to all other liabilities of the Company.                               40,250                 -

Line of credit with a Bank,  interest range from LIBOR + 2.25% to Prime + 1.00%,
weighted average rate at December 31, 2003 was
3.89%, collateralized by virtually all of the Company's assets.                             -              11,550

Note payable to Bank, interest at LIBOR plus a fixed credit spread
of 2.50%,  (3.62% at December 31, 2003) collateralized by virtually
all of the Company's  assets, repaid in full in January 2004.                               -               1,663
                                                                                      --------           --------


         Total notes payable and line of credit                                         44,255             17,658
         Less convertible subordinated notes discount                                    1,132                 -
                                                                                      --------           --------

           Subtotal                                                                     43,123             17,658
         Less amount due within one year                                                   440              2,103
                                                                                      --------           --------
                                                                                      $ 42,683           $ 15,555
                                                                                      ========           ========
</TABLE>



                                       40
<PAGE>







Maturities of notes payable are as follows, in thousands:

             Year Ending December 31,                         Amount
             ------------------------                         ------
                      2005                                   $   440
                      2006                                       440
                      2007                                       440
                      2008                                       440
                      2009                                       440
                      Thereafter                              42,055
                                                             -------
                                                             $44,255
                                                             =======

On January 22,  2004,  the  Company  completed  an  offering  of $40.25  million
principal amount of the 2011 Notes.  The offering was for $35 million  principal
amount plus an underwriter's  over-allotment  option of $5.25 million  principal
amount,  which was exercised in full.  The 2011 Notes bear interest at a rate of
6.25% per annum,  payable  semi-annually,  and are  convertible  into  shares of
common stock at a conversion price of $13.89 per share,  subject to adjustments.
The 2011 Notes are  subordinated  to all other  liabilities of the Company.  The
carrying value is listed below, in thousands.

          Face value                           $   40,250
          Underwriters discounts, net               1,132
                                             ------------
                                               $   39,118

The 2011 Notes can be converted into the Company's common stock at the option of
the holder at any time at a  conversion  price of $13.89  per share,  subject to
adjustments for stock splits, stock dividends, the issuance of certain rights or
warrants to the existing  holders of the Company's common stock and common stock
cash dividends in excess of a stated threshold.

The 2011 Notes are  redeemable  at the option of the Company  after  January 15,
2009, at a premium of two percent of the face value plus accrued interest unless
a change in control event,  as defined in the indenture  dated as of January 15,
2004 between the Company and Wachovia  Bank of Delaware,  National  Association,
relating to the 2011 Notes, occurs. If such an event does occur, the Company may
redeem the 2011 Notes in whole but not in part at face value plus a premium.  If
a change in control  event  occurs and the Company  does not elect to redeem the
2011 Notes,  the holders can require the Company to repurchase the 2011 Notes at
face value plus accrued interest.

The Company  incurred $452  thousand of debt issuance  costs for the 2011 Notes.
These  costs  are  recorded  as  non-current  assets  and  are  amortized  on  a
straight-line  basis to interest  expense  over the term of the 2011  Notes.  In
addition,  underwriters'  discounts  totaled $1.3 million and are amortized on a
straight-line  basis to  interest  expense  over  the  term of the  2011  Notes.
Interest  expense recorded for the total of the deferred debt issuance costs and
underwriter's  discounts on the 2011 Notes  totaled  $245  thousand for the year
ended December 31, 2004.

During January 2004, the Company repaid all of its  outstanding  bank borrowings
from the proceeds of the issuance of the 2011 Notes.

On March 31, 2004, the Company signed an Amended and Restated  Credit  Agreement
for its $25.0 million secured working capital line of credit.  The new agreement
provides for borrowings  against eligible  accounts  receivable and inventories.
The new agreement also contains  various  financial  covenants,  including among
other things,  a minimum fixed charge coverage  ratio,  maximum debt to earnings
before interest,  taxes, depreciation and amortization ("EBITDA") ratio, minimum
EBITDA covenant, a minimum  consolidated  tangible net worth covenant, a maximum
permitted capital expenditures  covenant, and a covenant restricting the payment
of dividends.  Of this line of credit $10.0 million matures on March 1, 2007 and
$15.0  million  matured on March 1, 2005.  At December 31, 2004 $5.3 million was
committed  principally  as letters of credit  securing  the  Industrial  Revenue
Bonds.

On October 29, 2004 and March 4, 2005,  the Company and its banks  entered  into
amendments  to the  credit  agreement  pursuant  to which the banks  waived  the
Company's  non-compliance  with its fixed charge  coverage  ratio covenant as of
September 30, 2004 and  non-compliance  with its minimum  EBITDA  covenant as of
December 31, 2004, respectively.  In addition, the Company and its banks amended
the credit  agreement to eliminate the $15 million line of credit maturing March
2005 and to  require  borrowings  under  its $10  million  line of  credit to be
collateralized by pledged marketable securities equal to 111.11% of the value of
such  borrowings.  The  credit  agreement  was also  amended  to  eliminate  the
quarterly  minimum EBITDA  covenant for the Company's  fiscal years ending after
December 31, 2004 and to provide that the minimum  fixed charge  coverage  ratio
covenant,  maximum  debt to EBITDA ratio  covenant and the minimum  consolidated
tangible net worth covenant will not become effective until March 31, 2006.

                                       41
<PAGE>

So long as the Company maintains pledged marketable  securities equal to 111.11%
of the value of its borrowings under the credit agreement,  borrowings under the
credit  agreement  shall bear  interest  at LIBOR + 1.00% or Prime + 1.00%.  The
Company incurs  commitment fees equal to a range of 0.20% to 0.35% on any unused
balances,  defined  as the  difference  between  the  total  amount of its $10.0
million line of credit less amounts  borrowed,  and outstanding under letters of
credit.

In January 2004 the interest rate swap ceased to be a highly effective cash flow
hedge when the related  debt was repaid.  Consequently,  the amounts  previously
recorded in other comprehensive  income as changes in fair value of the interest
rate swap were recognized in earnings for the year ended December 31, 2004. Upon
determination of the hedge ineffectiveness the cumulative loss on the fair value
of the  interest  rate swap was $155  thousand,  which was  recognized  in other
income.  The change in fair value of the  interest  rate swap for the year ended
December  31,  2004  was a gain  of  $134  thousand,  resulting  in a  remaining
liability for the investment of $21 thousand. Future changes in the value of the
interest rate swap will be recognized in earnings.

13.  PRODUCT WARRANTIES

Included in accounts  payable and accrued  liabilities  are  estimated  expenses
related  to  warranties  made at the  time  products  are sold or  services  are
rendered.  These accruals are established  using  historical  information on the
nature,  frequency,  and average cost of warranty  claims.  The Company warrants
numerous  products,  the terms of which vary  widely.  In  general,  the Company
warrants  its  products  against  defect  and  specific  non-performance.  As of
December 31, 2004 and 2003,  the Company had a product  warranty  accrual in the
amount of $359 thousand and $517 thousand respectively.

     Product Warranty Liabilities                           December 31,
                                                  -----------------------------

                                                  2004                     2003
                                                  -----                    ----
                                                           (in thousands)
                                                           --------------
     Beginning balance at January 1,              $ 517                   $ 482
     Plus:  accruals for product warranties         280                     499
     Less:  warranty charges/claims                (438)                   (464)
                                                  -----                   -----
     Ending balance at December 31,               $ 359                   $ 517
                                                  =====                   =====

14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and Cash Equivalents,  Accounts Receivable and Accounts Payable and Accrued
Expenses - The carrying  amounts  reported in the balance sheets for these items
approximate  fair value due to the  short-term  maturities  of these  assets and
liabilities.

Long-Term Debt - The carrying amounts reported in the balance sheet  approximate
fair value as the  amounts  are at  floating  rates and terms  available  to the
Company at December 31, 2004 and 2003 for borrowings  for similar  transactions.
The  Company's  2011  Notes  are at a fixed  rate of 6.25%,  which  approximates
current rates for similar obligations.

Interest Rate Swap  Agreements - The Company uses interest rate swap  agreements
to manage  exposure to fluctuations in interest rates. At December 31, 2004, the
Company had an unleveraged swap agreement with a bank with a notional  principal
amount of $2.0 million.  This agreement was placed on June 26, 2001 with a fixed
rate of 4.9% and is settled in cash on a quarterly  basis.  The termination date
is September 30, 2005.

In prior years the Company  hedged the cash flows of some of its long-term  debt
using an interest rate swap. The Company entered into these derivative contracts
to manage its  exposure  to  interest  rate  movements  by  achieving  a desired
proportion  of fixed rate versus  variable  rate debt. In an interest rate swap,
the Company agrees to exchange the difference  between a variable  interest rate
and either a fixed or another variable  interest rate,  multiplied by a notional
principal amount.

As of December 31, 2003, the Company  recognized the cash flow hedge at its fair
value  of  $155  thousand  in  accounts  payable  and  accrued  expenses  on the
consolidated  balance  sheet.  As of December  31, 2003 the  interest  rate swap
qualified for cash flow hedge  accounting,  therefore an unrealized loss of $155
thousand ($93 thousand net of tax),  representing  the effective  portion of the
change in its fair value, was reported in other comprehensive loss. For the year
ended December 31, 2004, the interest rate swap was determined to be ineffective
and the changes in fair value are recognized in earnings.

                                       42
<PAGE>

15.  INCOME TAXES

The components of the income tax provision (benefit) are as follows:

                                       For the years ended December 31,
                                 2004                2003                2002
                               --------             -------            -------
                                                (in thousands)
        Current                $ (2,013)            $ 2,103            $ 1,314
        Deferred                   (219)                245               (288)
                               --------             -------            -------
                               $ (2,232)            $ 2,348            $ 1,026
                               ========             =======            =======

The  tax  effects  of the  primary  temporary  differences  giving  rise  to the
Company's net deferred tax assets and  liabilities at December 31, 2004 and 2003
are summarized as follows:
<TABLE>
<CAPTION>

                                                                             December 31,
                                                                            (in thousands)
                                                                     2004                      2003
                                                                   --------                  --------

     Deferred tax assets:
<S>                                                                 <C>                       <C>
          Accrued expenses and deferred compensation               $    566                  $    301
          Tax operating loss carry-forward                            1,064                       526
          Book reserves in excess of tax                              1,093                     1,140
          Price risk management activities                               (9)                       62
          Tax depreciation and amortization in excess
              of book depreciation and amortization                     440                        -
          Other                                                          84                        -
                                                                   --------                  --------

          Total deferred assets                                       3,238                     2,029
                                                                   --------                  --------

     Deferred tax liabilities:
          Book depreciated and amortization in excess
              of tax depreciation and amortization                        -                      (538)
          Purchased intangibles                                      (3,452)                   (3,782)
                                                                   --------                  --------
          Total deferred tax liabilities                             (3,452)                   (4,320)
              Valuation allowance                                    (1,858)                       -
                                                                   --------                  --------
     Net deferred tax (liability) asset                            $ (2,072)                 $ (2,291)
                                                                   ========                  ========
</TABLE>

At December 31, 2004 the Company  established  a valuation  allowance to reserve
substantially all of its net deferred tax assets.

The  valuation  allowance  represents  temporary  differences  where the Company
believes  it is not  "more  likely  than  not" it will  be able to  receive  tax
benefits in the future.

At  December  31,  2004,  the  Company  and its  subsidiaries  have  Federal net
operating  loss  carry-forwards  available to offset  future  taxable  income of
approximately  $10.0 million subject to severe  limitations.  Approximately $1.5
million are available for use on an unlimited basis through 2024. The balance of
these carry-forwards  expires between 2005 and 2010. Tax loss carry-forwards for
this balance are limited to approximately $235 thousand each year as a result of
an ownership change, which occurred in 1995.

The  difference  between the statutory tax rate and the Company's  effective tax
rate is summarized as follows:

<TABLE>
<CAPTION>

                                                    For the years ended December 31,
                                                  2004              2003             2002
                                                ------            ------            ------
<S>                                             <C>                <C>               <C>
       Statutory federal income tax rate        (34.0)%            34.0%             34.0%
       State income taxes, net of
          Federal benefit                        (0.3)              6.2               6.0
       Change in valuation allowance             14.8                 -                -
       Tax effect of NOL utilization                -                 -              (0.5)
       Tax effect of non-deductible items         0.5               1.1               1.0
       Foreign income exclusion                  (1.9)             (2.4)             (5.3)
       Other                                     (0.5)              1.9               0.9
                                                ------            ------            ------
          Tax                                   (21.4)%            40.8%             36.1%
                                                ======            ======            ======
</TABLE>

                                       43
<PAGE>

At December  31,  2004,  the Company and its  subsidiaries  have  recorded a tax
receivable  representing  net operating losses which will be carried back to its
2003 and 2002 Federal and State tax  returns.  The value of these carry backs is
approximately  $2.5 million and is recorded  within  prepaid  expenses and other
current liabilities in the accompanying balance sheet as of December 31, 2004.

16.  SHAREHOLDERS' EQUITY

Warrants for Common  Stock.  In connection  with a Private  Investment in Public
Equity  ("PIPE")  transaction  the Company  entered  into in October  2001,  the
Company  granted  its  underwriter  an option to purchase  40,000  shares of the
Company's  common stock at $12.00 per share,  the price at which the shares were
sold in the PIPE.  These  options were granted on October 29, 2001 and expire on
October  29,  2006.  The  shares   underlying   these  warrants  have  piggyback
registration rights. At the underwriter's  option, these piggyback  registration
rights may either convert to demand  registration  rights, with any fees related
to the registration of these warrants and underlying shares paid by the Company,
or the  Company  may  grant the  underwriter  a put  option  to sell the  shares
underlying the warrants back to the Company at a predetermined price.

In connection with the Company's  acquisition of Tiburon,  the Company exchanged
warrants and convertible  securities to purchase shares of Tiburon into warrants
to purchase  shares of the Company.  On May 2, 2002,  the Company  issued 90,962
warrants to purchase  shares of CompuDyne  common  stock at prices  ranging from
$3.75 to $6.71 per share.  During 2002,  11,909 of the warrants were  exercised.
During 2003,  44,417 of the warrants were exercised  resulting in 34,636 of such
warrants  remaining  outstanding at December 31, 2004.  The following  shows the
exercise price and expiration date of the remaining warrants outstanding:

      Number of Warrants          Exercise Price             Expiration Date
      ------------------          --------------             ---------------
                23,000               $   5.37                December, 2006
                11,636               $   6.71                December, 2006

Stock Option  Plans.  The Company has various  stock option  plans.  Under these
plans,  7,991,654  options to purchase  common stock may be granted  until 2006.
Options  generally  are  granted  at fair  market  value at the  date of  grant,
typically  vest over 1 to 5 years  from the date of grant,  and  expire 10 years
after the date of grant. The plans permit the issuance of either incentive stock
options or non-qualified  stock options.  Under all plans,  there were 5,052,102
shares of common stock  reserved for future grants as of December 31, 2004.  The
1996 Stock  Incentive Plan for Employees was amended on May 27, 2004 to increase
the  number  of shares  available  as  restricted  stock  awards  to  4,000,000.
Transactions for stock options and warrants are summarized as follows:

<TABLE>
<CAPTION>

                                          Year                        Year                       Year
                                          Ended       Weighted        Ended        Weighted      Ended        Weighted
                                      December 31,     Average     December 31,    Average    December 31,     Average
                                          2004         Price           2003         Price         2002         Price
                                       ---------     ---------      ---------     ---------     ---------     ---------


<S>                                    <C>           <C>            <C>           <C>           <C>           <C>
Outstanding, Beginning of Year         1,414,556     $   8.587      1,489,653     $   8.324     1,126,160     $   6.553
         Granted                         675,000     $   9.145        271,500     $   8.131       566,462     $  11.412
         Exercised                       303,898     $   4.131        172,497     $   3.610       137,690     $   5.174
         Expired or Cancelled            113,700     $  11.590        174,100     $  10.554        65,279     $  11.280
                                       ---------     ---------      ---------     ---------     ---------     ---------
Outstanding, End of Year               1,671,958     $   9.418      1,414,556     $   8.587     1,489,653     $   8.324
                                       ---------     ---------      ---------     ---------     ---------     ---------
Exercisable, End of Year                 492,861     $   9.226        616,365     $   6.625       596,218     $   5.018
                                       =========     =========      =========     =========     =========     =========
</TABLE>



Summarized  information  about stock  options  and  warrants  outstanding  as of
December 31, 2004 is as follows:

<TABLE>
<CAPTION>

                                 Options and Warrants Outstanding        Options and Warrants Exercisable
                               ------------------------------------      --------------------------------
                                              Weighted     Average                             Weighted
                                              Average     Remaining                            Average
                                              Exercise      Life                               Exercise
Exercise Price Range             Number        Price     (In years)         Number              Price
--------------------           ---------     ---------   ----------        --------           ---------
<S>                                 <C>           <C>         <C>             <C>                 <C>
     $1.625  -   7.310           216,761       $5.8747      6.30            107,261             $4.7835
     $7.375  -   7.640           211,000       $7.5934      9.26             18,250             $7.4708
     $7.719  -   8.075           210,000       $7.9906      7.31             96,400             $8.0263
     $8.105  -   8.885           169,397       $8.4879      7.33             67,150             $8.5264
     $8.960  -   9.585           191,000       $9.1461      9.35                  0             $0.0000
      $9.675  - 10.460           223,300      $10.3595      8.58             40,200            $10.4200
     $11.165  - 12.070           188,500      $11.4640      8.56             55,000            $12.0191
     $12.210  - 13.290            44,500      $12.2585      7.17             18,000            $12.2700
     $13.445  - 13.445           182,000      $13.4450      7.36             71,600            $13.4450
     $13.750  - 16.630            35,500      $15.2551      7.12             19,000            $15.1700
                               ---------                                   --------
                               1,671,958       $9.4181      7.97            492,861             $9.2265
                               =========                                   ========
</TABLE>

                                       44
<PAGE>


As of December 31, 2004,  the Company  continues to account for its  stock-based
compensation  plans using the intrinsic  value method and in accordance with the
recognition  and measurement  principles of APB Opinion No. 25,  "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation  cost is  reflected  in net income,  as all options  granted had an
exercise price equal to fair market value of the underlying  common stock on the
date of grant.

The Company has provided the additional disclosures specified in SFAS No. 123 as
amended by SFAS No. 148 (see Note 1).

The weighted  average fair value at the date of grant for options granted during
2004, 2003 and 2002 was $5.95, $5.80, and $9.40 per option, respectively.

17.  COMMITMENTS AND CONTINGENCIES

Operating  Leases.  The Company  leases office space,  equipment,  distribution,
manufacturing and storage facilities under non-cancelable  operating leases with
various  expiration  dates through  December 2009.  Rental expense for the years
ended December 2004, 2003 and 2002 totaled $3.2 million,  $3.2 million, and $2.4
million, respectively.

As  of  December  31,  2004,  future  minimum  rental  payments  required  under
non-cancelable operating leases are as follows (in thousands):

            Year Ending
            December 31,         Total
           -------------        -------
           2005                 $ 2,376
           2006                   1,259
           2007                   1,027
           2008                     539
           2009                     237
           Thereafter                 -
                                -------
                                $ 5,438
                                =======

Interest on Contractual Obligations.  As of December 31, 2004, the Company has a
$40.25  million note  outstanding  at a fixed rate of 6.25%.  In addition it has
industrial  revenue bonds in the amount of $4.0 million and a swap  agreement in
the amount of $2.0  million,  both of which  have  variable  interest  rates and
decreasing  principal  balances until  maturity.  Future interest on contractual
obligations is as follows (in thousands):

          Year Ending
          December 31,         Total
          -------------       -------
          2005                $ 2,637
          2006                  2,602
          2007                  2,590
          2008                  2,579
          2009                  2,567
          Thereafter            3,359
                              -------
                              $16,334
                              =======

Purchase Obligations.  In addition, the Company enters into purchase obligations
to procure equipment and services,  including  subcontractor  contracts,  in the
performance of the day-to-day  operations of its business.  Substantially all of
these obligations are covered by our existing backlog and the revenues generated
by these backlogs are expected to be sufficient to meet any payment  obligations
resulting from these purchase commitments.

Legal  Matters.  The Company is party to certain legal actions and inquiries for
environmental  and other matters  resulting  from the normal course of business.
Some of our  businesses,  especially  Institutional  Security  Systems,  involve
working  as a  subcontractor  to a prime  contractor.  From time to time we make
claims  against  the prime  contractor,  or the prime  contractor  makes  claims
against  us. At any point in time we are  engaged in a number of claim  disputes
with prime contractors,  some of which may have a significant  negative outcome.
Although the total amount of potential  liability  with respect to these matters
can not be ascertained, the Company believes that any resulting liability should
not  have a  material  effect  on its  financial  position,  results  of  future
operations or cash flows.

                                       45
<PAGE>

In addition to claims with prime  contractors,  we may also make claims  against
customers and customers may make claims against us.

The Company has learned  that the National  Association  of  Securities  Dealers
("NASD") is seeking sanctions  against  purchasers of the Company's common stock
in its 2001 PIPE  transaction.  In  addition,  the Company has learned  that the
placement agent for this  transaction is also being  investigated by the SEC and
the NASD.  The Company is  investigating  these  matters and is  evaluating  its
options for recovery.

The Company's Public Safety and Justice segment settled certain  litigation with
one of its clients  during June 2004. As a result of the  settlement  agreement,
the Company  refunded $350 thousand to this client in exchange for the return of
the hardware and other products previously delivered to this client.

Over the past several  years,  the Company has been named in lawsuits  involving
asbestos   related   personal   injury  and  death  claims  in  which  CompuDyne
Corporation,  individually  and as an alleged  successor,  is a  defendant.  The
Company has been named as a defendant  in cases  related to claims for  asbestos
exposure  allegedly  due to asbestos  contained in certain of its  predecessor's
products.  The Company has advised its insurers of each of these cases,  and the
insurers are providing a defense pursuant to agreement with the Company, subject
to reservation of rights by the insurers.  The insurers have advised that claims
in such  litigation  for punitive  damages,  exemplary  damages,  malicious  and
willful and wanton behavior and intentional conduct are not covered.  One of the
carriers has given notice that asbestos related claims are excluded from certain
of these policies.  The insurers have additional  coverage  defenses,  which are
reserved,  including that claims may fall outside of a particular  policy period
of coverage.  Litigation costs to date have not been significant and the Company
has not paid any settlements from its own funds.

The Company  cannot  ascertain  the total  amount of  potential  liability  with
respect to these legal  matters,  but does not believe  that any such  potential
liability  should  have a  material  effect on its  financial  position,  future
operations or future cash flows.

The Company anticipates that cash generated from operations and borrowings under
the  working  capital  line of credit  and the cash  generated  from its  recent
issuance  of the 2011 Notes  will  enable  the  Company  to meet its  liquidity,
working capital and capital  expenditure  requirements during the next 12 months
and beyond. The Company, however, may require additional financing to pursue its
strategy of growth through  acquisitions,  and to meet its long-term  liquidity,
working  capital and capital  expenditure  requirements.  If such  financing  is
required,  there are no assurances  that it will be available,  or if available,
that it can be obtained on terms  favorable to the  Company.  From time to time,
the Company may be party to one or more non-binding  letters of intent regarding
material  acquisitions,  which,  if  consummated,  may be paid for with  cash or
through the issuance of a significant  number of shares of the Company's  common
stock. The interest rate environment  earlier this year was at historic lows. In
light of this favorable  environment,  the Company determined that it was in its
best  interests to lock in a favorable  fixed  interest  rate for a  significant
amount of borrowings. These borrowings, which were made on a subordinated basis,
were used to pay off the  Company's  existing bank debt and will be available to
fund the  Company's  future growth  opportunities  and also will be available to
fund any  acquisitions  the  Company  may wish to  pursue.  These  funds will be
instrumental in the Company's growth through  acquisition  strategy.  Unlike the
Company's  existing  bank debt  availability,  the 2011 Notes do not contain any
restrictive  covenants or ratios.  As a result of securing this  borrowing,  the
Company  renegotiated its bank lines of credit.  Although the Company  currently
does not see the need to borrow  under its bank  line,  it  intends to keep this
line  available at least to provide the required  collateral  for its industrial
revenue bond borrowings.

18.  RELATED PARTY TRANSACTION

During 2004 the Company's  Federal  Security  Systems unit recorded revenue of
approximately $200 thousand from a company of which one of CompuDyne's Directors
is a senior vice  president  and member of its board of  directors.  Included in
accounts  receivable  and costs in excess of billings  of the  Federal  Security
Systems  unit at  December  31, 2004 was  approximately  $29  thousand  and $171
thousand,  respectively,  related  to the  company  at which  this  Director  is
employed.

19.  EMPLOYEE BENEFIT PLANS

The Company established a non-qualified  Employee Stock Purchase Plan in October
1999,  the  terms of  which  allow  for  qualified  employees  (as  defined)  to
participate in the purchase of shares of the Company's common stock. The Company
matches at a rate of 15% of the  employee  purchase  at the market  value of the
common stock for the monthly purchase period. The Company purchases stock on the
open  market  and  distributes  the  shares  monthly  to  employees'  individual
accounts.  Expense for matching  contributions to the plan was $33 thousand, $34
thousand, and $41 thousand for 2004, 2003, and 2002 respectively.

                                       46
<PAGE>

The Company has 401(k)  retirement  savings plans  covering all  employees.  All
employees are eligible to  participate  in a plan after  completing  one year of
service (as defined by the plan). Participants may make before tax contributions
subject to Internal Revenue Service limitations.  CompuDyne currently matches up
to 2.5% of  employee  contributions  up to a maximum  of 5% of annual  earnings.
Expense for matching contributions to the Plan was $694 thousand,  $712 thousand
and $609 thousand for 2004, 2003, and 2002, respectively.

The Company had a money purchase  pension plan that covered all employees at one
of the  Company's  divisions.  All  employees at this  division were eligible to
participate  in the plan after one year of  service.  The  Company  made  annual
contributions  of 3% to 5% based on years of  service.  Expense  related to this
plan was $0 thousand  in 2004 and 2003,  and $507  thousand  in 2002.  Effective
December 31, 2002, the Company ceased contributions to this plan. The balance in
this plan was 100% vested and the plan was then terminated  giving  participants
three distribution options, rollover to their 401K plan, a cash distribution, or
an annuity purchase.

20.  OPERATING SEGMENT INFORMATION

Segment  information  has been  prepared in  accordance  with the  Statement  of
Financial  Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise  and  Related  Information"  ("SFAS No.  131").  SFAS No. 131 defines
"operating  segments" to be those  components of a business about which separate
financial  information is available that is regularly evaluated by management in
deciding how to allocate  resources and in assessing  performance.  SFAS No. 131
further requires that the segment  information  presented be consistent with the
basis  and  manner  in  which  management  internally   desegregates   financial
information for the purpose of assisting in making internal operating decisions.

The following segment information includes operating information for CompuDyne's
four operating  segments,  Institutional  Security Systems,  Attack  Protection,
Federal  Security Systems and Public Safety and Justice in addition to Corporate
activities  for each of the years ended December 31, 2004,  2003 and 2002.  Also
included is operating  information from Tiburon, Inc. (Public Safety and Justice
segment) since its date of acquisition, May 2, 2002.
<TABLE>
<CAPTION>

                                                   Revenues                                  Gross Profit
                                                   --------                                  ------------
(in thousands)                           2004         2003         2002              2004         2003         2002
                                     -----------  -----------  -----------        ----------  -----------   ---------

<S>                                    <C>          <C>           <C>               <C>          <C>          <C>
Institutional Security Systems        $  53,952    $  98,653    $  84,182         $  6,437      $14,203      $11,384
Attack Protection                        25,161       28,375       28,357            1,551        5,694        4,618
Federal Security Systems                 14,293       16,441       13,374            2,019        2,606        2,372
Public Safety and Justice                49,376       49,794       29,643           27,671       23,893       16,442
CompuDyne Corporate                          -            -            -                 -            -            -
                                     -----------  -----------  -----------        ----------  ----------    ---------
                                      $ 142,782    $ 193,263    $ 155,556         $ 37,678      $46,396      $34,816
                                     ===========  ===========  ===========        ==========  ==========    =========

                                           Total Assets, at Year End                     Pre-tax Income (Loss)
                                           -------------------------                     ---------------------
                                         2004         2003         2002              2004         2003         2002
                                     -----------  -----------  -----------        ----------  -----------   ---------

Institutional Security Systems        $  26,895    $  34,343    $  37,881         $ (5,174)     $ 3,613      $ 1,867
Attack Protection                        15,760       21,202       21,156           (5,444)         551         (706)
Federal Security Systems                  3,807        6,076        6,234              563          953          827
Public Safety and Justice                56,538       49,439       52,561            2,364          407          444
CompuDyne Corporate                      29,891        4,672        2,972           (2,739)         232          408
                                     -----------  -----------  -----------        ----------  -----------   ---------
                                      $ 132,891    $ 115,732    $ 120,804         $(10,430)     $ 5,756      $ 2,840
                                     ===========  ===========  ===========        ==========  ==========    =========

                                             Capital Expenditures                    Depreciation and Amortization
                                             --------------------                    -----------------------------
                                         2004         2003         2002              2004         2003         2002
                                     -----------  -----------  -----------        ----------  -----------   ---------

Institutional Security Systems        $     411    $     312    $     119         $   531       $   330      $   562
Attack Protection                            64          215        2,580              644          885          622
Federal Security Systems                     16           72            -               41           68           70
Public Safety and Justice                 1,140          451          396            1,664        1,679        1,573
CompuDyne Corporate                         153           18           55               41           26           20
                                      $   1,784    $   1,068    $   3,150         $  2,921      $ 2,988      $ 2,847
                                     ===========  ===========  ===========        ==========  ==========    =========
</TABLE>

Included in the 2004  results is a $739  thousand  pre-tax  charge to record the
impairment of the Institutional  Security Systems segment's  goodwill and a $1.1
million charge to record the impairment of certain of the Institutional Security
Systems segment's other intangible assets. In addition,  the continuing problems
in the West Coast  office of ISS  resulted in the Company  recording  additional
losses of $6.1 million from the work  performed in this office and an additional
$2.0 milion was added to a project's  estimated cost to complete.  Also included
in 2004's results are charges of $411 thousand for terminated deal costs related
to unconsummated acquisitions,  and $2.6 million of interest expense incurred in
connection  with the 2011 Notes  issued in January  2004;  these  expenses  were
recorded in CompuDyne Corporate's accounts.

                                       47
<PAGE>

Included in the 2003 results is a $1.6 million  pre-tax charge for a contract in
litigation,  which occurred in the Public Safety and Justice segment. During the
second  quarter of 2004 this matter was settled  resulting in a reversal of $0.3
million of the accrued charge, which was reflected as a reduction of its cost of
sales.

During 2003,  the Company  increased  its  allowance  for  doubtful  accounts by
approximately  $725 thousand in its  Institutional  Security Systems segment for
past due receivables.  Pre-tax income in the Attack Protection segment benefited
by approximately $900 thousand from a successful arbitration decision related to
a disputed customer receivable.

During 2002, the West Coast  operations of the  Institutional  Security  Systems
segment  experienced  significant  cost overruns on many of its projects.  These
cost overruns were incurred and recorded  during the latter half of the year and
amounted to  approximately  $2.2 million.  As a result,  as these  projects were
brought to completion in 2003, the revenues generated by them resulted in little
margin or in some cases losses.  The Company recorded $3.0 million of additional
write-downs  on its West Coast  projects  that were either  completed  or neared
completion in 2003. In 2004, the West Coast operations  generated pre-tax losses
of $6.1 million.

21.  SELECTED QUARTERLY FINANCIAL DATA  (Unaudited)

<TABLE>
<CAPTION>


                                                  First         Second          Third           Fourth
(In thousands, except per share data)            Quarter        Quarter        Quarter         Quarter          Total
-------------------------------------           ---------      ---------       ---------       ---------      ---------
Year Ended December 31, 2004
Revenues
<S>                                              <C>            <C>            <C>              <C>            <C>
Institutional Security Systems                   $16,057        $13,954        $ 11,783         $12,158       $ 53,952
Attack Protection                                  6,953          6,741           6,510           4,957         25,161
Federal Security Systems                           3,575          4,371           3,296           3,051         14,293
Public Safety and Justice                         12,442         12,717          11,771          12,446         49,376
                                                ---------      ---------       ---------       ---------      ---------
Total revenues                                   $39,027        $37,783        $ 33,360         $32,612       $142,782

Gross Profit
Institutional Security Systems                   $ 2,505        $ 2,244        $  1,773         $  (85)       $  6,437
Attack Protection                                    919          1,082            (477)             27          1,551
Federal Security Systems                             490            611             501             417          2,019
Public Safety and Justice                          6,284          7,210           7,011           7,166         27,671
                                                ---------      ---------       ---------       ---------      ---------
Total gross profit                               $10,198        $11,147        $  8,808         $ 7,525       $ 37,678

Pre-tax Income (loss)
Institutional Security Systems                   $   207        $   (84)       $   (806)        $(4,491)      $ (5,174)

Attack Protection                                   (679)          (456)         (2,101)         (2,208)        (5,444)
Federal Security Systems                             200            214             137              12            563
Public Safety and Justice                            435            960             370             599          2,364
Unallocated corporate expense                       (674)          (481)           (671)           (913)        (2,739)
                                                ---------      ---------       ---------       ---------      ---------
Pre-tax income from operations                   $  (511)       $   153        $ (3,071)        $(7,001)      $(10,430)


Net income                                       $  (307)       $    90        $ (1,850)        $(6,131)      $ (8,198)
                                                ---------      ---------       ---------       ---------      ---------
Basic earnings per share                         $  (.04)       $   .01        $   (.23)        $  (.74)      $  (1.01)
                                                ---------      ---------       ---------       ---------      ---------
Diluted earnings per share                       $  (.04)       $   .01        $   (.23)        $  (.74)      $  (1.01)
                                                ---------      ---------       ---------       ---------      ---------



</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>

                                                  First         Second          Third           Fourth
(In thousands, except per share data)            Quarter        Quarter        Quarter         Quarter          Total
-------------------------------------           ---------      ---------       ---------       ---------      ---------
Year Ended December 31, 2003
Revenues
<S>                                              <C>            <C>             <C>             <C>          <C>
Institutional Security Systems                   $23,448        $25,692         $26,357         $23,156      $  98,653
Attack Protection                                  8,343          6,533           6,036           7,463         28,375
Federal Security Systems                           3,489          4,261           4,549           4,142         16,441
Public Safety and Justice                         11,487         11,052          16,194          11,061         49,794
                                                ---------      ---------       ---------       ---------      ---------
Total revenues                                   $46,767        $47,538         $53,136         $45,822       $193,263

Gross Profit
Institutional Security Systems                   $ 3,277        $ 3,240         $ 3,729         $ 3,957        $14,203
Attack Protection                                  1,975          1,380             758           1,581          5,694
Federal Security Systems                             522            603             934             547          2,606
Public Safety and Justice                          6,009          6,564           6,590           4,730         23,893
                                                ---------      ---------       ---------       ---------      ---------
Total gross profit                               $11,783        $11,787         $12,011         $10,815       $ 46,396

Pre-tax Income (loss)
Institutional Security Systems                   $   737        $   835         $ 1,216         $   825       $  3,613
Attack Protection                                    562            (52)           (663)            704            551
Federal Security Systems                             207            296             223             227            953
Public Safety and Justice                             68            482             790            (933)           407
Unallocated corporate expense                         (2)           166              70              (2)           232
                                                ---------      ---------       ---------       ---------      ---------
Pre-tax income from operations                   $ 1,572        $ 1,727         $ 1,636         $   821       $  5,756

                                                ---------      ---------       ---------       ---------      ---------
Net income                                       $   942        $ 1,037         $   982         $   447       $  3,408
                                                ---------      ---------       ---------       ---------      ---------
Basic earnings per share                         $   .12        $   .13         $   .12         $   .06       $    .43
                                                ---------      ---------       ---------       ---------      ---------
Diluted earnings per share                       $   .12        $   .13         $   .12         $   .05       $    .42
                                                ---------      ---------       ---------       ---------      ---------
</TABLE>


Included in the results of the fourth quarter of 2004 is a $739 thousand pre-tax
charge to record the impairment of the Institutional  Security Systems segment's
goodwill and a $1.1 million  charge to record the  impairment  of certain of the
Institutional  Security Systems segment's other intangible  assets. In addition,
the continuing  problems in the West Coast office of ISS resulted in the Company
recording  additional  losses of $2.2  million  from the work  performed in this
office.

Included in the results of the fourth quarter of 2003 is a $1.6 million  pre-tax
charge for a contract in  litigation,  which  occurred in the Public  Safety and
Justice  segment.  During the second  quarter  of 2004 this  matter was  settled
resulting  in a  reversal  of $0.3  million  of the  accrued  charge,  which was
reflected as a reduction of its cost of sales.

In the fourth quarter of 2003, the Company  increased its allowance for doubtful
accounts by approximately  $725 thousand in its  Institutional  Security Systems
segment  for past due  receivables.  Pre-tax  income  in the  Attack  Protection
segment benefited by approximately  $900 thousand from a successful  arbitration
decision related to a disputed customer receivable.

                                       49
<PAGE>


During 2002, the West Coast  operations of the  Institutional  Security  Systems
segment  experienced  significant  cost overruns on many of its projects.  These
cost overruns were incurred and recorded  during the latter half of the year and
amounted to  approximately  $2.2 million.  As a result,  as these  projects were
brought to completion in 2003, the revenues generated by them resulted in little
margin or in some cases losses.  The Company recorded $3.0 million of additional
write-downs  on its West Coast  projects  that were either  completed  or neared
completion in 2003. In 2004, the West Coast operations  generated pre-tax losses
of $6.1 million.


<PAGE>



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

          Not Applicable

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company  maintains  disclosure  controls and procedures that are designed to
ensure that  information  required to be  disclosed  in the  Company's  periodic
Securities Exchange Act reports is recorded, processed, summarized, and reported
within the time periods  specified  in the SEC's rules and forms,  and that such
information  is  accumulated  and  communicated  to  the  Company's  management,
including  its  Chief  Executive  Officer  and  Chief  Financial   Officer,   as
appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report,  the Company  carried out an
evaluation,  under  the  supervision  and  with  the  participation  of  Company
management,  including  the Chief  Executive  Officer  and the  Chief  Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls  and  procedures  pursuant  to the  Securities  Exchange  Act  of  1934
("Exchange  Act") Rules 13a-15(e) and 15d-15(e).  Based upon, and as of the date
of this evaluation,  the Chief Executive Officer and the Chief Financial Officer
concluded  that  the  Company's  disclosure  controls  and  procedures  were not
effective because of the material  weaknesses  discussed below. To address these
material  weaknesses,  the  Company  performed  additional  analysis  and  other
post-closing  procedures to ensure that the  consolidated  financial  statements
were prepared in  accordance  with  generally  accepted  accounting  principles.
Accordingly,  management believes that the financial statements included in this
report  fairly  present  in  all  material  respects  the  Company's   financial
condition, results of operations and cash flows for the periods presented.

Status of Management's Report on Internal Control Over Financial Reporting

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate  internal  control over  financial  reporting.  The Company's  internal
control over  financial  reporting is a process  designed to provide  reasonable
assurance  regarding the reliability of financial  reporting and the preparation
of financial  statements  for external  purposes in  accordance  with  generally
accepted accounting  principles.  Because of its inherent limitations,  internal
control over financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of  effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or
that the degree of  compliance  with  established  policies  or  procedures  may
deteriorate.

Management  is in the  process of  conducting  an  evaluation  of the  Company's
internal control over financial reporting as of December 31, 2004. In making its
assessment of internal control over financial reporting, management is using the
criteria  described  in  Internal  Control-Integrated  Framework  issued  by the
Committee of Sponsoring Organizations of the Treadway Commission.

A  material  weakness  is  a  control  deficiency,  or  combination  of  control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

Management  has  determined  that, as of December 31, 2004,  the Company did not
maintain effective controls over the accounting for income taxes,  including the
determination   of  income  taxes  payable,   deferred  income  tax  assets  and
liabilities and the related income tax provision.  Specifically, the Company did
not have effective  controls over the  reconciliation of the difference  between
the tax basis and the  financial  reporting  basis of the  Company's  assets and
liabilities with the deferred income tax assets and  liabilities.  Additionally,
there was a lack of oversight and review over the income taxes payable, deferred
income tax assets and liabilities and the related income tax provision  accounts
by accounting  personnel with appropriate  financial reporting  expertise.  This
control  deficiency  resulted in an audit  adjustment to the fourth quarter 2004
financial  statements.  Additionally,  this control deficiency could result in a
misstatement of income taxes payable, deferred income tax assets and liabilities
and  the  related   income  tax  provision  that  would  result  in  a  material
misstatement  to  annual  or  interim  financial  statements  that  would not be
prevented or detected. Accordingly,  management has determined that this control
deficiency constitutes a material weakness.

Management has further determined that, as of December 31, 2004, the Company did
not  maintain   effective   control  over  the  accounting  for  and  review  of
significant,  non-routine transactions.  Specifically,  the Company did not have
effective  controls  over the  accounting  for a  non-routine  change order to a
customer  contract to ensure  that the  accounting  for the change  order was in
accordance  with generally  accepted  accounting  principles.  This  transaction
impacted  contract  revenues,  contract costs in excess of billings and accounts
receivables.  This control  deficiency  resulted in an audit  adjustment  to the
fourth quarter 2004 financial statements.  Additionally, this control deficiency
could result in a misstatement of contract revenues, contract costs in excess of
billings and accounts  receivables that would result in a material  misstatement
to annual or  interim  financial  statements  that  would  not be  prevented  or
detected.  Accordingly,  management has determined that this control  deficiency
constitutes a material weakness.

The existence of one or more  material  weaknesses as of December 31, 2004 would
preclude  a  conclusion  that the  Company's  internal  control  over  financial
reporting was  effective as of that date.  Upon  completion  of our  assessment,
management  expects to  conclude  that the Company  did not  maintain  effective
internal  control over  financial  reporting  as of December 31, 2004,  based on
criteria in Internal Controls--Integrated Framework.

The Company's  evaluation of its internal control over financial reporting as of
December 31, 2004 is not complete.  Further, there can be no assurance that as a
result of the ongoing  evaluation of internal control over financial  reporting,
additional  deficiencies  will not be identified  or that any such  deficiencies
identified, either alone or in combination with others, will not be considered a
material weakness.

                                       50
<PAGE>


Securities  and Exchange  Commission  Release No.  34-50754,  subject to certain
conditions, provides up to 45 additional days beyond the due date of this Annual
Report on Form 10-K for the filing of  management's  annual  report on  internal
control over financial  reporting  required by Item 308(a) of Regulation S-K and
the related  attestation report of the independent  registered public accounting
firm  required  by Item  308(b) of  Regulation  S-K.  Pursuant  to the  Release,
management's  report  on  internal  control  over  financial  reporting  and the
associated  report on the audit of management's  assessment of the effectiveness
of the Company's  internal  control over financial  reporting as of December 31,
2004 are not filed herein and are expected to be filed no later than May 2, 2005
with an amendment to this Annual Report on Form 10-K.

The Company expects that the material weaknesses identified above will result in
an adverse opinion by the Company's  independent  registered  public  accounting
firm on the  effectiveness  of the  Company's  internal  control over  financial
reporting as of December 31, 2004.

Changes in Internal Control Over Financial Reporting

Except as otherwise discussed herein,  there has been no change in the Company's
internal  control  over  financial  reporting  that  occurred  during the fourth
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, such internal control over financial reporting.

To address the material weaknesses described above, the Company has: (1) engaged
an outside tax consultant,  other than from the Company's independent registered
public  accounting firm, and intends to implement an ongoing training program to
enhance the  capabilities of its internal tax personnel,  and (2) instituted new
procedures   requiring  the   accounting   for  all   significant,   non-routine
transactions to be approved by the Corporate Accounting group.



                                       51
<PAGE>



                                    PART III

Information  required  by  Items  10,  11,  12,  13 and 14  about  CompuDyne  is
incorporated  herein  by  reference  from  the  definitive  proxy  statement  of
CompuDyne  to be filed  with the SEC within  120 days  following  the end of the
fiscal year ended December 31, 2004.

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements
   (1)  Index to Financial Statements
        Report  of  Independent
        Registered  Public  Accounting  Firm  -  PricewaterhouseCoopers   LLP
        Report  of  Independent  Registered Public
              Accounting  Firm -  Deloitte  & Touche  LLP
        Consolidated  Balance  Sheets  at  December  31,  2004  and  2003
        Consolidated  Statements of Operations for the
              years ended  December 31, 2004, 2003 and 2002
        Consolidated Statement of Changes in Shareholders' Equity
              for the  years ended December 31, 2004, 2003 and 2002
        Consolidated Statements of Cash Flows for the years
              ended December 31, 2004, 2003 and 2002
        Notes to Consolidated Financial Statements

  (2)  Schedule II - Schedule of valuation and qualifying accounts

(b) Exhibits
    The  Exhibits  listed on the index  below are filed as a part of this Annual
    Report.


                                       52
<PAGE>



                                   SCHEDULE II

                     COMPUDYNE CORPORATION AND SUBSIDIARIES
                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2004, 2003, and 2002
                                ($ in thousands)

<TABLE>
<CAPTION>


                                                              Balance at      Charged to                     Balance
                                                               Beginning      Costs and                      At End
Description                                                    Of Period       Expenses       Deduction     Of Period
-----------                                                    ---------       --------       ---------     ---------

Year Ended December 31, 2004
Reserve and allowances deducted from asset accounts:
<S>                                                             <C>                 <C>          <C>        <C>
Reserve for excess and slow moving inventory                    $   840             649          (127)      $   1,362
Reserve for accounts receivable                                 $ 1,252           1,153          (486)      $   1,919
Deferred tax asset valuation allowance                          $     -           1,858            -        $   1,858


Year Ended December 31, 2003
Reserve and allowances deducted from asset accounts:
Reserve for excess and slow moving inventory                    $   642             367          (169)      $      840
Reserve for accounts receivable                                 $ 1,173             996          (917)      $   1,252

Year Ended December 31, 2002
Reserve and allowances deducted from asset accounts:
Reserve for excess and slow moving inventory                    $   385             257             -       $      642
Reserve for accounts receivable                                 $ 1,094             79              -       $    1,173
Deferred tax asset valuation allowance                          $   329              -           (329)      $        _

</TABLE>


                                       53
<PAGE>



                              COMPUDYNE CORPORATION
                                INDEX TO EXHIBITS
                                  (Item 15(b))

2(A).     Agreement  and Plan of  Merger  dated as of May 10,  2001 by and among
          CompuDyne  Corporation,  Tiburon,  Inc. and New Tiburon,  Inc., herein
          incorporated  by reference to Exhibit 2(c) of  Registrant's  Quarterly
          Report on Form 10-Q filed May 15, 2001.

2(B).     First  Amendment to  Agreement  and Plan of Merger dated as of January
          25, 2002 by and among  CompuDyne  Corporation,  Tiburon,  Inc. and New
          Tiburon,  Inc.,  herein  incorporated  by reference to Exhibit 2(B) of
          Registrant's Registration Statement on Form S-4 dated March 25, 2002.

3(A).     Articles of  Incorporation  of  CompuDyne  Corporation  filed with the
          Secretary  of State of the  State of  Nevada  on May 8,  1996,  herein
          incorporated  by reference to  Registrant's  Proxy Statement dated May
          13, 1996 for its 1996 Annual Meeting of Shareholders.

3(B).     Amendment to the Articles of  Incorporation  of CompuDyne  Corporation
          increasing  the  number of  authorized  common  shares  filed with the
          Secretary  of the  State  of  Nevada  on  February  16,  2001,  herein
          incorporated  by reference to Exhibit  3(B) to the  Registrant's  10-K
          filed March 27, 2001.

3(C).     Agreement and Plan of Merger dated May 8, 1996, herein incorporated by
          reference to Exhibit 3(B) to Registrant's 10-K filed March 31, 1997.

3(D).     By-Laws,  as amended  through  January  28, 1997 and as  presently  in
          effect,   herein   incorporated   by  reference  to  Exhibit  3(C)  to
          Registrant's 10-K filed March 31, 1997.

10(A).    CompuDyne  Corporation  1996  Stock  Incentive  Compensation  Plan for
          Employees,  herein  incorporated  by reference to  Registrant's  Proxy
          Statement  dated  July  17,  2001  for  its  2001  Annual  Meeting  of
          Shareholders.

10(B).    Credit  Agreement  dated  November  16,  2001 by and  among  CompuDyne
          Corporation,  its subsidiaries,  certain participating lenders and PNC
          Bank,  National  Association in its capacity as agent for the lenders,
          herein incorporated by reference to Exhibit 10 (b) to Registrant's 8-K
          filed November 21, 2001.

10(C)(1). Amended  and  Restated  Credit  Agreement  dated March 31, 2004 by and
          among   CompuDyne   Corporation   and   its   subsidiaries,    certain
          participating  lenders  and PNC  Bank,  National  Association,  in its
          capacity as agent for the lenders, herein incorporated by reference to
          Exhibit 3.1 to Registrant's 10-Q filed May 7, 2004.

10(C)(2). Amendment to Amended and Restated  Credit  Agreement dated October 29,
          2004 by and among CompuDyne  Corporation,  its  subsidiaries,  certain
          participating  lenders  and  PNC  Bank,  National  Association  in its
          capacity as agent for the lenders, herein incorporated by reference to
          Exhibit 10.1 to Registrant's 8-K filed on November 1, 2004.

10(C)(3). Employment  Agreement  between  CompuDyne  Corporation  and Mr. Daniel
          Crawford herein incorporated by reference,  filed on Form 8-K, October
          27, 2004.

10(C)(4). Transition  Agreement  by and  among  CompuDyne  Corporation,  Norment
          Security  Group,  Inc., and Mr. Jon Lucynski  herein  incorporated  by
          reference, filed on Form 8-K, January 26, 2005.

10(C)(5). Report  regarding Mr. Bruce  Kelling's  resignation  from the Board of
          Directors  herein  incorporated  by  reference,  filed  on  Form  8-K,
          February 10, 2005.

10(C)(6). Current report on Form 8-K  disclosing  the death of Director  Millard
          Pryor filed on March 2, 2005.

10(C)(7). Second   Amendment  to  Amended  and  Restated  Credit  Agreement  and
          Amendment to Securities  Pledge  Agreement  dated March 4, 2005 by and
          among CompuDyne Corporation,  its subsidiaries,  certain participating
          lenders and PNC Bank,  National  Association  in its capacity as agent
          for the lenders,  herein incorporated by referenced to Exhibit 10.1 to
          registrant's 8-K filed on March 7, 2005.

                                       54
<PAGE>


10(D).    1996  Stock  Non-Employee   Director  Plan,  herein   incorporated  by
          reference to Registrant's Proxy Statement dated April 18, 1997 for its
          1997 Annual Meeting of Shareholders.

10(E).    Stock Option  Agreement dated August 21, 1995 by and between Martin A.
          Roenigk and CompuDyne Corporation, herein incorporated by reference to
          Exhibit (4.5) to Registrant's Form 8-K filed September 5, 1995.

10.3*     Compensatory Arrangements.

21.*      Subsidiaries of the Registrant.

23.1*     Consent  of   Independent   Registered   Public   Accounting   Firm  -
          PricewaterhouseCoopers LLP.

23.2*     Consent of Independent  Registered Public Accounting Firm - Deloitte &
          Touche LLP.

31.1*     Certification of Chief Executive  Officer pursuant to Rule 13(a)-14(a)
          or 15(d)-14(a).

31.2*     Certification of Chief Financial  Officer pursuant to Rule 13(a)-14(a)
          or 15(d)-14(a).

32.1*     Certification  Pursuant To 18 U.S.C.  Section 1350 As Adopted Pursuant
          To  Section  906 of The  Sarbanes-Oxley  Act Of 2002,  for Mr.  Martin
          Roenigk.

32.2*     Certification  Pursuant To 18 U.S.C.  Section 1350 As Adopted Pursuant
          To Section 906 of The  Sarbanes-Oxley Act Of 2002, for Mr. Geoffrey F.
          Feidelberg.

*         Filed herewith.

                                       55
<PAGE>




                                   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
its behalf by the undersigned, thereunto duly authorized.

                                              COMPUDYNE CORPORATION
                                                 (Registrant)

                                                 By:/s/  Martin Roenigk
                                                    ----------------------------
                                                 Martin Roenigk
                                                 Chief Executive Officer

                                                 By:/s/  Geoffrey F. Feidelberg
                                                    ----------------------------
                                                 Geoffrey F. Feidelberg
Dated: March 31, 2005                            Chief Financial Officer


              Pursuant to the  requirements  of the  Securities  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
the Registrant and in the capacities indicated on March 31, 2005.

<TABLE>
<CAPTION>

<S>                                      <C>                             <C>                                    <C>

/s/ Martin A. Roenigk            Director, Chairman, President         /s/ David W. Clark, Jr.             Director
------------------------          and Chief Executive Officer         --------------------------
Martin A. Roenigk                                                       David W. Clark, Jr.


/s/ John H. Gutfreund            Director                              /s/ Ronald J. Angelone              Director
----------------------                                                 -----------------------
John H. Gutfreund                                                      Ronald J. Angelone


/s/ Philip M. Blackmon           Director and                          /s/ Wade B. Houk                    Director
------------------------          Executive Vice-President            ------------------
Philip M. Blackmon                                                     Wade B. Houk


/s/ Geoffrey F. Feidelberg       Director and                          /s/ John Michael McConnell          Director
---------------------------       Chief Financial Officer               --------------------------
Geoffrey F. Feidelberg                                                 John Michael McConnell



</TABLE>

                                       56